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TMI Blog2017 (9) TMI 1836X X X X Extracts X X X X X X X X Extracts X X X X ..... ting that all International transactions of Tetra Pak India Pvt. Ltd. be aggregated/ whereas as per section 92(1) and Rule 10C(1), 'Income arising from an International Transaction' has to be calculated with regards to Arm's Length Pricing, when clear segments were identified from the financial information by revenue and aggregation of such international transaction is allowed only as an exception as per Rule 10A(d). 2. Hon'ble DRP erred in holding that International transactions of Imports of Machines and Import of straws were functionally different segments, when Function Asset and Risk profile of Tetra Pak was compared to that of uncontrolled comparables after carefully choosing them through a structured search carried out by assessee itself within meaning of Rule 10B(2) and 10C(2). 3. Hon'ble DRP erred in holding that margins of 5.87% used as Arm's Length Price is not correct when Tetra Pak India Private Limited suffered a gross loss in International transactions of Imports of Capital Equipments and Import of straws, as in a pure ' trading junction' net margins will always be positive. 4. The assessee in ITA No.537/PUN/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble DRP, the learned AO and Transfer Pricing Officer ('TPO') grossly erred in computing the Transfer Pricing ('TP') adjustment by inappropriately comparing the packaging machinery and straw business segment with the comparable companies which are engaged in manufacturing of packaging material with an operating margin of 5.87%. 3. Not considering income from technical services and leasing income as part of packaging machinery segment of the Respondent (without prejudice) machinery and related technical services which is closely linked to the supply of packaging machinery. 4. Erred in computing the segmental profitability of the Respondent (without prejudice) Without prejudice to the above contentions, erred in ignoring the contentions of the Respondent and prepared a revised profitability statement by considering certain heads of income (like commission income, scrap sale, finance charge on lease agreement etc.), considered as operating by the respondent, as non-operating in nature. 5. Ground of Objection 5 - Transfer pricing adjustment without giving benefit of +/- 5% per cent as available under erstwhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, the assessee aggregated the said transactions for transfer pricing analysis and evaluated by adopting combined transaction approach. The assessee had identified TNMM method as most appropriate method to benchmark its international transactions. The assessee had selected few companies as functionally comparable and had applied multiple year data to benchmark its international transactions to determine arm's length price of its transactions. The PLI of assessee i.e. OP/sales was 12.09%. The average margin of comparables identified by the assessee of multiple year data works out to 6.13% and hence, it was claimed that international transactions of assessee were at arm's length. During the course of transfer pricing proceedings, the TPO at the first instance asked the assessee to update the margins of comparable companies using the data for the instant assessment year in which on the basis of single year's data, the mean margins of comparables worked out to 5.87%. The TPO thereafter, asked the assessee to split the profitability showing the breakup of revenue under carton packaging segment and processing equipment segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing or 18 months from the date of delivery, whichever was earlier and the assessee made provision for warranty @ 2% of equipment sale price except sale of processing components and this was based on generally acceptable practice worldwide. The assessee furnished the working of its claim of deduction of Rs. 1.27 crores. The Assessing Officer noted from the past records of assessee that similar claim of assessee had been disallowed in earlier years also and the DRP in its directions for earlier years had upheld the disallowance. In view thereof, the Assessing Officer was of the view that expenditure was in the nature of contingent liability and hence, sum of Rs. 1.27 crores was proposed to be disallowed. 11. The assessee filed objections before the DRP in this regard. The first issue which was considered by the DRP was rejection of aggregation approach by the TPO. The assessee pointed out that it was a full system supplier offering customers packaging solutions, processing solutions and technical services. The assessee claimed that as part of its activities, it was supplying packaging machines, packaging material and straws. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckaging material at reduced price so as to keep cost of total packaging low, so as to provide incentives to purchasers for using its packaging material. The approach adopted by the TPO was not accepted by the DRP on the premise that the manner of conducting business could not be decided by anyone else but only by the assessee. The portfolio approach adopted by the assessee to carry on its business was accepted as business strategy and consequently, the sale of packaging material and straws were held to be closely linked. The DRP further held that it was not possible to determine separate transfer pricing of either straws or machines, packaging material, etc. as the assessee had decided to sell everything as package. The approach of TPO in segregating closely interlinked business activities into two segments was held to be not correct. Another plea raised by the assessee before the DRP that where the TPO had considered segment of sale of packaging machinery and equipment and sale of straws functionally separate, then he could not have applied same margin of 5.87% of comparable companies for both the functionally different segments. The DRP held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s engineers which help the customers in printing of packaging material. Further, straws were also