TaxTMI 
TaxTMI 
2013 (12) TMI 243
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....s and Components, GmbH, Germany. The assessee filed a return of income for the assessment year 2007-08 declaring a total income of Rs. 8,81,20,598 which was subject to a scrutiny assessment. The Assessing Officer noticed that during the year under consideration, the assessee had entered into "international transactions" pertaining to the provision of material handling solutions with its associated enterprises (in short "AE's") within the meaning of section 92B(1) of the Act. Section 92(1) of the Act requires that any income arising from an international transaction shall be computed having regard to the arm's length price (in short "ALP"). The computation of the arm's length price under section 92C of the Act in relation to the international transactions carried out by the assessee was referred to by the Assessing Officer to the Transfer Pricing Officer (in short TPO) in terms of section 92CA(1) of the Act. The Transfer Pricing Officer vide his order passed under section 92CA(3) of the Act, after allowing an opportunity to the assessee of being heard, determined the arm's length price in relation to the international transaction by enhancing the same by Rs. 6,36,05,887. The aforesa....
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....gin of the manufacturing activities by excluding the transaction of sale of component and spares to the third parties and high sea sales and service income ; Non-grant of adjustment 5. erred in not providing working capital adjustment to the unadjusted margins of the comparable companies for the financial year 2006-07 ; 6. erred in not providing adjustment on account of expenses for import of raw materials, components and spares ; Incorrect computation of transfer pricing adjustment to the manufacturing activity. 7. erred in computing the transfer pricing adjustment on the entire manufacturing segment sales instead of computing the transfer pricing adjustment on manufacturing segment sales pertaining to import of components and spares from associated enterprises only. Applicability of +/-5% range. 8. erred in computing the arm's length price of the international transactions pertaining to manufacturing activity and export of components and spares without taking into account the Añ 5 per cent. variation from the mean, which is permitted and which has also been opted for by the appellant under the provisions of section 92C(3) of the Act. Use of multiple....
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....e of hearing and accordingly ground No. 10 is also dismissed as not pressed. 6. Ground No. 12 challenging initiation of penalty proceedings under section 271(1)(c) of the Act has also not been pressed being premature and is accordingly dismissed. 7. We may now proceed to adjudicate the substantive disputes raised by the assessee in the remaining grounds of appeal. In order to appreciate the contours of the controversy between the assessee and the Revenue in this case, the following discussion is relevant. As noted earlier, the appellant is a company engaged in providing material handling solutions to Indian customers and is wholly owned subsidiary of Demag Cranes and Components, GmbH, Germany, who is a market leader in the field of cranes and hoists. The assessee is engaged in manufacturing of material handling equipment., viz., industrial cranes like standard cranes, process cranes, jib cranes and KBK cranes. The assessee is not only engaged in the activity of manufacture of such equipments, but also installation and servicing thereof. The assessee assembles/manufactures material handling equipments in India and provides entire range of products and support for Demag materia....
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.... The Transfer Pricing Officer has accepted the application of transactional net margin method adopted by the assessee as the most appropriate method for the purposes of determining the arm's length price under section 92C of the Act. The Transfer Pricing Officer has also found it appropriate to accept the seven comparable companies selected by the assessee in its transfer pricing study. However, the Transfer Pricing Officer differed with the assessee for computing the grand average of operating margin ratio of such seven comparable companies, inasmuch as, as per the Transfer Pricing Officer the operating margin ratio of the comparables companies has to be seen on the basis of financial data of such companies for the period ending March 31, 2007 alone, which corresponds to the financial year in which the impugned transactions have been undertaken by the assessee. On the basis of such an approach the average operating margin ratio of such seven comparable companies was computed at 10.64 per cent., as is enumerated in para 6 of the order of the Transfer Pricing Officer. Pertinently, on the aforesaid approach of the Revenue, there is no dispute by the assessee inasmuch as the grie....
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....cing Officer observed the comparable companies selected by the assessee in its transfer pricing study were to be compared only with regard to their manufacturing segment alone, and therefore, he required the assessee to furnish necessary financial information to compute the operating margin ratio of the assessee's manufacturing segment in terms of which the operating margin ratio of the assessee was computed at (-)7.05 per cent. 11. Another area of difference was with regard to the assessee's plea to the Transfer Pricing Officer for adjustment on account of additional charges/ cost incurred towards import of components undertaken by the assesseecompany. The aforesaid plea of the assessee has not been accepted by the Transfer Pricing Officer, which according to him, was impermissible in terms of rule 10B(1)(e)(i) of the Income-tax Rules 1962 (in short "the Rules"). In final analysis, the Transfer Pricing Officer proceeded to benchmark the assessee's international transactions falling under the manufacturing segment as per the transactional net margin method and taking the comparables selected by the assessee in its transfer pricing study but after considering the financial data o....
