TaxTMI 
TaxTMI 
2017 (9) TMI 1836
X X X X Extracts X X X X
X X X X Extracts X X X X
....eal:- 1. Hon'ble DRP has erred while directing that all International transactions of Tetra Pak India Pvt. Ltd. be aggregated/ whereas as per section 92(1) and Rule 10C(1), 'Income arising from an International Transaction' has to be calculated with regards to Arm's Length Pricing, when clear segments were identified from the financial information by revenue and aggregation of such international transaction is allowed only as an exception as per Rule 10A(d). 2. Hon'ble DRP erred in holding that International transactions of Imports of Machines and Import of straws were functionally different segments, when Function Asset and Risk profile of Tetra Pak was compared to that of uncontrolled comparables after carefully choosing them through a structured search carried out by assessee itself within meaning of Rule 10B(2) and 10C(2). 3. Hon'ble DRP erred in holding that margins of 5.87% used as Arm's Length Price is not correct when Tetra Pak India Private Limited suffered a gross loss in International transactions of Imports of Capital Equipments and Import of straws, as in a pure ' trading junction' net margins....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on to functionally different segments (without prejudice) Without prejudice to the aggregation approach upheld by the Hon'ble DRP, the learned AO and Transfer Pricing Officer ('TPO') grossly erred in computing the Transfer Pricing ('TP') adjustment by inappropriately comparing the packaging machinery and straw business segment with the comparable companies which are engaged in manufacturing of packaging material with an operating margin of 5.87%. 3. Not considering income from technical services and leasing income as part of packaging machinery segment of the Respondent (without prejudice) machinery and related technical services which is closely linked to the supply of packaging machinery. 4. Erred in computing the segmental profitability of the Respondent (without prejudice) Without prejudice to the above contentions, erred in ignoring the contentions of the Respondent and prepared a revised profitability statement by considering certain heads of income (like commission income, scrap sale, finance charge on lease agreement etc.), considered as operating by the res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....actions with its associated enterprises and the case of assessee was that the said transactions were closely interlinked and were to be considered as part of assessee's manufacturing activity. Accordingly, the assessee aggregated the said transactions for transfer pricing analysis and evaluated by adopting combined transaction approach. The assessee had identified TNMM method as most appropriate method to benchmark its international transactions. The assessee had selected few companies as functionally comparable and had applied multiple year data to benchmark its international transactions to determine arm's length price of its transactions. The PLI of assessee i.e. OP/sales was 12.09%. The average margin of comparables identified by the assessee of multiple year data works out to 6.13% and hence, it was claimed that international transactions of assessee were at arm's length. During the course of transfer pricing proceedings, the TPO at the first instance asked the assessee to update the margins of comparable companies using the data for the instant assessment year in which on the basis of single year's data, the mean margins of comparab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccount. The assessee explained that in respect of its sale and supply of processing equipment and filling machines, the assessee offered warranty for 12 months from the date of commissioning or 18 months from the date of delivery, whichever was earlier and the assessee made provision for warranty @ 2% of equipment sale price except sale of processing components and this was based on generally acceptable practice worldwide. The assessee furnished the working of its claim of deduction of Rs. 1.27 crores. The Assessing Officer noted from the past records of assessee that similar claim of assessee had been disallowed in earlier years also and the DRP in its directions for earlier years had upheld the disallowance. In view thereof, the Assessing Officer was of the view that expenditure was in the nature of contingent liability and hence, sum of Rs. 1.27 crores was proposed to be disallowed. 11. The assessee filed objections before the DRP in this regard. The first issue which was considered by the DRP was rejection of aggregation approach by the TPO. The assessee pointed out that it was a full system supplier offering customers packaging sol....