TaxTMI 
TaxTMI 
2019 (8) TMI 1864
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.... of manufacture and sale of printing inks and allied products. For the relevant AY 2013-14 the appellant filed its return of income declaring total income of Rs17,94,81,280/-. The case of the appellant was originally selected for scrutiny u/s 143(3) and thereafter the AO referred the case to the TPO. In the Form 3CEB filed along with the return of income, the appellant had benchmarked the transactions involving purchase of raw materials and sale of finished goods by applying the internal TNMM Method and the transaction involving purchase of finished goods for trading purposes was benchmarked under the internal RPM Method. In the TPSR furnished along with the Form 3CEB, the appellant had drawn up segmented accounts for its manufacturing and trading segment. The manufacturing segment was further sub-divided into domestic, export and blanket. The export segment was sub-divided into related party and unrelated party and thereafter the internal TNMM was applied to benchmark transactions involving purchase of raw materials and sale of finished goods. As far as purchase of finished goods from the AEs is concerned, the trading segment involving purchase & sale of press chemicals was divide....
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....ing TNMM on entity level in the AYs 2004-05 and 2005-06. The Revenue however rejected the application of TNMM on the premise that the value of transactions with its AEs as a percentage of overall volume of business was minimal and hence entity level TNMM was not the most appropriate method. Instead the Revenue drew up segmented accounts of the appellant and applied CPM in respect of purchase of raw materials and export of finished goods and RPM for the purchase of finished goods. The Ld. AR drew our attention to the decision of the coordinate Bench of this Tribunal in the appellant's own case for AYs 2004-05 & 2005-06 reported in [2016] 75 taxmann.com 122 (Kolkata - Trib.) wherein although application of TNMM by the assessee was upheld but even otherwise the Tribunal found the segmented accounts of the appellant to be reliable and on application of RPM & CPM, the international transactions were held to be at arm's length. He submitted that subsequent thereto, the appellant had been preparing segmented accounts and applying RPM in respect of its trading functions i.e. purchase of finished goods from AEs and TNMM in respect of manufacturing functions, i.e. purchase of raw materials a....
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....2009-10. The Ld. AR submitted that each activity, function or transaction has its own distinct FAR analysis and therefore where the FAR analysis of different activities are not inter-linked or inter-related then the correct approach is to determine the ALP for each of the activities independently. Drawing our attention to the facts of the case, the Ld. AR submitted that the appellant performed two separate and distinct functions i.e. manufacturing & trading which cannot be said to be relatedly comparable or inter-linked. He submitted that the manufacturing segment only dealt with manufacture of different variety of printing inks and the trading segment involved dealing in press chemicals. Accordingly he contended that the international transactions involving purchase of raw materials and export of manufactured finished goods being part of the manufacturing segment was rightly benchmarked together. As regards the press chemicals purchased from the AEs, he submitted that this transaction was completely distinct in as much as the appellant conducted only trading of these goods. The product profile, functions performed, risks assumed, assets employed& profitability in the trading activ....
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....eporting of the published financial statements. According to him merely because a segment does not fulfill the conditions laid down in AS-17 so as to qualify for reporting purposes cannot be reason enough to hold that such segment does not exist. Drawing our attention to the TPO's order, the ld. AR submitted that even the TPO had carved out a separate R&D segment to benchmark the R&D expenses incurred by the appellant, which admittedly was not part of any segment reporting in the published financial statements. He thus submitted that the TPO's rejection of the audited segment results furnished by the appellant was selfcontradictory. In this backdrop, the ld. AR submitted that the ld. TPO indeed has the requisite powers to examine and verify the segmental results furnished by the assessee and make necessary changes/alterations, if any infirmities are found therein but the segmental results cannot be rejectedon the bald premise that it does not form part of the segment reporting of the published financial statements. In support thereof, he relied on the following decisions: - Netguru Ltd. [TS-383-ITAT-2019(Kol)-TP] (Copy enclosed); - Tata Technologies Limtied [TS-39....
