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TMI Blog2020 (2) TMI 1040X X X X Extracts X X X X X X X X Extracts X X X X ..... report in Form no. 3CEB detailing certain international transactions classified under two business segments, namely, Engine sale, Spares sale and After-sale service (ESAS) and Engineering & Research Centre (EARC). The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO recommended transfer pricing adjustment in both the segments leading to the making of the additions by the AO. Aggrieved thereby, the assessee is in appeal before the Tribunal. A. ENGINE SALE, SPARE SALES & AFTER-SALE SERVICE (ESAS) 3. We first espouse the ESAS business segment. The assessee, inter alia, reported international transactions of `Import of engines for trading' with transacted value of Rs. 25.11 crore; `Import of spares and components for trading' at Rs. 29.70 crore; `Sale of spares' at Rs. 7.52 crore; `Receipt of commission on sales' at Rs. 12.22 crore; `Service income - Defence' at Rs. 22.76 lakh; `Payment for training received' at Rs. 6.71 lakh; `Service income - Warranty and after-sales services' at Rs. 3.42 crore; and `Payment of IT maintenance charges' at Rs. 1.52 crore. The TPO obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of ESAS segment into three segments, namely, Sales, Trading and Service 5. The assessee covered first eight international transactions under the overall ESAS segment, namely, Receipt of commission; Service income -Defence; Import of engine for trading; Import of spares and components for trading; Sale of spares; Payment for training received; Service income - Warranty and after-sales services; and Payment of IT maintenance charges. As the name of the ESAS business segment suggests, it comprises of three sets of transactions, namely, Engine Sales (Indenting or commission); Spares sales (Trading); and After-sales service (Service). Whereas the first two transactions relate to Indenting activity; next three transactions relate to Trading activity; next two transactions relate to Service activity; and the last transaction is payment of IT maintenance charges which is in the nature of expenditure. The assessee aggregated all the above referred eight transactions under ESAS segment and applied the TNMM as the most appropriate method for demonstrating that all these transactions were at ALP on aggregate basis. The TPO did not accept such aggregation. He segregated the transactions u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finition of the term `transaction' in section 92F(v) is meant for identifying a transaction, the definition of the term `transaction' in rule 10A(d) is meant for determining the ALP of international transaction under the relevant rules. In the present context, we are concerned only with the definition of `transaction' as given in rule 10A(d). It, therefore, boils down that in so far as the determination of the ALP under the machinery of computation under the methods as given in Rule 10B is concerned, the term 'transaction' also includes a plural of transactions. However, the caveat is that in order to be covered within the term 'transaction' under Rule 10A(d), it is sine qua non that such number of transactions must be closely linked. If they are not closely linked, then there can be no aggregation for the purpose of determination of the ALP under the IT Rules. 8. In one sense, closely linked transactions mean similar or alike transactions of purchase or sale etc. of goods or services. To put it simply, if there are several international transactions of, say, purchase of similar goods or goods with minor variations, then instead of finding the ALP of such international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdination required for selling diesel engines directly to the India customers for Marine, Mining and Construction and Power Generation application.' It has further been noted that: `For providing marketing support services, MTU India is remunerated with commission which ranges from 2 to 10% on the value of sales. These rates have been prescribed under the `Sales Representative' agreement'. Thus it is vivid that not only risks and rewards under the Indenting activity have absolutely no relation with the activities of Trading and Service, even the kind of effort required and the nature of expenses incurred for such an activity are also miles apart. By no stretch of imagination, the Indenting activity can be considered as a 'closely linked transaction' with the Trading and Service activities. 11. At this juncture, it is pertinent to note that in the FAR (Functions, assets and risks) analysis, the assessee itself analysed Import of Spares and Engines, Sale of spares and provision of warranty services together on page 10 and Commission separately on page 12 of its T.P. Study report. 12. In view of the foregoing raison d'etre, we are satisfied that the segment of Indenting (pre-sale a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue from sale or Service for the year de hors any linkage with sale of spares on transaction-to-transaction basis, as was required. Apart from Party name and Revenue type etc., there is a last column of `Customer Type' in this Chart. A glance at this Column divulges that the assessee made sales of spares not only to `Direct Customers', such as, ABG Shipyard Ltd. and Adani Hazira Port Pvt. Ltd. etc. but also to `Dealers', such as, Apollo Generators Pvt. Ltd., Apollo Power Systems Pvt. Ltd., Astha Sterling Crane Pvt. Ltd., Dynatron Services, Ravi Diesel Pvt. Ltd., Sterling and Wilson, and Sterling Generators Pvt. Ltd. Out of total sales revenue of Rs. 71.56 crore, the assessee made sales of spare parts to its seven Dealers at Rs. 50.00 crore and to Direct customers at Rs. 21.56 crore. On a further query, it transpired that apart from the assessee, the parent company has at least seven more Dealers in India, who cater to the requirements of sale of spare parts and service of diesel engines supplied to the Indian customers. The ld. AR admitted that the employees of other seven dealers were rather imparted training by the assessee for carrying out repair job to the diesel engines. