TaxTMI 
TaxTMI 
2014 (9) TMI 265
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....ciated enterprise. 2.1 That the assessing officer/DRP erred on facts and in law in not considering the audited segmental profit statement of the appellant submitted during the course of assessment, allegedly on the ground that - a. The audited segment report is issued and signed by the sister concern of the representatives of the appellant and the results are at variance from audited accounts and TP report. b. That the annual account of the appellant does not provide separate value of domestic purchases and imports. c. That the appellant has failed to provide the allocation keys for preparing the segment profit report. d. That the auditors have conducted 'test checks' to prepare the segment profit analysis of the appellant. 2.2 That the assessing officer/DRP erred on facts and in law in not considering the combined profitability of international transactions undertaken by the appellant with associated enterprise and transactions undertaken with unrelated third parties in domestic market, for the purpose of be....
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....rately benchmarked. 2.3 For benchmarking the international transaction of export and import of parts and steel/resin, search and screening process undertaken by the appellant, in the transfer pricing document, resulted in 2 comparable companies, earning a mean operating margin of 0.21%, as under: Company Name Sales Crs Trading Income/ Sales (%) OP/OC (%) OP/Sales (%) Stanes Motor Parts Ltd. 18.23 98.57% 3.44% 3.57% Spectra Industries Ltd. 21.58 96.39% (-3.07%) -3.15% Average PLI 0.18% 0.21% PLI of Assessee 5.00% 2.4 It was submitted that since the operating profit margin (OP/OC%) of the appellant company in the import segment at 5% was much higher than the average of two comparable companies at 0.21%, the international transactions of import of parts and steel/resin entered into by the appellant were to be considered at arms length price. 2.5 Ld. TPO however for benchmarking purpose, aggregated two transactions, namely - international transactions wherein the appellant purchased goods from associated enterprise and sold it in domestic market - along with domestic transactions wherein, the appellant purchased....
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....of TP proceedings certain inadvertent errors were found by assessee in the said segmental profitability, consequently services of a firm of Chartered Accountants were undertaken for computation and certifying the correctness of the segmental profitability. By their certificate 26.08.2011, the profit earned by the appellant under different segments was filed before the TPO and is enclosed at pages 160-166 of the paper book. 3.1 In terms of the audited and certified segment profitability of the appellant, the profit margins of the appellant under trading segment are as under: Particulars Trading Segment Revenue Export (AE'S) Domestic Sale of Imported Goods (AE'S) Other Domestic Sale Service/Sales Revenue 77,47,651 79,35,91,469 66,11,53,663 Export Incentive 6,320 - - Miscellaneous Receipts - 4,38,545 - Operating Income 77,53,971 79,40,30,014 66,11,53,663 Exchange Fluctuation income 58,956 4,12,39,132 3,662 Total Operating Income (A) +(B) 78,12,927 83,52,69,146 66,11,57,325 Expenditure Cost of Service/COGS 70,37,203 75,90,83,....
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....sis of his surmises and conjectures. 4.2 In its financial statements, assessee has shown two segments, namely, export and domestic segment, which is further bifurcated into "trading segment" and "commission and service segment". The said certified filed during the TP proceedings is also on the basis of export and domestic sales and there is no change in methodology and facts and figures as considered in the segmental profitability as shown in audited financial statements vis-à-vis segmental profitability submitted before the TPO on 26.08.2011. 4.3 In this behalf assessee filed a detailed reason on TPO's disagreeing with the segment report filed as annexure to TP study report. The same are as under: (i) Commission and Service charges segment has been further bifurcated into domestic segment wherein, the appellant has earned commission from the supplier of the goods which was an Indian entity and the purchaser was also an Indian entity. (ii) Trading segment has been further bifurcated into domestic segment, wherein the appellant has merely acted as a reseller/trader of goods purchased from an Indian entity and s....
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....ss of record and the true and fair view. Ld. TPO has erred in rejecting the segmental profitability without providing any cogent reasons and pointing put any material defect. Besides as per the settled principles of natural justice, when the audited segmental accounts are available on record they are to be objectively considered for the purpose of benchmarking. 4.7 Reliance in this regard is placed on the decision of Mumbai Bench of Tribunal in the case of Technimount ICB India P. Ltd. vs. ACIT [ITA No.7098/Mum/2010], wherein the Tribunal qua the question, whether for determining ALP, segmental results should be taken into account or whether profits at the entity level needs to be considered, has held as under: "The only objection for not considering the same was that they were not audit. This was only a procedural requirement and once the same was complied with, the audited segmental accounts should have been admitted as additional evidence by the DRP in order to impart substantial justice to the assessee. Therefore, the audited segmental results filed by the assessee is admitted and the matter is restored back to the file of Assessing Officer for de....
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.... had purchased goods from the domestic market and sold goods in the domestic market. While doing so it is allegedly held that "it is decided that being an independent distributor, it is imperative that all your trading transactions are linked together to create synergy in all your functions. The trading transactions cannot be judged piecemeal but trading segment must be benchmarked as a whole." 4.13 Ld. TPO failed to consider that ALP is to be determined under the TP regulations by benchmarking relevant international transaction separately and the comparison is to be made of the profitability of the international transactions on a stand alone basis; and entity level comparison is to be resorted to, only when such stand alone comparison is otherwise not feasible. 4.14 Reliance in this regard is placed on the following decisions, wherein it has been held that arms length price should be determined on a transaction to transaction basis: - Development Consultants (P.) Ltd. v. Dy. CIT [2008] 23 SOT 455 (Kol.) - Star India Ltd. v. Asstt. CIT [IT Appeal Nos. 3846 /3585 (Mum.) of 2006, dated 28-5-2008]  ....
