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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 ..... sely linked transactions. Hence, the provisions of the Act also recognizes person to undertake its international transactions by including any number of closely interlinked transactions. 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. TPO while benchmarking two segments of sale of packaging machinery and equipment and sale of straws as functionally separate, had applied same margin of 5.87% of comparable companies for both the functionally different segments. Where the two segments are treated as functionally different from each other, then the same could not be compared with the margins of same comparable companies for both the segments. Accordingly, we accept the aggregation approach applied by the DRP and dismiss the grounds of appeal raised by the Revenue. Provision of warranty - assessee claims that as part of its sale and supply of processing equipment and fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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/2014 has raised the following grounds of appeal:- 1.1 On the facts of the case and in law, the learned Assessing Officer / DRP erred in disallowing prior period expenses of ₹ 1,02,19,142/- while computing the total income of the assessee company. 1.2 The learned A.O./ Dispute Resolution Panel erred in confirming the disallowance of the prior period expenses of ₹ 1,02,19,142/- without appreciating that the liability in respect of above expenditure of ₹ 1,02,19,142/- had crystallized during the year under assessment and hence, the same should have been allowed as a deduction while computing the income of the assessee company. 2.1 The learned Assessing Officer / DRP erred in disallowing the incremental provision for warranty of ₹ 1,27,01,521/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 erstwhile proviso to section 92C(2) of the Act. Erred in making the transfer pricing adjustment from the arm's length price without giving benefit of the option available to the Respondent under erstwhile proviso to section 92C(2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price (ie without appreciating the facts that the amended proviso is prospective in nature). 6. The learned Authorized Representative for the assessee at the outset pointed out that grounds of appeal No.1.1, 1.2, 3.1 and 3.2 are not pressed. The learned Authorized Representative for the assessee pointed out that only the issue which remains to be adjudicated in assessee s appeal is in relation to allowance of incre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The TPO provided segmental profitability statements to the assessee and show caused why the same should not be considered for benchmarking the purpose. As per the TPO, there was net level loss in straws, filling machines and processing equipment segment. The assessee pleaded that all the transactions undertaken by it were closely linked to its manufacturing of packaging material and activity-wise analysis was not appropriate. The assessee also pointed out certain computational error in the split profitability statement prepared by the TPO. On without prejudice basis, the TPO rejecting combined transactions approach adopted by the assessee, accepted the transactional value of international transactions carried out in the processing equipment segment but under the carton packaging division, the TPO revised the segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oach 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 assessee pointed out that as per its business plan, machines supplied to the customers would result in sale of packaging material as only the packaging material manufactured by the assessee, could be used in packaging machines supplied by it. Similarly, straws were also supplied as part of packaging material. The assessee also claimed that its main activity of supply of packaging material was dependent on sale / leasing of packaging machines and machines were connected to the processing equipment. Further, supply of processing equipment and packaging machines gives rise to supply of spares, technical services and commission income, since the customers requires such support. Further, supply of straws was incidental to sales of packaging material. Since the transactions were interlinked to the activity relating to manufacture and sale of packaging material, the assessee claimed that it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 that after having treated two segments functionally different from each other, it was not possible to compare them with the margins of same comparable companies for both the segments. Thus, the assessee s aggregation approach was accepted and transfer pricing analysis was directed to be based on the said aggregation approach adopted by the assessee. The DRP upheld the order of Assessing Officer with regard to disallowance of prior period expenses of ₹ 1.02 crores and the provision for warranty expenses at ₹ 1.27 crores. 13. The Revenue is in appeal against the aggregation approach adopted by the DRP. The learned Departmental Representative for the Revenue before us relied on the order of Assessing Officer / TPO. On the other hand, the learned Authorized Representative for the assessee relied on the order of DRP. 14. We have heard the rival contentions and perused the record. The assessee is part of Tetra Pack Group. The assessee is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibution 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 processing equipment 1,501,039,323 5 Sale of fixed assets 1,509,964 6 Technical services, design services and services in the nature of education and training, etc received by Tetra Pak India 49,723,236 7 Technical services, design services rendered by Tetra Pak India 16,272,887 8 Commission received 13,203,849 9 Reimbursement of expenses to the associated enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 packaging material to the said customers as only the packaging material which was manufactured by the assessee could be used in the filling machines supplied by it. The aforesaid commercial transactions were undertaken by the assessee as business strategy and the same was to create demand for its packaging material which was manufactured by it. Looking at the totality of the facts and circumstances, tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is to apply the most appropriate method to each particular transaction, keeping in view, the definition of the term transaction‟, the most appropriate method may be chosen for a group of similar transactions. 