TaxTMI 
TaxTMI 
2013 (8) TMI 926
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....cribed in Section 92C(3) of the Income Tax Act, 1961 ('the Act1), had been violated by the appellant and thus, the A.O./DRP erred in making an addition of Rs. 39.35 Crs. u/s 92C on the basis of the order of the Transfer Pricing Officer u/s 92CA(3) dated 31.10.2011 in the case of the assessee company. 4. The learned A.O./DRP erred in rejecting the "Aggregation Approach" followed by the Assessee Company only for the benchmarking of International Transaction of export of manufactured goods of Equipment Division by holding that the assessee company had failed to demonstrate how the international transactions were closely interlinked. 5. The learned A.O./DRP erred in rejecting the Transactional Net Margin Method (TNM) as the most appropriate method for determining the Arm's Length Price (ALP) of the International Transactions relating to export of manufactured goods to the AEs without appreciating that the TNM was the most appropriate method for determining the ALP. 6. The learned A.O./DRP erred in holding that the Cost Plus Method (CPM) was the most appropriate method for determining the ALP of the International Transactions relating to export of manufactured goods to ....
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....erred in not appreciating that the domestic segment had controlled transactions and thereby could not be considered as a comparable uncontrolled transaction as per Rule 10B. 13. The learned A.O/DRP erred in confirming the comparison of the segmental profitability of the assessee company from "Export to Associated Enterprises" and "Domestic Sales" ignoring the following: (i) Differences in products sold (type 85 specification) (ii) Differences in the nature of business i.e. the exports to AE was a "Very Large Volume and Stable Business" where forecast were available for 3 years in advance (i.e. in the nature of Wholesale Business) whereas the domestic business was low value and highly uncertain margins business with small volumes (i.e. in the nature of Retail trade) and because of this difference in nature of two businesses, the exports to AE were entitled to certain price discount. (iii) products sold in the Non AE sale segment included sale of traded goods as well as substantial sale of spares which was not comparable with the products exported to AE (iv) the segments compared represented two different geographical markets and, therefore, such comparison was unwarra....
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....unctions and associated risks. e. Adjustment on account of bad debt risks, f. Adjustment of royalties/brand fees charged by the Associated Enterprises on Domestic Sales. 18. The learned A.O./DRP erred in not granting the benefit of adjustment of + / - 5% as provided in Section 92C(2) of the Income Tax Act, 1961 by applying the amended provisions as per Finance Act 2009. 19. The learned A.O./DRP erred in not appreciating that the assessee company had no reason to manipulate prices and hence, the addition made of Rs. 39.35 crs was not warranted. 20. The learned A.O./DRP erred in confirming the disallowance of expenses of Rs. 13,06,214/- as attributable to earning of exempted dividend income u/s. 14A by applying Rule 8D and erred in not appreciating that there was no dominant and immediate connection between the expenditure incurred and exempted income and therefore there cannot be any adhoc disallowance out of general expenses. 21.The learned A.O./DRP erred in confirming the disallowance of EDP Service Charges to the extent of Rs. 1,11,14,287/- (Rs. 77,80,001/- net of depreciation thereon) by holding that the above expenditure was in the nature of capital expenditur....
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....thod. 2.2 He erred in holding that CPM was the Most Appropriate Method in the case of the Assessee Company for International Transaction of Export of manufactured goods of Equipment Division on the premise that internal data was available for comparison. 2.3 The learned Transfer Pricing Officer failed to appreciate that the inherent nature of exports business with Associated Enterprises and domestic business was entirely different. The export business to AE was "Very Large Volume and Stable Business" where forecast were available for 3 years in advance. The manufacturing facility of Appellant could sustain only on account of such export business. The domestic business was low value and highly uncertain margins business. The volumes in domestic business were small and on its own could not sustain the manufacturing facility of the Appellant Company. Accordingly these businesses were not comparable by their very nature. 2.4 The learned Transfer Pricing Officer erred in holding that the functions of Marketing, Advertisement, pre and post -sales support, credit monitoring and collection follow ups and risks of Product Liability, Market and Business Development, revenue recovery....
