M/s Toyota Kirloskar Motor (P) Ltd., Bangalore V. ACIT, Bangalore

ITA 1315/BANG/2011

• Counselvise Citation: 131521114 RSA 2011
• Duration Of Justice: 2 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-07-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 20-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Transfer pricing; International transaction; Fair market value
• Section: 143(3); 92B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER IT(TP)A NO.1315/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S. TOYOTA KIRLOSKAR MOTOR (P) LTD., PLOT NO.1, BIDADI INDUSTRIAL AREA, RAMANAGAR DISTRICT, BANGALORE 562 109. PAN : AAACT 5415B VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, LTU, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, C.A. RESPONDENT BY : SHRI C.H. SUNDAR RAO, CIT-I(DR) DATE OF HEARING : 07.07.2014 DATE OF PRONOUNCEMENT : 11.07.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER PASSED ON 21.10.2011 BY THE ACIT, LTU, BANGALORE U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS T HE ACT IN SHORT], INCORPORATING THE DIRECTIONS OF THE DRP DATED 27.9. 2011. 2. THOUGH THE ASSESSEE HAS RAISED ABOUT 30 GROUNDS IN ITS GROUNDS OF APPEAL FILED ALONG WITH FORM 36B, GROUND NO.12 & 22 TO 24 RAISED THEREIN WAS TAKEN UP FOR CONSIDERATION. IF THE CONTENTION OF THE ASSESSEE ON IT(TP)A NO.1315/BANG/2011 PAGE 2 OF 39 GROUND NO.12, 22 TO 24 IS ACCEPTED, THEN THE OTHER ISSUES RAISED IN THE GROUNDS OF APPEAL NEED NOT BE GONE INTO AND THOSE G ROUNDS WOULD BE LEFT OPEN FOR ADJUDICATION IN THE APPROPRIATE PROCEEDING S IN THE APPROPRIATE ASSESSMENT YEAR. 3. GR.NO.12, 22 TO 24 RAISED BY THE ASSESSEE IN ITS GROUNDS OF APPEAL READS THUS: THE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PR ICING OFFICER AND HONOURABLE DISPUTE RESOLUTION PANEL HAVE ERRED IN GR.NO.12: NOT APPRECIATING THAT THE TRADING AND MA NUFACTURING SEGMENTS ARE INTERTWINED AND INTER-RELATED WARRANTI NG A COMBINED TRANSACTION APPROACH IN ARRIVING AT THE ARMS LENG TH PRICE. GR.NO.22: DOING SEPARATE EVALUATION OF ROYALTY PAY MENT, TECHNICAL FEES AND OTHER PAYMENTS BY ADOPTING CUP METHOD WITH OUT JUSTIFYING HOW THE SAME WAS MOST APPROPRIATE METHOD. GR.NO.23: CONCLUDING THAT ARMS LENGTH PRICE OF RO YALTY PAYMENT, TECHNICAL FEES AND OTHER PAYMENTS AS NIL WITHOUT BR INING ON RECORD ANY COMPARABLE; GR.NO.24: CONCLUDING THAT THE TAXPAYER HAS NOT BEE N ABLE TO SHOW THAT IT DERIVED ANY ECONOMIC BENEFIT FROM THE ALLEG ED KNOW-HOW RECEIVED FROM THE ASSOCIATED ENTERPRISES IGNORING T HE EVIDENCE SUPPORTING THE SAME, WHICH WERE ON RECORD; 4. THE ASSESSEE IS A COMPANY. IT IS IN THE BUSINES S OF MANUFACTURE AND SELLING MULTI UTILITY VEHICLES UNDER THE MODEL NAME INNOVA AND PASSENGER CARS UNDER THE MODEL CAMRY AND COROLLA . FOR THE A.Y. 2007- 08, IT FILED A RETURN OF INCOME ON 19.10.2007, WHIC H WAS REVISED ON 3.1.2008 DECLARING AN INCOME OF RS.118,56,65,783. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE IS A SUBSIDIARY OF TOYOTA MOTOR CORPORATION, JAPAN AND HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS HOLDING COMPANY DURING THE PREVIOUS YEAR. THE TRANSACTION WITH THE HOLDING COMPANY WAS AN INT ERNATIONAL TRANSACTION IT(TP)A NO.1315/BANG/2011 PAGE 3 OF 39 WITH AN ASSOCIATED ENTERPRISE (AE) AND THEREFORE TH E PRICE AT WHICH THE INTERNATIONAL TRANSACTION WAS CARRIED OUT HAS TO PA SS THE ARMS LENGTH PRICE TEST LAID DOWN IN SEC.92 OF THE ACT. 5. AS ALREADY STATED THE ASSESSEE IS A SUBSIDIARY OF TOYOTA MOTOR CORPORATION, JAPAN (TMC), MANUFACTURES AND SELLS MU LTI-UTILITY VEHICLES UNDER MODEL NAME INNOVA AND PASSENGER CARS UNDER THE MODEL NAME CAMRY/COROLLA. 6. DURING THE PREVIOUS YEAR, THE ASSESSEE WAS ENGA GED IN CARRYING OUT TWO ACTIVITIES: 1. MANUFACTURING AND 2. TRADING THE FINANCIALS OF ASSESSEE FOR THE FY 2006-07 AT TH E ENTITY LEVEL RELEVANT TO AY 07-08 (INCLUDES TRANSACTIONS WITH AE AS WELL AS NON-AE) : DESCRIPTION RS. IN (000) OPERATING REVENUE (EXCLUDING OTHER INCOME) 37633754 OPERATING EXPENSES (EXCLUDING INTEREST AND LOSS ON SALE OF ASSETS) 36847765 OPERATING PROFIT (PBIT) 785989 OP ON COST 2.13% OP ON SALES 2.09% THE SEGMENTAL RESULTS IN RESPECT OF ITS TRADING SEG MENT AND MANUFACTURING SEGMENT WERE AS UNDER:- DESCRIPTION MANUFACTURING RS. TRADING RS. TOTAL RS. OPERATING REVENUES 76.55% 23.45% 100% NET SALES 2858,56,48,000 875,81,13,000 3734,37,61,000 SCRAP SALES 28,99,93,000 0 28,99,93,000 2887,56,41,000 875,81,13,000 3763,37,54,000 COST OF GOODS SOLD / CONSUMPTION OF MATERIAL 2419,28,33,000 715,82,34,000 3135,10,67,000 