sold to the customers and as a business strategy, the assessee imports straws from its associated enterprises for sale to the customers. This division is called Carton Division. The assessee is also engaged in another line of manufacturing processing equipment, wherein some items have been manufactured in India and some are imported from its associated enterprises and both are sold to the customers. The assessee thus, claims that in addition to import of packaging material, it imported certain spare parts, straws and also exported packaging material (some part) to its associated enterprises. The assessee thus, had entered into the following international transactions with its associated enterprises:- Sr. No. International transactions Value (Rs.) 1 Import of raw materials, spares and components, processing/distribution equipment and filling machines 1,214,571,819 2 Import of filling machines, processing equipments, spare parts, etc for resale 974,860,030 3 Import of capital goods 15,333,150 4 Export of finished goods and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lling packaging material; in turn, assessee supplied processing equipment and packaging machines and also supplied spares, technical services and commissioning as part of its bundle of activities in the line of business undertaken by the assessee. In addition to this, the assessee was also imports straws and supplied the same as part of sale of packaging materials. The activities of planning, purchasing, logistics, selling and administrative activities were claimed to be associated with overall business of assessee and the same needs to be aggregated for benchmarking the international transactions. The assessee also claimed that it was a business strategy to charge price to its customers on sale of straws at lower than the total price cost of straws i.e. purchase price + import duty. However, the sale price was higher than the purchase price of straws. Therefore, for comparability purposes, the price of straws should be considered excluding the effect of import duty. The assessee claimed that it was providing support to its customers in the form of subsidizing the cost of packaging machines which in turn, would result increase in sale of its pack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate transactions (whether before, during, or after the taxable year under review) may be considered, if such transactions, taken as a whole, are so interrelated that consideration of multiple transactions is the most reliable means of determining the arm‟s length consideration for the controlled transactions. Generally, transactions will be aggregated only when that involve related products or services, as defined in §1.603A-3(c)(7)(vii.)." 18. Further, even the Guidance Note issued by ICAI on report of international transactions under section 92E of the Act clearly provides as under:- "13.5 The conditions referred to above are cumulative. The reference therein to the terms "best suited‟ and "most reliable measure‟ indicates that the most appropriate method will have to be selected after a meticulous appraisal of the facts and circumstances of the international transaction. Further, the selection of the most appropriate method shall be for each particular transaction. The term "transaction‟ itself is defined in rule 10A(d) to include a number of closely linked transactions. Therefore, though the reference i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis." 21. In view thereof, we uphold the business strategy adopted by the assessee which would follow that sale of machinery, packaging material and straws, etc. were closely interlinked and the same could not be evaluated separately. The aggregation approach adopted by the assessee in benchmarking its international transactions of closely interlinked transactions is thus, accepted. 22. We further find that similar issue of aggregation has been accepted by the Pune Bench of Tribunal in Demag Cranes & Components (India) (P.) Ltd. Vs. DCIT (2013) 30 taxmann.com 364 (Pune - Trib.). 23. Further, the Tribunal in Cummins India Ltd. Vs. Addl.CIT (2015) 53 taxmann.com 53 (Pune - Trib.) in turn, relying on OECD Guidelines, Indian Transfer Pricing Provisions and the ratio laid down in Demag Cranes & Components (India) (P.) Ltd. Vs. DCIT (supra), accepted aggregation of transactions holding as under:- "24. The first issue arising in the present appeal is whether in view of the OECD guidelines and the Indian Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to access the arm‟s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm‟s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis." 31. In this background, considering the legislative intent manifested by way of Rule 10A(d) read with Rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions exist, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with comparable uncontrolled transactions, such an appoach can be said to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation agreement may provide for import of raw materials, sale of finished goods, provision of technical services and payment of royalty. Different methods may be chosen as the most appropriate methods for each of the above transactions when considered on a standalone basis. However, under particular circumstances, one single method maybe chosen as the most appropriate method covering all the above transactions as the same are closely linked." (Underlined for emphasis by us). 