TaxTMI 
TaxTMI 
2013 (11) TMI 930
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.... and steam and power generation plants. During the previous year relevant to the assessment year under consideration, it entered into certain international transactions with the Associated Enterprises (AEs) which were duly reported. A reference was made u/s 92CA(1) by the Assessing Officer (A.O.) to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) in relation to such international transactions. The TPO, vide his order dated 10.10.2011, proposed total adjustments to the extent of Rs. 11,01,10,403. Accordingly, the A.O. framed the draft assessment order. The assessee raised certain objections before the Dispute Resolution Panel (DRP) in respect of such proposed adjustments. The DRP gave certain directions to the A.O. The matter was reverted to the TPO for giving effect to the DRP's directions. In the order giving effect, the TPO reworked the adjustment on account of import of spares and equipments and sale of equipments/components at Rs. 5,10,61,123 as against its earlier proposed adjustment on this score at Rs. 6,72,06,437. The A.O. in his final order passed on 25.09.2012 made adjustment inter alia, of Rs. 5.10 crore on account of import of spares and e....
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....ansactions recorded in the books of account should be accepted at ALP. The TPO observed that the sales transactions were far in excess of the purchase transactions and hence the PLI of OP/Sales chosen by the assessee was incorrect. In his opinion, the correct PLI should be Operating profit to Total cost (OP/TC). On the perusal of the segmental details furnished by the assessee during the course of proceedings before him as tabulated above, the T.P.O. observed that the amount of AEs sales was shown at Rs. 322.58 crore while that of Non-AEs at Rs. 1061.69 crore. From the report in Form No. 3CEB, the TPO noticed that the quantum of total international transactions including sales, purchases and services was only at Rs. 137 crore. The assessee was confronted with this fact, upon which it was stated that some of the AE purchases had gone into the Non-AE sales and similarly some of the Non-AE purchases were reflected in the AE sales, The TPO observed that the assessee did not admittedly maintain segmental accounts for AE and Non-AE transactions and it was only for the purposes of transfer pricing proceedings that the audited segmental accounts were furnished by splitting the total figure....
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....en earlier, viz., TRF Limited and Sunil Hitech Engineers Limited. The first case was dropped due to the alleged higher related party transactions and the second due to functional differences. The TPO noticed that the assessee had selected Gillanders Arbuthnot & Company Ltd. as one of comparables. This company was found by him to be functionally different from that of the assessee for the reason that it was primarily into Cotton and man-made fibre yarn with 43.62% of its total turnover from this division alone. This enterprise also dealt with saleable tea which accounted for 16.94% of the total sales. In view of these facts, the TPO rejected this case as comparable as also for the reason that the assessee was engaged in the business of turnkey project, which this company was not. As the TPO was left with only three comparable cases from the assessee's list of cases, he conducted a fresh search with key phrase "turnkey project" and found five more comparable cases. After addressing to the assessee's objections to such cases, the TPO short listed total comparable cases to six by also including three cases left from the assessee's list of comparables. One case of TRF Limited, which was....
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....n in respect of transactions with AEs and Non-AEs. He further argued that the TPO was wrong in considering the ratio of material consumed to sales in the case of Non-AE segment at 86% as against that in the case of AE segment at 73%. It was pointed out that the TPO inadvertently considered figures of direct costs apart from material cost for working out ratio of material consumed to sales in respect of the Non-AE segment. He stated that such correct ratio was only 77% as against 86% originally considered by the TPO. In the light of the above arguments it was contended that when profit rate from internally comparable cases was available, then the internal TNMM should not have been disturbed. In the opposition, the learned Departmental Representative relied on the impugned order. 11.2 First thing which we need to determine is the extent of the reliability of the so called segment-wise figures of AE transactions and Non-AE transactions furnished by the assessee during the course of proceedings before the TPO for contending that the internal TNMM should be applied. Admittedly no such segment-wise accounts were maintained by the assessee. Such figures of AE and Non-AE transactions we....
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....r assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 11.4 It is relevant to note that sub-clause (i) of rule 10B(l)(e), which is first step in the computation of ALP under TNMM, talks of ascertaining the profit margi....
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....the figures of AE purchases and AE sales considered by the assessee for working out operating profit margin at 6.54% in respect of AEs also include Non-AE transactions. Such a course of action followed by the assessee to determine the profit margin from transactions with the AEs has absolutely no sanction of law. It rather defies and runs contrary to the very definition of 'international transactions' and the mandate of rule 10B(l)(e). Approving the course of action adopted by the assessee for calculating profit margin in respect of AE and Non-AE segments would require rewriting of the relevant provisions as discussed supra. By considering some transactions with Non-AEs also as a part of the AE segment, the computation of the operating profit margin in respect of AE transactions at 6.54% has completely lost its significance. Once the figure of OP/OC margin at 6.54% is itself incorrect, there can be no question of comparing it with that of Non-AE segment at 4.20%, which again stands distorted because of the exclusion of certain purchases and sales from/to Non-AEs from this segment eventually finding their way into the AE segment. We, therefore, uphold the view taken by the authoriti....