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....g traded goods and spares) mainly comprised of Separators and the products exported to AE comprised of Decanters and therefore the products were not comparable. 3.3 Further he erred in not appreciating that the segments compared by him represented two different geographical markets and therefore such comparison was unwarranted considering the differences is locations and markets. 3.4 Without prejudice to above, the learned Transfer Pricing Officer erred in not appreciating that the Comparison of margins earned from exports to Associated Enterprises with Domestic Sales segment was incorrect as the domestic sales segment also had substantial Related Party Transactions. He erred in holding that the entire imported material purchased from Associated Enterprises was being consumed in manufacture of goods exported to Associated Enterprises and therefore the domestic sales segment was free of any related party transactions which is contrary to the facts of the case. 3.5 The learned Transfer Pricing Officer erred in observing in Para 63 of the order that Appellant Company has not demonstrated that there were sizable RPT within the segment when Appellant had vide Para 3.3.1 to 3.3.....
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....ed goods. He erred in not following the ratio of the following decisions : (a) Mentor Graphics (Noida) (P.) Ltd. v Dy. CIT [2007] 112 TTJ 408 (Delhi) (b) Philips Software Centre (P.) Ltd. v Asstt. CIT [2008] 119 TTJ 721 (Bang.) (c) Sony India (P.) Ltd. v Dy. CIT [2008] 118 TTJ 865 (Delhi) Ground of objection No. 7 : 7.1 The learned Transfer Pricing Officer erred in not granting the benefit of adjustment of + / - 5% as provided" in Section 92C(2) of the Income Tax Act, 1961 by applying the amended provisions as per Finance Act 2009. Ground of objection No. 8 : The learned Transfer Pricing Officer erred in Considering PLI as "Gross Profit over Total Cost" instead of "Net Operating Margin over Sales". He erred in not appreciating that the assessee company was free to select any PLI and the PLI selected by the Assessee Company had commercial basis and reasoning. Ground of objection No. 9 : 9.1 The learned Transfer Pricing Officer erred in not appreciating that the assessee company had no reason to manipulate prices. Further he erred in not appreciating that the effective tax rates in Sweden as well as Denmark where most of goods were exported by the assessee ....
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....ssee-company dated 3/01/2012 whereby the DRP has rejected Objections No. 1 to 10 and 12 raised by the assessee in totality. However, the DRP has deleted the disallowance made by the Assessing Officer in draft assessment order dated 29-12-2009 which were objected to by the assessee vide Objection No. 11 and 13 before the DRP which is not the issue before us. Thus, taking in cognizance of the order of Dispute Resolution Panel and in conformity with the directions given, final order u/s 143 (3) r.w.s. 144C(13) was passed as under:- 5. Order u/s 92CA(3) of the I.T. Act, 1961. 5.1 A reference u/s 92CA(1) of the I.T. Act, 1961 dated 06.08.2010 in the case of M/s. Alfa Laval (India) Ltd., Mumbai Pune Road, Dapodi, Pune 411 012 (hereinafter: ALIL) for A.Y.2008-09 for the computation of arm's length price in relation to the international transactions detailed in the audit report in the Form No.3CEB (hereinafter: Audit Report) was received from the A.C.I.T., Circle 8, Pune on 12.08.2010. 5.2 A notice u/s 92CA(2) of the ITA, 1961 along with a detailed questionnaire was issued to the assessee on 18.01.2011, requiring the assessee to file details /explanations with regards to the c....
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....y it at Rs, 164.57 Crs. It was found that the figures of export to Associate Enterprises and domestic sales are very much in the vicinity and therefore, same were found very much comparable. During the course of the proceedings, assessee was asked to give the segmental accounts in respect of the various segments of the assessee with the working at the gross profit level, as well. The details were submitted by the assessee vide submission dated 27.09.2011. It was seen from there that the gross profit over cost in respect of the domestic segment of equipments was at 43.70%, and that in case of export of equipments to AE was a 19.76%. This gross profit calculation has been done by the assessee considering all the direct and indirect cost of production as has been envisaged in Rule 10B(1)(c) of the Income-tax Rules, 1962. 5.5 It was found that such gross profit in case of domestic sales of equipments being 43.70% and that being 19.76% in respect of exports of equipments to AEs, there is a difference of 23.94%, and by this margin assessee has earned less gross profit from its international transaction relating to export of equipments to the AEs. In view of this, it was proposed to ad....
