TaxTMI 
TaxTMI 
2015 (5) TMI 546
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....income of Rs. 47,43,31,466. Subsequently, the assessee filed a revised return of income on 7.2.2008 returning the same income of Rs. 47,43,31,466 as originally returned, but revised its claim for TDS from Rs. 1,68,88,845 in the original return, to Rs. 2,48,77,109 in the revised return. In the assessment year under consideration, the assessee primarily operated its business in two segments; (i) Air Solution Segment manufacturing air compressors and (ii) Infrastructure segment manufacturing mining and compaction equipments. The Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determination of the Arm's Length Price ('ALP') of the international transactions reported by the assessee in the period relevant to Assessment Year 2006-07 after obtaining the approval of the CIT-I, Bangalore. The TPO passed the order under Section 92CA of the Act vide order dt.28.10.2009 proposing on T.P. Adjustment of Rs. 34,40,77,835 which comprised of the following :- i) Adjustment to the manufacturing segment : Rs.33,58,49,835. ii) Adjustment towards interest on debts outstanding : Rs.56,28,000. 2.2 Subsequent to....
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....he appellant has conducted an exhaustive and elaborate benchmarking analysis, to arrive at a set of companies that are broadly comparable with the appellant in respect of functions performed, assets employed and risks assumed, and benchmarked the average net margins earned by the independent comparables with the net margins earned by the appellant. Error in arriving at the International Transactions of the Infrastructure Segment: Ground No. 3 (i): The Honourable DRP and the learned AO have erroneously erred in arriving at the value of the sale made by the Infrastructure segment to the Associated Enterprises. Ground No. 3 ii): The Honourable DRP and the learned AO ought to have appreciated the fact that even after accepting the international transactions pertaining to the Air Solutions Segment to be at arm's length, it was erroneous on the part of the learned TPO to have included the aggregate value of the international transactions entered into by the Air Solutions segment instead restricting himself only to the international transactions entered into by the Infrastructure segment of the business. Ground No. 3 (iii): The Honourable DRP and the learned AO have erroneousl....
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.... for the same Financial Year in which the international transaction was actually entered into is a mandatory requirement. Also the appellant wishes to submit that the Honourable DRP and the learned AO ought to have appreciated that the transfer pricing regulations provide contemporaneous documentation to be mandatory, and not use of data for the same financial year. The Honourable DRP and the learned AO ought to have appreciated the fact that the objective underlying the use of multiple-year data was to ensure that the outcomes of the international transactions for the year under consideration were based on all the earlier periods which were relevant for determination of transfer price. Moreover the data of the preceding two financial years gives a clear indication of the business and economic conditions prevailing at the beginning of the relevant financial year i.e. the time when the transfer prices are set up, and the purpose of using multiple year data is to minimize and even out the impact of any abnormal factor which might have unduly influenced the outcomes of the data used for the comparability analysis. Escorts Limited should not be rejected: Ground No. 6(i): The H....
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....ssociated and non Associated enterprises. Safe Harbour provisions as postulated under the Proviso to Section 92C(2): Ground No. 9: Without prejudice to any of the appellant's other grounds of appeal, if at all any adjustment is made, the same should be made only to the lower limit of the 5% range set out u/s 92C (2). Error in computation of imputed cost of interest: Ground No. 10: The Honourable DRP and the learned AO have erred in upholding an adjustment of `56,28,000 made by the learned TPO as interest on outstanding debt and have failed to appreciate the fact that arms length principle is not applicable on notional income. Ground No. 11:The learned TPO has failed in applying the prescribed methods in determining the arms length price for interest on outstanding debt and treating the receivable on par with investment grade bond rated as BBB by credit rating agencies. Ground No. 12:Also the learned AO/DRP/TPO have failed to appreciate the fact that on a consolidated basis, the outstanding payable of the appellant due to the holding company and other fellow subsidiaries is more than the outstanding receivable from the holding company and fellow subsidiaries. Gr....
