9911796707
TMI Blog2019 (8) TMI 1864X X X X Extracts X X X X X X X X Extracts X X X X ..... 13-14 the appellant filed its return of income declaring total income of Rs17,94,81,280/-. The case of the appellant was originally selected for scrutiny u/s 143(3) and thereafter the AO referred the case to the TPO. In the Form 3CEB filed along with the return of income, the appellant had benchmarked the transactions involving purchase of raw materials and sale of finished goods by applying the internal TNMM Method and the transaction involving purchase of finished goods for trading purposes was benchmarked under the internal RPM Method. In the TPSR furnished along with the Form 3CEB, the appellant had drawn up segmented accounts for its manufacturing and trading segment. The manufacturing segment was further sub-divided into domestic, export and blanket. The export segment was sub-divided into related party and unrelated party and thereafter the internal TNMM was applied to benchmark transactions involving purchase of raw materials and sale of finished goods. As far as purchase of finished goods from the AEs is concerned, the trading segment involving purchase & sale of press chemicals was divided internally into related and unrelated party and benchmarked accordingly. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he application of TNMM on the premise that the value of transactions with its AEs as a percentage of overall volume of business was minimal and hence entity level TNMM was not the most appropriate method. Instead the Revenue drew up segmented accounts of the appellant and applied CPM in respect of purchase of raw materials and export of finished goods and RPM for the purchase of finished goods. The Ld. AR drew our attention to the decision of the coordinate Bench of this Tribunal in the appellant's own case for AYs 2004-05 & 2005-06 reported in [2016] 75 taxmann.com 122 (Kolkata - Trib.) wherein although application of TNMM by the assessee was upheld but even otherwise the Tribunal found the segmented accounts of the appellant to be reliable and on application of RPM & CPM, the international transactions were held to be at arm's length. He submitted that subsequent thereto, the appellant had been preparing segmented accounts and applying RPM in respect of its trading functions i.e. purchase of finished goods from AEs and TNMM in respect of manufacturing functions, i.e. purchase of raw materials and sale of manufactured goods to AEs. The Ld. AR submitted that this TPSR of the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinct FAR analysis and therefore where the FAR analysis of different activities are not inter-linked or inter-related then the correct approach is to determine the ALP for each of the activities independently. Drawing our attention to the facts of the case, the Ld. AR submitted that the appellant performed two separate and distinct functions i.e. manufacturing & trading which cannot be said to be relatedly comparable or inter-linked. He submitted that the manufacturing segment only dealt with manufacture of different variety of printing inks and the trading segment involved dealing in press chemicals. Accordingly he contended that the international transactions involving purchase of raw materials and export of manufactured finished goods being part of the manufacturing segment was rightly benchmarked together. As regards the press chemicals purchased from the AEs, he submitted that this transaction was completely distinct in as much as the appellant conducted only trading of these goods. The product profile, functions performed, risks assumed, assets employed& profitability in the trading activity could not be even remotely be said to be linked or connected with the activity of man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not fulfill the conditions laid down in AS-17 so as to qualify for reporting purposes cannot be reason enough to hold that such segment does not exist. Drawing our attention to the TPO's order, the ld. AR submitted that even the TPO had carved out a separate R&D segment to benchmark the R&D expenses incurred by the appellant, which admittedly was not part of any segment reporting in the published financial statements. He thus submitted that the TPO's rejection of the audited segment results furnished by the appellant was selfcontradictory. In this backdrop, the ld. AR submitted that the ld. TPO indeed has the requisite powers to examine and verify the segmental results furnished by the assessee and make necessary changes/alterations, if any infirmities are found therein but the segmental results cannot be rejectedon the bald premise that it does not form part of the segment reporting of the published financial statements. In support thereof, he relied on the following decisions: - Netguru Ltd. [TS-383-ITAT-2019(Kol)-TP] (Copy enclosed); - Tata Technologies Limtied [TS-390-ITAT-2019(PUN)-TP]; - Almatis Alumina Pvt. Ltd. [TS-302-ITAT-2019(Kol)-TP]; - Lummus Technology Heat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant's own case for AYs 2004-05 & 2005-06 reported in 75 taxmann.com 122. 