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....ds, the application of RPM for benchmarking the purchase of press chemicals from AEs, he relied on the orders passed in appellant's own case for AYs 2004-05 & 2005-06 reported in 75 taxmann.com 122. 8. Per contra the Ld. CIT, DR vehemently supported the order of the lower authorities. According to him although segmented data can be used for undertaking benchmarking analysis in transfer pricing but re-segmentation of segmented data is not permissible. He reiterated the AO's observation that the segmented data did not form part of annual report and hence could not be relied upon. He alternatively submitted that in case the usage of segmented results were upheld, then the matters be restored to the file of the AO/TPO for verification of the facts & figures stated therein. As regards the comparability analysis, the Ld. DR supported the order of the DRP, Delhi upholding the retention of comparables engaged in manufacture of pigments viz., the raw material used in manufacture of printing inks. According to Ld. DR, since pigments is an essential raw material for manufacturing pigments the said industry could be said to be broadly comparable with the printing inks industry. 9. After ....
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....ength price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transac....
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....mputed. In view of the foregoing we note the ALP should be ordinarily determined in relation to an international transaction. The term 'international transaction' has been defined in section 92B to mean : 'a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, etc. It is discernible from the above definition of international transaction given in section 92B that it refers to 'a transaction' between two or more associated enterprises. The term 'transaction' has been defined in section 92F(v) and also in Rule 10A(d) of the Income-tax Rules, 1962. The Rule defines the term 'transaction' to include: 'a number of closely linked transactions.' 12. Hence, in view of the above provisions and rules set out there-under, we are of the considered view that the arm's length price is essentially required to be determined on transaction-by-transaction approach for each....
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.... transactions under the aggregate approach on entity level under TNMM, then it shall result in cross subsidization of the international transactions which is impermissible. It shall so happen therefore that a probable addition on account of transfer pricing adjustment arising from one set of international transactions may get set off against the income from the other international transaction giving higher income on transacted value. In our considered view therefore the transaction by transaction approach is the more appropriate and reasonable way to benchmark different international transactions, having regard to their FAR profile and this approach holds precedence over the aggregate approach. 14. In this regard we find that the Hon'ble Punjab & Haryana High Court in Knorr Bremse India (P) Ltd. v. Asstt. CIT [2016] 380 ITR 307 considered the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction only if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an ....
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....her transactions. The value of the other transactions, on the other hand, may be over estimated and would not be at the arm's length price. In that event, for the purpose of the Act, the price of the second transaction cannot possibly be taken to be the arm's length price for it was not the arm's length price. It does not become the arm's length price merely because the bargain struck with respect to the first transaction balanced the inflated price of the second although the two transactions were independent of each other. The two transactions are different and, therefore, the arm's length price of each of them must be determined separately. The question, therefore, in each case must first be whether the sale of goods or the provision of services was a separate independent agreement or whether they formed part of an international transaction, i.e., a composite transaction. [Para 41] - It follows, therefore, that if the TPO had correctly come to the conclusion that the said five items were not connected to the rest, he was justified in determining the arm's length price thereof separately from and independent of the otheRs. It would be neither logic....
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....ndent upon or interrelated to the pricing of the other transactions with the group entities. Prima facie at least, it appears, therefore, that each transaction was separate and independent of the other." 15. We note that the decision of the coordinate Delhi bench of this Tribunal in the case of JCB India Ltd Vs DCIT (69 taxmann.com 383) is of much relevance. In the decided case the assessee had international transactions with AEs inter alia including payment of royalty on sales and import of raw materials. It was the argument of the assessee that these transactions should be aggregated and benchmarked under TNMM on entity level. The Tribunal however did not find merit in this contention as because the payment of royalty pertained to marketing & distribution functions whereas the import of raw materials was a part of manufacturing activities. The Tribunal found that these two set of transactions were neither inter-linked or closely connected having regard to their respective FAR and therefore upheld the Revenue's contention that these transactions should be benchmarked separately viz., royalty under CUP Method and import of raw materials under TNMM. The relevant extracts of this ....
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....P functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregated manner at par with those undertaken by the comparables, then, segregation should be done and the international transaction of AMP should be separately processed under the transfer pricing provisions. In such a determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed. ..... 7.4 Though the judgment in Sony Ericsson Mobile Communications India (P.) Ltd's case (supra)lays down at length the broader principles for determination of the ALP of AMP expenses in the case of a 'Distributor', certain principles dealing exclusively with the determination of the ALP of AMP expenses in the case of a ....
