TaxTMI 
TaxTMI 
2015 (3) TMI 304
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....ome of Rs. 118,56,65,783. In the course of assessment proceedings, the Assessing Officer noticed that the assessee is a subsidiary of Toyota Motor Corporation, Japan and has entered into international transaction with its holding company during the previous year. The transaction with the holding company was an international transaction with an Associated Enterprise (AE) and therefore the price at which the international transaction was carried out has to pass the Arm's Length price test laid down in Sec.92 of the Act. 4. As already stated the Assessee is a subsidiary of Toyota Motor Corporation, Japan (TMC), manufactures and sells multi-utility vehicles under model name "Innova" and passenger cars under the model name "Camry/Corolla." 5. During the previous year, the Assessee was engaged in carrying out two activities: 1. Manufacturing and 2. Trading The Financials of Assessee for the FY 2006-07 at the entity level relevant to AY 07-08 (Includes Transactions with AE as well as Non-AE) :- Description Rs. In (000) Operating Revenue (excluding other income) 37633754 Operating Expenses (excluding interest and loss on sale of assets) 36847765 Operatin....
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....- Manufacturing (iv) Receipt of commission - Trading (v) Return of racks - Manufacturing (vi) Purchase of parts and components - Manufacturing and trading (vii) Purchase of automobiles and accessories - Trading (viii) Payment of royalty and technical fees - Manufacturing (ix) Payment for intra group services - Manufacturing and trading (x) Reimbursement of expenses received - Manufacturing and trading The TPO then proceeded to categorize the aforesaid transactions into two distinct segments:- i. Manufacture and sale of passenger cars ii. Trading in auto components 8. Thereafter, the TPO arrived at the results of the trading segment as well as manufacturing segment of the assessee. The PLI adopted was operating profit on sales. As far as trading segment is concerned, the AO arrived at the following segmental results:- Particulars Trading (Rs. in crores) Operating Revenues 818.02 Cost of Goods sold 715.82 Gross Profit 102.02 Gross Profit on Sales 12.49% Operating Cost 780.24 Operating profit 37.78 Operating profit margin on sales 4.62% The TPO was satisfied that the international transaction....
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.... to comparable then the same should be applied to the taxpayer so as to combine manufacturing and trading as trading revenues in the case of taxpayer are also less than 25% of the revenues. The TPO however was of the view that trading and manufacturing are different activities associated with different asset and risk profile therefore the two activities cannot be combined. The Assessee pointed out that the comparable companies are also into trading and that the trading revenues in the case of comparable companies contribute less than 25% of revenues. The TPO however held that the impact on the overall profits of the comparable companies on account of trading revenues being less than 25% of the overall revenues was negligible. 12. Thereafter, the TPO arrived at the following arithmetic mean of the 5 comparable companies chosen in the manufacturing segment:- (Rs. in Crore) Sl No Company Name Finance Year Adj. Net Sales Adj. Op. Cost Adj. Op. Profit Adj. OP /Sales 1 Ashok Leyland 2007- 08 7237.19 6789.24 447.95 6.19% 2 Eicher Motors Ltd 2007- 08 1932.90 1878.77 54.13 2.80% 3 Mahindra & Mahindra Ltd. 2007- 08 9552.32 8923.55 628.77 6.58% 4 Swaraj Maz....
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....ing the FY 2006-07. The TPO thus concluded that the international transactions entered into by the Assessee in the manufacturing segment was not at arm's length. The arm's length price was computed by him as under. "Computation of Arm's Length Price The arm's length price is computed as under for the manufacturing segment: Costs incurred in the international transactions (as per submissions of the taxpayer dated 25-02-2011) a. Purchase of parts & components Rs. 1089,86,95,168 b. Payment of technical support fee Rs. 76,63,572 c. Other expenses Rs. 3,21,80,558 d. Royalty Rs. 78,13,84,839 Total cost incurred with AEs in the mfg segment ...... Rs. 1171,99,324,137 Operating Revenues (a) Rs. 2949,89,00,000 Arms Length Mean Adjusted Operative Profit Margin 7.10% on Sales Total Arm's Length Operative Cost (92.90% of (a)) (b) Rs. 2740,44,78,100 Operative Cost shown in the books (c) Rs. 2893,33,00,000 Cost shown in the international transactions (as arrived above) (d) Rs. 1171,99,24,137 Costs incurred with un-associated enterprises / persons (e = c - d) Rs. 172 1,33,75,863 Arm's length cost of international transactions (f= b - e) Rs. 1019,11,0....
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....les advocate profit split method of determining ALP where international transactions involve transfer of unique intangible or in multiple international transactions which are so inter-related that they cannot be evaluated separately for the purpose of determining ALP of any one transaction. It thus appears that the Act and the Rules contemplate determining ALP by aggregating international transactions which are multiple, interlinked or inter-related to each other and cannot be evaluated separately. To this extent the conclusions of the TPO regarding determination of ALP by taking segmental results without looking into as to whether the two segments are interlinked or inter-related cannot be sustained. As to what would be the most appropriate method in such cases is again dependent on Rules 10B(2) and (3) of the Rules. 42. The OECD guidelines as well as the Australian Tax Officer (ATO) Taxation Rule 97/20 on International Transfer Pricing para.2.74(1) referred to by the assessee before the Revenue authorities which have been set out in the earlier part of this order seems to support 'combined transaction approach' where the transactions are closely linked or continuous that they ....
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....assets and risks of the trading and manufacturing segments generally differ, however circumstances may warrant combining both of them. It is only in the specific facts of the case that the combining of both segments is advisable. In the instant case of the assessee, the sale of spare parts is triggered as a result of the manufacturing activities, including warranty commitments. Therefore, we are of the view that it would not be in the fitness of things for the sale of spare parts and components to be considered in isolation from the sale of manufactured vehicles. This view is supported by the OECD T.P. Guidelines, 2010, relied on by the assessee. This view is also buttressed by the fact that the comparable companies are also trading in spare parts and components. On a overall consideration, it can be concluded that trading in spare parts is closely inter-linked with the manufacturing segment of the assessee. We are of the view that no meaningful purpose would be served in segregating the trading and manufacturing segments, particularly when the assessee and the comparable companies are at par with regard to the nature and scale of combined activities. Needless to add that this find....
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....nal. The Tribunal went ahead and decided the issue whether the TPO can come to the conclusion that ALP of international transaction is NIL because no services were rendered or that the assessee did not derive any benefit from the AE for which payments were made. The Tribunal in para 48 of its order clearly observed that this issue is purely academic because the Tribunal has already held that international transaction is at arm's length and no addition needs to be made to the total income of the assessee. The Tribunal finally concluded in para 48 of the order that TPO cannot come to the conclusion that the assessee has not derived any benefit for which it made payments and therefore the consideration paid by the assessee has to be arrived at NIL. 20. In paras 50 & 51 of the order, the Tribunal also referred to an order of CIT(A) for A.Y. 2005-06 wherein the CIT(A) held that TPO cannot determine the ALP of royalty payment at NIL and concurred with the view. 21. In this M.P., the Revenue after referring to paras 50, 51 and 48 has submitted as follows:- "5. The above para reads to mean that the TPO is to recomputed the ALP in accordance with the methods laid down in the Ac....