TaxTMI 
TaxTMI 
2015 (4) TMI 180
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....ar, the assessee was involved in export of pharmaceutical products (manufactured as well as traded) 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 46.33% 10.23% Export of traded medicines Cost ('OP/TC') 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 assess....
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....hat the difference should be reflected in profits. " • In this regard, the Appellant would like to place reliance on the following rulings wherein the need to undertake 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! prof....
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.... • Bharti Airtel Limited Vs. ACIT (TS-76-ITAT-2014(DEL)- TP) • Vodafone International Holdings BV vs Union of India (2012) 17 taxmann.com 202 (SC) • Sony Ericsson Mobile Communication India Pvt. Ltd and several other connected matters [TS-96-HC-2015(DEL)- TP] • Evonik Degussa India Private Limited (ITA No. 7653/MUM/2011) • CIT vs M/s Sutlej Cotton Mills Supply Agency Ltd (1975) 100 ITR 706 • CIT vs Niraj Amidhar Surti - Tax Appeal No. 836 of 2009. V. Devaluation of 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....
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....olly unjustified and unwarranted. LIBOR rate should be applied on an international loan for computing interest, which has been upheld in the following rulings: • • Kohinoor Foods Ltd. (TS-224-ITAT-2014(DEL)- TP) • Siva Industries & Holdings Ltd (ITA No. 2148/Mds/2010), • Four Soft Ltd. (ITA No. 1495/HYD/2010) • Varroc Engineering Pvt. Ltd. (I.T.A No. 2482/PN/2012) • Tricorn India Ltd. ( TS-266-ITAT-2014(MUM)-TP) • • Accordingly, the approach of the Ld. AO is grossly incorrect and void and it is respectfully submitted that keeping in view the above contentions, factual position as well the judicial precedence, any adjustment to on the pretext of outstanding receivables is wholly unjustified and therefore, 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 stip....
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....the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon'ble Tribunals : • • Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] • Mentor Graphics (Noida) Private Limited [109 ITD 101] • Egain communication (P) Ltd. [ITA No. 1685/PN/2007] • Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] • Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee 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....
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....he Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction," 13. The above principle was also clarified by the Hon'ble Jurisdictional High Court by way of an example which is reproduced below: "At Para 93: An example given below would make it clear: Particulars Case 1 Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale promotion 50 150 Overhead expense 300 300 Net 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 substan....