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....s. In such circumstances, the import of raw material for manufacture would be an independent international transaction viz., marketing and distribution activities or functions. The essence of the above para is that two or more unrelated transactions cannot be aggregated and in case of a 'Manufacturer', the international transactions concerned with the manufacturing activity cannot be aggregated with the AMP activities as both are separate and distinct. 7.6 Nitty gritty of the above discussion is that aggregation of related transactions is permissible, but there is no rule that all the related and unrelated transactions can be combined and shown at ALP under the TNMM on entity level. The Hon'ble Punjab & Haryana High Court in Knorr-Bremse India (P.)Ltd. v. Asstt. CIT [2016] 380 ITR 307/[2015] 236 Taxman 318/63 taxmann.com 186, has held that in order to combine two or more transactions, it is essential that they should be either inextricably linked to each other either by way of a package deal or that a number of transactions are priced differently but on the understanding that the assessee will accept all of them together (i.e. either take all or leave all). It ....
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.... be adopted. 7.1 From the facts mentioned above, it is clear that assessee's manufacturing export activities; buying/sourcing and commission earning activities are independent of each other. Each activity has different factors in respect of source, identification of vendors, merchandise, designs quality control, handling etc. The FAR analysis in each of the activity will have distinct and separate considerations. 7.2 We, find merit in the argument of the learned counsel that the TPO should have accepted the method of assessee's benchmarking analysis on the basis of transaction to transaction basis in respect of different segments of assessee's international transactions with associated enterprises. In our view, assessee's functions, risk and assets FAR considerations, which are given in the above table, deserves to be merited. TPO did not appreciate the assessee's transactions correctly and applied entity level benchmarking on TNMM method by combining assessee's all international transactions with associated enterprise without justification. 7.3 Our view is supported by ITAT judgments - Mumbai Bench in the cases of UCB India (P.) L....
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....at the transaction-by-transaction approach was the most scientific and correct way to determine the ALP of each of set of similar / closely related international transactions. 18. In view of the above findings, the next issue for our consideration is whether therefore the use of segmented information qua the (a) manufacturing segment and (b) trading segment is permissible in the given facts of the present case. In the given facts of the present case, we note that the appellant has two separate & distinct activities viz., manufacturing of printing inks, blankets and trading in press chemicals. It is well understood that the functions involved in manufacturing activities, risks assumed, assets employed are significantly different and higher than the trading activity. Consequently it is generally seen that the profitability of a manufacturing enterprise is higher than the profitability of a trading enterprise. As already held earlier, the cross subsidization of the international transactions in a combined approach is impermissible since it results in distorted presentation of facts. Hence if both the manufacturing & trading segments of the appellant are aggregated, the combined pro....
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....ant definitions of the two types of segments in AS-17 read as follows: "A BUSINESS SEGMENT is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. A GEOGRAPHICAL SEGMENT is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments." 21. It is thus noted that the AS-17 does not define or identify reportable segment based on the company's function or activity i.e. manufacturing or trading which is carried out in the same/similar products in the same geographical environment and hence there was no occasion for the appellant to have reported its identifiable manufacturing and trading segment in its financial statements since it did not satisfy the criteria laid down in AS-17. We are accordingly of the considered view that there was valid reason for non-disclosure of ....
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....in the case of Addl. CIT v. Technimont ICB India (P) Ltd. 148 TTJ (Mumbai) (TM) 547 had held that where the segmental data was furnished rejection of such cases as comparable is not justified. It was further held by both the lower authorities that bad debts written off cannot be allowed as operating cost. The Assessee respectfully submits that bad debts written off forms part of operating cost. In this connection, reliance is placed on the decision of Almatis Alumina Pvt. Ltd. ITA Nos.726&2361/Kol/2017 Assessment Years:2012-13&2013-14 Page|23 Tribunal in the cases of CA Computer Associates (P.) Ltd. v. Dy. CIT [2010] 37 SOT 306 (Mum.Tribunal) and Dy. CIT v. Vertex Customer Services India (P.)Ltd. [2009] 34 SOT 532 (Delhi). 34. The DR submitted that segmental total cost not available and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company. 35. We have considered the arguments of both the parties. In our considered view for computing the net margin of the assessee for the purpose of transfer pricing only the cost relat....