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..... Accordingly, an amount of Rs. 39,35,00,000/- was therefore added back to the income of the assessee in pursuance of order u/s. 92CA(3) of the Income Tax Act, 1961 in draft order dated 29.12.2011. The DRP has upheld the decision of Assessing Officer and has not interfered with the Assessing Officer's decision. In view of above and as directed by the DRP, an addition of Rs. 39,35,00,000/- was made on account of adjustment in arm's length price by concerned Assessing Officer. Same has been opposed before us. Before us the learned Authorised Representative made various contentions as detailed in grounds of appeal before us which are being detailed in preceding paras. On the other hand, Ld. DR supported the order of the Assessing Officer and raised detailed arguments for the same which are being dealt in preceding paras. 6. Having considered the rival submissions and material on record, we find that the assessee company is engaged in the business of manufacture and sale of industrial products such as decanters, separators, etc. etc. The assessee is a subsidiary of Alfa Laval AB, Swiden. The total sales of the assessee in this year were to the tune of Rs. 742.37 Crs and the ....
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.... sold equipments in the domestic market as well and hence, he has compared the gross margin earned by the assessee on sale of equipments in the domestic segment vis-a-vis the gross margin earned by the assessee on sale of equipments to the AEs. Accordingly, the Transfer Pricing Officer has stated that the total exports to the AEs was Rs. 208.65 Crs. and the domestic sales of the equipments was Rs. 164.67 Crs. The Transfer Pricing Officer has worked out the G.P. in the export segment at 19.76% and in the domestic segment at 43.70%. Thus, the Transfer Pricing Officer has mentioned that there is a difference of 23.94% and accordingly, he has proposed adjustments of Rs. 39.35 Crs. which is being challenged by the assessee company in this appeal. 6.3 The various issues raised on behalf of the assessee can be summarised and analysed as under :- "A. Whether TNM method is the most appropriate method for determining the ALP and whether the Transfer Pricing Officer was justified in rejecting some of the companies selected by the assessee company as comparable entities. B. If external TNM is to be rejected, in that case, internal TNM should be adopted for determining the ALP. C. W....
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....rders passed for A.Y. 2002 - 03 to 2007 - 08 have been placed at pages 31 to 57 of the Paper Book 1. In this background, the Ld. Authorized Representative for assessee submitted that for last several years, the department has accepted TNM method as the most appropriate method for determining ALP in respect of the transactions of export of equipments. The facts for this year are similar to the facts involved for the earlier years. On the principle of consistency, the learned Transfer Pricing Officer should not have rejected TNM method as the most appropriate method. The courts have observed that when the facts involved art similar for various years and the department has accepted a particular stand in some of the years, there is no reason to take a different stand in the subsequent years. Assessee has placed the reliance on following decisions for this proposition. a. Radhasoami Satsang v. CIT [1992] 193 ITR 321 b. H. A. Shah & Co. v. CIT [1958] 30 ITR 618 (Bom) c. Brintons Carpets Asia (P.) Ltd. v. Dy. CIT [2011] 46 SOT 289 (URO) d. Drilbits International (P.) Ltd. v. Dy. CIT [2011] 142 TTJ (Pune) 86 E. Skol Breweries Ltd. v. Asstt. CIT [2013] 142 ITD 49 6.3(A)III....
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....oducts Segment 6.69 9 Average 9.70 6.3 (A) V The learned Transfer Pricing Officer has given reasons for rejecting some of the above companies as detailed on page 36-41 of the Transfer Pricing Officer's order. The Transfer Pricing Officer has not given any reasons for rejecting GEI Hamon Inds. Ltd., Anup Engineering Ltd. and BGR Energy Systems Ltd. As regards, Thermax Ltd., the Transfer Pricing Officer has stated that Thermax is in the business of selling boilers while the assessee is in the business of selling different products. Similarly, in respect of Walchandnagar Industries Ltd., the Transfer Pricing Officer states that Walchandnagar is mainly engaged in foundry business and hence, it cannot be compared with the assessee company. The Transfer Pricing Officer has stated that GMM Pefaulders Ltd. is also engaged in selling different products vis-a-vis the assessee company and therefore, cannot be compared with the assessee company. Finally, in respect of Gansons and Kilburn Engineering, the Transfer Pricing Officer has mentioned that there is substantial difference in the turnover of the assessee company and the above two companies and therefore, the said two c....
