TaxTMI 
TaxTMI 
2018 (10) TMI 923
X X X X Extracts X X X X
X X X X Extracts X X X X
....,39,710. The following were the international transactions entered into by the assessee with its Associated Enterprise (AE) during the relevant previous year:- Nature of International Transaction Amount (Rs.) Import of raw materials and components 8,53,90,600 Export of finished goods 14,40,84,509 Purchase of traded goods 2,62,99,700 Provision of marketing support services 2,59,94,545 Provision of research and development fees 6,29,16,160 Payment of royalty 2,06,19,173 Payment of interest on loan 16,65,636 Payment of personnel support fees 2,42,63,031 Purchase of fixed assets 18,84,045 Reimbursement of expenses to AE 68,71,417 4. In view of the provisions of section 92 of the Income-Tax Act, 1961 ["the Act"], income from an international transaction had to be determined having regard to the arm's length price (ALP). The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO accepted that all international transactions carried out by the assessee was at arm's length, except the international transaction of export of finished goods by the assessee to its AE. The dispute raised in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Limited 2.99% 3.00% Rejected 3 Systronics India Ltd.(Seg.) 4.36% 4.38% Rejected Arithmetic Mean 4.77% 4.80% 7. As already stated, the TPO accepted the price paid or received by the assessee in all the international transactions as at arm's length, except the international transaction in relation to the manufacturing activity with its AE. The learned TPO did not accept the economic analysis undertaken by the assessee and conducted a fresh economic analysis. The TPO rejected 2 companies out of 3 companies selected as comparables by the assessee in the TP Study. The TPO on his search of the database chose 12 new companies and selected the following 13 companies as the final set of comparables with unadjusted margin of 8.61% on operating revenue:- S.No. Particulars Margin (OP/OR) (%) Margin (OP/OC) (%) 1 Hindustan Syringes & Medical Devices 10.14 11.28 2. Artificial Limbs Mfg. Corporation of India 16.90 20.34 3. Allengers Medical Systems Ltd. 9.88 10.96 4. Elico Limited 12.99 14.93 5. Premier Medical Corporation Pvt. Ltd. 2.20 2.25 6. Centenial Surgica....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r grounds, the CIT(A) primarily agreed with the TPO's approach and did not appreciate the Assessee's submission. * In addition to the above, the CIT(A) directed the TPO to recompute the operating margins of the comparable companies and the Assessee by considering operating profit on operating cost as profit level indicator. 11. Aggrieved against the order passed by learned CIT(A), the Assessee has preferred an appeal before the Tribunal on the following grounds of appeal. Grounds of general nature Ground 1: The order of the learned CIT(A) is based on incorrect interpretation of law and facts and therefore is bad in law; Grounds of appeal relating to transfer pricing matters Ground 2: The learned CIT(A) has erred in making an addition to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") relating to the manufacturing activity entered into by the Appellant with its Associated Enterprises ("AEs") thereby holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax act, 1961 (the "Act"); Ground 3: The learned CIT(A) has erred in law and facts by u....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Limited f) Blue Neem Medical Devices Private Limited g) Iscon Surgicals Limited h) Hemant Surgicial Industries Limited i) Shree pacetronix Ltd. j) Continental Controls Ltd. Ground 6: The learned CIT(A) has erred, in law and in facts, by considering the following companies as functionally dissimilar to the Appellant and failed to appreciate the fact that the following companies are functionally comparable: a) Systronics India Limited b) Gansons Limited 15. Gr.No.5 & 6 are on the action of TPO in including 10 comparable companies and in excluding 2 comparable companies chosen by the Assessee in its Transfer Pricing Study. At the time of hearing it was agreed by the parties that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee's own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee's own case ruled regarding inclusion of the following comparable companies in favour of the Revenue with the following observations: "14. It was argued that Shree Pacetronix should be rejected on account of the difference in products manufactured by S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ability analysis to include transactions involving products that are different, but functionally similar. The acceptance of such an approach depends on the effects of the product differences on the reliability of the comparison and on whether or not more reliable data are available. In other words, it cannot be said that product difference is a factor which needs to be either ignored or strictly followed. It depends on facts and circumstances of each case. 18. In the present case, the fact that the product manufactured by the tested party i.e. the Assessee viz., laboratory and processing equipment and the comparable company i.e., Shree Pacetronix viz., manufacture of pacemaker for implanting in heart, can be categorized as "manufacture of equipment". The relevancy of the end use of equipment whether by consumer or as component may be relevant while evaluating functional dissimilarity, Assets employed and risks assumed but not on the basis of characteristics of the property transferred under Rule 10B(2)(b) of the Rules. 