32. In this background, we may now examine the facts of the present case. The primary activity of the assessee is to manufacture material handling equipments viz. cranes and hoists. It is seen from the documents placed in the Paper Book that the assessee enters into a single negotiation with the customers, which, inter-alia, includes manufacturing and supply of the material handling equipment, provision of commissioning and installation services, etc. Though the assessee raises different invoices for supply of equipments and separately for erection and commissioning charges, however, it is evident that the negotiations for the same are carried on at one go. In fact, at the time of hearing, it was speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer, the position has been clarified by the assessee. According to the assessee, in the financial statements affirmed by the Auditors, the activities have been clubbed together in accordance with the Accounting Standards prescribed by the ICAI. It was clarified that the segmental profits were worked out by the assessee only at the asking of the TPO during the proceedings before him. The learned counsel pointed out with reference to the chart in this regard placed in the Paper Book and submitted that the segmental profitability was not computed on the basis of any separately maintained records viz. books of account or vouchers but was computed by undertaking a statistical exercise. The costs were allocated as a proportion of sales/revenues and not an actual basis. In view of the aforesaid fact situation, we do not find that the availability of separate segmental profits in the present case can be a justifiable ground for the TPO to say that the transactions are not "closely linked‟ within the meaning of Rule 10A(d) of the Rules. Thus, the activity of installation and commissioning/engineering services is "closely linked‟ with the manufacturing activity and deserves to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate from common source being an order or contract or an agreement or an arrangement, then such transactions could be said to be closely linked as the nature, characteristic and terms of such transaction substantially flow from the said common source. 27. In the above said background, we analyse the different international transactions entered into by the assessee as pointed out by us in the paras hereinabove. The business of the assessee company was to provide aftermarket support to IC engines sold, in the form of sale of spare parts and rendering of after sales service including warranty administration. The assessee is thus, providing after sales support for engines sold by Cummins India Ltd., Cummins INC, etc. which were under warranty period and also post warranty period. The servicing, repair and annual maintenance contract, warranty period and for post warranty period were the services provided by the assessee for carrying out most of the above said activities. The sale of spare parts was claimed to be the principal activity of the assessee. The repair & maintenance and the warranty administration including services of the IC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from associated enterprises was Rs. 1.09 crores and the payment for access to customized part catalogues was Rs. 0.02 crores. Further, the assessee had received Rs. 0.76 crores against warranty administration. All these international transactions are linked to the main business being carried on by the assessee and such closely linked transactions are to be analysed in aggregate to determine the arm's length price. The aggregation of the import of spare parts, export of spare parts, IT support services, access to customized parts catalogue and amount received for warranty consideration are inter-related transactions, which were the sourcing activities of the assessee company and have to be aggregated in order to benchmark the international transactions. The assessee had benchmarked the arm's length price of all the transactions by comparing results of the comparable companies which were found to be at arm's length price. The assessee had also furnished the segmental Profit & Loss Account for the exports to associated enterprises and as compared to the export to third parties and percentage of services over total sales in respect of export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee thus, was making a provision for warranty @ 2% of equipment sale price, except sale of processing components. The assessee was making the said provision from year to year by following a system of accounting and during the year under consideration, had claimed expenditure of Rs. 1.27 crores. Both the Assessing Officer and the DRP did not allow the claim of assessee, in view of similar claim being rejected in earlier years. 26. We find that the Tribunal in assessee's own case relating to assessment year 2008-09 in ITA No.786/PN/2014, order dated 23.12.2016, had allowed the claim of assessee holding as under:- "9. We have heard the rival contentions and perused the record. The issue arising in the present appeal is against the claim of deduction on account of provision made for warranty. The assessee was engaged in the manufacture and sale of processing equipments and filling machines for both dairy and bread processing industries. The machineries which were being manufactured by the assessee were heavy packaging machineries and for the supply of same, the assessee was entering into agreement with the prospective buyers. The copy o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio laid down by the Hon‟ble Supreme Court in Rotork Controls India P. Ltd. Vs. CIT (supra), we hold that the value of Contingent Liability by way of recognizing the warranty liabilities, by making a provision and also following systematic method of its write back and / or utilization is an accepted accounting method adopted by the assessee and the provision made by the assessee is to be allowed as deduction in the hands of assessee. It may be clarified herein that the CIT(A) had rejected the claim of assessee in assessment year 2008-09 observing that the assessee had made provision to the extent of Rs. 32.74 crores, whereas none of the provisions made in the earlier years were much utilized. The learned Authorized Representative for the assessee in this regard has clarified that inadvertently, the same was created at Rs. 32.74 crores but Rs. 31.07 crores was written back and the deduction by way of provision of warranty was claimed only at Rs. 1.67 crores. The Assessing Officer had also disallowed sum of Rs. 1.67 crores only. In view thereof, we find no merit in the observations of CIT(A) in denying the claim of assessee. Applying the ratio l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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