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....d the facts of the case. Walchandnagar Industries Ltd., the stand of the assessee has been that he has not appreciated the facts of the case. The TPO on p. 39 of the order has mentioned that Walchandnagar is engaged in foundry business. The TPO has not appreciated that as per the details of sales given in the balance sheet of Walchandnagar, his main business is of sale of industrial machinery and the foundry business constitutes a very small percentage of the total sales. Hence, there is no reason to reject Walchandnagar as a comparable entity. Moreover, the Walchandnagar was considered as a comparable entity for asst. yrs. 2006-07 and 2007-08 and the same has been accepted by the Department. Thus, the TPO is not justified in rejecting the said company. 6.3(A) (VIII) In respect of Thermax Ltd., the TPO has stated that Thermax is engaged in sale of boilers and the products sold by Thermax and the assessee company cannot be compared. The assessee stated that it has -considered companies which are in the business of manufacturing industrial equipments and accordingly, Thermax can be considered as a comparable entity. Moreover, Thermax was accepted as a comparable entity for asst....
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.... net operating margin to costs of the comparable entities and it was contended that the assessee's margin was much better. However, there is no bar for adopting internal comparables. The learned Transfer Pricing Officer while adopting the CPM stated that the comparability of gross margins of the domestic and export segment gives better comparability. He has also stated that the comparability at the net margin level would not be a proper comparability for the reason that there are certain functions represented by certain costs which are there in the case of sales to third parties and supposedly not present in case of sales to the AEs. According to him, these factors are not relevant for determination of price at which International Transactions are entered into by the AEs, Thus, he has rejected the applicability of internal comparables for determining AEP under the TNM method. 6.3(B)(III) Assessee stated that the contention of the AO regarding adoption of internal comparables for determining the ALP under the TNM method is not justified at all. If at all, the domestic segment is to be compared with the export segment, then it should be at net profit level and not gross margin....
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....he AEs in the form of reduced sale price. Thus, when the above referred functions are performed by the assessee in respect of sales in the domestic market, logically, the sale price of the equipments would be determined by considering the above functions performed and hence, the comparability of the net margins of the domestic and export segment gives a clear picture of the actual profit earned by the assessee from the said segments. In view of above discussion, we find that in terms of rule 10B(l)(e) of I.T. Rules, internal comparables are permitted while adopting the TNM method. The external comparable should be considered for determining the ALP as per TNM method, even if, internal comparable is adopted. There is nothing on record to suggest that transactions relating to sale of equipments to the AEs is not ALP. The net margin in export segment is 21.12%. While the net margin in domestic segment is 18.05% as detailed in chart given on page 248 of Paper Book 1. Since the net margin of the export segment is more than the domestic segment, as per the internal TNM method as well the transactions relating to export of equipments are at ALP. 6.3(C) Let us also we address ourselves ....
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....ssee submitted that as per Rule 10B, for application of CPM, following method is to be adopted (i) ascertaining the direct and indirect costs of property transferred, or services rendered, to the AEs; (ii) ascertaining the normal mark-up of profit over aggregate of direct costs and indirect costs in respect of same or similar property or services, or a series of transactions of same or similar property or services, to the unrelated enterprises; (iii) adjusting the normal mark-up, or gross profit, for differences, if any, in the material factors; (iv) applying the mark-up or gross profit so arrived at on the aggregate of direct and indirect costs. The way this rule works, the benchmark gross profit is to be applied on each transaction with the AEs, while, for computing the benchmark, one could take into account a series of same or similar transactions. In other words, while setting the benchmark, one can take into account several transactions with unrelated enterprise on what can be termed as 'global basis', essentially in respect of same or similar property or services though, the benchmark so arrived at could not be applied on the global basis i.e. the avera....