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....sults of the assessee are as under :- Operating Revenue Rs.493,79,26,646 Operating Cost Rs.455,89,35,409 PBIT Rs.373,89,91,237 PBIT as % of Cost 8.31% 6.2 The international transactions reported by the assessee in the year under consideration are as under :- International Transactions (Rs.) 1. Import of components and spares. 51,97,13,905 2. Import of finished goods 13,01,31,245 3. Export of finished goods, components and spares. 86,87,23,023 4. Rendering of CAD/CAM services 6,05,05,588 5. Co-ordinating sales for commission. 39,85,518 6. Recovery of expenses 1,83,55,185 7. Reimbursement of expenses 38,54,136 Adjustment only on the Infrastructure Segment. 6.3 The assessee had undertaken its T.P. Study with respect to the following two segments separately :- (i) Air Solutions, and (ii) Infrastructure Segments. The TPO, however, rejected the assessee's T. P. Study mainly due to the non-use of current year data, use of earlier year data of the comparable companies and use of comparable companies with different accounting years. After making these observatio....
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....per book to establish that separate bench marking was done for both segments separately; different comparables were chosen for the two segments and ALP was drawn up separately for both the segments. The learned Authorised Representative also drew the attention of the bench to the fact that the comparables adopted by the TPO for making the adjustment were the 4 comparables related to the infrastructure group and that the three comparables selected by the assessee for the air solutions group are not considered by the TPO at all. 6.5.2 It was therefore contended by the learned Authorised Representative that while the adjustment made by the TPO pertains to the infrastructure segment only, the TPO has also taken the sales of the air solutions segment while computing the ALP adjustment. The learned Authorised Representative drew our attention to the order dt.29.6.2010 passed by the TPO under Section 92CA rws 154 of the Act wherein the value of the international transactions has been taken at Rs. 93,32,14,129. It was contended by the learned Authorised Representative that out of this amount of Rs. 93,32,14,129, a sum of Rs. 84,50,33,854 pertains to the air solutions segment and only an....
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....s the international transactions related to the Air Solutions Group, the assessee had selected the following three companies as comparables :- 1) Elgi Equipments Ltd. 2) Kirloskar Copeland Ltd. 3) Kirloskar Pneumatic Co. Ltd. 6.7.2 In the T.P. order passed by the TPO under Section 92CA of the Act dt.28.10.2009, it is seen that there is neither any mention whatsoever about the two segments nor is there any finding whether the TPO accepts or rejects the segmental details furnished by the assessee. However, for the computation of the ALP of international transactions, the TPO has adopted four out of five of the comparables chosen by the assessee in its T.P. Study for its infrastructure group and also adopted the current year margins of these comparables for determining the mean margin of the comparables. From these details as emanate from the record, it is clear that the TPO has made an adjustment only to the Infrastructure Group Segment and has not proposed any T.P. Adjustment for the Air Solutions Segment. That being the case, it is but appropriate that only those transactions pertaining to the infrastructure group segment are considered for making the T.P. Adjustment. I....
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....e contends that the adjustments are to be made only on AE transactions related to the Infrastructure Segment and not only the entire transactions of the segment. It was submitted by the learned Authorised Representative that the infrastructure segment which has been subjected to T.P. Adjustment consisted of both the sales made not only to AEs and but also to non-AEs. The learned Authorised Representative submitted the sales revenues from the AEs only Rs. 8,81,80,275 out of the Revenues of Rs. 1,76,49,86,478 of the total infrastructure segment, as can be seen from the details extracted in the Table below :- Particulars Revenue from AEs (Rs.) Revenue from Non-AEs (Rs.) Total (Rs.) Sales of finished goods 2,36,89,169 1,67,68,06,203 1,70,04,95,372 Rendering of services 6,05,05,588 6,05,05,588 Sales Commission 39,85,518 39,85,518 8,81,80,275 1,67,68,06,203 1,76,49,86,478 7.1.2 It was therefore submitted by the learned Authorised Representative that the transactions with AEs works out to only about 5% of the total revenue from infrastructure segment and that if at all any adjustment is....