19. For the reasons given above, we are of the view that Shree Pacetronix was rightly not excluded for the purpose of comparison on the gr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urgical Industries Ltd. also and therefore the inclusion of these companies by the TPO in the list of comparable companies has to be upheld. Similarly, following the precedent in Assessee's own case, we hold that M/S.Gansons Ltd., and M/S.Systronics India Ltd., comparable chosen by the Assessee which was rejected by the TPO because of difference in products manufactured should be included as comparable company. 16. The remaining companies in the list of companies which was added by the TPO and whose inclusion is challenged by the Assessee in Gr.No.5 will now be taken up for consideration. 17. Artificial Limb Manufacturing Corporation of India, which is a comparable company chosen by the TPO was challenged as not comparable company for the reason that it was a Government company. This argument is liable to be rejected in view of the decision of the Hon'ble Madras High Court in the case of CIT Vs. Same Deutz Fahr India Private Limited Tax case (Appeal) No.567 of 2017 order dated 5.12.2017 wherein it was held in para 17 & 18 that there is no reason why a government owned company cannot be treated as comparable. It was further submitted that the margin computation of this comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... companies chosen by the TPO. After hearing the rival submissions of the parties, we are of the view that it would be just and appropriate to direct the AO/TPO to call for the details with regard to segmental revenue of this company in exercise of the AO/TPO's powers u/s.133(6) of the Act from the said company and find out whether segmental information is possible and further examine if more than 75% of the revenue of this company is from manufacturing. The AO/TPO will confront the Assessee with the material that is gathered by them and after affording the Assessee opportunity of being heard, determine whether this company can be regarded as comparable. 20. Ground Nos. 5 & 6 are decided accordingly. Ground 7: The learned CIT(A) has erred, in law and in facts, by treating foreign exchange fluctuation as operating in nature for the Appellant as well as the comparable companies. 21. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee's own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee's own case ruled on similar issue with the followin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y adjustment to account for the differences in the capacity utilization by the assessee vis-à-vis the comparables while computing profit margin of assessee as well as the comparable companies. 22. We have heard the submissions of the assessee and the ld. DR on the issue raised by the assessee in ground No.7. We shall first see the statutory provisions relevant to the issue. Rule 10B(1)(e) of the Rules states that adjustments should be made to account for: "...the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market" 23. Rule 10B(2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. One such factor is conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... applying the transaction net margin method states as follows: "..... Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied) 25. US transfer pricing Regulations on this aspect is as follows:- In addition, the US transfer pricing regulations, u/s 482 of the Internal Revenue Code (hereinafter referred to as 'the US regulations') also support the above. Regulation 1.482-1(d)(2) of the US regulation states as follows: "In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the eff....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sm for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment." (iii) In the case of Biesse Manufacturing Company Limited (IT(TP) A Nos. 97 & 493/Bang/2015) for AY 2010-11, the Tribunal held as follows: "10.4.1. We have heard the rival contentions and perused and carefully considered the submissions made and material on record; including the judicial pronouncements cited. The issue for consideration is whether adjustment for under-utilisation of capacity is allowable in the case on hand and if so, the manner of computation thereof and the quantum of adjustment...... .................. 10.4.5 In the above cited case of the Mumbai Tribunal i.e. Petro Araldite P. Ltd. (supra), the Tribunal has upheld the principle that adjustment for capacity underutilisation can be granted .............. Following the decision of the ITAT, Mumbai in the case of Petro Araldite P. Ltd. (supra), we hold that any adjustment for capacity underutilisation can be granted....." (iv) In the recent case of GE Intelligent Platform Private Limited (IT(TP)A No. 148/Bang/2015 and 164/Bang/2015) for AY 2010....
