TaxTMI 
TaxTMI 
2018 (4) TMI 436
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....cial result of the company 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 2. Briefly the facts of the case are that the A.O. passed the assessment order under section 143(3) dated 18th December, 2008 whereby the A.O. determined the total assessed income of Rs. 9,63,50,800/- by making the disallowances/additions to the returned income of Rs. 5,46,81,880/-. One of the addition was on account of Arm's Length Price ("ALP") of Rs. 2,31,23,800/-. During the assessment proceedings, the A.O. noticed the following international transactions entered into by the assessee during financial year under appeal as reported in Form-3CEB and details filed by the assessee along with the return of income for the year under consideration. S. No. Particulars Value of transactions (in Rs.) 1. Purchase of Compound Alcoholic Preparation (CAP) 7,50,42,300/- 2. Provision of market support services 1,09,14,596/- 3. Reimbursement of expenses received 1,13,07,791/- 4. Reimbursement of expenses paid 225,976/- 5. Reimburse....
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....usiness model, asked the assessee to give power- point presentation, which the assessee gave on 22nd October, 2010. The same reads as under : ♦ The appellant is a wholly-owned subsidiary of Allied Domecq Spirits & Wine (Europe) BV, Netherlands. The ultimate parent company of the appellant is Allied Domecq Pic, UK. The business segments under which the appellant processes, bottles and sells liquor in India comprise of BIIS and IMFL. ♦ Under the BIIS segment, the appellant processes CAP imported by it from its AE, Allied Distilleries Limited, Scotland ("Allied Scotland"). The CAP so imported is further processed by the appellant into scotch whiskey by way of dilution into desired alcoholic strength, bottled and sold in India under the brand name, Teacher's(r) Scotch, Old Smuggler Whiskey and Long John. ♦ The IMFL segment pertains to domestic business of the appellant. The IMFL is manufactured from a purified form of spirit/alcohol called the Extra Neutral Alcohol ("ENA"). The ENA is manufactured by the appellant in its own distillery in Behror, District Alwar, State of Rajasthan, India. The IMFL is sold by the appellant under the brand....
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....tic business. ♦ The two products (BIIS and IMFL) are completely different and represent distinct product lines. Also, these are sold under different brand names - * BIIS - Teacher's(R) Scotch, Old Smuggler Whiskey and Long John. * IMFL - Old Smuggler Rum, Old Smuggler Gin and Curtis No. 1, Royal Stag, Imperial Blue, and Fling Vodka. ♦ Further, there are no international transactions with AEs for production of grain based alcohol and IMFL. 3.4 To explain the rationale for segmental analysis, the assessee draws attention to the definition of "TNMM" as mentioned in Rule 10B(1)(e) of the I.T. Rules, 1962 and submitted that this Rule refers to net profit margin realised by an enterprise from an international transaction or a class of such transactions. The key points as envisaged in the above Rule are noted below : ♦ An analysis should consider only the profits of the associated enterprise that are attributable to particular controlled transactions. Similarly, when analyzing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to ....
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....rolled transactions is to be taken into account for dealing as under:- ♦ "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." ♦ Thus, the Rule envisages that the net profit margin realised by the taxpayer from the international transactions needs to be compared with the net profit margin of the comparables. ♦ As discussed in para above not only there are functional differences in the BIIS and IMFL segment but also the international transaction pertaining to purchase of CAP pertains to the BIIS operations of the appellant. Since the IMFL segment does not involve any international transactions, the exclusion of the said segment for the purpose of analysis is consistent with the Rules. 3.5 The assessee also ref....
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.... following judgments: (i) Development Consultants (P.) Ltd. v. Dy. CIT [2008] 23 SOT 455 (Kol.). (ii) Star India Ltd. v. ACIT [IT Appeal No. 3846 (M) of 2006] (Mum.). 3.8 It was further submitted that for the purpose of benchmarking its transactions, the assessee selected 12 broadly comparable independent companies with a three year's weighted average arithmetic mean NPM of 5.18%. Since the assessee earned an NPM of 12.21% from its manufacturing function pertaining to the BIIS segment as shown below, the assessee determined the international transaction pertaining to purchase of CAP to be at arm's length. Net Profit Margin ('NPM') computation Particulars FY 2004-05 Income Amt (Rs.) Net Sales (Net of Excise Duty) 511,752,721 Other Income 835,896 Total Income 512,588,617 Expenditure Change in stock (5,103,694) Manufacturing expenses 225,034,913 Personnel expenses 29,797,653 Net Profit Margin ('NPM') computation Particulars FY 2004-05 Administrative expenses 30,393,463....
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.... Transfer Pricing Adjustment Particulars Amount (Rs.) Operating Income (Manufacturing - BUS + IMFL) 132,04,08,637 Operating Expenditure 124,08,04,645 Net Profit 7,96,03,992 NPM % 6.02% Revenue related to manufacturing 132,04,08,637 NPM at 7.78% 10,27,27,792 NPM earned 7,96,03,992 Difference (Transfer Pricing adjustment) 2,31,23,800 3.10 Further, in the power-point presentation, the assessee depicted the T.P. adjustment on segmental analysis - BIIS at 5.18% and as per TPO by clubbing BIIS and IMFL segments clubbed together at 7.78%. It was, therefore, submitted that while clubbing the above two segments, TPO observed that BIIS and IMFL are not distinct and that the risk and reward of the enterprise manufacturing operations as a whole is uniform. The TPO has placed reliance on the audited accounts of the assessee, according to which, no segmental accounts were being maintained by the assessee. The TPO observed that vide note 22 to the notes to accounts, the auditors have specifically mentioned that - ♦ "The company primarily manufactures and se....
