TaxTMI 
TaxTMI 
2020 (4) TMI 128
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....scrutiny and notices u/s 143(2) and 142(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') and served on the assessee. It was noticed that assessee had entered into international transactions with Associated Enterprises (hereinafter referred to as 'AEs') as envisaged in section 92A of the Act valued at Rs. 72.24 crores. The Assessing Officer (AO) accordingly, made reference to Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) of purchase and sale services availed by the company. The TPO vide order dated 21.10.2016 passed u/s 92CA(3) of the Act held the adjustment of Rs. 2,64,18,333/- was required to be made to international transactions relating to sales commission. After receipt of TPO's order, AO framed draft assessment order u/s 144C r.w.s. 92CA of the Act vide order dated 21.12.2016 determining the total income at Rs. 20,37,88,733/-. Aggrieved by the draft assessment order, assessee carried the matter before Dispute Resolution Panel (DRP). The DRP vide directions dated 11.09.2017 directed the AO to pass orders as per directions therein. Thereafter, assessment order was passed u/s 143(3) r.w.s. 144C & 92CA of the Act vide order dated 30.1....
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....9,991/-. 7. The Id A.O. erred in computing the operating margin of Engine business segment of UMS Technologies Ltd. at -5% without appreciating that he ought to have followed the directions given by the Ld DRP and should have computed the operating margin as per the segmental financial data of the said company and therefore, making an addition by disregarding the directions of the DPR was not justified at all and the same may kindly be deleted. 8. The appellant submits that the correct operating margin of the engine business segment of UMS Technologies Ltd. was -21.48% and since the same is within the benefit of plus or minus 3% of the operating margin of the manufacturing segment of the appellant company, no addition on transfer pricing was warranted at all. 9. Without prejudice to the above grounds, the appellant company submits that if at all, any addition is warranted, the same should be restricted only to the international transactions entered into with the AEs. 10. On the facts and circumstances of the case, and in law, the Ld AO erred in initiating the penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961 wherein the addition sustained is merely dif....
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....O, assessee carried the matter before DRP, who upheld the order of TPO. Aggrieved by the order of DRP, assessee is now in appeal before us. 6. We find that an identical issue in assessee's own case arose before the Co-ordinate Bench of Tribunal in A.Y. 2012-13. The Co-ordinate Bench of Tribunal held that manufacturing segment cannot be aggregated with distribution segment and both need to be benchmarked independent of each other by observing as under:- "7. The moot question is whether the transactions of the assessee in Production and Distribution segments can be construed as 'closely linked transactions'? At the cost of repetition, it is mentioned that whereas the Production segment covers the full diesel engines manufactured by the assessee in India and exported to its AEs, the traded goods segment covers spare parts purchased by the assessee from its AE for the purpose of sale in India to non-related parties. There is another significant aspect of the matter. The assessee exported diesel engines to its AEs and there is no sale of spare parts to the AEs as the entire sale of spare parts is in India to the third parties. It is only the import of such spare parts, which has been....
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....e instant case on the touchstone of the principles enunciated by the Hon'ble High Court, it becomes overt that the transactions of Production and Distribution segments cannot be clubbed because it is neither a case of package deal nor the two sets of transactions are structured in such a manner that the assessee has no option to accept one and reject the other nor they are so inextricably linked that one cannot survive without other. In fact, in all the earlier years, the assessee was exclusively in the trading of components and the manufacturing activity started at the fag end of the preceding year only. 10. The assessee in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT (2016) 389 ITR 469 (Delhi) entered into agreement with its A.E. for acquiring technology required for the purpose of manufacturing. It applied the TNMM to benchmark its international transactions of import of raw materials, sub-assemblies and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets. All these were categorized under one broad head, that is, "Manufacturing of automotive components" and shown to be at ALP. The TPO rejected the assess....
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.... could be categorized into (i) Manufacturing / assembly of diesel engines (Production activity), (ii) Distribution of spares and after sales services (Distribution and after sales activity) and (iii) Provision of design engineering services (Design Engineering activity). During the course of assessment proceedings the assessee was asked to submit separate profitability of manufacturing segment and also show caused as to why unadjusted operating margins of manufacturing activity cannot be compared with average operating margins as comparable in TPO's order for A.Y. 2012-13. The TPO after considering the submissions of assessee re- computed unadjusted operating margins of assessee from manufacturing segment at (-) 22.69% (the working of which is tabulated at pages 11 to 14 of assessment order). He thereafter noted that the average operating margin of comparable set as considered by the TPO in TP order for A.Y. 2012-13 was 9.90%. He thereafter, noted the difference between PLI of assessee and comparable companies at 32.59% and accordingly, made TP adjustment of Rs. 2,64,18,333/-. Aggrieved by the order of TPO, assessee carried the matter before DRP. Before the DRP, it was contended by....
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....ed results where the margins are (-) 21.48% as against assessee's margins of (-) 22%, the difference is within +/- 3% and therefore, no adjustment to ALP is called for. He further submitted that once the profitability results of a segment are available in the audited Balance Sheet, TPO has no discretion to alter it in the absence of valid reasons and further the TPO has not spelt out the reasons for rejecting the audited margins of UMS Technologies Ltd. He therefore, once again reiterated that if the profitability of UMS Technologies Ltd. is worked out on the basis of audited statements, then the margin of assessee is comparable with UMS Technologies Ltd. and no adjustment is called for. He thereafter, submitted that if ground No.6 is decided in assessee's favour, ground Nos.4 and 5 become academic. 10. The ld. DR on the other hand supported the order of TPO. 11. We have heard the rival submissions and perused the material on record. We find that before the TPO assessee had asked to include UMS Technologies Ltd. as comparable company. The TPO did not agree with the contention of assessee and proceeded to benchmark the transactions after considering Kirloskar Oil Engines Ltd. and ....