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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 ..... view of the foregoing raison d etre , we are satisfied that the segment of Indenting (pre-sale activity) is not closed linked with Trading and Service (post-sale activities) activities and hence cannot be aggregated. Each international transaction of an assessee is to be benchmarked separately unless two or more international transactions are closely linked to each other. If the argument of the ld. AR is taken to a logical conclusion, then all the international transactions of an assessee would require aggregation in as much as they cumulatively lead to one aim of carrying on the business and earning profit. But for transaction of purchase of raw material, there can be no sale; but for acquisition of technical know-how, there can be no manufacturing; but for availing administrative, financial and marketing services, there can be no production or sale; so on and so forth. The scenario as presented by the ld. AR before us, if accepted, would lead to complete bypassing of the transfer pricing provisions because of cross-subsidizations etc., which is impermissible. As the law requires benchmarking of each transaction separately, unless closely linked, we are unable to accord our im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) TMI 798 - SC ORDER] We, therefore, direct to restrict the transfer pricing addition in the Trading segment only in respect of transactions with AEs. To sum up, we set-aside the transfer pricing addition of ₹ 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. Transfer pricing addition made in the EARC business segment - Grant of risk adjustment - HELD THAT:- Through the relevant material on record, it is observed that there is no dispute in the computation of ALP under EARC business segment except for grant of risk adjustment. Such an argument was taken up before the DRP for the first time and the TPO had no occasion to examine the assessee s claim in this regard. Under the given circumstances, we set-aside the impugned order on this issue and send the matter back to the AO/TPO for examining, if any, risk adjustment can be granted in the facts and circumstances of the instant case. - ITA No.1744/PUN/2019 - - - Dated:- 20-2-2020 - Shri R.S. Syal, Vice President And Shri S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for benchmarking, which he did not approve. He segregated revenue under ESAS business segment into three segments, namely, Indenting, Service and Trading. Applying the same method for determining the ALP as was applied by the assessee, namely, the Transactional Net Margin Method (TNMM), the TPO worked out the Profit Level Indicator (PLI) under the Indenting segment at 53.07%; Service segment at 58.34%; and Trading segment at (-)7.84%. While making this calculation, he allocated common expenses on the basis of different keys. Some of the expenses were allocated on the basis of turnover while others in the ratio of certain percentage to Indenting, Service and Trading, varying with the nature of expenditure. He did not dispute the ALP in the Indenting and Service segments. For the Trading segment, he shortlisted certain comparables with their weighted Operating Profit (OP) / Operating Revenue (OR) in the dataset of seven companies starting with (-)1.01% and ending with 5.87%. 35th percentile of the dataset was found at 1.55% and 65th percentile at 5.50%. Since the assessee s margin from trading segment at (-)7.84% did not fall within the arm s length range, the TPO adopted m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the most appropriate method, he worked out their PLIs at page 13 of his order and accepted the transactions in respect of Indenting and Service segments at ALP. Entire dispute rotates around the determination of the ALP in respect of the Trading segment. 6. The assessee has pleaded before the Tribunal that splitting of the ESAS into three segments by the TPO was unwarranted. In support of such a contention, the ld. AR stated that up to the Assessment year 2013-14, the TPO accepted the aggregation of Indenting, Trading and Services under the ESAS segment. It was for the A.Y. 2014-15 that the TPO bifurcated the ESAS segment into two parts, namely, Indenting as first part and Trading Service as a combined second part. It was for the year under consideration that the TPO bifurcated ESAS segment into three segments, namely, Indenting, Trading and Service. The ld. AR candidly admitted that the bifurcation of ESAS into two segments in the proceedings for the immediately preceding year, that is, assessment year 2014-15, has been finally accepted by the assessee. In view of this factual backdrop, the ld. AR canvassed a view that no segregation of ESAS segment into three segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regate manner, it satisfies the prescription of closely linked transactions. 9. The moot question is whether the instant transactions of Indenting, Trading and Service can be construed as closely linked transactions ? In the Indenting segment, the nature of activity carried out by the assessee is to procure orders for its parent company situated abroad towards sale of diesel engines and spare parts in India. The ld. AR contended that during the year under consideration, the assessee did Indenting only for sale of diesel engines and not for spare parts. On a further query, the ld. AR explained that the Sale of diesel engines resulting into Indenting commission to the assessee can be bifurcated into three Applications, namely, Marine Applications (whose customers are Indian Navy and Coast Guard); Power Generation Applications (whose customers are Airports, Hotels, Hospitals and IT companies) and Construction Industrial Applications (whose customers are Mining-Coal, Oil Gas and Rail). He further submitted that albeit exact figures of sales made through the assessee of Marine, Power Generation and Construction and Industrial Applications were not available but roughly these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Trading and Service (post-sale activities) activities and hence cannot be aggregated. 13. Now we turn to examine as to whether the Trading and Service segments need to be benchmarked in an aggregate or segregate manner. Without prejudice to the aggregation of all the three segments under the ESAS segment, the instant claim of the assessee is that Trading and Service segments should be segregated. 