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....hese functions require a lot of man power and time and substantial funds are spent on the marketing functions. The assessee has around 13 branches all over India for its marketing functions and substantial expenditure is incurred by the assessee for obtaining the orders in the domestic segment. This is a major difference between the export and domestic segment. In case of export segment, the assessee gets the orders directly from the AE and the assessee does not have to incur any expenditure on marketing for obtaining the orders. (c) Credit Risk -In case of exports to AE, there is no credit risk and no bad debts at all. However, in case of domestic segment, there is an apparent credit risk. In fact, in this year, the bad debts pertaining to the domestic segment were claimed to the tune of Rs. 59.05 lakhs. (d) Product liability risk -In case of sales in domestic segment, the assessee has to provide performance guarantee which is not the case in the export segment. The assessee provides bank guarantee for which it has to pay commission to the bank. (e) Volume differences -The assessee had explained to the learned Transfer Pricing Officer that there are volume differences in ....
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.... of ITAT Third Member in the case of Tecnimont ICB (P.) Ltd. v. Addl. CIT [2012] 138 ITD 23 where it was held that a controlled transaction can never be regarded as comparable transaction. Taking all facts and circumstances and in view of the principle laid down in the case of Tecnimont ICB (P.) Ltd. (supra) the Transfer Pricing Officer was not justified in considering the domestic segment of sale of equipments as a comparable transaction. 6.3(D) Now, let us deal with the issue whether CPM is to be considered as the most appropriate method for determining ALP and suitable adjustments should be made an account for differences between the export and domestic segment. 6.3(D)(1) As discussed above, the assessee had explained to the learned Transfer Pricing Officer that there were various differences in the two segments and appropriate adjustments are required to be made for arriving at ALP under CPM. The learned Transfer Pricing Officer has not given any such adjustments and has made the additions. The learned authorized representative for the assessee submitted that the GP worked out by the Transfer Pricing Officer of the domestic segment is not correct. The Transfer Pricing Off....
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....pared, the selling and distribution expenses are not to be considered while determining the gross margin. Hence, he has not allowed any adjustments on account of marketing expenses. (b) In respect of sales to its AEs, it does not have to undertake any marketing activities. The assessee Company does not have to undertake any marketing activities in respect of exports to the associated enterprises, whereas extensive efforts are required in marketing to capture the domestic market. The Company incurs expenditure on marketing of products including salaries of sales personnel, advertisement, etc. However, for the export transactions, these functions and the related expenses are performed/incurred by the associated enterprises. The function of marketing and sales is an important link in value chain as it involves tapping of market potential. (c) The assessee company does not have to incur any marketing costs in respect of sales to its AEs vis-a-vis, the sales in the domestic segment, logically, it has to factor the said expense while determining the sale price of the equipments in the domestic market. However, according to the Transfer Pricing Officer, under CPM gross margins are c....
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....annot be ruled out. Thus, this risk is also factored in while determining the sale price in the domestic market. Accordingly, the adjustment on account of bad debt risk of Rs. 59.05 lacs should have been made while determining the gross margin in respect of the domestic segment. 6.3(D) (IV) Royalty payments -The assessee has paid royalty only on the domestic sales as clarified by the assessee from details at page 288 - 289 of Paper Book 2 filed by the assessee The total royalty paid by the assessee in this year is Rs. 1.20 Crs. pertaining to equipment division and the same should have been considered while determining the gross margins of the domestic segment. 6.3(D)(V) Volume Discount -The assessee has an assured business from its AEs. However, in case of domestic segment, there is lot of competition and there is no guarantee that the assessee would be able to sustain its business. Further, top five AEs have cumulatively placed orders worth Rs. 180 Crs. while the top five domestic customers have cumulatively placed order worth Rs. 35 Crs. Considering the huge volume difference, the assessee requests for an adjustment. Considering the huge volume discount and adjustment of ab....
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....ks. 'Equipment' segment is of manufacturing function whereas the 'project' segment is akin to execution of contracts. These segments cannot be aggregated. The assessee has stated that the Transfer Pricing Officer's application of CPM is incorrect on 'principle of consistency' as the Department had accepted TNM applied by the assessee in the earlier years. In this regard, the learned DR stated that the Rule 10C requires 'most appropriate method' be applied on the basis of the conditions provided in the sub rule. The conditions provided in sub-Rule (c) and (d) of Rule 10C and 'comparability' provided in these sub-Rules rws factors of comparability mentioned in Rule 10B(2) can be different every year. Therefore, it is possible that CPM would be different every year. In fact, it is inherent in the concept of the "most appropriate method' that every year after examination, CPM may be selected. Therefore, principle of 'consistency' cannot be applied to the TP cases in view of this express legal provision. The application of 'Most Appropriate Method' is a question of law on given facts every year. Transfer Price is a quest....