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.... plea, reliance has also been placed on the decision of the Tribunal in the assessee's own case for the assessment year 2006-07 vide ITA No. 120/PN/2011 dated January 4, 2012 ([2013] 1 ITR (Trib)-OL 32), a copy of which is placed on record. On the aforesaid proposition, reliance has also been placed on the following decisions : 1. Deputy CIT v. Firmenich Aromatics (I) P. Ltd. (I.T.A. No. 2056/ Mum/2006) ; 2. Lionbridge Technologies P. Ltd. v. Deputy CIT (I.T.A. No. 9032/ Mum/2010) ; 3. Emersons Process Management India P. Ltd. v. Addl. CIT (I.T.A. No. 8118/MUM/2010) ; 4. Il Jin Electronics (I) P. Ltd. v. Asst. CIT [2010] 36 SOT 227 (Delhi) 5. Deputy CIT v. Starlite [2010] TII-28-ITAT-Mum-TP ; 6. Abhishek Auto Industries Ltd. v. Deputy CIT [2012] 15 ITR (Trib) 168 (Delhi) ; 7. Asst. CIT v. Wockhardt Ltd. 6 Taxmann.com 78 Mum-ITAT ; 8. Phoenix Mecano (India) ....
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....of proportionality is relevant here and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the associate enterprises, i.e., controlled cost. Accordingly, the grounds 10 relating to incorrect computation of transfer pricing adjustment to the manufacturing activity is allowed pro tanto." 15. In view of aforesaid discussion we therefore, hold that the assessee has to succeed on the said plea and as a result ground No. 7 raised by the assessee stands allowed. 16. By way of ground of appeal No. 5, the grievance of the assessee-company is that the lower authorities have erred in not providing adjustment to the unadjusted margins of the comparable companies on account of working capital differences. In relation to this ground of appeal, the preliminary plea of the assessee is that similar issue has been adjudicated by the Pune Bench of the Tribunal in the assessee's own case for the assessment year 2006-07 (Demag Cranes and Components (India) P. Ltd....
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....l has examined the provisions of rule 10B(1)(e)(iii) of the Rules and other precedents and concluded that the aspect of working capital can constitute a subject matter of adjustment in matters relating to arm's length price in transfer pricing. In the context of rule 10B(1)(e)(iii) of the Rules, the Tribunal has also concluded that in the assessee's case the aspect of working capital difference between the international transaction and the comparable uncontrolled transactions constituted a difference which materially affected the net profit margin of the relevant transactions in the open market. In para 34 of its order dated January 4, 2012, (Demag Cranes and Components (India) P. Ltd. v. Deputy CIT [2013] 1 ITR (Trib)-OL 32 (Pune)) the Tribunal has finally concluded as under (page 58) : "33. We have already discussed in the preceding paragraphs, this issue of adjustment on account of working capital was raised for the first time before the learned Dispute Resolution Panel and the Dispute Resolution Panel has passively relied on the order of the Transfer Pricing Officer without realising that the said issue....
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....ssessee in the light of the order of the Tribunal dated January 4, 2012, (Demag Cranes and Components (India) P. Ltd. v. Deputy CIT [2013] 1 ITR (Trib)-OL 32 (Pune)) and thereafter workout the adjustments, if any, that are required to be made in order to ascertain the arm's length price of the international transaction in question. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity to put forth material and submissions in support of its stand and only thereafter the Assessing Officer shall pass an order afresh on the above aspect in accordance with law. Thus, on ground of appeal No. 5, the assessee succeeds for statistical purposes. 20. By way of ground No. 6, the grievance of the assessee is that the lower authorities have erred in not providing adjustment on account of additional expenses incurred for import of raw materials, components and spares. In this regard, before the Transfer Pricing Officer the assessee pointed out that the import of components constituted 37.63 per cent. of the cost of material consumed in the assessee's case whereas the comparable companies had only 5.53 per cent. of imported components as compared to its c....