IT(TP)A NO.1315/BANG/2011 PAGE 4 OF 39 GROSS PROFIT 468,28,08,000 159,98,79,000 628,26,87,000 GROSS PROFIT ON SALES 16.22% 18.27% 16.69% OTHER EXPENSES MANUFACTURING EXPENSES 90,35,91,000 0 90,35,91,000 EXPENSES ON EMPLOYEES 86,54,98,000 26,51,33,000 113,06,31,000 DEPRECIATION 94,24,11,000 0 94,24,11,000 ROYALTY 78,01,61,000 0 78,01,61,000 OTHER OPERATING EXPENSES 133,18,97,000 40,80,07,000 173,99,04,000 482,35,58,000 67,31,40,000 549,66,98,000 TOTAL COST 2901,63,91,000 783,13,74,000 3684,77,65,000 OPERATING PROFIT (PBIT) (-)14,07,50,000 92,67,39,000 78,59,89,000 OP ON SALES (-) 0.49% 10.58% OP ON COST (-) 0.48% 11.83% THE ABOVE FINANCIALS MAY NOT BE RELEVANT FOR THE PU RPOSE OF DECIDING THE ISSUES RAISED BY THE ASSESSEE IN GR.NO.12, 22 TO 24 BUT HAS BEEN GIVEN JUST TO GIVE A BROAD PICTURE. THE ABOVE DETAILS MA Y BE RELEVANT 7. AS ALREADY STATED, THE ASSESSEE WAS ENGAGED IN THE FOLLOWING ACTIVITIES: 1. MANUFACTURING AND 2. TRADING THE ASSESSEE PURCHASES VARIOUS SPARES AND COMPONENT S FROM THE ASSOCIATED ENTERPRISES, WHICH FORM PART OF THE MULT I UTILITY VEHICLE (MUV) AND PASSENGER CAR MANUFACTURED BY THE ASSESSEE. TH E ASSESSEE ALSO MADE PAYMENTS TOWARDS ROYALTY AS ALSO FOR VARIOUS S ERVICES RECEIVED FROM ASSOCIATED ENTERPRISES. THE ASSESSEE ALSO PURCHASE S CERTAIN PARTS AND COMPONENTS LOCALLY AND EXPORTS THE SAME TO ASSOCIAT ED ENTERPRISES. THE ASSESSEE ALSO IMPORTS CBUS AND SELLS THE SAME LOCA LLY. THE ASSESSEE SELECTED TRANSACTIONAL NET MARGIN METHOD(TNMM) AS T HE MOST APPROPRIATE IT(TP)A NO.1315/BANG/2011 PAGE 5 OF 39 METHOD. THE TP ANALYSIS WAS DONE AT THE ENTITY LEV EL COMBINING ALL THE TRANSACTIONS INCLUDING THOSE AS A DISTRIBUTOR. THE ASSESSEE IN HIS TRANSFER PRICING ANALYSIS TOOK AS COMPARABLE COMPANIES 7 COM PANIES WHO HAD BUSINESS SIMILAR TO THAT OF THE ASSESSEE I.E., THEY WERE ALSO ENGAGED IN MANUFACTURING OF MOTOR VEHICLES AS WELL AS TRADING IN PARTS AND ACCESSORIES. THE PROFIT LEVEL INDICATOR (PLI) ADOP TED WAS CASH PROFIT TO SALES. THE ASSESSEE ARRIVED AT THE CASH AND OPERAT ING PROFIT MARGIN OF THE 7 COMPARABLE AND ARRIVED AT AN ARITHMETIC MEAN OF 5 .28% AND 2.87% RESPECTIVELY OF CASH PROFIT MARGIN AND OPERATING PR OFIT MARGIN OF THE 7 COMPARABLE. THE ASSESSEES CASH PROFIT MARGIN AND OPERATING PROFIT MARGIN WERE ARRIVED AT 11.36% AND 8.84% RESPECTIVEL Y. IT WAS SUBMITTED BY THE ASSESSEE THAT ON A COMPARISON AT THE ENTITY LEVEL, THE PROFIT MARGINS OF THE ASSESSEE WAS MUCH HIGHER THAN THE ARITHMETIC MEAN OF THE COMPARABLE AND THEREFORE THE INTERNATIONAL TRANSACT ION WITH THE AE SHOULD BE CONSIDERED AS AT ARMS LENGTH. 8. THE TPO WAS OF THE VIEW THAT SEGMENTAL FINANCIA LS DEMARCATING MANUFACTURING SEGMENT AND TRADING SEGMENT ARE IMPOR TANT FOR TRANSFER PRICING ANALYSIS AT THE SEGMENTAL LEVEL. THE SEGMEN TAL RESULT AS GIVEN BY THE ASSESSEE AS ENCLOSURE TO ONE OF THE LETTER DATE D 27.1.2011 OF THE ASSESSEE TO THE TPO WAS ACCEPTED BY THE TPO. THERE AFTER THE TPO WAS OF THE VIEW THAT WHILE COMPUTING THE OPERATING MARG IN IN THE MANUFACTURING SEGMENT, THE FOLLOWING ITEMS WERE NOT CONSIDERED AS PART OF OPERATING REVENUES. I. INTEREST FROM BANKS; II. INTEREST FROM OTHERS; III. PROFIT ON SALE/SCRAPING OF FIXED ASSETS; IT(TP)A NO.1315/BANG/2011 PAGE 6 OF 39 THE TPO ALSO FOUND THAT CERTAIN EXPENSES HAD BEEN T REATED AS EXTRAORDINARY AND NOT CONSIDERED WHILE ARRIVING AT THE MARGIN OF CASH PROFIT TO SALES. THE FOLLOWING WERE THE EXPENSES THAT HA D BEEN TREATED AS EXTRAORDINARY. I. ABNORMAL WARRANTY PROVISION - RS.4.7 CRORES II, WRITE OFF OF QUALIS PARTS - RS.3.676CRORES III. EXTRAORDINARY GRATUITY PROVISION DUE TO CHANGE IN ACCOUNTING SYSTEM RS.2.202 CRORES. 9. AFTER TAKING INTO CONSIDERATION THE ABOVE EXPEN SES AS WELL AS OPERATING REVENUE, THE TPO ARRIVED AT THE SEGMENTAL OPERATING RESULTS FOR MANUFACTURING AND TRADING SEGMENTS FOR THE PURPOSE OF TRANSFER PRICING ANALYSIS. PARTICULARS MANUFACTURING (RS. IN CRORES) TRADING (RS. IN CRORES) OPERATING REVENUES NET SALES 2916.42 817.96 SALE OF SCRAP 26.3 0 OTHER OPERATING INCOME (COMMISSION AND FOREIGN EXCHANGE GAIN) 7.17 0.06 COMMISSION 2.70 EXCHANGE GAIN 0.23 0.06 PROVISIONS NO LONGER REQUIRED WRITTEN BACK 1.28 MISCELLANEOUS INCOME 0.90 INSURANCE 2.05 OPERATING REVENUE 2949.89 818.02 EXPENSES DEBITED TO P&L 2903.91 780.86 LESS: EXTRAORDINARY EXPENSES ABNORMAL WARRANTY PROVISIONS 4.7 0 WRITE OFF OF QUAILS PARTS 3,676 0 EXTRAORDINARY GRATUITY PROVISION 2,202 0.617 OPERATING COST 2893.33 780.24 OPERATING PROFIT 56.56 37.78 OPERATING PROFIT MARGIN ON SALES 1.94% 4.62% IT(TP)A NO.1315/BANG/2011 PAGE 7 OF 39 THE ABOVE SEGMENTAL RESULTS WERE CONSIDERED FOR TRA NSFER PRICING ANALYSIS BY THE TPO. IF THE ABOVE SEGMENTAL RESULT S ARE COMBINED AND TAKEN AT THE ENTITY LEVEL THEN THE OPERATING REVENU E WOULD BE RS.3767.91 CRORES AND THE OPERATING PROFIT WOULD BE RS.94.34 CRORES GIVING A COMBINED OPERATING PROFIT ON SALES OF 2.51 7%. THIS MAY ASSUME SIGNIFICANCE AT A LATER POINT OF TIME WHEN A DECISION IS TAKEN AS TO WHETHER THE TP ANALYSIS HAS TO BE CARRIED OUT AT THE SEGMENTAL LEVEL OR AT THE ENTITY LEVEL. 