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....lled transactions below GP level, hence this segment becomes tainted for comparison, especially when ALP of the transactions like 'royalty' also is required to be supported by. applying suitable TP method. It is necessary to adopt an accounting segment, which is required to be compared. This means, gross margin will take in to consideration, where profitability of both the segments are reflected and for the same reason, domestic segment profitability is compared with the export segment profitability. Thirdly, CPM being traditional method is preferred over TNM method. 7.2 Applicability of internal TNM method Assessee has submitted that application of internal TNM method would present better picture, as the Appellant in the domestic segment has received reward for performing additional function for marketing and assuming additional risk of credit risk, which are reflected in price received in the domestic segment and not reflected in the AE segment. The assessee has submitted that net margin earned in the export segment is better than net margin earned in the domestic segment. The learned DR stated that the assessee's argument is not borne by the facts. Firstly, if the....
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..... v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) 7.5 Assessee's contention of domestic segment has more than 25% RPT is not substantiated submitted by the learned DR. The assessee has stated that export segment cannot be compared with domestic segment as it has more than 25% RPT. The assessee has stated that, it has furnished supporting computation on page 281 of the Paper Book. In this connection, attention was drawn to the observations of the Transfer pricing Officer on page 81 of his Order inter alia stated that "The assessee has also demonstrated that with calculation inter-segment RPT's, basis of which is not known: that there are RPT transactions within the segment, however it is not known, how the same have been arrived at and nor they have been explained with the location keysor backed by documentary evidences. " Therefore, the assessee's contention in this regard cannot be accepted, submitted by the learned DR. 7.6 Adjustments on account of geography, volume, Market, credit risk, product liability risk, royalty etc cannot be granted without data justifying adjustment, submitted on behalf of the Id. DR. The assessee has stated that, if CPM is used then i....
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....ures. However, if entity does not offer competitive rates or if its service is of not acceptable standard than the entity would not get an Order from the AE. In the case of Alberta Printed Circuits Ltd. v. Queen [2011] TCC 232 (Tax Court Canada) it has been held that the fact that the sub contractor entity is guaranteed business does not necessarily mean that the sub contracting entity bears lesser risk because if the entity has only one customer and the customer is lost, there is a market risk. The relevant para 218 of said decision is reproduced below:- "218 Thirdly, when one evaluates the market risks both sides were exposed to, there is no doubt both bore risks. However, Dr. Wright's suggestion that, since the annual contracts did not address the question of who was liable for potentially poor set-up work or the warranty for such work, the Assessee took on that warranty risk is inconsistent with the evidence that adjustments were made each month for any work that had to be redone; it seems APC/'s payments were reduced as a result. In addition, the evidence was that the Assessee collected its fees in advance from its customers while APCI was paid 30 or more days later....
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....Therefore, if the functions are compared, risk also would automatically get compared negating the need for this adjustment. The Id. DR drew support from the following decisions in which risk adjustment in similar circumstances was denied. (i) ADP (P.) Ltd. (supra). (ii) Deloitte Consulting (India) (P.) Ltd. (supra). (iii) Marubeni India (P.) Ltd. (supra). (iv) Vedaris Technology (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 316 (Delhi) In the above background, it was submitted by the Id. DR that reasonably accurate adjustment as required under Rule 10B(3)(ii) cannot be made and therefore risk adjustment should not be granted. 8. According to learned DR, the assessee company had aggregated its equipment segment and project segment and applied TNM method on the results of the entire entity. According to him such an approach of the assessee of aggregating its equipment and project segment is not justified. He has stated that since both the segments differ significantly, such an aggregation approach adopted by the assessee is not correct. In this regard, stand of assessee has been that the contention of the learned CIT D.R. that the assessee has aggregated its project and equ....