8. Per contra the Ld. CIT, DR vehemently supported the order of the lower authorities. According to him although segmented data can be used for undertaking benchmarking analysis in transfer pricing but re-segmentation of segmented data is not permissible. He reiterated the AO's observation that the segmented data did not form part of annual report and hence could not be relied upon. He alternatively submitted that in case the usage of segmented results were upheld, then the matters be restored to the file of the AO/TPO for verification of the facts & figures stated therein. As regards the comparability analysis, the Ld. DR supported the order of the DRP, Delhi upholding the retention of comparables engaged in manufacture of pigments viz., the raw material used in manufacture of printing inks. According to Ld. DR, since pigments is an essential raw material for manufacturing pigments the said industry could be said to be broadly comparable with the printing inks industry. 9. After giving a thoughtful consideration to the facts of the case and the issues raised before us, we deem it fit to first frame the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method, in the following manner, namely :- (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (v) the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, etc. It is discernible from the above definition of international transaction given in section 92B that it refers to 'a transaction' between two or more associated enterprises. The term 'transaction' has been defined in section 92F(v) and also in Rule 10A(d) of the Income-tax Rules, 1962. The Rule defines the term 'transaction' to include: 'a number of closely linked transactions.' 12. Hence, in view of the above provisions and rules set out there-under, we are of the considered view that the arm's length price is essentially required to be determined on transaction-by-transaction approach for each international transaction separately. For that purpose, a transaction in singular also includes plural for closely linked transactions. In other words, where the transactions are not closely linked, that their ALP should be determined separately for each int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment arising from one set of international transactions may get set off against the income from the other international transaction giving higher income on transacted value. In our considered view therefore the transaction by transaction approach is the more appropriate and reasonable way to benchmark different international transactions, having regard to their FAR profile and this approach holds precedence over the aggregate approach. 14. In this regard we find that the Hon'ble Punjab & Haryana High Court in Knorr Bremse India (P) Ltd. v. Asstt. CIT [2016] 380 ITR 307 considered the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction only if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group. It went on to hold that where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice for it was not the arm's length price. It does not become the arm's length price merely because the bargain struck with respect to the first transaction balanced the inflated price of the second although the two transactions were independent of each other. The two transactions are different and, therefore, the arm's length price of each of them must be determined separately. The question, therefore, in each case must first be whether the sale of goods or the provision of services was a separate independent agreement or whether they formed part of an international transaction, i.e., a composite transaction. [Para 41] - It follows, therefore, that if the TPO had correctly come to the conclusion that the said five items were not connected to the rest, he was justified in determining the arm's length price thereof separately from and independent of the otheRs. It would be neither logical nor rational in that event to club several independent and unconnected transactions for the purpose of determining the arm's length price. If, on the other hand, it is established that the sale of various goods and/or the provision of services formed one composite indivisible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CB India Ltd Vs DCIT (69 taxmann.com 383) is of much relevance. In the decided case the assessee had international transactions with AEs inter alia including payment of royalty on sales and import of raw materials. It was the argument of the assessee that these transactions should be aggregated and benchmarked under TNMM on entity level. The Tribunal however did not find merit in this contention as because the payment of royalty pertained to marketing & distribution functions whereas the import of raw materials was a part of manufacturing activities. The Tribunal found that these two set of transactions were neither inter-linked or closely connected having regard to their respective FAR and therefore upheld the Revenue's contention that these transactions should be benchmarked separately viz., royalty under CUP Method and import of raw materials under TNMM. The relevant extracts of this decision is as follows: "7.1 Next argument of the ld. AR was that the TNMM was applicable on entity level de hors the separate determination of ALP of the international transaction of payment of royalty under the CUP method by the assessee. It was argued that the assessee's main emphasis in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregated manner at par with those undertaken by the comparables, then, segregation should be done and the international transaction of AMP should be separately processed under the transfer pricing provisions. In such a determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed. ..... 