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... DRP also noted that though the assessee had sold packaging machineries at loss, however, it had recorded net profit margin of 28%. Similarly, it had also chosen to sell straws along with packaging material at reduced price so as to keep cost of total packaging low, so as to provide incentives to purchasers for using its packaging material. The approach adopted by the TPO was not accepted by the DRP on the premise that the manner of conducting business could not be decided by anyone else but only by the assessee. The portfolio approach adopted by the assessee to carry on its business was accepted as business strategy and consequently, the sale of packaging material and straws were held to be closely linked. The DRP further held that it was not possible to determine separate transfer pricing of either straws or machines, packaging material, etc. as the assessee had decided to sell everything as package. The approach of TPO in segregating closely interlinked business activities into two segments was held to be not correct. Another plea raised by the assessee before the DRP that where the TPO had considered segment of sale of packaging machinery and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egy, it identifies its customers and market its products by selling the same. The assessee first sells the machinery and then packaging material. The assessee also gave services through its engineers which help the customers in printing of packaging material. Further, straws were also sold to the customers and as a business strategy, the assessee imports straws from its associated enterprises for sale to the customers. This division is called Carton Division. The assessee is also engaged in another line of manufacturing processing equipment, wherein some items have been manufactured in India and some are imported from its associated enterprises and both are sold to the customers. The assessee thus, claims that in addition to import of packaging material, it imported certain spare parts, straws and also exported packaging material (some part) to its associated enterprises. The assessee thus, had entered into the following international transactions with its associated enterprises:- Sr. No. International transactions Value (Rs.) 1 Import of raw materials, spares and components, processing/distribution equipment and fillin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he business of packaging material, it was providing complete solutions by way of selling / leasing packaging machines. The supply of processing equipment gave rise to the sale of packaging machines which in turn, were used for filling packaging material; in turn, assessee supplied processing equipment and packaging machines and also supplied spares, technical services and commissioning as part of its bundle of activities in the line of business undertaken by the assessee. In addition to this, the assessee was also imports straws and supplied the same as part of sale of packaging materials. The activities of planning, purchasing, logistics, selling and administrative activities were claimed to be associated with overall business of assessee and the same needs to be aggregated for benchmarking the international transactions. The assessee also claimed that it was a business strategy to charge price to its customers on sale of straws at lower than the total price cost of straws i.e. purchase price + import duty. However, the sale price was higher than the purchase price of straws. Therefore, for comparability purposes, the price of straws should be c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....transactions. 17. Even under US Transfer Pricing Regulations, the aggregation of transactions is approved, which is as under:- "Aggregation of transactions - (A) In general. The combined effect of two or more separate transactions (whether before, during, or after the taxable year under review) may be considered, if such transactions, taken as a whole, are so interrelated that consideration of multiple transactions is the most reliable means of determining the arm‟s length consideration for the controlled transactions. Generally, transactions will be aggregated only when that involve related products or services, as defined in §1.603A-3(c)(7)(vii.)." 18. Further, even the Guidance Note issued by ICAI on report of international transactions under section 92E of the Act clearly provides as under:- "13.5 The conditions referred to above are cumulative. The reference therein to the terms "best suited‟ and "most reliable measure‟ indicates that the most appropriate method will have to be selected after a meticulous appraisal of the facts and circumstances of the international transaction. Fu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm‟s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis." 21. In view thereof, we uphold the business strategy adopted by the assessee which would follow that sale of machinery, packaging material and straws, etc. were closely interlinked and the same could not be evaluated separately. The aggregation approach adopted by the assessee in benchmarking its international transactions of closely interlinked transactions is thus, accepted. 22. We further find that similar issue of aggregation has been accepted by the Pune Bench of Tribunal in Demag Cranes & Components (India) (P.) Ltd. Vs. DCIT (2013) 30 taxmann.com 364 (Pune - Trib.). 23. Further, the Tribunal in Cummins India Ltd. Vs. Addl.CIT (2015) 53 taxmann.com 53 (Pune - Trib.) in turn, relying on OECD Guidelines, Indian Transfer Pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ong term contracts for the supply of commodities or services; 2. Rights to use intangible property; and 3. Pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to access the arm‟s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm‟s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis." 31. In this background, considering the legislative intent manifested by way of Rule 10A(d) read with Rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions exist, the same should be treated as one composite transaction and a common transfer prici....