19. Further, para 13.8 of ICAI Guidance Note states as under:- It may be noted that in order to closely linked transactions, it is not necessary that these transactions need be identical or even similar. For example, a collaboration agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely 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 Transfer Pricing provisions, aggregation of transactions could be made or not. We find that Pune Bench of the Tribunal in Demag Cranes Components (India) Pvt. Ltd. Vs. DCIT (supra) had elaborately considered the OECD guidelines under Chapter III and also the guidance Notes issued by the Institute of Chartered Accountants of India on transfer pricing in para 13.7 and had held as under:- 30. We have carefully considered the rival submissions. Section 92B of the Act provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 be well established in the transfer pricing regulation having regard to Rule 10A(d) of the Rules. Though it is not feasible to define the parameters in a water tight compartment as to what transactions can be considered as closely linked‟, since the same would depend on facts and circumstances of each case. So however, as per an example noted by the Institute of Chartered Accountants of India (in short the ICAI‟) in its Guidance Notes on transfer pricing in para 13.7, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 specifically queried from the learned counsel as to whether the assessee is undertaking installation/commissioning activities independent of its own-supplied material handling equipments. It was clarified that the servicing and commissioning charges are earned only in relation to services performed for own supplied manufacture/assembled material handling equipments. The aforesaid factual assertion is not disputed. Factually, it is the activity of manufacturing/assembling of cranes etc. d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k 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 be aggregated and construed as a single transaction for the purposes of determining the ALP as per the method adopted. 34. In view of the aforesaid discussion, in our opinion, the approach of the TPO, in out-rightly rejecting the aggregation of all the transactions itemized at 1 to 7 in para 7 is flawed having regard to the facts and circumstances of the case. Further, it is noticed from the tabulation in para 7 of this order, that the assessee is also rendering marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port 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 engines requires the support of the spare parts which were sold by the assessee. Where the assessee was engaged in aftermarket support of engines manufactured and sold by Cummins entities, the question arises whether the sale of spare parts could be categorized separately as a trading activity engaged in by the assessee, which in turn is separate from the activity of doing servicing of the IC engines, their repair and maintenance and also warranty administration i.e. support during the warranty period and also annual mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 to associated enterprises works out to 0.2069% and in respect of exports to third parties works out to 0.0098%. 29. The plea of the assessee in this regard was that besides difference in the value of exports to third parties and to associated enterprises, the spare parts exported to third parties and to associated enterprises were different in nature. Further, the export value was less and these parties were one of customers and therefore, the risk involved was high. Further, the frequency of such transactions was very low. In view of the above facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 of one such agreement is placed on record by the assessee at pages 70 to 79 of the Paper Book. As per warranty clause 7 of the agreement, it is provided that the equipment is sold subject to express warranty, wherein the seller warrants that the equipments shall be free from material defects in workmanship, materials and design for period of 12 months from the date of commencement of use or period or 18 months from the delivery, whichever is shorter. It was undertaken by the assessee to repair or replace free of charge to the purchaser any part of equipment which contains a defect or actual refund to the purchaser the portion of pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs were much utilized. The learned Authorized Representative for the assessee in this regard has clarified that inadvertently, the same was created at ₹ 32.74 crores but ₹ 31.07 crores was written back and the deduction by way of provision of warranty was claimed only at ₹ 1.67 crores. The Assessing Officer had also disallowed sum of ₹ 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 laid down by the Hon‟ble Supreme Court in Rotork Controls India P. Ltd. Vs. CIT (supra), the assessee having fulfilled the conditions laid down by the Apex Court, we find merit in the claim of assessee and accordingly, we direct the Assessing Officer to allow the deduction on account of provision for warranty made at ₹ 1.67 crores. The grounds of appeal raised by the assessee are thus, allowed. 27. The issue arising in the present appeal is squarely covered by the similar issue as in earlier year and even the DRP and the Assessing Officer had disallowed the claim of assessee, since similar claim was not allowed in earlier years. Following the same parity of reasoni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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