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....ons put forth to the Transfer Pricing Officer as also the calculation sheet furnished during the hearing of the appeal whereby the import component in the cases of comparable companies have been depicted. Explaining further, learned counsel pointed out that the assessee is still in the process of localising its product and therefore, it has a high import content whereas the comparable companies are in existence for a number of years and they have already localised their products thereby resulting in lower imports. In this manner, it was sought to be made out that the adjustment has to be granted for additional cost of imports incurred by the assessee and that similar plea was upheld by the Tribunal in principle in the assessee's own case for the assessment year 2006-07 vide its order dated January 4, 2012, Demag Cranes and Components (India) P. Ltd. v. Deputy CIT [2013] 1 ITR (Trib)OL 32 (Pune). 22. On the other hand, the learned Departmental representative appearing for the Revenue has pointed out that the Transfer Pricing Officer has dealt with the aforesaid plea by pointing out that the adjustment in the profit margin can only be made as permitted in rule 10B(1)(e) of the Rul....
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....cal purposes. 25. By way of ground No. 8, the assessee has contended that the lower authorities have erred in computing the arm's length price of the international transactions pertaining to the manufacturing activity and export of components and spares without taking into account Añ 5 per cent. variation from the mean which is permissible and was also opted for by the assessee in terms of section 92C(2) of the Act. 26. On this ground of appeal, the assessee has not articulated its grievance at the time of hearing, primarily on account of the amendments made by the Finance Act, 2012 in section 92C of the Act. In this view of the matter, we therefore, deem it fit and proper to direct the Assessing Officer to revisit such controversy in the light of legal position emerging as a result of amendments made to section 92C of the Act by the Finance Act, 2012. Thus this ground is accordingly disposed of. 27. Now, we may take up ground of appeal No. 3 whereby the grievance of the assessee is that the income-tax authorities have unjustly disagreed with the transfer pricing study conducted by the assessee for benchmarking its international transactions pertaining to supervisio....
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....d a combined transaction approach for the international transactions in relation to manufacturing of equipment. The same are closely interlinked and cannot be benchmarked separately. In this regard, reference was made to page 161 of the paper book wherein is placed an exhibit showing different activities carried out by the assessee which according to him all related to the manufacturing of material handling equipments and installation/commissioning thereof by way of providing complete material handling equipment solution to the customers. Learned counsel pointed out that the approach of the Transfer Pricing Officer is unjustified and according to him, if business operations of the assessee are perused it would show that the assessee enters into a consolidated negotiation with the customers in order to manufacture material handling equipments and cranes and also does erection/commissioning services which is then followed by repairs/maintenance and other after sales services. It was vehemently pointed out that merely because invoices are separately raised at different point of time would not show that the transactions are not interlinked. The separate invoicing is on account of vario....
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....be aggregated and construed as a single "transaction" for the purposes of determining the arm's length price, provided of course that such transactions are "closely linked". Ostensibly the rationale of aggregating "closely linked" transactions to facilitate determination of the arm's length price envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in order to compute the arm's length price also finds an echo in the OECD guidelines under Chapter III wherein the following extract is relevant : "Ideally, in order to arrive at the most precise approximation of arm's length conditions, the arm's length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. Some long term contracts for the supply of commodities or services ; 2. Rights to use intangible property ; and 3. Pri....
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.... to the terms 'best suited' and 'most reliable measure' indicates that the most appropriate method will have to be selected after a meticulous appraisal of the facts and circumstances of the international transaction. Further, the selection of the most appropriate method shall be for each particular international transaction. The term 'transaction' itself is defined in rule 10A(d) to include a number of closely linked transactions. Therefore, though the reference is to apply the most appropriate method to each particular transaction, keeping in view, the definition of the term 'transaction', the most appropriate method may be chosen for a group of closely linked transactions. Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or an arrangement and the nature, characteristics and terms of these transactions are substantially flowing from the said common source. For example, a master purchase order is issued stating the various terms and conditions and subsequently individuals orders are released for specific quantities. The various purchase transactions are closely linked transactions. ....
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....that the assessee has invoiced separately for such activities and therefore, they have to be understood as different transactions. The Transfer Pricing Officer has also observed in his order that in a case where profits of each individual transaction can be segregated then the aggregation of transaction is not intended by the transfer pricing regulations. The learned Transfer Pricing Officer has also referred to the segmental profitability in this regard computed by the assessee during the course of transfer pricing proceedings before him. In our considered opinion, the point made out by the learned Transfer Pricing Officer is not justified, inasmuch as, separate invoicing of an activity, flowing from a singular contract/negotiation, would not ipso facto lead to an inference that they are individual/independent transactions. In fact, it is the nature and characteristic of the activities which would be required to be analysed having regard to the facts and circumstances of each case as to whether they can be considered as individual/independent transactions or a single transaction for the purpose of transfer pricing regulation. In the present case, as we have noted earlier, it is on....