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any use of spares. 15. We have noted above that the assessee made exclusive sale of spare parts to the Dealers to the tune of Rs. 50.00 crore out of total sale of spares of Rs. 71.56 crore. Thus about 70% of total sales of spare parts of the assessee has no connection whatsoever with service as the same has been made directly to dealers. In addition, the assessee has also made exclusive sale of spare parts to Direct customers, whose figure is stated to be not available. This analysis leaves no room for doubt that sale of service parts is, by and large, independent of service. 16. Two separate international transactions, in the present context, can be termed as closely linked and capable of aggregation only when they are either valued together or valued separately but so inextricably linked with each other that one cannot exist without the other, which is, unfortunately, not the case before us. The situation would have been different warranting aggregation if the entire sale of spare parts by the assessee had been dependent on its own servicing so as to make Trading and Service as one inter-woven transaction. 17. The ld. AR advocated for aggregation of all the three segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce fee. The Hon'ble Delhi High Court admitted the question in this regard - `Whether the Income Tax Appellate Tribunal was right in holding that royalty and technical assistance fee did not form part of a composite transaction and have to be treated as two separate transactions for the purpose of benchmarking and computing arms length price?' Answering the question against the assessee, the Hon'ble High Court countenanced the view of the Tribunal that aggregation of the transaction of payment of Technical fees with other international transactions under the common TNMM, was not correct. Restoring the matter to the TPO/AO, it held that the TNMM should be separately applied for determining the ALP of the international transaction of payment of Technical fee. The SLP filed against this judgment has since been dismissed vide DCIT vs. Magneti Marelli Powertain India (P) Ltd. (2018) 252 Taxman 385 (SC). 20. In a nutshell, we hold that the authorities below were justified in segregating Indenting, Trading and Service under the main ESAS segment. II. Most appropriate method- Whether TNMM or RPM? 21. The assessee applied the TNMM on the aggregated transactions under the ESAS business seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be accepted and TNMM is proposed to be applied which accepts broader similarity in overall functions of assessee and comparables and no exact product similarity is required'. Ex consequenti, it was on the basis of the comparables in the Trading of different commodities like auto parts etc. that the TPO proceeded to apply the TNMM and determined the ALP of the assessee's Trading segment under ESAS. In our humble opinion, the view canvassed by the TPO of accepting dissimilar companies as comparable under the TNMM and not under the RPM, does not sound logical. Selection of companies as comparables cannot differ with the method adopted. Comparables have to be selected on the basis of similarity irrespective of the method - be it the RPM or the TNMM. The Hon'ble Delhi High court in Rampgreen Solutions Pvt. Ltd. Vs. CIT (2015) 377 ITR 533 (Delhi) has laid down to this extent. 24. In hue of above discussion, it is held that the TPO was not justified in applying the TNMM by considering functionally dissimilar companies as comparables and not accepting the RPM as the most appropriate method with correct comparables. The ld. AR stated that the assessee can provide correct comparables engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefore, direct to restrict the transfer pricing addition in the Trading segment only in respect of transactions with AEs. 30. To sum up, we set-aside the transfer pricing addition of Rs. 8.29 crore made in the international transaction of Trading of spare parts under the ESAS business segment and remit the matter to the file of AO/TPO for a fresh determination of the ALP in terms of the discussion made supra in this order. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh determination. B. ENGINEERING & RESEARCH CENTRE (EARC) 31. The next issue in dispute is in respect of transfer pricing addition of Rs. 90,35,530/- made in the EARC business segment. 32. Facts apropos this issue are that the TPO proposed transfer pricing adjustment of Rs. 90.35 lakh in this segment. The assessee contended before the DRP that Risk adjustment ought to have been granted because the assessee, as a captive service provider, was remunerated on cost plus markup for the provision of services under this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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