10. THE ASSESSEE HAD CARRIED OUT THE FOLLOWING INT ERNATIONAL TRANSACTIONS DURING THE PREVIOUS YEAR:- SL NO. PARTICULARS AMOUNT (RS.) 1 PURCHASE OF SPARES AND COMPONENTS 1089,86,95,168 2 SALE OF SPARE PARTS AND COMPONENTS 430,54,09,091 3 PAYMENT AND PROVISION OF ROYALTY 78,13,84,839 4 PAYMENT TECHNICAL ASSISTANCE FEES 76,63,572 5 PURCHASE OF CBU 89,67,94,031 6 RETURN OF RACKS 39,97,081 7 SALE OF MANUFACTURED CBU 25,42,829 8 SALE OF PROTOTYPES AND TRIAL PARTS 2,93,000 9 REIMBURSEMENT TOWARDS WARRANTY, SALES PROMOTION ETC 8,54,55,130 10 PAYMENT TOWARDS TRAVELING, BOARDING & LODGING ETC 1,93,47,686 11 PAYMENT TOWARDS SALES PROMOTION, ADVT, R&D ETC 64,19,459 12 PAYMENT TOWARDS SOFTWARE & COMMUNICATION EXPENSES 28,35,218 13 PAYMENT TOWARDS DEALER TRAINING, SALES PROMOTION AND ADVT. MATERIAL 35,78,196 11. THE TPO WAS OF THE VIEW THAT THE ACTION OF THE ASSESSEE IN DOING TP ANALYSIS ADOPTING TNMM BY COMBINING BOTH MANUFAC TURING AND TRADING ACTIVITY WAS NOT CORRECT AS THE TWO ACTIVITIES WERE DISTINCT FUNCTIONS. IT(TP)A NO.1315/BANG/2011 PAGE 8 OF 39 ACCORDING TO THE TPO, THE TP ANALYSIS HAS TO BE DON E AT THE MANUFACTURING AND TRADING SEGMENTAL LEVEL BY A SEPA RATE TRANSFER PRICING ANALYSIS FOR TRADING AND MANUFACTURING. IN THIS RE GARD, THE TPO WAS OF THE VIEW THAT FOR ANALYSING INTERNATIONAL TRANSACTIONS, MOST APPROPRIATE METHOD IS TO BE APPLIED FOR EACH CLASS OF TRANSACTION. IN THIS REGARD, HE REFERRED TO RULE 10B(2) OF THE INCOME TAX RULES, 1962 (RULES) W HICH READS THUS: MOST APPROPRIATE METHOD. 10C(1) FOR THE PURPOSES OF SUB-SECTION (1) OF SECTI ON 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH I S BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR INTERNATIONAL TRANSACTION, AND WHICH PROVIDES THE M OST RELIABLE MEASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SP ECIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRAN SACTION; ACCORDING TO THE TPO, THE MOST APPROPRIATE METHOD I S TO BE APPLIED KEEPING IN VIEW THE NATURE AND CLASS OF TRANSACTION . THUS EACH CLASS OF INTERNATIONAL TRANSACTION IS TO BE ANALYSED SEPARAT ELY BY APPLYING THE MOST APPROPRIATE METHOD. 12. THE TPO ALSO HELD THAT THE LAW PROVIDES FOR CO MPARATIVE ANALYSIS OF THE INTERNATIONAL TRANSACTIONS IN TNMM ON THE BASIS OF THE NET MARGIN REALIZED BY THE TAXPAYER DURING THE YEAR FROM THE I NTERNATIONAL TRANSACTIONS AND NOT BASED ON ENTERPRISE LEVEL EARNINGS AND IN T HIS REGARD REFERRED TO SUB CLAUSE (I) OF CLAUSE (E) OF RULE 10B(1) OF THE INCOME TAX RULES, 1962 (THE RULES) IS EXTRACTED BELOW:- (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPR ISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITHIN ASSOC IATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS IT(TP)A NO.1315/BANG/2011 PAGE 9 OF 39 EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE. (EMPHASIS ADDED) ACCORDING TO THE TPO, FROM THE ABOVE PROVISIONS IT WAS VERY CLEAR THAT THE NET MARGIN REALIZED BY THE ENTERPRISE DURING THE YE AR FROM THE DIFFERENT CLASS OF INTERNATIONAL TRANSACTIONS COMPUTED AS PER THE ABOVE SAID CLAUSE IN TNMM IS REQUIRED TO BE TAKEN. HENCE, THE COMPARI SON OF MARGINS AT THE ENTERPRISE LEVEL INSTEAD OF THE ACTUAL MARGIN REALI ZED BY THE ASSESSEE COMPANY IN THE VARIOUS SEGMENTS WAS HELD BY THE TPO TO BE INCORRECT AND NOT IN ACCORDANCE WITH THE LAW PROVIDING FOR DETERM INATION OF THE ARMS LENGTH. THE TPO EMPHASIZED THE FACT THAT WHEN A TA XPAYER IS INVOLVED IN TWO DISTINCT ACTIVITIES LIKE MANUFACTURING OF PASSE NGER CARS AND TRADING IN AUTO COMPONENTS WHICH IS EVIDENCED BY THE SEGMENTAL AND OTHER DETAILS AVAILABLE IN THE AUDITED FINANCIALS OF THE TAXPAYER THESE HAVE TO BE ANALYZED SEPARATELY BY APPLYING THE MOST APPROPRIAT E METHOD IN EACH CASE. THEREAFTER THE TPO REFERRED TO THE DECISIONS OF THE ITAT, MUMBAI IN THE CASE OF STAR (I) PVT. LTD. VS. ACIT [2008-TIOL- 426-ITAT-MUM] AND UCB(I) PVT. LTD. (317 ITR 292 (AT)(MUMBAI) WHEREIN AGGREGATION OF INTERNATIONAL TRANSACTIONS WERE NOT ACCEPTED AND TH E TPO WAS DIRECTED TO DETERMINE ALP OF INDIVIDUAL TRANSACTIONS. THE TPO THEN CONCLUDED THAT TRANSACTIONS THAT HAVE A BEARING ON PROFIT CAN BE A NALYZED SEPARATELY AND THEREFORE THE TRANSACTIONS OF MANUFACTURING SEGMENT AND TRADING SEGMENT HAVE TO BE CONSIDERED SEPARATELY FOR THE PURPOSE OF TRANSFER PRICING ANALYSIS. 