14. Under the ESAS business segment, the assessee aggregated revenue from sale of spare parts and service income apart from Indenting, which we have dealt with hereinabove by holding that the Indenting needs to be segregated. In the Trading segment, the assessee sold spare parts during the year and earned revenue. In the Service segment, the assessee earned revenue from servicing of the diesel engines supplied by its AEs. The Service segment includes carrying out service to the diesel engines sold by its parent AE in India during warranty and post warranty periods. For servicing of engines during warranty period, the assessee raised bills on its AEs and for the servicing of diesel engines post warranty period, the assessee raised bills directly to the customers in India. A c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an overall analysis of the pattern of revenue earned by the assessee from trading of spare parts and the information transpiring from the column `Customer type in the Chart supplied by the assessee, it is manifestly borne out that the assessee s earlier contention that all the customers of diesel engines in India have to necessarily approach the assessee for carrying out repairs and the integrated and stitched sale of spare parts, is not correct. The ld. AR candidly admitted that there are several transactions of sale of spare parts by the assessee, which are not coupled with rendition of service. Another significant factor which has came to light during the course of hearing is that the assessee was supplying the spares not only to the Direct customers but also to the Dealers, seven in number. Such dealers also sell spare parts purchased, inter alia, from the assessee and serve the diesel engines sold by the parent company of the assessee in India in the same way as the assessee is doing, barring the cases of very complex nature of repair, which is exclusively done by the assessee. The position which, ergo, emerges is that the customers who purchase diesel engines from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for aggregation of all the three segments on the premise that entire business of the assessee rotates around sale of diesel engines. Unless sale of engines is made, he said, there can be no question of sale of spare parts or servicing. It was due to such a common link of Indenting, Trading and Service that the ESAS business segment should not be segregated. 18. In our considered opinion, this argument is devoid of any force in the context of transfer pricing regime, wherein each international transaction of an assessee is to be benchmarked separately unless two or more international transactions are closely linked to each other. If the argument of the ld. AR is taken to a logical conclusion, then all the international transactions of an assessee would require aggregation in as much as they cumulatively lead to one aim of carrying on the business and earning profit. But for transaction of purchase of raw material, there can be no sale; but for acquisition of technical know-how, there can be no manufacturing; but for availing administrative, financial and marketing services, there can be no production or sale; so on and so forth. The scenario as presented by the ld. AR before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM on the aggregated transactions under the ESAS business segment. When the TPO ventured to segregate the transaction of Trading of spare parts from the others and continued to apply the TNMM, the assessee requested the TPO to apply the Resale Price Method (RPM) as the most appropriate method. The TPO did not accede to the same and proceeded to benchmark it on the basis of the TNMM, which was accorded approval by the DRP as well. The assessee is aggrieved by the decision of the authorities below in this regard. 22. We have heard the rival submissions and gone through the relevant material on record. It is noticed that the subject matter of controversy is the segregated international transaction of Trading in spare parts. In other words, the spare parts as purchased from the AEs were sold as such by the assessee. Under such circumstances, a question arises as to whether in the case of resale of spare parts without any value addition carried out by the assessee, the most appropriate method should be RPM or TNMM? In our opinion, the RPM is a method which exclusively deals with a situation of the assessee purchasing goods and then selling the same as such. The entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct comparables. The ld. AR stated that the assessee can provide correct comparables engaged in trading of diesel engine spare parts. In these circumstances, we direct to determine the ALP of the segment of Trading of spare parts afresh under the RPM with correct comparables. III. Calculation of PLI and T.P. adjustment 25. The TPO computed the transfer pricing adjustment by considering operating revenue of Trading segment at ₹ 71.56 crore and operating costs at ₹ 77.17 crore with the PLI [OP/OR] of the assessee at (-)7.84%. In the rectification order, he determined median of the dataset of comparables at 3.75% and thus proposed transfer pricing adjustment accordingly. 26. The ld. AR has raised two-folded contents in this regard. Firstly, it was submitted that the TPO computed the operating costs at ₹ 77.17 crore by using ad hoc allocation keys ranging from the Turnover ratio to certain percentage of marketing, service of trading segments. Our attention was drawn towards a chart showing that the allocation keys adopted for the instant year are at much variance with those used for the preceding year. 27. We find from the allocation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore 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 segment. The DRP did not accept the claim of the assessee by observing that it was not a risk free entity and further there was considerable difference between risks borne by a cost-protected entity like the assessee and normal entrepreneur. It further held that until and unless the risk difference results in deflation or inflation of financial results of comparable companies, there can be no general rule of Risk adjustment. 33. Having heard both the sides and gone through the relevant material on record, it is observed that there is no dispute in the computation of ALP under EARC business segment except for grant of risk adjustment. Such an argument was taken up before the DRP for the first time and the TPO had no occasion to examine the assessee s claim in this regard. Under the given circumstances, we set-aside the impugned order on this issue and send the matter back to the AO/TPO for examining, if any, risk adjustment can be granted in the facts and circumstances of the instant case. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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