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....ost appropriate method. There is no reason given by the Transfer Pricing Officer as to why TNM method was not the correct method for determining the ALP. For the proposition that in case the department had accepted a particular fact in one year, the same should be accepted in the subsequent year. The learned D.R. has referred to the decision of ITAT Bangalore in the case of SAP LABS India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156. According to us in the said case the learned Transfer Pricing Officer in the proceedings had firstly applied CUP method for determining ALP. Thereafter, the Transfer Pricing Officer ultimately adopted TNM method and computed the ALP. The contention of the assessee was that since Transfer Pricing Officer had adopted a particular method for comparing the price deviation for the purpose of ALP, it was not open for him to switch to another method. In that context, Hon'ble ITAT held that the contention of the assessee cannot be accepted that once the Transfer Pricing Officer had selected one method, he cannot prefer any other method. In the case of SAP LABS India (P.) Ltd. (supra), it was not a case that a particular method was adopted for the earlier year....
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....entical and no concrete reason has been given by the lower authorities for deviating from TNM method in this year, the adoption of CPM is not justified and the principle of consistency should be applied in as far as possible. Hon'ble Supreme Court in the case of Radhasoami Satsang (supra) has held that in the absence of any material change justifying the dept. to take a different view vis-a-vis the view taken in the earlier years the same position should be continued in the subsequent year. 8.4 The stand of the DR has been that the CPM is the most appropriate method as it provides direct comparison between the two segments viz export and domestic. According to the learned D.R. CPM being a traditional method is to be preferred over TNM method. In this regard, the assessee had given various reasons as to why, CPM could not be considered as the most appropriate method. It was pointed out that there are differences in the domestic and export segment and considering the nature and variety of differences, CPM ought to have been rejected as the most appropriate method. In case there are various differences, suitable adjustments cannot be made and therefore, CPM is to be rejected. F....
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....ents should be compared and not the gross margins. The assessee has already highlighted various expenses related to domestic sales which are very important and most of such expenses are not considered while computing gross margin. As per the provisions of the Act, the assessee is required to compute the Arm's Length Price of its International Transaction. While computing the ALP, one should not ignore the commercial issues which are very vital for determining the selling price of a product. While applying CPM, various expenses were ignored which has an important bearing on the sale price of the product. Therefore, comparison of gross margins lead to an incorrect comparison. 8.5 The learned D.R. further stated that internal TNM method is not correct because the net margin in export segment is higher than the net margin in domestic segment. The assessee has given the working of the net margins in the two segments which reveals that the net margin of the export segment is higher. This point clearly highlights the case of the assessee that if there was any undercharging on the sales to the AE, the net margin of the export segment would have been much lesser than the net margin i....
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...., the case before us, the assessee has highlighted the differences between the two segments and hence, CPM is not applicable. The ITAT, Pune in the case of Drilbits International (P.) Ltd. (supra) after considering similar objections has held that the comparison of export and domestic segment is not justified. The facts of the case before ITAT, Delhi are distinguishable and accordingly, the said decision is not applicable to the case of Alfa Laval. Moreover, it is settled legal proposition that each case is decided in its facts and circumstances. 8.7 The learned D.R. further argued that the contention of the assessee that the domestic segment had more than 25% related party transactions was not substantiated. The learned D.R. also referred to the definition of substantial interest given in Section 40A(2)(b) and tried to link the same to the 25% threshold limit considered for related party transactions. He also stated that the working of the assessee was not properly substantiated. In this regard, we find that the working of related party transactions was submitted to the Transfer Pricing Officer along with the basis. The basis of allocation was also mentioned therein. It is not ....
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....stments are not possible, CPM has to be rejected, There are differences as accepted by the Transfer Pricing Officer and therefore, in view of the decision of Drilbits International Pvt. Ltd., CPM should not be applied, according to us. 9. Next issue is with regards to disallowance u/s 14A of Rs. 13,06,214/-. In this case, Assessing Officer and DRP made disallowance of Rs. 13,06,214/- u/s 14A of Act. According to assessee, there is no document and immediate connection between expenditure incurred and exempted income. Therefore, no disallowance is called for on this account. Assessee claimed to have received tax free dividend and tax free interest of Rs. 1,24,16,019/-as mutual funds and tax free bonds which was exempt u/s 10 of the Act, 1961. It was the stand of the assessee that above investments were made out of owned funds and company had no interest bearing loans outstanding as at the end of year nor at the beginning of the year. Most of dividend received was under the Reinvest operation i.e. the dividend was automatically reinvested by the respective mutual fund. No portion of salary paid to staff and other expenses were incurred in relation to exempt dividend. According to a....