13. THEREAFTER THE TPO CLASSIFIED THE INTERNATIONA L TRANSACTIONS ENTERED INTO BY THE TAXPAYER DURING THE FY 2006-07 BASED ON THEIR NATURE AS BELOW:- IT(TP)A NO.1315/BANG/2011 PAGE 10 OF 39 (I) SALE OF SPARE PARTS AND COMPONENTS MANUFACTUR ING (II) SALE OF PROTOTYPES AND TRIAL PARTS MANUFACT URING (III) SALE OF MANUFACTURED CBU MANUFACTURING (IV) RECEIPT OF COMMISSION TRADING (V) RETURN OF RACKS - MANUFACTURING (VI) PURCHASE OF PARTS AND COMPONENTS MANUFACTUR ING AND TRADING (VII) PURCHASE OF AUTOMOBILES AND ACCESSORIES TRA DING (VIII) PAYMENT OF ROYALTY AND TECHNICAL FEES MANU FACTURING (IX) PAYMENT FOR INTRA GROUP SERVICES MANUFACTU RING AND TRADING (X) REIMBURSEMENT OF EXPENSES RECEIVED MANUFACTU RING AND TRADING THE TPO THEN PROCEEDED TO CATEGORIZE THE AFORESAID TRANSACTIONS INTO TWO DISTINCT SEGMENTS:- I. MANUFACTURE AND SALE OF PASSENGER CARS II. TRADING IN AUTO COMPONENTS 14. THEREAFTER, THE TPO ARRIVED AT THE RESULTS OF THE TRADING SEGMENT AS WELL AS MANUFACTURING SEGMENT OF THE ASSESSEE. THE PLI ADOPTED WAS OPERATING PROFIT ON SALES. AS FAR AS TRADING SEGME NT IS CONCERNED, THE AO ARRIVED AT THE FOLLOWING SEGMENTAL RESULTS:- PARTICULARS TRADING (RS. IN CRORES) OPERATING REVENUES 818.02 COST OF GOODS SOLD 715.82 GROSS PROFIT 102.02 GROSS PROFIT ON SALES 12.49% OPERATING COST 780.24 OPERATING PROFIT 37.78 OPERATING PROFIT MARGIN ON SALES 4.62% IT(TP)A NO.1315/BANG/2011 PAGE 11 OF 39 THE TPO WAS SATISFIED THAT THE INTERNATIONAL TRANSA CTIONS IN THE TRADING SEGMENTS WERE AT ARMS LENGTH AS THE ASSESSEES PRO FIT MARGIN WAS BETTER COMPARED TO THE PROFIT MARGIN OF THE COMPARABLE COM PANIES (IN ITS TRADING SEGMENT) SELECTED BY THE ASSESSEE IN ITS TP STUDY . NO ADJUSTMENT WHATSOEVER WAS THEREFORE SUGGESTED BY THE TPO IN SO FAR AS IT RELATES TO THE TRADING SEGMENT IS CONCERNED. 15. AS FAR AS MANUFACTURING SEGMENT IS CONCERNED, THE TPO AS WE HAVE ALREADY SEEN HAD ARRIVED AT THE OPERATING PROFIT MA RGIN ON SALES AT 1.94% IN THE CHART GIVEN AT PARA-9 OF THIS ORDER. THE TAXPA YER HAD IDENTIFIED 7 COMPARABLES AT THE ENTERPRISE LEVEL BY TAKING MANUF ACTURING SEGMENT AS WELL AS TRADING SEGMENT RESULTS. THE 7 COMPARABLES CHOSEN BY THE ASSESSEE WERE AS FOLLOWS:- SL NO. NAME OF THE COMPANY 1 ASHOK LEYLAND LIMITED 2 EICHER MOTORS LTD. 3 FORCE MOTORS LTD. 4 HINDUSTAN MOTORS LTD. 5 MAHINDRA & MAHINDRA LTD. 6 SWARAJ MAZDA LTD. 7 TATA MOTORS LTD. 16. THE TPO ACCEPTED 5 COMPANIES AS COMPARABLES. O NE OF THE FILTERS APPLIED BY THE TPO WAS THAT THE COMPARABLE COMPANY SHOULD HAVE AT LEAST 75% OF ITS REVENUE FROM MANUFACTURING OF THESE GOOD S. FOR APPLYING THE ABOVE FILTER FOR CHOOSING COMPARABLE COMPANIES, THE TPO RELIED ON PARA 1.20 (UNDER THE HEAD FUNCTIONAL ANALYSIS) OF THE OECD GUIDELINES, 1995 WHICH SAYS THAT FUNCTIONAL ANALYSIS IS TO IDENTIFY AND TO COMPARE ECONOMICALLY SIGNIFICANT ACTIVITIES UNDERTAKEN BY T HE INDEPENDENT IT(TP)A NO.1315/BANG/2011 PAGE 12 OF 39 ENTERPRISES. THE RELEVANT PORTION OF THE OECD GUIDE LINES IS REPRODUCED BELOW. 1.20 IN DEALINGS BETWEEN TWO INDEPENDENT ENTERPRISES, COMPENSATION USUALLY WILL REFLECT THE FUNCTIONS THAT EACH ENTERPRISE PERFORMS (TAKING INT O ACCOUNT ASSETS USED AND RISKS ASSUMED). THEREFORE, IN DETERMINING WHETHER CONTROLLED AND UNCONTROLLED TRANSACTIONS OR ENTITIES ARE COMPARABLE, COMPARISON OF THE FUNCTIONS TAKEN ON BY THE PARTIES IS NECESSARY. THIS COMPARISON IS BASED ON A FUNCTIONAL ANALYSIS, WHICH SEEKS TO IDENTIFY AND TO COMPARE THE ECONOMICALLY SIGNIFICANT ACTIVITIES AND RESPONSIBILITIES UNDERTAKEN OR TO LIE UNDERTAKEN BY THE INDEPENDENT AND ASSOCIATED ENTERPRISES . FOR THIS PURPOSE, PARTICULAR ATTENTION SHOULD BE PAID T O THE STRUCTURE AND ORGANISATION OF THE GROUP. IT WILL AL SO BE RELEVANT TO DETERMINE IN WHAT JURIDICAL CAPACITY TH E TAXPAYER PERFORMS ITS FUNCTIONS. THE ASSESSEE SUBMITTED BEFORE THE TPO THAT IF THE A BOVE FILTER IS APPLIED TO COMPARABLE THEN THE SAME SHOULD BE APPLI ED TO THE TAXPAYER SO AS TO COMBINE MANUFACTURING AND TRADING AS TRADI NG REVENUES IN THE CASE OF TAXPAYER ARE ALSO LESS THAN 25% OF THE REVE NUES. THE TPO HOWEVER WAS OF THE VIEW THAT TRADING AND MANUFACTUR ING ARE DIFFERENT ACTIVITIES ASSOCIATED WITH DIFFERENT ASSET AND RISK PROFILE THEREFORE THE TWO ACTIVITIES CANNOT BE COMBINED. THE ASSESSEE POI NTED OUT THAT THE COMPARABLE COMPANIES ARE ALSO INTO TRADING AND THAT THE TRADING REVENUES IN THE CASE OF COMPARABLE COMPANIES CONTRI BUTE LESS THAN 25% OF REVENUES. THE TPO HOWEVER HELD THAT THE IMP ACT ON THE OVERALL PROFITS OF THE COMPARABLE COMPANIES ON ACCO UNT OF TRADING REVENUES BEING LESS THAN 25% OF THE OVERALL REVENUE S WAS NEGLIGIBLE. 