X X X X Extracts X X X X
X X X X Extracts X X X X
....individuals orders are released for specific quantities. The various purchase transactions are closely linked transactions. 13.8 It may be noted that in order to be closely linked transactions, it is not necessary that the transactions need be identical or even similar. For example, a collaboration agreement may provide for import of raw materials, sale of finished goods, provision of technical services and payment of royalty. Different methods may be chosen as the most appropriate methods for each of the above transactions when considered on a standalone basis. However, under particular circumstances, one single method maybe chosen as the most appropriate method covering all the above transactions as the same are closely linked." (Underlined for emphasis by us). 32. In this background, we may now examine the facts of the present case. The primary activity of the assessee is to manufacture material handling equipments viz. cranes and hoists. It is seen from the documents placed in the Paper Book that the assessee enters into a single negotiation with the customers, which, inter-alia, includes manufacturing and supply of the material handling eq....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t case, as we have noted earlier, it is only on account of the manufacturing activity that the activity of commissioning and installation of the equipment arises and pertinently all the aforesaid activities are negotiated and contracted for at one instance. With regard to the segmental profitability referred by the Assessing Officer, the position has been clarified by the assessee. According to the assessee, in the financial statements affirmed by the Auditors, the activities have been clubbed together in accordance with the Accounting Standards prescribed by the ICAI. It was clarified that the segmental profits were worked out by the assessee only at the asking of the TPO during the proceedings before him. The learned counsel pointed out with reference to the chart in this regard placed in the Paper Book and submitted that the segmental profitability was not computed on the basis of any separately maintained records viz. books of account or vouchers but was computed by undertaking a statistical exercise. The costs were allocated as a proportion of sales/revenues and not an actual basis. In view of the aforesaid fact situation, we do not find that the availability of separate segme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d construed as a single transaction for the purpose of determining the arm's length price. In case, there is close link exists between the different transactions, the same should be treated as composite transaction and appropriate method should be applied to work out the transfer pricing analysis. Where two or more transactions emanate from common source being an order or contract or an agreement or an arrangement, then such transactions could be said to be closely linked as the nature, characteristic and terms of such transaction substantially flow from the said common source. 27. In the above said background, we analyse the different international transactions entered into by the assessee as pointed out by us in the paras hereinabove. The business of the assessee company was to provide aftermarket support to IC engines sold, in the form of sale of spare parts and rendering of after sales service including warranty administration. The assessee is thus, providing after sales support for engines sold by Cummins India Ltd., Cummins INC, etc. which were under warranty period and also post warranty period. The servicing, rep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rgent basis and hence, the premium was charged and further, the frequency of such transactions was low and consequently, higher margins of profits. The first major activity carried on by the assessee was of import of spare parts to Rs. 29.45 crores as against which, the export of spare parts was only Rs. 0.87 crores. The payment for IT support received from associated enterprises was Rs. 1.09 crores and the payment for access to customized part catalogues was Rs. 0.02 crores. Further, the assessee had received Rs. 0.76 crores against warranty administration. All these international transactions are linked to the main business being carried on by the assessee and such closely linked transactions are to be analysed in aggregate to determine the arm's length price. The aggregation of the import of spare parts, export of spare parts, IT support services, access to customized parts catalogue and amount received for warranty consideration are inter-related transactions, which were the sourcing activities of the assessee company and have to be aggregated in order to benchmark the international transactions. The assessee had benchmarked the arm's....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the Revenue. 25. Now, coming to the issue raised by the assessee in its appeal i.e. provision of warranty. The assessee claims that as part of its sale and supply of processing equipment and filling machines, it was offering warranty for 12 months from the date of commissioning or 18 months from the date of delivery, whichever was earlier. The assessee thus, was making a provision for warranty @ 2% of equipment sale price, except sale of processing components. The assessee was making the said provision from year to year by following a system of accounting and during the year under consideration, had claimed expenditure of Rs. 1.27 crores. Both the Assessing Officer and the DRP did not allow the claim of assessee, in view of similar claim being rejected in earlier years. 26. We find that the Tribunal in assessee's own case relating to assessment year 2008-09 in ITA No.786/PN/2014, order dated 23.12.2016, had allowed the claim of assessee holding as under:- "9. We have heard the rival contentions and perused the record. The issue arising in the present appeal is against the claim of deduction on account of provision made....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee was engaged in the manufacture of specialized machinery for packaging and the assessee had warranty clause against supply of the said machinery, then the recognition of application of warranty by way of making the provision in the books of account is accepted accounting practice and such a liability recognized by the assessee is Contingent Liability. Following the ratio laid down by the Hon‟ble Supreme Court in Rotork Controls India P. Ltd. Vs. CIT (supra), we hold that the value of Contingent Liability by way of recognizing the warranty liabilities, by making a provision and also following systematic method of its write back and / or utilization is an accepted accounting method adopted by the assessee and the provision made by the assessee is to be allowed as deduction in the hands of assessee. It may be clarified herein that the CIT(A) had rejected the claim of assessee in assessment year 2008-09 observing that the assessee had made provision to the extent of Rs. 32.74 crores, whereas none of the provisions made in the earlier years were much utilized. The learned Authorized Representative for the assessee in this regard has clarified that inadv....