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....herefore, as per the provisions contained under sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level" 4.19-20 For this proposition reliance is also placed on following decisions: - ACIT vs. Twinkle Diamond : ITA No. 5033/Mum/07 - ACIT vs. T Two International Pvt. Ltd. : ITA No. 5644/Mum/2008 - Addl. CIT vs. TejDiam : 130 TTJ 570 (Mum) - Abhishek Auto Industries Ltd. vs. DCIT : ITA No. 1433/Del/2009 - Starlite vs. DCIT: ITA No. 925/Mum/2006 - SMCC Construction India Ltd v. Addl. CIT: 44 SOT 63(Delhi) (URO) - Emerson Process Management (India) Pvt. Ltd. vs. DCIT (ITA No.7878/Mum/2011), - Phoenix Mecano (India) Ltd. vs. DCIT 49 SOT 515 - Hindustan Unilever Ltd. vs. ACIT (ITA No. 7868/Mum/2010) - 3i Infotech Ltd. vs. ITO (ITA No. 21/MDS/2013) - Sandoz (P) Ltd. vs DCIT (25 IT....
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....t can be seen that the revenue has arisen from completing Paraxylene Plant of IOCL and further that company is engaged in execution of other unit of IOCL's Panipat Naphtha Cracker Project. In our considered opinion, this case should not have been included in the list of final comparables for two reasons. First reason 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." 4.24 Thus Bharat Power Corpn. was incorporated only with an objective of providing services and supplies to Coal India limited and its subsidiaries companies, it has a fixed customer base with fixed demand and supply. It assumes lesser market risk and incurs less on account of marketing and advertisement. In view of the....
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....he associated enterprises negotiate with the suppliers and places orders for procurement of components. It is submitted that in the whole transaction, the appellant merely acts as a channel for communication of order to the associated enterprises. On the other hand, BPCL is the sole authorized distributors of specialized equipments and spares. In view of the aforesaid, it is respectfully submitted that the functional profile of the appellant is entirely different from the functional profile of Bharat Power Corporation Pvt Ltd. 4.25 In view of the aforesaid, since the business model of the BPC is different from the appellant in as much as the BPC enjoys a monopolistic economy and the appellant is established in a competitive market, the same shall not be considered as functionally similar to the appellant and excluded from the final set of comparable companies. 4.26 Reliance in this regard is also placed on sub-clause (2) of clause B of Rule 10 of Income Tax Rules, reproduced as under: "10 B. ..... (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shal....
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.... rejection of Spectra Industries Ltd. 4.29-30 The TPO has rejected Spectra Industries Ltd. in the search process on basis of declining sales. In this regard, it is respectfully submitted that revenue is not a true indicator of the performance of the company and the evaluation of comparable companies based on revenues is not an appropriate filter for the following reasons: a. Rejection of the companies on the basis of the profit margin/diminishing revenue rather than functional or asset profile would not meet the comparability standard required in application of TNMM. b. The diminishing revenues companies are as much a part and parcel of an industry as are increasing revenues making companies. A declining revenue company may be faced with issues such as competition in the market place, new technology introduced by competitors, choked working capital, these issues are reflective of the market. c. The arithmetical mean is a measure of central tendency and elimination of diminishing revenue making companies would introduce skewness in the set of comparables. Elimination of companies with diminishing ....
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.... Financial year 2005-06 2006-07 2007-08 2008-09 2009-10 PBIT 0.91 1.06 -0.46 -0.61 0.89 Net Worth 12.4 12.88 12 10.8 11.38 4.33 In view of the aforesaid, it is submitted that, since the company is functionally comparable to the appellant with respect to functions, assets and risk, the company shall be include in the final list of comparable companies. Further, since the sales and profits of the company has increased in the future years, the reason of its rejection is also could not be validated. 4.34 It is vehemently argued that in preceding assessment year, DRP in the appellant's own case has directed the assessing officer to re-compute the arms length price after including the profit/loss of Spectra Industries Limited, in the final list of comparable companies. There is no justification to deviate from what DRP itself has adopted in preceding year. Re: Final comparable companies: 4.35 After excluding Bharat Power Limited and including Spectra Industries Limited as comparable company in the final set, the average profit margin of the final comparable companies works out to 0.425% ....
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....ds and sale of goods purchased from associated enterprise, in accordance with the audited segment account, at 8.23% is within safe harbor range of +/- 5%, than the average operating profit margin of the comparable companies considered above at 8.82%, the international transaction undertaken by the appellant should be considered at arm's length. 4.41 Even considering the unaudited segmental profit relied upon by the TPO, the profit margin of the appellant in export and import segment workout to 5.32%, as under: Trading Segment Sale of Imported Goods Export to associated enterprises Average Sales (A) 793,591,469 77,47,651 801,339,120 Operating profit over sales (B) 5% 53% Total operating profit (A*B) 3,85,55,625 40,92,138 4,26,47,763 OP/Sales (appellant) 5.32% OP/Sales (comparables) 8.82% 4.42 Consequently, as the operating profit margin over sales of the appellant, considering international transaction of export of goods and import of goods....