17. THEREAFTER, THE TPO ARRIVED AT THE FOLLOWING A RITHMETIC MEAN OF THE 5 COMPARABLE COMPANIES CHOSEN IN THE MANUFACTURING SEGMENT:- IT(TP)A NO.1315/BANG/2011 PAGE 13 OF 39 (RS. IN CRORE) SL NO COMPANY NAME FINANCE YEAR ADJ. NET SALES ADJ. OP. COST ADJ. OP. PROFIT ADJ. OP /SALES 1 ASHOK LEYLAND 2007- 08 7237.19 6789.24 447.95 6.19% 2 EICHER MOTORS LTD 2007- 08 1932.90 1878.77 54.13 2.80% 3 MAHINDRA & MAHINDRA LTD. 2007- 08 9552.32 8923.55 628.77 6.58% 4 SWARAJ MAZDA LTD 2007- 08 576.38 565.08 11.30 1.96% 5 TATA MOTORS LTD. 2007- 08 27004.49 24859.14 2145.35 7.94% ARITHMETICAL MEAN MARGIN 5.10% 18. THEREAFTER, THE TPO MADE THE DOWNWARD REVISION OF THE PROFIT MARGINS OF THE COMPARABLE ON ACCOUNT OF OPERATING E FFICIENCY. IN THIS REGARD THE TPO WAS OF THE VIEW THAT THE OPERATIONAL EFFICIENCY IS INDICATED BY HOW AN ENTERPRISE CONTROLS ITS OPERATING EXPENSE S OTHER THAN COST OF RAW MATERIAL. THUS IF AN ORGANIZATION IS ABLE TO CONTRO L THE INDIRECT EXPENSES LIKE EMPLOYEE COST ETC, ITS PROFITABILITY IMPROVES. THUS , BEFORE COMPARING THE TAXPAYER WITH THE COMPARABLE COMPANIES, THEIR EFFIC IENCIES ALSO HAVE TO BE EQUALIZED. OTHERWISE, THE COMPARABILITY EXERCISE WO ULD BE DISTORTED. ADJUSTMENTS HAVE TO BE MADE FOR THE DIFFERENCES IN OPERATIONAL EFFICIENCY LEVELS BETWEEN THE TAXPAYER AND THE COMPARABLE COMP ANY. THEREAFTER THE TPO DREW THE FOLLOWING CONCLUSION WITH REGARD TO TH E OPERATIONAL EFFICIENCY OF THE ASSESSEE AND THAT OF THE COMPARABLE COMPANIE S. DESCRIPTION OTHER OPERATIVE EXPENSES AS % OF SALES ARITHMETIC MEAN OF COMPARABLES (AS PER ANNEXURE C TO THE ORDER OF TPO) 19.64% TOYATA-KIRLOSKAR 16.07% IT(TP)A NO.1315/BANG/2011 PAGE 14 OF 39 THE TPO CONCLUDED THAT THE OPERATIVE EFFICIENCY OF THE ASSESSEE VIS--VIS THE COMPARABLE COMPANIES IS HIGHER BY 3.57%. THIS D IFFERENCE ACCORDING TO THE TPO WAS MATERIAL AS THE MARGINS OF THE COMPARAB LE COMPANIES IN THIS SECTOR VARIED ONLY FROM 3.52% ON SALES TO 9.35% ON SALES FOR THE FY 2006- 07. THE TPO THEREFORE PROPOSED TO INCREASE THE MAR GINS OF THE COMPARABLE CHOSEN I.E., HE REVISED THE PROFIT MARGI NS OF THE COMPARABLES SO THAT THEY WOULD BE ON PAR WITH THE ASSESSEE. 19. THE ASSESSEE HOWEVER VEHEMENTLY OPPOSED SUCH A COURSE OF ACTION BEING ADOPTED BY THE TPO. ACCORDING TO THE ASSESSEE ADJUSTMENT ON ACCOUNT OF OPERATING EFFICIENCY IS NOT CONTEMPLA TED IN LAW AT ALL. IN THIS REGARD THE ASSESSEE POINTED OUT THAT THERE COULD BE ADJUSTMENTS MADE FOR TRANSACTION LEVEL DIFFERENCE OR AN ENTERPRISE LEVEL DIFFERENCE. THESE DIFFERENCES CAN BE EITHER IN THE FUNCTIONS PERFORME D OR ASSETS EMPLOYED OR RISKS ASSUMED. AN OPERATING EFFICIENCY DOES NOT FA LL WITHIN ANY OF THE PARAMETERS LISTED ABOVE. THE ASSESSEE ALSO POINTED OUT THAT UNDER RULE 10B(1)(E)(III) OF THE RULES WHICH PROVIDES FOR ADJU STMENT WHILE COMPUTING MARGINS UNDER TNMM, NO SUCH ADJUSTMENT FOR OPERATIN G EFFICIENCY IS CONTEMPLATED. THE RELEVANT RULE READS THUS: DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING T HE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A) TO (D) ( E )TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRE D OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRAN SACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; ( II ) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES , IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING IT(TP)A NO.1315/BANG/2011 PAGE 15 OF 39 INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT THE PRICE IN THE OPEN MARKET; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET; THE ASSESSEE POINTED OUT THAT THE RULES CONTEMPLATE ONLY FOR AN ADJUSTMENT FOR TRANSACTION LEVEL DIFFERENCES OR ENTERPRISE LEV EL DIFFERENCES. THE ASSESSEE SUBMITTED THAT THE DIFFERENCE IN OPERATING EXPENSES IS NEITHER DIFFERENCE IN TRANSACTION NOR ENTERPRISE. BESIDES O THER SUBMISSIONS RELYING ON OECD GUIDELINES ON WHY ADJUSTMENT ON ACCOUNT OF OPERATING EFFICIENCY SHOULD NOT BE MADE, THE ASSESSEE SUBMITTED THAT UND ER THE TNMM COMPARISON NEEDS TO BE MADE AT NET PROFIT LEVEL. B Y NEGATING IMPACT OF OPERATING EXPENSES; THE COMPARISON IS EFFECTIVELY B EING MADE AT GROSS PROFIT LEVEL INSTEAD OF NET PROFIT LEVEL AS REQUIRE D UNDER TNMM. THE