9911796707
TMI Blog2022 (8) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... d Parts and Elements for Extruders. M/s Steer Japan Corporation (hereinafter referred as "Steer Japan" for brevity) and M/s Steer America Inc (hereinafter referred as "Steer America" for brevity) are both 100% subsidiaries of the Assessee and act as distributors in Japan and America respectively for the products manufactured by the Assessee. Steer China Corporation (hereinafter referred as "Steer China" for brevity) manufactures full range of extrusion lines, twin screw compounding extruders and CNC Wire EDM machines. During the relevant previous year, Steer China operated as distributor for products manufactured by the Assessee. Steer China is a wholly-owned subsidiary of Chindia Company Limited, Hong Kong (hereinafter referred as "Chindia" for brevity) which is a wholly owned subsidiary of Steer Engineering Private Limited. Chindia is an investment company. 4. There is no dispute that (i) Steer Japan Corporation, Japan, (ii) Steer America Inc., USA and (iii) Steer China Corporation, China, were associated enterprise(AE) within the meaning of the term as defined in Sec.92A(1) of the Income Tax Act, 1961 (Act). In terms of Sec.92(1) of the Act, the any income arising from an inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution Panel (DRP) u/s.144C of the Act. Under section 144C(5), the Dispute Resolution Panel (DRP) shall issue the directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment after considering report of TPO. The AO passes a final assessment order on the basis of directions of the DRP. In case the Assessee chooses not to filed objections before the DRP to the draft assessment order within the time required u/s.144C of the Act, the AO passes a final assessment order. The Assessee has a right of appeal against the said order to the CIT(A), which course the Assessee has adopted in the present case. 5. During the previous year, the Assessee entered into the following international transactions with its AE: Sl. No Name of Associated Enterprises Nature of Transactions Value (INR) 1 Steer Japan Corporation Sale of Extruders / Parts and Elements of Extruders 124,631,529 2 Steer America Inc Sale of Extruders / Parts and Elements of Extruders 167,037,028 3 Steer China Corporation Sale of Extruders / Parts and Elements of Extruders 4,091,356 4 Steer China Corporation Purchase of parts and elements of extruders 6,148,295 5 Steer China ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statements for financial year 2011-2012 keeping the above PLI was tabulated by the Assessee in it's TP analysis as given below: Particulars Total (INR) Operating Revenues: Revenue from operations 787,483,935 Other operating income 13,838,634 Total 801,322,569 Operating cost: Material consumption 269,861,504 Manufacturing and Operating Expenses 443,542,009 Bank Charges 5,411,760 Depreciation 37,626,304 Total Operating Cost 756,441,577 Operating Profits 44,880,992 Net Operating Profit/Operating Cost 5.93% 8. Since the operating profit margin of the Assessee was within the arm's length range of comparable companies, the Assessee claimed that the price received in the international transaction was at Arm's length. The second provisio to Sec.92C(2) provides that if arm's length price determined and price at which the international transaction has actually been undertaken does not exceed such percentage of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction [or specified domestic transaction] has actually been undertaken shall be deemed to be the arm's le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elements of extruders, commission on sales, purchase of fixed assets and services received were considered as closely linked transactions. Therefore, the Assessee evaluated the international transactions by adopting Combined Transaction approach at entity level. This was for the following reasons: i. The transactions between the Appellant and its associated enterprises are two ways i.e. purchase as well as sale. ii. The comparable transactions are also available only at the entity level and not at individual transaction level; and iii. The net profit at an entity level would broadly justify the intrinsic value of all the underlying transactions particularly when the organization views them as interdependent and integrated whole. Therefore, the Assessee submitted that due to the nature of transactions, performing transfer pricing analysis at entity level is the most appropriate way to benchmark the international transactions. 11. The TPO however did not accept the plea of the Assessee. He proceeded to perform a fresh TP analysis with respect to manufacturing activity based on segmental analysis i.e. bifurcation of the financial statement into international and domestic segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25% is appropriate in the case of the Appellant. The TPO justified the allocation keys adopted by him. The TPO held that apportionment of cost based on revenue is valid as the Assessee himself had adopted entity wide analysis for benchmarking international transactions. The TPO also held that actual allocation of sales & marketing expenditure is valid as sales and marketing expenses are mainly incurred for earning revenue from international segment. Based on the above, learned TPO computed an adjustment u/s 92CA for manufacturing segment at Rs. 5,92,37,627/-. Following is the relevant extract of the TP Order: "4.1 The adjustment to international transactions is determined as under: Mean PLI of comparables A 6.16% Operating cost of tested party B 49,23,07,220 Arms length Operating Revenue C = (100+A)% of B 52,26,33,345 Operating Revenue of tested party D 43,54,22,715 Difference E = C-D 8,72,10,630 International transactions as part of Operating Revenue F 29,57,59,913 Ratio of international transaction in OR G = F/D 67.92% Adjustment to international transaction H = G% of E 5,92,37,627 4.2 Above adjustment of INR 5,92,37,627 is the adjustment to internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is provided. However actual profit from each geography is not given. This reflects that the Assessee as well statutory auditor are of the view that profit from reach geography cannot be computed with reasonable accuracy and they view them as single segment. In such circumstances arbitrary allocation of expenses by the TPO is bad in law and hence to be rejected. Relevant extract of the Annual Report is given below: It was further contended that the TPO has bifurcated expenses based on the ratio of turnover. However, the TPO has failed to appreciate that the basis for apportionment also included international transactions with AE's which itself is a tainted transaction. The TPO by allocating expenditure based on turnover, which has tainted transactions has therefore computed tainted segmental. The TP adjustment based on such tainted segmental is therefore bad in law. Therefore, the action of the TPO of drawing segmental based on turnover is incorrect and without basis. 