X X X X Extracts X X X X
X X X X Extracts X X X X
....said objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per subclause (i) of rule 10B(1)(e) of the Rules itself. The absence of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. The above view has also been upheld in the following decisions:- * Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) * Demang Cranes & Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 30. As far as data of comparable companies on capacity utilization being not available in public domain is concerned, it is practically not possible to obtain data on capacity utilization of comparable companies and consequently compute adjustment on the comparable companies, the operating cost of the tested party is adjusted for capacity utilization adjustment. 31. The assessee has under-utilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reaso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gmental/ product wise information, if any. 34. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Ground No.7 is decided accordingly." 24. The TPO is directed to follow the directions as given above in the order for AY 2012-13 in the present AY also. Ground 10: The learned CIT(A) has erred, in law and in facts, by upholding the action of the AO/TPO in not allowing suitable adjustment to account for the differences in the working capital position of the Appellant vis-à-vis the comparable companies." 25. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee's own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee's own case ruled on similar issue with the following observations: "37. The assessee used the TNMM in determining the ALP for the international transaction entered into during the FY 2011-12. The provisions of Rule 10B of the Rules prescribes the methods to be us....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has to be eliminated. TPO must know that the TNMM visualizes the undertaking of the thorough comparability analysis and elimination of the differences through the requisite adjustments ................. Therefore, we dismiss the revenue's contention that no further adjustment if any is entertained once the comparables are supplied by the assessee and when they are accepted by the TPO. Thus, working capital is a factor which influence the price in the open market and therefore the net profit margin of the business segment of the assessee which is targeted by the TPO/AO/DRP. Hence, in principle, we hold that the TPO/AO/DRP has failed to entertain the objections of the assessee on the 'working capital' adjustments issue. Therefore, we direct them to allow the requisite adjustment on account of the impugned 'working capital' while determining the Arm's Length operating Margin of the Comparables." (emphasis supplied) (ii) In the case of Capgemini India Private Limited Vs Asstt. Commissioner of Income Tax (ITA No.7861/Mum/2011), the Mumbai Tribunal held as follows:- "... In our view, working capital adjustments are required to b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ex. 4 to the written submissions filed before us. Such working was also given in pages 59 to 64 of submissions filed before the CIT(A). Therefore, the TPO/AO is directed to consider the claim of the assessee and allow adjustment to profit margins towards working capital adjustment in accordance with the law, after affording assessee the opportunity of being heard. Gr.No.8 is decided accordingly. 26. The TPO is directed to follow the directions as given above in the order for AY 2012-13 in the present AY also. Ground 11: The learned CIT(A), has erred in law and in facts, by directing the AO/ TPO to make the transfer pricing adjustment on the entire manufacturing segment of the Appellant rather than restricting the same to the value of international transactions undertaken with Associated Enterprises only. Without prejudice, in case the adjustments made to international transactions are held to be valid, then the same deserves to be restricted in proportion to international transactions in the interest of justice. 27. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermination of ALP only in relation to international transaction i.e., transactions with AE in the export of finished goods segment by considering the value of international transaction at Rs. 3,31,50,982 which is the value of export of finished goods by the assessee to its AE and not on the total sales in the finished goods segment of Rs. 39,19,74,355 (vide para 8.3 of the TPO's order). 49. The Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- 6.1 Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was correct in directing the AO to restrict the determination of the ALP to transactions with the AE rather than on the entire turnover of the Company. 6.2 Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., which held as below:- "2. .............. (a) Whether on facts and the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.)? 3. ........ ... .......... . (e) We find that in terms of Chapter X of the Act, redetermination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered to with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act. 5. In the above view, as the provisions of the Act in respect of transfer pricing are self evidence, Quest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it in relation to purchases from AE. So this cannot be presumed that the profit percentage earned in relation to costs related to AE transactions as well as non-AE transactions was same. Since costs are common to the products ultimately sold by the appellant, and the same includes AE transactions, so it is always possible that the margin of profit percentage vis-a-vis costs related to AE transaction is not the same as profit margin on costs related to non-AE transactions but ultimately overall certain profits are being shown. Further, the transactions with non-AEs can be presumed to be at arm's length as there is no reason to earn lesser profit. But in case of transactions with AEs, there is always a likelihood of earning lesser profits as transactions are controlled and decisions are influenced by AE. Thus the overall profits on account of transactions with AE as well as non-AE gets suppressed." 54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....clusively for the purpose of business of the appellant. c) Without prejudice to the above, the learned CIT(A) ought to have set off the prior period income of Rs. 47,04,916 against the prior period expenditure of Rs. 65,48,1490 and thereby restricted the net disallowance of prior period expenditure to Rs. 18,43,233". 29. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee's own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee's own case ruled that the expenses should be allowed on the basis of crystilization. The AO is directed to follow the aforesaid direction contained in paragraph 58 & 59 of the aforesaid order on this issue, which reads as follows: "58. It is not in dispute that in AY 2013-14, the Assessee has claimed the same expenses as deduction but the same was disallowed by the AO on the ground that it was expenditure relating to AY 2012-13 and therefore cannot be allowed as deduction in AY 2013-14 as it was prior period expenditure. The additional ground is admitted for adjudication as the claim could not be made ....