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....rib.) wherein the Chennai Tribunal, placing reliance on the decision rendered in the matter of 3iInfotec Ltd. v. ITO reported in [2013] 35 txmann.com 582 (Chennai - Trib), held that even if such segmental results were not shown in the audited financial accounts, they had to be accepted. The Coordinate Bench in the matter of InfotecLtd. v. ITO (supra) held that there was no legal requirement that the segment wiseworking submitted before the TPO should have been audited by the Assessee'sChartered Accountant. The Coordinate Bench Delhi Tribunal further placedreliance on the decision rendered in the matter of Lummus Technology Heat Transfer BV v. Dy. CIT reported in [2014] 42 taxmann.com 342/64 SOT 47(URO) (Delhi - Trib) wherein it was held that segmental results could not berejected on the ground that the same was not audited. The TPO/DRP was required o examine the segmental results if the same were maintained in the ordinary course of business. On perusal of, inter alia, the aforesaid decisions, the Coordinate Bench Delhi in the matter of CSR Technology (India) (P.) Ltd vs. ACIT (supra)held that the AO/TPO/DRP erred in disregarding the segmental result of the taxpayer by proceedi....
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.... information, this Tribunal had found the transactions involving purchase of traded goods to be at ALP under internal RPM. The relevant extracts of the decision is as follows: "From the submission we find that the assessee had imported printing inks from AEs worth Rs. 7.06 crores which was sold to unrelated parties for Rs. 8.09 crores resulting in gross profit margin of 13%. Correspondingly the assessee had imported press chemicals from unrelated parties worth Rs. 1.75 crores which was sold to unrelated parties for Rs. 2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it was observed that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(Appeals). The difference in margin of 1% was well within the permitted range of +/- 5% allowed in second proviso Section 92C of the Income-tax Act, 1961. In view of above we do not find any infirmity in the order of the ld. CIT(A). Hence we allow asse....
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....Inx (India) Ltd (c) Tirupati Inks Ld (d) Organic Coatings Ltd 28. It is noted that comparables (a) to (c) are not in dispute in as much as all of them have been accepted and retained both by the TPO as well as the DRP. With regard to the comparable (d), M/s Organic Coatings Limited, it is noted that although the appellant had contended for its inclusion before the lower authorities but no reasons are found to have been given either by the AO or the DRP to reject the same. Instead we find that the DRP's order is conspicuously silent about this comparable. It was brought to our notice by the ld. AR that this company, M/s Organic Coatings Ltd was found to be functionally comparable and engaged in the same line of business by the DRP, Delhi in the appellant's own case in the earlier AY 2012-13 and thereafter it was also accepted by the TPO to be a comparable. On these facts and in view of the DRP's order for AY 2012-13, we do not find any reason to exclude the company, M/s Organic Coatings Limited from the list of comparables and hence direct the TPO/AO to consider the same. 29. Now we proceed to examine the six comparables, which were identified by the TPO and ....
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....ve, it is noted that each of the above companies are engaged in manufacture of pigments, which in DRP's opinion is an essential raw material in manufacture of printings inks. According to the DRP therefore these companies could be considered as good comparables. We are however unable to agree with this analysis of the DRP. It is an admitted position that each of the above companies manufacture pigments as their final product. None of them manufacture printing inks. It is also not in dispute that the pigments, are used as a raw material along with dyes, resins, solvents & additives to manufacture the printing inks. The use of pigments in the manufacturing process is limited to colour the ink and make it frosted. Accordingly, it is evident that the manufacturing process& assets employed for producing pigments is materially different than the manufacturing process and assets employed for producing printing inks by consuming various components/materials inter-alia including pigments, dyes, resins, solvents & additives etc. In our considered view therefore it is incorrect to hold the supplier of one raw materialis functionally comparable with the manufacturer. It is further observed tha....