TaxTMI 
TaxTMI 
2012 (6) TMI 138
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....yalty and technical assistance. As per the assessee, such international transactions carried out with its AE were inextricably related to its main manufacturing operations and the transactions were so closely linked and continuous that they could not be evaluated on a separate basis. Therefore, assessee considered all these transactions together in its TP analysis. As per the Transfer Pricing Report filed by the assessee, for the impugned assessment year (paper-book pages 94 to 135), the transactions entered by the assessee with AEs, were as under:- Name of the Associate Details of transaction Amount of transaction (in Rs.) Method adopted M/s SL Tech Corporation Import of 658100 Nos. of components/Raw Materials 52977685 TNMM M/s SL Engineering Company Ltd. Import 586336 Nos. of components/Raw Materials 1,98,61,201 TNMM M/sHSL Electronics Company Ltd. Import 349800 Nos. of components/Raw Materials 10,98,73,443 TNMM M/s SL Corporation Royalty , MSA Fee & Technical Assistance Fee 3,54,18,419 TNMM 4. For the purpose of justifying the transaction values, assessee ascertained the Arm's Length Price (ALP) using Transactional N....
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.... assessee for the purchases made from AEs, the TPO was of the opinion that a downward adjustment of Rs. 13,22,13,231/- was required to be made for bringing the purchase cost at par with arm's length price. Assessee was put on notice of the above proposal, whereupon the objections submitted by it could be summarized as under:- (i) Transactions with AEs included purchases, sales, services, and royalty payment, i.e. both revenue and expenditure, which were intermingled. Therefore, fixing of ALP based on costs alone will not be correct. (ii) The non-AE cost was considered to be constant by the TPO and variations were entirely shifted to the transactions with AEs. This was incorrect since AE cost and non-AE cost were interdependent in respect of their composition and quantum. (iii) If the PLI of comparable companies were taken as basis, then sale value determined based on such PLI will be within the range of + 5%. (iv) Treatment of provision as not an operating cost was incorrect. (v) Foreign exchange gains/loss directly related to operating cost and hence could not be excluded. (vi) Determination of the + 5% range has to be done con....
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....etermination of ALP PLI being % of operating profit/operating income of assessee company 5.56% PLI being % of operating profit/operating income comparable company 10.52% Operating Income of assessee company 265.83 C Operating Cost of assessee company 251.04 C Operating Profit of assessee company 14.79 C If Operating income is 100 and Operating Profit is 10.52, operating cost = 89.48 If Operating income is 100 and Operating Profit is 5.56, operating cost = 94.44 ALP cost of assessee company 251.04 x 89.48 237.86 C 94.44 Less: Non AE cost (Total cost - AE cost 2498619360 - 15,74,83,824) 235.29 C ALP of AE purchase cost 2.57 C Less: Actual AE purchase cost 15.75 C Difference to be adjusted 13.18 C In respect of royalty and MSA fees, the TPO did not make any a....
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....ns when the analysis itself was made based on operating costs. According to him, assessee had correctly selected two comparables and worked out the PLI. In respect of M/s Halonix Ltd., the operating margin even if the figures adopted by the TPO were accepted, would come to only 12.23%. Learned A.R. submitted that the arithmetic mean of the PLIs of the two comparables would therefore be only 10.17%. Though the assessee had filed a rectification application in this regard, it was still to be dealt with. In any case, according to him, the methodology adopted by the Assessing Officer was not logical. He had excluded the non-AEs cost to work out the ALP of the purchases made from AEs and this had resulted in illogical conclusions. According to learned A.R., if the TPO's version was accepted, assessee need to have expended only 2.7 Crores for 15.75 Crores worth purchases made by it from the AEs. Learned A.R. pointed out that total raw material purchases of the assessee came to Rs. 175.88 Crores out of which purchases from AE came to only Rs. 15.75 Crores. Application of margin difference in cost in its entirety to the AE purchase and determination of ALP on absolute terms without applyin....
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....with actual payment made by the assessee, there was a difference of Rs. 13.18 Crores. In other words, the purchase cost was overstated by that amount. Assessing Officer had taken operating cost as shown by the assessee and operating profit based on the results of the assessee. According to him, therefore, A.O. had correctly and logically arrived at the ALP. As for the argument that adjustments were made by the TPO on absolute terms, D.R. submitted that such absolute figures which were applied for arriving at the ALP of the purchase cost, were worked out based on PLIs and nothing else. According to him, assessee had on theother hand not adopted a clear method in the computation. Assessee had paid excessively on the items purchased from the AEs for reducing its profits. Insofar as addition of new comparables was concerned, D.R. submitted that the DRP had rightly rejected such comparables since TPO had never gone beyond the original comparable set given by the assessee. If such an exercise was allowed, assessee would keep on adding new comparables till an ALP was reached which would be favourable to it. As for adjustment in the operating margin of M/s Halonix Ltd. for difference in fu....
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....sue to be dealt with is on the plea of the learned A.R. that adjustment ought have been allowed on the margins with reference to M/s Halonix Ltd., for a reason that M/s Halonix Ltd. had different functionalities. It might be true that M/s Halonix Ltd. was in the business of manufacturing lamps, whereas, assessee was in the business of manufacturing of light assembles. It may also be true that M/s Halonix Ltd. was selling some of its products through retail distributor, whereas, assessee was obliged to sell through original equipment manufacturers only. In the first place, this issue was never raised by the assessee either before the TPO or the A.O. or the DRP. Secondly, ALP analysis is made under TNM method. TNM method is generally preferred where functions are not strictly comparable, but when the tested and comparables were in the same lines of business. Multiple type of manufacturing within the same line of business will not by itself call for any adjustment of risk factor for mitigation of functional disparities, especially where such disparities were miniscule. Here, the assessee was supplying to original equipment manufacturers and its business risk stood much mitigated when ....
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....s is adopted 265.83 x 89.48 100 = 237.86 Crores Upto this level, the figures are exactly what has been arrived at by the TPO. Of course, we have taken 10.52% as the PLI of comparable companies, whereas, the actual PLI is 10.15%. This has been done with the purpose of making a meaningful analysis for finding out what logical error if any was committed by the TPO while working out the ALP. In our opinion, a logical error happened in the next stage, i.e. determination of non-AE cost. The non-AE costs are the costs relatable to transactions with non-Associated Enterprises and this has been taken by the A.O. as Rs. 235.29 Crores. He arrived at this amount by deducting from the operating cost of Rs. 251.04 Crores, a sum of Rs. 15.75 crores. The latter amount of Rs. 15.75 Crores is the cost of purchases effected by the assessee from Associated Enterprises. What we like to emphasize is that this was the cost of purchases only. For arriving at ALP of purchase, Assessing Officer has deducted from the total cost including material cost, the purchase cost of materials from Associated Enterprises. Total cost of Rs. 251.04 Crores included many....