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....that notwithstanding the submissions on the T.P. Adjustment, the following errors have crept into the computation of the operating margin :- (i) that the TPO has erroneously considered the other operating income of the infrastructure segment to be Rs. 6,95,00,000 instead of the correct figure of Rs. 7,89,27,267 for computing the operating profitability of the Infrastructure Segment while computing the T.P. Adjustment. (ii) that the excise duty being pass through costs, the same should be excluded from the sales as well as from the operating expenses while computing the operating profitability of both the assessee as well as comparable companies. 8.2 Before us, the learned Authorised Representative submitted that the TPO has adopted the figure of other operating income of the infrastructure segment wrongly in the computation of the T.P. Adjustment. In this regard, we direct the TPO to examine this contention of the assessee and adopt the correct figure i.e. Rs. 6,95,00,000 or Rs. 7,89,27,267 after due verification. 8.3.1 As regards the treatment of excise duty while computing the margins, the learned Authorised Representative submitted that the excise duty being pa....
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....egment, he rejected one of the comparables, namely Escorts Ltd., on the ground that it had a different year ending. In this regard, as per the assessee's admission, this company had a different year ending and the figures related to the year ending 31st March were not available. We are of the view that in the above factual matrix, since the financial figures adopted for this company were for a different period, the TPO was right in holding that it is not comparable. We, therefore, find no infirmity in the decision of the TPO in rejecting this company as a comparable company. Consequently, Ground No.6 raised by the assessee is dismissed. 10. Ground No.5 - Multiple year data should be accepted. 10.1 The assessee has used Multiple Year Data while computing the margins of comparable companies. The TPO, however, while accepting four of the five comparables chosen by the assessee, has considered the current year's data for these comparable companies while computing the margins thereof. The only contention put forth by the assessee against this decision of the TPO is that the assessee cannot be expected to use data that is unavailable in the data bases at the time of preparing t....
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.... accordance with section 92C(1) and 92C(2) of the Act. As it is mandatory requirement of law to utilise data of the current financial year to conduct the comparability analysis at the time of transfer pricing proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its T.P. Study report. Further, we are also of the view that the TPO has rightly rejected the use of earlier year's data by the assessee, as the assessee failed to establish how such earlier year's data had an influence on the prices of the current financial year. Consequently, Ground No.5 raised by the assessee is dismissed. 11. Ground Nos.10 to 13 - Interest on Receivable - Rs. 56,28,000. 11.1 In the course of T.P. proceedings, the TPO observed that there are certain receivables from the AEs which were due for a period in excess of six months at the end of the financial year. The TPO, therefore, held that the delay in collection had impacted the profits of the assessee and therefore an adjustment towards notional interest on net r....
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....he payment is not due to extension of credit period by the assessee to its AEs. In this regard, the assessee placed reliance on the decision of the Hon'ble High Court of Bombay in the case of CIT V Indo American Jewellery Ltd., in ITA No.1053 of 2012. 11.2.4 The assessee further made the following submissions :- (i) The TPO had mentioned, in his order under Section 92CA of the Act, that debts outstanding for more than 6 months is considered for making the T.P. Adjustment towards notional interest. However, the actual adjustment has been made on the total amount of receivables. In this regard, it was submitted by the learned Authorised Representative that there were no receivables from AEs outstanding for more than 6 months. (ii) It was submitted that if at all any adjustment had to be made, the notional interest is to be computed on the net receivables after netting off payables to all the AEs and not only to the holding company, as taken by the TPO. (iii) It was submitted that the TPO has erred in adopting an interest rate of 14% by stating that in terms of the financial health, the AEs of the assessee are not considered fit to be returned even as BBB (Moderate Saf....