ASSESSEE ALSO SUBMITTED THAT IF OPERATING EFFICIENC Y IS CRITERIA FOR EVALUATION FOR SELECTING COMPARABLES, THEN COMPANIES WITH WIDE DISPARITIES IN OPERATING EFFICIENCIES CANNOT BE COMPARED AT ALL. WE ARE NOT GOING INTO THE OTHER ELABORATE SUBMISSIONS MADE BY THE ASSESSEE IN THIS REGARD AS THE ISSUE RAISED IN GR.NO.12 PROCEEDS UNDER THE ASSUMPT ION THAT EVEN IF THE ADJUSTMENT ON ACCOUNT OF OPERATING EFFICIENCY IS GI VEN EVEN THEN THE MARGINS OF THE ASSESSEE IF COMPARED AT ENTITY LEVEL RATHER THAN AT SEGMENTAL LEVEL, WILL BE WELL WITHIN THE PERMITTED (+) (-) 5% RANGE OF ARITHMETIC MEAN PLI OF THE COMPARABLE COMPANIES CHO SEN BY THE TPO. 20. THE TPO DID NOT AGREE WITH THE SUBMISSIONS OF THE ASSESSEE REGARDING UPWARD ADJUSTMENT OF THE MARGINS OF THE C OMPARABLE FOR THE IT(TP)A NO.1315/BANG/2011 PAGE 16 OF 39 PURPOSE OF COMPARABILITY AND ACCORDINGLY ARRIVED AT THE MARGIN OF THE COMPARABLES AFTER MAKING ADJUSTMENTS TOWARDS OPERAT IONAL EFFICIENCY AS FOLLOWS:- SL NO COMPANY NAME MARGIN BEFORE ADJUSTMENT MARGIN AFTER ADJUSTMENT DIFFERENCE 1 ASHOK LEYLAND 6.19% 7.59% 1.40% 2 EICHER MOTORS LTD 2.80% 8.58% 5.78% 3 MAHINDRA & MAHINDRA LTD. 6.58% 13.03% 6.45% 4 SWARAJ MAZDA LTD 1.96% - 6.15% - 8.11% 5 TATA MOTORS LTD. 7.94% 12.45% 4.51% 5.10% 7.10% 2.00% 21. THE TPO THEREAFTER COMPARED THE NET MARGIN EAR NED BY THE ASSESSEE AS COMPUTED BY HIM IN PARA-9 OF THIS ORDER ON SEGMENTAL BASIS FOR MANUFACTURING SEGMENT TO THE ADJUSTED NET MARGI N EARNED BY THE COMPARABLE COMPANIES AS FOLLOWS: PLI (OP TO SALES) ARITHMETIC MEAN OF ADJUSTED NET MARGIN OF COMPARABLES 7.10% TOYATA-KIRLOSKAR MOTOR (THE ASSESSEE AS COMPUTED IN PARA-9 OF THIS ORDER BY THE TPO ON MANUFACTURING SEGMENT) 1.94% THE TPO HELD THAT THE MARGIN EARNED BY THE ASSESSEE WAS MUCH LESS THAN THE ARITHMETICAL MEAN MARGIN EARNED BY COMPARABLE E NTERPRISES AND WAS BEYOND +/- 5% RANGE FROM THE PRICE CHARGED BY THE A SSESSEE IN ITS INTERNATIONAL TRANSACTIONS DURING THE FY 2006-07. T HE TPO THUS CONCLUDED THAT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN THE MANUFACTURING SEGMENT WAS NOT AT ARMS LENGTH. THE ARMS LENGTH PRICE WAS COMPUTED BY HIM AS UNDER. IT(TP)A NO.1315/BANG/2011 PAGE 17 OF 39 COMPUTATION OF ARMS LENGTH PRICE THE ARMS LENGTH PRICE IS COMPUTED AS UNDER FOR THE MANUFACTURING SEGMENT: COSTS INCURRED IN THE INTERNATIONAL TRANSACTIONS (AS PER SUBMISSIONS OF THE TAXPAYER DATED 25-02-201 1) A. PURCHASE OF PARTS & COMPONENTS RS.1089,86,95,1 68 B. PAYMENT OF TECHNICAL SUPPORT FEE RS. 76 ,63,572 C. OTHER EXPENSES RS. 3,21,80,558 D. ROYALTY RS. 78,13,84,839 TOTAL COST INCURRED WITH AES IN THE MFG SEGMENT RS.1171,99,324,13 7 THE ABOVE AMOUNT OF RS. 152,88,21,900 IS CONSIDERED AS AN ADJUSTMENT U/S 92CA IN THE MANUFACTURING SEGMENT. 22. HAVING CATEGORIZED THE INTERNATIONAL TRANSACTI ONS OF THE ASSESSEE WITH ITS AE INTO MANUFACTURING AND TRADING SEGMENT AND HAVING HELD THAT BOTH THE PROFIT MARGINS OF BOTH THE SEGMENTS SHOUL D NOT BE TAKEN TOGETHER FOR COMPARABILITY ANALYSIS AT THE ENTITY LEVEL AND HAVING PROCEEDED TO DETERMINE THE ALP OF THE MANUFACTURING SEGMENT BY T AKING THE FOLLOWING INTERNATIONAL TRANSACTIONS AS COMPRISING IN THE MAN UFACTURING SEGMENT, OPERATING REVENUES (A) RS. 2949,89,00,000 ARMS LENGTH MEAN ADJUSTED OPERATIVE PROFIT MARGIN 7.10% ON SALES TOTAL ARMS LENGTH OPERATIVE COST (92.90% OF (A)) (B) RS. 2740,44,78,100 OPERATIVE COST SHOWN IN THE BOOKS (C) RS. 2893,33,0 0,000 COST SHOWN IN THE INTERNATIONAL TRANSACTIONS (AS ARRIVED ABOVE) (D) RS. 1171,99,24,137 COSTS INCURRED WITH UN-ASSOCIATED ENTERPRISES / PERSONS (E = C D) RS. 172 1,33,75,863 ARMS LENGTH COST OF INTERNATIONAL TRANSACTIONS (F= B - E) RS. 1019,11,02,237 SHORTFALL BEING ADJUSTMENT U/S 92CA (G=D F) RS. 1 52,88,21,900 IT(TP)A NO.1315/BANG/2011 PAGE 18 OF 39 A. PURCHASE OF PARTS & COMPONENTS RS.1089,86,95,1 68 B. PAYMENT OF TECHNICAL SUPPORT FEE RS. 76 ,63,572 C. OTHER EXPENSES RS. 3,21,80,558 D. ROYALTY RS. 78,13,84,839 TOTAL COST INCURRED WITH AES IN THE MFG SEGMENT RS.1171,99,324,13 7 THE TPO ALSO TOOK UP THE INDIVIDUALLY THE FOUR CATE GORIES OF INTERNATIONAL TRANSACTIONS COMPRISED IN THE MANUFACTURING SEGMENT FOR INDIVIDUAL ANALYSIS. HE WAS OF THE VIEW THAT EACH OF THE AFO RESAID INDIVIDUAL TRANSACTIONS WERE AT ARMS LENGTH EXCEPT THE TRANSA CTION OF PAYMENT OF ROYALTY. IN THIS REGARD THE TPO WAS OF THE VIEW TH AT THE ASSESSEE DID NOT PROVE THAT BENEFIT ACCRUED AS A RESULT OF PAYMENT F OR ROYALTY. HE THEREFORE HELD THAT THE ROYALTY PAYMENTS BY THE TAXPAYER FOR USE OF KNOW HOW HAS TO BE TAKEN AT NIL BECAUSE: 1. THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE THAT IT HAD ACTUALLY RECEIVED ANY TECHNICAL KNOW-HOW DURING THE YEAR FROM THE AE. 2. THERE IS NO PROOF THAT THE OTHER GROUP CONCERNS OR THIRD PARTIES ARE ALSO CHARGED IDENTICAL ROYALTY. 