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....itted that during the appellate stage when Ld. CIT(A) asked the assessee to submit the updated margins for the year under consideration, the arithmetic mean NPM of the above 12 comparable companies worked-out at 5.91% based on which also the assessee's international transactions complied with the arm's length standard. The comparables selected by the assessee for the assessment year under appeal margin is as under : NPM % for Comparable Companies for FY S.No. Name of the Company NPM % for FY 2004-05 Appellant's Set of Companies 1 Associated Alcohols & Breweries Limited (5.73) 2 Brihan Maharashtra Sugar Syndicate Limited 4.28 3 GM Breweries Limited 2.01 4 IFB Agro Industries Limited 2.06 5 Radico Khaitan Limited 6.73 6 Sri Rama Distilleries Limited 34.08 7 Tilaknagar Industries Limited 4.20 8 Arthos Breweries Limited 3.59 9 Blossom Industries Limited 10.07 10 Khoday India Limited (2.41) 11 Rajasthan State Ganganagar Sugar Mills Limited* 6.03 12 Thiru Arroran Sugars Limited 6.01 ....
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....segment represents international transaction with the AE and hence the two can not be equated and treated as a single segment. In view the above, I hold that the economic analysis undertaken by the appellant in respect of international transaction pertaining to purchase of CAP following a segmental approach by segregating manufacturing operations into BUS and IMFL business verticals is in accordance with the relevant transfer pricing regulations. The appellant's international transaction pertaining to purchase of CAP, thus, complies with the arm's length standard for the year under consideration. In the result, Ground No. 3 to 8 of the grounds of appeal filed by the appellant in relation to transfer pricing adjustment are allowed. Issue 2 : Whether the international transaction of the appellant comply with the arm's length standard even if the TPO's approach of clubbing the BUS and IMFL segment is to be followed for the year under consideration? 23. Prima facie relief of Rs. 1,29,40,005/- The appellant has filed the updated (FY 2004-05) NPM computations of the comparable companies based on their annual reports and selecte....
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.... 1 Associated Alcohols & Breweries Limited (4.22) 6 Sri Rama Distilleries Limited 34.76 NPM % for Comparable Companies for FY 2004-05 S. No. Name of the Company NPM % for FY 2004-05 TPO's Set of Companies 1 Associated Alcohols 8s Breweries Limited X 2 Brihan Maharashtra Sugar Syndicate Limited 4.61 3 GM Breweries Limited 1.87 4 IFB Agro Industries Limited 1.40 5 Radico Khaitan Limited 12.83 6 Sri Rama Distilleries Limited X 7 Tilaknagar Industries Limited 3.20 8 Arthos Breweries Limited X 9 Blossom Industries Limited X 10 Khoday India Limited X 11 Rajasthan State Ganganagar Sugar Mills Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 3.60% The appellant placed reliance on the following ITAT decisions : * DCIT v. Quark System Private Limited (2010- TIOL-31 -ITAT-CHD-SB) * Sap Labs India Pvt. Ltd. v. ACIT (2010-TII-44- ITAT-BANG-TP) * Aztee Software and Technology, v. ACIT (294 ITR 32) * Mentor Graphi....
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....tled for a full relief on account of transfer pricing adjustment, Issue No. 2 as discussed above does not require separate adjudication. However based on submissions and explanations provided by the appellant, I find merit in appellant's alternate contentions which have been briefly discussed in the above paragraphs 23 and 24 of my order." 4. The Ld. D.R. relied upon the order of the A.O./TPO. He has submitted that no segmental accounts have been prepared by the assessee. The assessee prepared combined accounts of both the segments. Therefore, no separate accounts of BIIS segment have been prepared. The risk and return of both segments are same. Product may be different but risk and return on both segments are same. The Auditor has taken both the segments together. The Ld. D.R. also referred to page 244 on AS-17. He has, therefore, submitted that once Auditor has reported both the segments together, the Ld. CIT(A), should not have deleted the addition. 5. On the other hand, Learned Counsel for the Assessee, reiterated the submissions made before the authorities below and submitted that BIIS and IMFL are two different segments. The raw material are different. AS-17 is irre....
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....essee with those of the broadly comparable independent companies. The assessee, however, explained that under BIIS segment, assessee processes CAP imported by it from it's A.E. in Scotland. The CAP so imported, is further processed by the assessee into the scotch, whisky by way of dilution into desired Alcoholic strength bottled and sold in India. Further, in IMFL segment, it pertains to domestic business of the assessee. The IMFL is manufactured from a purified form of spirit/alcohol called the Extra Neutral Alcohol ("ENA"). The ENA is manufactured by the assessee in India and IMFL is sold under different names. The assessee, therefore, explained that there is a key indicative difference between the two business segments as reproduced above. It was, therefore, proved that raw material imported by the assessee is CAP which is matured under the climatic conditions of Scotland and cannot be manufactured in India. Then, the imported CAP is filtered and diluted for the bottling of the final product i.e., Scotch. The manufacturing ultimate product, market condition, price and functions of both segments i.e., BIIS and IMFL are completely different and distinct. Therefore, both the se....