14. Without prejudice to above submissions, it was contended that the segmental adopted by the TPO in the TP Order contains several errors. It was pointed out that the revenue for the international segment is consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n increasing trend. In the aftermarket (post sales) segment (Extruder Parts), the Assessee is consistently growing its market share in US using its 'made-in- India' Technology and is penetrating into being the 'preferred supplier' to the Top 25 Compounding Companies in the world. The Assessee tabulated below its sales trend and projection for sakes for US market: SALES TREND Financial Year Sales (INR Crs) 2011-12 16.70 2012-13 21.43 2013-14 33.32 2014-15 24.15 2015-16 50.03 PROJECTIONS FOR US MARKET INR Crores Sl. Particulars 2017-18 2018-19 2019-20 1 Sales 45.42 50.31 55.95 - Extruders 19.31 21.29 23.54 - Extruder Parts 26.11 29.02 32.41 17. The Assessee thus pointed out that from the above it can be observed that slowly but surely, revenue generated from the US market is improving and Assessee's penetrating strategy in the US market is working. The Assessee submitted that the facts and economic circumstances unique to the Assessee's business strategy should be appreciated. The business model of cost plus 10% is therefore to be accepted as at arm's length. As detailed above, Steer America is remunerated at cost plus 10%. Steer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 91,37,883 4 Purchase of intangibles 3,29,91,505 5 Payment of commission on sales 15,44,27,194 6 Reimbursement of sales promotion and other expenses 23,26,538 7 Interest received 8,11,791 21. The transactions of sale and purchase of extruders and parts and elements of extruders, commission on sales, purchase of fixed assets and services received were considered as closely linked transactions. Therefore, the Assessee evaluated the international transactions by adopting Combined Transaction approach at entity level. Following are the important reason for benchmarking international transactions by considering Entity Level margins: a. The transactions between the Assessee and its associated enterprises are two ways i.e. purchase as well as sale. These transactions are linked and interdependent; b. In the peculiar circumstances of the operations involving various types of transactions entered into, towards achievement of a common goal, it is not possible to split the financial data to arrive at the net result from particular and individual transaction; c. The data in the public domain is not detailed enough to permit a comparison of the results at the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess 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. See example 26 of the Annex to Chapter VI." 22. The Assessee also relied on para 2.73 of Australian Tax Office (ATO) Taxation Ruling 97/20 on International Transfer Pricing which provides that: "Ideally, dealings between associated enterprises should be priced on a transaction by transaction basis. However, it is also recognised that if it is impractical to assess individual transactions (e.g., if such an approach would not address all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee has paid commission, which is part of business promotion expenses. In case of third party sales the Assessee performs similar functions. It manufacturers extruders and elements of extruders and sells directly to third parties/distributors. All the activities of the Assessee have similar functions and assets. These activities are governed by the same set of risk. These had therefore been grouped as single business segment and the TP analysis was conducted at entity level under combined transaction approach. In this regard it was pointed out that the Assessee had only one business segment which is the business of manufacturing extruders and wire EDM's machines including spares which constitutes a single business segment and hence business segments have not been reported. It was therefore submitted that the segmental P&L account considered by the TPO was not appropriate. The Assessee therefore submitted that transfer pricing analysis should be conducted at entity level. 25. On the adoption of PLI as done by the TPO, the Assessee pointed out that the TPO's observation in his order that tested party should be selected first and thereafter the comparable companies have to be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajoo Engineers Ltd. are available in public database whose functions, risks and assets are similar to the Appellant [This is also accepted by the TPO in para 3.7 of the TP Order] * Both the comparables also have domestic sales and international sales, similar to the Appellant. Tabulated below is the details of domestic and international sales made by the Assessee and comparables during the year under consideration: [This is also accepted by the TPO in para 3.7 of the TP Order] Sl. No. Particulars Domestic Sales and its % of total sales International Sales and its % of total sales Total Sales Annexure 1 Appellant 35,20,61,220 (45%) 43,54,22,715 (55%) 78,74,83,935 1 2 Rojoo Engineers 47,01,61,005 (58%) 34,22,24,399 (42%) 81,23,85,404 2 3 Kabra 60,19,00,000 (32%) 130,09,84,000 (68%) 190,28,84,000 3 * For both the comparables and the Assessee segmental bifurcation between domestic and international sales segment is not available. [This is also accepted by the TPO in para 3.7 of the TP Order] 27. It was pointed out that both the comparables and the Assessee are engaged in manufacture and sale of extruders and parts of extruders. Both the comparables and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineers Ltd export revenue is 42%) will get selected and therefore export revenue filter of 25% is appropriate in the case of the Assessee, the Assessee submitted that Rule 10B(2) and 10(3) of the Rules provide that, if uncontrolled comparable companies do not meet the comparability criteria or if the functional differences cannot be adjusted then such uncontrolled comparable companies cannot be selected. 