TaxTMI 
TaxTMI 
2015 (4) TMI 180
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....ed) to its AE. The said international transaction was benchmarked in the transfer pricing ("TP") study using Transactional Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM"). The segmental profitability of the assessee from its manufacturing and trading segment was compared with margin earned by comparable companies engaged in performing similar manufacturing and trading functions respectively. The results of the benchmarking analysis undertaken by the assessee are provided in the table below: International Transactions Profit level Indicator Appellant's margin Comparables margin Export of manufactured medicines Operating Profit/Total Cost ('OP/TC') 46.33% 10.23% Export of traded medicines 17.44% 5.31% 3.1 Since the operating profit margin of the assessee in both the segments was higher than the comparable companies considered in respective segments, the international transactions were considered to be undertaken at arm's length price. 4. During the course of assessment proceeding, the above international transactions of the assessee were accepted by the TPO at arm's length price. However, the TPO imputed a notional interest based on SBI Prime Lending....
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....e working capital adjustment has been appreciated by the Hon'ble ITAT: Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] Sony India (Pvt.) Ltd. [2011- TII/-43-ITAT-dEL- TP] Mentor Graphics (Noida) Private Limited [109 ITD 101J Capgemini India Private Limited [TS-45-ITAT-2013(Mum)- TP] Micro ink Ltd [TS-216-ITAT-2013 (Ahd)-TP] II. Aggregation of closely linked transactions * Principle of aggregation is a well-established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be determined for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself and has also been advocated by the OECD Guidelines. * Differential impact of working capital of the Appellant vis-a-vis its comparables has already been factored in the pricing! profitability of the Appellant and therefore, any further adjustment to the margins of the Appellant on the pretext of outstanding receivables is uneconomical, unwarranted and wholly unjustified. * In this regard, reliance is placed on the recent ruling of Hon'ble Delhi High Court in case of Son....
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.... foreign currency * The Appellant would also like to highlight that during the year 2009 the home currency of the AE i.e. Hryvinia ('UAH') had strikingly devaluated which resulted in increase of liability for AE towards the Appellant. It is respectfully submitted that the Appellant invoices its AE in the USD and its liability arises in USD whereas, the AE bills its customers in the UAH. * Your Honours would appreciate that the AE undertaking routine distribution functions is entitled to a routine return vis-a-vis the Appellant which is a manufacturer. Such a distributor in an arm's length scenario would not assume such increased liability arising out of foreign exchange fluctuation. Any third party distributor would have asked for a discount or waiver for the same. VI. Business model of Kusum India needs to be appreciated * The business model of the Appellant and the geographic region where it sells its goods is such, where the revenue cycle is usually longer and it takes longer time to recover the proceeds. * Majority of the revenue earned by the Appellant is from AE (i.e. 88%, INR 70.09 crores during the year). Keeping in view the strong presence of and volume of....
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....efore, the proposed adjustment should be withdrawn. 6. The Ld. DR, Shri J. James submitted that the argument of the assessee that the transaction in question has been recharacterised is incorrect. He submitted that at the first instance itself, the TPO has characterised the amount due from the A.E. beyond 180 days, as a loan, for the reason that the agreement between the parties stipulate that the credit period shall be only for a period of 180 days. He referred to page 16 of the assessee's paper book and to page 249 as well as 255 to drive home his point that the assessee itself has characterised the dues from A.E. and Non-A.E. as debtors and that it is an interest free loan given to an A.E. To the other propositions argued by the assessee, he submits that the D.R.P. at page 20 dealt with the issue of clubbing. On the reliance placed by the assessee on recent Jurisdictional High Court judgement in the case of Soni India Pvt.Ltd. and others, he submitted that the issue considered by the Hon'ble High Court was whether expenditure incurred on advertising and marketing intangibles can be separately bench marked or not when TNMM is adopted. He submitted that the issue on hand ....
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....ee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below: Segment Name Appellant's Margin (OP/TC) Working capital adjusted margins of comparables (OP/TC) Manufacturing Activity 46.33% 11.84% Trading Activity 17.44% 8.36% 10. The above analysis empirically demonstrates that the differential impact of working capital of the vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than....
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....t profit 50 (5%) 50 (5%) The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as Rs. 501-, i.e. identical as case 1 and AMP of Rs. 1001- as a separate transaction, the position in case 2 would be: Particulars Case 2 Sales 1,000 Purchase Price 500 Gross Margin 500 (50%) Overhead expenses 300 Marketing expenses 50 Net profit 150 (15%) It is obvious that this would not be the correct way and method to compute the arm's length price. The purchase price adjustments/set off would be mandated to arrive at the arm's length price, if the AMP expenses are segregated as an independent international transaction ....." 14. As mentioned earlier, the differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/ profitability of the....