7.4 Though the judgment in Sony Ericsson Mobile Communications India (P.) Ltd's case (supra)lays down at length the broader principles for determination of the ALP of AMP expenses in the case of a 'Distributor', certain principles dealing exclusively with the determination of the ALP of AMP expenses in the case of a 'Manufacturer' have also been laid down. Such discussion has been made in para 92 of the judgment, the relevant part of which is reproduced here as under :- "92. The majority judgment refers to an example where the Indian AE may have earned actual profit of Rs. 140/-, but returned reduced net profit of Rs. 120/- as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned with the manufacturing activity cannot be aggregated with the AMP activities as both are separate and distinct. 7.6 Nitty gritty of the above discussion is that aggregation of related transactions is permissible, but there is no rule that all the related and unrelated transactions can be combined and shown at ALP under the TNMM on entity level. The Hon'ble Punjab & Haryana High Court in Knorr-Bremse India (P.)Ltd. v. Asstt. CIT [2016] 380 ITR 307/[2015] 236 Taxman 318/63 taxmann.com 186, has held that in order to combine two or more transactions, it is essential that they should be either inextricably linked to each other either by way of a package deal or that a number of transactions are priced differently but on the understanding that the assessee will accept all of them together (i.e. either take all or leave all). It further held that merely because purchase of goods and acceptance of services lead to manufacture of final product, it does not follow that they are dependent transactions. 7.7 On going through the facts and ratio of the decisions in Sony Ericsson Mobile Communication India (P.) Ltd's case (supra) and Knorr-Bremse (supra), it is manifest tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity will have distinct and separate considerations. 7.2 We, find merit in the argument of the learned counsel that the TPO should have accepted the method of assessee's benchmarking analysis on the basis of transaction to transaction basis in respect of different segments of assessee's international transactions with associated enterprises. In our view, assessee's functions, risk and assets FAR considerations, which are given in the above table, deserves to be merited. TPO did not appreciate the assessee's transactions correctly and applied entity level benchmarking on TNMM method by combining assessee's all international transactions with associated enterprise without justification. 7.3 Our view is supported by ITAT judgments - Mumbai Bench in the cases of UCB India (P.) Ltd. (supra); and Star India Ltd. ( supra); and Kolkata Bench in the case of Development Consultants (P.) Ltd. (supra). All these cases clearly lay down that ALP would be determined based on the nature of service provided by assessee for each class of transaction based on various factors and analysis. In the case of Star India Ltd. (supra), also the TPO treated all the activities of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the present case. In the given facts of the present case, we note that the appellant has two separate & distinct activities viz., manufacturing of printing inks, blankets and trading in press chemicals. It is well understood that the functions involved in manufacturing activities, risks assumed, assets employed are significantly different and higher than the trading activity. Consequently it is generally seen that the profitability of a manufacturing enterprise is higher than the profitability of a trading enterprise. As already held earlier, the cross subsidization of the international transactions in a combined approach is impermissible since it results in distorted presentation of facts. Hence if both the manufacturing & trading segments of the appellant are aggregated, the combined profit margin would throw up an inappropriate result in as much as it cannot be compared either with companies engaged in manufacture of printing ink or companies engaged in trading activities. Furthermore in order to benchmark each set of transactions distinctly, it is imperative to use the segmented information of the manufacturing activity and trading activity of the appellant. On these facts w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onent of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments." 21. It is thus noted that the AS-17 does not define or identify reportable segment based on the company's function or activity i.e. manufacturing or trading which is carried out in the same/similar products in the same geographical environment and hence there was no occasion for the appellant to have reported its identifiable manufacturing and trading segment in its financial statements since it did not satisfy the criteria laid down in AS-17. We are accordingly of the considered view that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company. At the same time however it is an undisputed fact that the appellant indeed has two identifiable segments i.e. manufacturing & trading which have significantly different FAR profile. The audited segmental information as furnished before the TPO & DRP is available at Pages __ to __ of the paper book. For the reasons as set out in the foregoing, we r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of Almatis Alumina Pvt. Ltd. ITA Nos.726&2361/Kol/2017 Assessment Years:2012-13&2013-14 Page|23 Tribunal in the cases of CA Computer Associates (P.) Ltd. v. Dy. CIT [2010] 37 SOT 306 (Mum.Tribunal) and Dy. CIT v. Vertex Customer Services India (P.)Ltd. [2009] 34 SOT 532 (Delhi). 