3. THE ASSESSEE HAS ALSO NOT BEEN ABLE TO SHOW THAT IT DERIVED ANY ECONOMIC BENEFIT FROM THE ALLEGED KNOW HOW RECEIVED FROM THE AE. 4. THE PROFITABILITY IS MUCH BELOW THE COMPARABLE C OMPANIES. THE ARMS LENGTH PRICE OF ROYALTY WAS DETERMINED AT RS.NIL BY THE TPO AND AN ADJUSTMENT U/S.92CA OF THE ACT OF RS.78,13,8 4,839/- WAS MADE BY THE AO. NO SEPARATE ADDITION WAS HOWEVER MADE BY T HE TPO BECAUSE ACCORDING TO HIM THIS ADJUSTMENT WOULD MERGE WITH T HE OVERALL ADJUSTMENT OF RS. 152,88,21,900 MADE IN THE MANUFACTURING SEGM ENT BY APPLYING TNMM AT THE SEGMENT LEVEL. IT(TP)A NO.1315/BANG/2011 PAGE 19 OF 39 23. AGGRIEVED BY THE ORDER OF THE TPO WHICH WERE IN CORPORATED BY THE AO IN THE DRAFT ORDER OF ASSESSMENT, THE ASSESSEE F ILED OBJECTIONS BEFORE THE DISPUTES RESOLUTION PANEL (DRP). WE DEEM IT AP PROPRIATE TO SET OUT THE OBJECTIONS WITH REGARD TO THE ISSUES THAT ARISE FOR CONSIDERATION IN GR.NO.12 AND GR.NO.22 TO 24 ALONE, AS OUR DECISION AT THE FIRST INSTANCE WOULD BE ON THOSE GROUNDS AND ONLY IF THOSE GROUNDS DO NOT SURVIVE, THE OTHER GROUNDS NEED TO BE GONE INTO. 24. THE OBJECTION OF THE ASSESSEE WITH REGARD TO TH E ACTION OF THE TPO IN NOT ACCEPTING THE COMBINED TRANSACTION APPROACH ADO PTED BY THE ASSESSEE COMBINING THE PROFIT MARGINS OF BOTH THE MANUFACTUR ING AND TRADING SEGMENTS WAS (A) THE CONCLUSION OF THE TPO THAT THE TRADING AND MANUFACTURING SEGMENT OF THE ASSESSEE ARE DISTINCT WITHOUT APPRECIATING THAT BOTH THE SEGMENTS ARE INTERTWINED AND INTER-RE LATED WARRANTING A COMBINED TRANSACTION APPROACH IN ARRIVING AT THE ARMS LENGTH PRICE. (B) SELECTING COMPARABLES FOR THE MANUFACTURING SEGMENT COMPANIES WHICH WERE ENGAGED IN BOTH TRADING AND MANUFACTURING ACTI VITIES AND WITHOUT BIFURCATING THE FINANCIAL RESULTS OF THE COMPARABLE BETWEEN TRADING AND MANUFACTURING SEGMENT. (C) NOT APPRECIATING THAT THE ASSESSEE HAD ADOPTED THE TNMM AT THE ENTITY LEVEL, IN WHICH PROC ESS, THE PAYMENT FOR ROYALTY AND OTHER SERVICES WERE CONSIDERED AS CLOSE LY LINKED TRANSACTION AND HENCE WAS SUBSUMED INTO THE EXPENDITURE AND ACC ORDINGLY ALREADY CONSIDERED. 25. THE ASSESSEE ELABORATED ON THE ABOVE MAIN CONTE NTIONS BY POINTING OUT THAT IT WAS SET UP IN INDIA TO MANUFACTURE AND SELL MUV UNDER THE MODEL NAME INNOVA AND PASSENGER CAR UNDER THE MODEL NAM E COROLLA. THE IT(TP)A NO.1315/BANG/2011 PAGE 20 OF 39 ASSESSEE HAS LICENSE TO MANUFACTURE INNOVA AND C OROLLA FROM TOYOTA MOTOR CORPORATION, JAPAN(TMC), WHICH OWNS THE ABOVE BRANDS. THE ASSESSEE ALSO IMPORTS CAMRY AND SPORTS UTILITY VEHI CLE (SUV) LAND CRUISER PRADO AS (COMPLETED BROUGHT UNIT) CBU AND SELLS THE SAME IN THE INDIAN MARKET. THE ASSESSEE ALSO PURCHASES VARIOUS SPARES AND COMPONENTS FROM TMC, WHICH FORMS PART OF THE MUV AND PASSENGER CAR. THE ASSESSEE RECEIVED VARIOUS SUPPORT SERVICES FROM TMC. THE AS SESSEE ALSO PURCHASE CERTAIN PARTS AND COMPONENTS LOCALLY AND EXPORTS TH E SAME TO ASSOCIATED ENTERPRISES. THE ASSESSEE SUBMITTED THAT IT HAD AP PLIED TNMM AT THE ENTITY LEVEL FOR THE FOLLOWING REASONS: 1. THE TRANSACTIONS BETWEEN THE ASSESSEE AND ITS A SSOCIATED ENTERPRISES ARE TWO WAY I.E., PURCHASE AS WELL AS S ALE OF PARTS AND COMPONENTS. THE TRANSACTIONS ARE LINKED AND INTERDEPENDENT; 2. THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSES SEE AND ITS AE INCLUDE BOTH SERVICE AND SALE TRANSACTIONS; 3. THE VARIOUS ACTIVITIES ARE INTERTWINED AND INTER -RELATED. PART OF THE TRADING ACTIVITIES WERE PROMPTED BY AND ARE A R ESULT OF THE MANUFACTURING ACTIVITIES, INCLUDING THE WARRANT COM MITMENTS; 4. THE DATA IN THE PUBLIC DOMAIN IS NOT DETAILED EN OUGH TO PERMIT A COMPARISON OF THE RESULTS AT THE TRANSACTION LEVEL; 5. IN THE PECULIAR CIRCUMSTANCES OF THE OPERATIONS INVOLVING VARIOUS TYPES OF TRANSACTIONS ENTERED INTO, TOWARDS ACHIEVE MENT OF A COMMON GOAL, IT IS NOT POSSIBLE TO SPLIT THE FINANC IAL DATA TO ARRIVE AT THE NET RESULT FROM PARTICULAR AND INDIVIDUAL TR ANSACTION. 