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.... were taken before the DRP. The A.O. was directed by the DRP to check the correctness of the ratio of OP/TC as contended by the assessee. Before passing final order u/s 143(3)/144C(13), the A.O. requested the TPO to vet the correctness of the assessee's claim. The TPO verified this aspect and sent his report dated 17.09.2012 to the AO, who in turn gave effect to the working made by the TPO in his final order. 12.2 In respect of Tata Projects Limited, the TPO had earlier computed ratio of OP/TC at 4.98% which was reduced to 4.13% in the fresh calculation. The assessee is disputing this calculation also to the extent of exclusion of Amortization of value of investment and Provision for doubtful debts from the operating cost. Insofar as the Amortization of value of investment is concerned, we hardly see any relevance of this expenditure with the operations of the business. As regards the provision for doubtful debts, it is relevant to note that it is a provision which has been considered as non-operating and not the actual incurring of bad debts. Obviously a provision for doubtful debts cannot be considered as operating cost. We, therefore, uphold the calculation of OP/TC at 4.13% ....
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....ssessee initially included the case of TRF Limited in its list of comparables. However, in the revised list of comparables submitted during the course of proceedings before the TPO, the said case was excluded. However, the TPO included this case in the final list of comparables. The learned Counsel for the assessee contended that this case should not have been included because the related party transactions in this case are around 20%. It was argued that the assessee adopted filter of 10% of related party transactions for the purposes of inclusion of cases in the list of comparables. As this filter was not disturbed by the TPO, the learned AR argued that the case of TRF Ltd. ought to have been excluded. In the opposition, the learned Departmental Representative strongly supported the inclusion of this case in the list of comparables. 12.6.3 Having heard the rival submissions and perused the relevant material on record, we find that the related party transactions in this case are admittedly a little more than 20% but less than 25%. On page 11 of the order passed by the TPO, it can be seen that he adopted filter of related party transactions at 25%. In the case of ACTIS Advisers P....
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....gment-wise results. It was shown that the revenue of "Project & services" segment is Rs. 29782.65 lakh and that of the "Product & services" is Rs. 11551.07 lakh. Taking us through the break-up of revenue of Product & services segment, it was shown that it consisted of two parts, namely, External sales at Rs. 6501.88 lakh and Inter-segment revenue at Rs. 5049.19 lakh. Because of the inclusion of intersegment revenue in the Product & services segment, the learned Departmental Representative contended that both the segments were rightly considered by the TPO as one unit. In the rejoinder, the learned AR submitted that the Inter-segment revenue was recorded at market driven agreed price as mentioned on the next page and in that view of the matter it would not affect the revenue of Projects & Services. 12.6.5 We find substance in the contention of the learned AR for adoption of results of "Project & services" segment of this comparable case instead of the entity level. There are only two segments of TRF Limited, viz., Product & services and Project & services. It has been rightly pointed out by the ld. DR that the total revenue of Rs. 11551.07 lakh of "Product & services" segment inc....
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....Company Ltd., which was included by the assessee in its final list of comparables submitted during the course of hearing before the TPO but the same was shunted out by the TPO on the ground that the said company is primarily into Cotton and man-made fiber yarn with 43.62% of total turnover under this segment. This enterprise was also found to have dealt with Saleable tea which accounted for 16.94% of the total turnover. The TPO observed on page 7 of his order that "this entity is not engaged in the business of turnkey project, hence rejected as comparable". 12.7.2 We find that the observations made by the TPO that Gillanders Arbuthnot & Company Ltd. is not engaged in the business of turnkey project, is incorrect. It is relevant to have a glance at page 681 of the paper book, being a copy of the Annual report of Gillanders Arbuthnot & Company Ltd., which contains information about its various business segments, such as, Trading, Tea, Property, Plastic Container, Textile and "Engineering Division". The same page contains information about the further break-up of the Engineering Division as comprising of manufacture and sale of "Steel Structurals, Pipes and equipments and Designing....
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....eason is that profit motive is not a relevant consideration in case of Government undertakings. Many Government Undertakings even operate on losses in furtherance of the social obligations of the government. The second reason is that Engineers India Limited earned income from turnkey project by successfully completing the project of IOCL and other Public Sector Undertakings. In that sense of the matter, the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables. 12.9 Last case which has been included by the TPO in his list of comparables is that of Sriram EPC Limited. This company is focused on providing turnkey solution for ferrous and non-ferrous, cement, aluminum, copper and thermal power plant. When we consider TNMM, it is the broader functional similarity which is considered. As the assessee is also engaged in the business of turnkey project, in our considered opinion, the TPO was right in including this case in the list of final comparables. 12.10 We, therefore, sum up our conclusion on inclusion or exclusion of cases in the final list drawn by the TPO. The cases of Tata Projects ....
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....ignificant to note that when the AO passed the impugned order on 25.09.2012, such amendment had already come into force. The consequences would have been different if the AO had allowed standard deduction of +-5% and the Revenue had orally challenged the grant of such standard deduction contrary to the provisions of law, without there being any legal recourse available to file appeal against the order of the AO u/s 143(3) read with section 144C(13) at the relevant point of time. The case before us is that the AO did not grant such standard deduction and we are required to ascertain as to whether or not his action is sustainable in law. As has been noticed above that the law as on the date as also retrospectively applicable to the relevant assessment year is against the granting of such standard deduction, we see no reason to hold that the assessee be allowed +-5% standard deduction in contravention of the legal provisions. This benefit of up to 5% can be allowed only if the variation between the price charged/paid in respect of international transaction and ALP determined by taking the results of comparable cases does not exceed 5%. In case such variation is more than 5%, then no s....