34. The DR submitted that segmental total cost not available and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company. 35. We have considered the arguments of both the parties. In our considered view for computing the net margin of the assessee for the purpose of transfer pricing only the cost related to the transaction with the AEs has to be considered and accordingly, we agree with the argument that segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's enterprises in respect of transactions carried on by the assessee. This view of ours is also supported by the order of the Hyderabad Bench of the Tribunal in the case of Foursoft Ltd. vs. DCIT (6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een audited by the Assessee'sChartered Accountant. The Coordinate Bench Delhi Tribunal further placedreliance on the decision rendered in the matter of Lummus Technology Heat Transfer BV v. Dy. CIT reported in [2014] 42 taxmann.com 342/64 SOT 47(URO) (Delhi - Trib) wherein it was held that segmental results could not berejected on the ground that the same was not audited. The TPO/DRP was required o examine the segmental results if the same were maintained in the ordinary course of business. On perusal of, inter alia, the aforesaid decisions, the Coordinate Bench Delhi in the matter of CSR Technology (India) (P.) Ltd vs. ACIT (supra)held that the AO/TPO/DRP erred in disregarding the segmental result of the taxpayer by proceeding to consider the margin of the taxpayer at the entity level for the transfer pricing analysis. In view of above judgments of coordinate benches, we note that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company and submission of segment reporting before the TPO. Therefore, the allegation made by the Revenue in this regard needs to be rejected." 23. For the reasons set out above we therefore upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1.75 crores which was sold to unrelated parties for Rs. 2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it was observed that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(Appeals). The difference in margin of 1% was well within the permitted range of +/- 5% allowed in second proviso Section 92C of the Income-tax Act, 1961. In view of above we do not find any infirmity in the order of the ld. CIT(A). Hence we allow assessee's ground." 25. Following the ratio laid down in the above decision rendered in appellant's own case and the given facts of the case, we uphold the application of internal RPM for benchmarking the international transactions involving purchase of press chemicals from AEs. We accordingly direct the TPO/AO to consider the assessee's audited trading segment results and to compute arm`s length price by applying internal RPM. 26. The next question for our consideration i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the DRP's order is conspicuously silent about this comparable. It was brought to our notice by the ld. AR that this company, M/s Organic Coatings Ltd was found to be functionally comparable and engaged in the same line of business by the DRP, Delhi in the appellant's own case in the earlier AY 2012-13 and thereafter it was also accepted by the TPO to be a comparable. On these facts and in view of the DRP's order for AY 2012-13, we do not find any reason to exclude the company, M/s Organic Coatings Limited from the list of comparables and hence direct the TPO/AO to consider the same. 29. Now we proceed to examine the six comparables, which were identified by the TPO and retained by DRP, but have been disputed by the appellant. The functional analysis conducted by the DRP and the remarks given for retaining them are reproduced hereunder: Sr.No Comparable TPO Assessee DRP 1. AshiSongwon Colours Ltd Selected by TPO. FAR being same The company is engaged in pigment Industry and is firmly fucused in becoming a leading global player in the phtalocyanine pigments The company as per the profile was found to be engaged in the production of pigments. The company had only one se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o manufacture the printing inks. The use of pigments in the manufacturing process is limited to colour the ink and make it frosted. Accordingly, it is evident that the manufacturing process& assets employed for producing pigments is materially different than the manufacturing process and assets employed for producing printing inks by consuming various components/materials inter-alia including pigments, dyes, resins, solvents & additives etc. In our considered view therefore it is incorrect to hold the supplier of one raw materialis functionally comparable with the manufacturer. It is further observed that the pigments are of wide variety having different applications and uses in different industries. As a consequence it is noted the price elasticity of the pigments is also very wide, depending it on its variety and actual use. It is also noted that the markets catered by pigment manufacturers, economic forces faced and other commercial factors are also significantly different with the companies involved in manufacture of printing inks. The ld. AR brought to our attention that the pigments are not only used as a raw material in manufacture of printing inks, but it is also an essenti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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