TaxTMI 
TaxTMI 
2022 (1) TMI 1338
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....anel (id. Panel') and Ld. Deputy Commissioner of Income Tax (Transfer Pricing) - 2(2)(2) (`Ld. TPO') erred on facts and in law in making an addition of INR 15,224,686 to the total income of the Appellant on account of adjustment to the arm's length price pertaining to recovery of expenses. (b) The draft / assessment order issued by the Ld. AO, is bad on facts and in law, and is in violation of the principles of natural justice 2 Mark-up on recovery transactions (a) The Ld. TPO erred in facts and circumstances of the case and in law, in determining the transfer pricing adjustment after charging mark-up on recovery transactions entered with associated enterprise without appreciating the submissions filed by the Appellant that these were mere pass through transactions. The Ld. Panel/ AO has not taken cognizance of the submissions filed by the Appellant and erred in upholding the actions of the Ld. TPO. (b) Although the TPO has proposed to establish an arm's length mark-up on the recovery transaction of the Assessee by comparing the same to the net operating margin of certain companies engaged in tours and travel agent services, no such average net operating ma....
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....rvices by the Appellant to its Associated Enterprises, the same ought to be aggregated with the principal transactions, and ought not to be treated as an independent international transaction. 2(e). That the action of the TPO in comparing the Appellant with companies in tours and travel industry is erroneous in as much as the functions performed, assets employed and risks assumed by the Appellant are different from that of companies in tours and travel industry." 3. In the petition for admission of the above additional grounds, the assessee has explained that it has challenged the adjustment vide ground No.1(a), a specific ground was not raised challenging the adjustment on the basis that the transaction is a mere reimbursement of costs incurred by the assessee and therefore it need not be benchmarked. It has challenged the action of the TPO proposing to determine the arm's length mark-up on the basis of the margin earned by companies in tours and travel industry without providing any such margin, but had not specifically challenged the TPO's action in comparing the assessee with the said companies. The assessee had challenged the functional comparability of the said com....
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....ed on a cost to cost basis. However, the TPO observed that as per the OECD guidelines the mark=- up should be done at a value lower than that of comparable companies having similar FAR. Accordingly, he made a mark-up of 5% on services rendered by the assessee to the AE in respect of travel expenses and other expenses as stated above. Against this, the assessee's objection of the assessee before the DRP is also declined and the TPO order upheld. Against this, the assessee is in appeal before us. 8. At the time of hearing, the ld. AR alternatively argued the additional grounds stating that as per OECD guidelines and Indian Transfer Pricing provisions, aggregation of transactions could be made. For this purpose, he relied on the order of the Tribunal in the case of Cummins India Ltd. v. Addl. CIT, 53 taxmann.com 53 (Pune Trib.). 9. The ld. DR relied on the orders of the lower authorities. 10. We have heard both the parties and perused the material on record. In our opinion, we do not find any merit in the main ground of the assessee, However, considering the alternative submissions of the ld. AR, the issue is covered by the Pune Bench of the Tribunal in the case of Cummins India Lt....
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....n 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 pricing analysis be performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sough....
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....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 equipment, provision of commissioning and installation services, etc. Though the assessee raises different invoices for supply of equipments and separately for erection and commissioning charges, h....
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....re 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 segmental profits in the present case can be a justifiable ground for the TPO to say that the transactions are not 'closely linked' within the meaning of Rule 10A(d) of the Rules. Thus, the activity of ins....
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....fer 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, repair and annual maintenance contract, warranty period and for post warranty period were the services provided by the assessee for carrying out most of the above said activities. The sale of spare parts was claimed to be the principal activity of the assessee. The repair & maintenance and the warranty administration including services of....
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....ess 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 length price of all the transactions by comparing results of the comparable companies which were found to be at arm's length price. The assessee had also furnished the segmental Profit & Loss Account for the exports to associated enterprises and as compared to the export to third parties and percentage of services over total sales in respect of export to associated enterprises works out to 0.2069% and in respect of exports to third parties works out to 0.....