30. The CIT(A) however without discussing the contentions as above and without giving any reasons whatsoever upheld the order of the TPO by observing that the TPO's order is self explanatory on the issue and that the Assessee has not been able to meet the TPO order in his arguments and submissions during appeal proceedings. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. 31. We have heard the rival submissions. The learned counsel for the Assessee reiterated submissions made before CIT(A). It was submitted that the Assessee has one single business segment of manufacture of Extruders and its parts. He submitted that the allocation of expenses on the basis of turnover as done by the TPO was erroneous because the domestic and export markets hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of extruders and parts by the Assessee to it's AE are: (i) Whether the profit margins for the purpose of comparison of Assessee's profit margin with that of the comparables has to be arrived at the entity level as was done by the Assessee or that part of the export sale to AE and non-AE as was done by the TPO or that part of the export sale to AE alone as was canvassed by the Assessee by way of an alternate plea. (ii) If the action of the TPO is justified in choosing Assessee's profit margin on export sale to AE and non AE, whether the manner of apportionment of expenses to the domestic and export sales was correct. (iii) Whether foreign exchange gain has to be treated as part of the operating profits for the purpose of comparison of Assessee's profit margin and that of the comparable companies. (iv) If the profit margins are taken on that part of the Export sale to AE and Non-AE, whether the filter of 75% export sale has to be applied and thereby the two comparable companies which are admittedly comparable companies available for comparison, will fail the test of comparability due to absence of 75% export sales and therefore has to be regarded as not comparable. 33. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions between the Appellant and its associated enterprises are two ways i.e. purchase as well as sale. ii. The comparable transactions are also available only at the entity level and not at individual transaction level; and iii. The net profit at an entity level would broadly justify the intrinsic value of all the underlying transactions particularly when the organization views them as interdependent and integrated whole. The TPO rejected the plea of the Assessee as above for the reason that tested party should be selected first and thereafter the comparable companies have to be searched. Therefore, entity level margin of the Assessee cannot be adopted just because the segmental information of the comparable companies in not available. There were 9 international transactions the Assessee had with it's AE's. The three international transactions of sale of extruders and parts and accessories were with steer America, Steer Japan and Steer China. Steer China Corporation (hereinafter referred as "Steer China" for brevity) manufactures full range of extrusion lines, twin screw compounding extruders and CNC Wire EDM machines. During the relevant previous year, Steer China oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried out by the TPO with regard to the two comparable companies and the profit margin of the two comparable companies has to be arrived at by identifying expenses relatable to export sale to AE and for this purpose the TPO may exercise his powers u/s.133(6) of the Act and call for the required details from the the comparable companies. 35. The second issue of manner of apportionment of expenses, in our view the basis of apportionment as adopted by the TPO is just and fair and calls for no interference. The Assessee has not given any other manner of apportionment except to say that expenses attributed to the export sale are not proper. In our view the Assessee is in knowledge of its own affairs and should be in a position to justify a better manner of apportionment rather than simply contend that the basis of apportionment by the TPO was unfair. 36. On the third issue regarding foreign exchange gain to be treated as part of the operating profits for the purpose of comparison of Assessee's profit margin and that of the comparable companies, we agree with the plea of the Assessee. Foreign exchange fluctuation to the extent it relates to the international transaction has to be rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge any commission from Steer China for providing such guarantee and hence the TPO determined the ALP by obtaining credit rating and relevant interest rate of corporate bonds from CRISIL at arrived at 0.925% as the appropriate rate at which the Assessee ought to have charged guarantee commission from the AE. By applying the said rate on the sum for which guarantee was extended the AO arrived at a sum of Rs.2,01,650 as the ALP of the international transaction of providing guarantee and the same was added to the total income of the Assessee and the action of the TPO was confirmed by the CIT(A). The limited prayer before the Tribunal is to adopt 0.5% as the appropriate rate and that too on the sum utilized by the AE from and out of the sum of Rs.2.18 crores extended as credit limit to the AE and the submission so made is based on the decisions of ITAT rendered in the case of Associated Capsules Pvt. Ltd. Vs. ACIT (2020) 121 taxmann.com 103(Mumbai-Trib). We are of the view that the prayer so made based on the decision cited is acceptable. We accordingly direct that the ALP be determined at 0.5% of the credit limit utilized and not that what is sanctioned. We hold and direct accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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