6. THE DATA REGARDING COMPARABLE TRANSACTIONS ARE A VAILABLE ONLY AT THE ENTITY LEVEL AND NOT AT INDIVIDUAL TRANSACTION LEVEL; AND 7. THE NET PROFIT AT THE ENTITY LEVEL WOULD BROADLY JUSTIFY THE INTRINSIC VALUE OF ALL THE UNDERLYING TRANSACTIONS PARTICULAR LY WHEN THE ORGANIZATION VIEWS THEM AS INDEPENDENT AND INTEGRAT ED WHOLE. THE ASSESSEE EXPLAINED THAT IT HAD ACCORDINGLY BUNC HED ALL THE INTERNATIONAL TRANSACTIONS THE SEGMENT LEVEL FOR DE TERMINING THE ARM'S LENGTH PRICE. IT(TP)A NO.1315/BANG/2011 PAGE 21 OF 39 26. THE ASSESSEE POINTED OUT THAT ORGANISATION FOR ECONOMIC CO- OPERATION AND DEVELOPMENT (OECD) IN ITS COMMENTARY ON TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX AD MINISTRATIONS (HEREINAFTER REFERRED AS 'OECD GUIDELINES' FOR SHOR T) REFERS TO THIS APPROACH. PARA 1.42 OF THE OECD GUIDELINES PROVIDE THAT IDEALLY, IN ORDER TO ARRIVE AT THE BEST APPROXIMATION OF FAIR MARKET VALUE, THE ARM'S LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION BY TRA NSACTION BASIS ('SEPARATE TRANSACTION' APPROACH). HOWEVER, THE OECD GUIDELINE S FURTHER PROVIDE THAT A 'COMBINED TRANSACTION APPROACH' CAN BE ADOPT ED IN CASE THE TRANSACTIONS ARE CLOSED LINKED OR CONTINUOUS AND TH EY CANNOT BE EVALUATED ADEQUATELY ON AN INDIVIDUAL BASIS. IN SUCH A SITUAT ION, RATHER THAN ASSESSING THE ARM'S LENGTH TERMS OF THE TRANSACTION S INDIVIDUALLY, THESE TRANSACTIONS COULD BE EVALUATED TOGETHER USING THE MOST APPROPRIATE METHOD. THE RELEVANT OBSERVATIONS ARE EXTRACTED HER EINBELOW: 'HOWEVER, THERE ARE OFTEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNO T BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. EXAMPLES MAY INCLUD E 1. SOME LONG-TERM CONTRACTS FOR THE SUPPLY OF COMMODITIES O R 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 TR ANSACTION. ANOTHER EXAMPLE WOULD BE THE LICENSING OR MANUFACTURING KNO W-HOW AND THE SUPPLY OR VITAL COMPONENTS TO AN ASSOCIATED MANUFAC TURER,' IT MAY BE MORE REASONABLE TO ASSESS THE ARM'S LENGTH TERMS {O R THE TWO ITEMS TOGETHER RATHER THAN INDIVIDUALLY. SUCH TRANSACTION S SHOULD BE EVALUATED TOGETHER USING THE MOST APPROPRIATE ARM'S LENGTH METHOD OR METHODS'. (EMPHASIS SUPPLIED) 27. THE ASSESSEE ALSO DREW THE ATTENTION OF THE DR P TO PARA 150 OF OECD GUIDELINES ON TRANSACTION PROFIT METHODS WHERE IN IT IS OBSERVED AS FOLLOWS: 'IN PARTICULAR, SALES REVENUE THAT IS DERIVED FROM UNCONTROLLED ACTIVITIES (PURCHASE FROM UNRELATED PARTIES, SALES TO UNRELATED IT(TP)A NO.1315/BANG/2011 PAGE 22 OF 39 PARTIES) SHOULD NOT BE INCLUDED IN THE DETERMINATIO N OR TESTING OF THE REMUNERATION FOR CONTROLLED ACTIVITIES, UNLESS THE CONTROLLED AND UNCONTROLLED ACTIVITIES ARE SO CLOSELY LINKED THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. ONE EXAMP LE OF THE LATTER SITUATION CAN SOMETIMES OCCUR IN RELATION TO UNCONT ROLLED AFTER-SALES SERVICES OR SALES OF SPARE PARTS PROVIDED BY A DIST RIBUTOR TO UNRELATED END-USER CUSTOMERS WHERE THEY ARE CLOSELY LINKED TO CONTROLLED PURCHASE TRANSACTIONS BY THE DISTRIBUTOR (OR RESALE TO THE SAME UNRELATED END-USER CUSTOMERS. ' 28. THE ASSESSEE SUBMITTED THAT BASED ON THE ABOVE GUIDELINES SALE SERVICES OR SALES ARE TO BE CONSIDERED AS CLOSELY L INKED TO PURCHASE TRANSACTIONS FROM AE EVEN IF THE AFTER SALE SERVICE S OR SALES ARE WITH UNRELATED PARTIES. THE ASSESSEE POINTED OUT THAT TH E PROPOSAL TO EVALUATE AFTER SALES SERVICES (PART OF INTRA GROUP SERVICES) SEPARATELY WAS NOT FEASIBLE BECAUSE THOSE TRANSACTIONS WITH THE AE AR E CLOSELY LINKED AND SHOULD BE EVALUATED TOGETHER. THE ASSESSEE ALSO POI NTED OUT THAT DOING SO WOULD BE IN ACCORDANCE WITH RULE 1O A( D) OF THE IN COME TAX RULES, 1962 (HEREINAFTER REFERRED AS 'RULES' FOR SHORT) WHICH D EFINES 'TRANSACTION' TO INCLUDE A NUMBER OF CLOSELY LINKED TRANSACTIONS. LI NKED MEANS SOMETHING WHICH IS CONNECTED. IT WAS SUBMITTED THAT THE DEFIN ITION DOES NOT PROVIDE THAT THE TRANSACTIONS SHOULD BE IDENTICAL OR SIMILA R. ONCE THE TRANSACTIONS ARE CONNECTED, THEY CAN BE EVALUATED TOGETHER. 29. FURTHER THE ASSESSEE ALSO RELIED ON PARA 2.73 OF AUSTRALIAN TAX OFFICE (ATO) TAXATION RULING 97/20 ON INTERNATIONAL TRANSFER PRICING WHICH PROVIDES THAT: 'IDEALLY, DEALINGS BETWEEN ASSOCIATED ENTERPRISES S HOULD BE PRICED ON A TRANSACTION BY TRANSACTION BASIS. HOWEVER, IT IS ALSO RECOGNISED THAT IF IT IS IMPRACTICAL TO ASSESS INDIVIDUAL TRAN SACTIONS (E.G., IF SUCH AN APPROACH WOULD NOT ADDRESS ALL THE RELEVANT ASPE CTS OF THE DEALINGS BETWEEN THE PARTIES THAT AFFECT COMPARABIL ITY), IT MAY BE MORE APPROPRIATE TO CONSIDER A COMBINATION OF TRANS ACTION'. IT(TP)A NO.1315/BANG/2011 PAGE 23 OF 39 IT WAS POINTED OUT THAT PARA 2.74 PROVIDES WHEN IT WOULD BE APPROPRIATE TO GROUP THE TRANSACTIONS. IN PARA 2.74(1) IT IS OBSER VED AS FOLLOWS: DEALINGS BETWEEN ASSOCIATED ENTERPRISES IN A PARTI CULAR PRODUCT MAY INVOLVE SEPARATE TRANSACTIONS FOR THE PRODUCT, THE INTANGIBLES ASSOCIATED WITH THE PRODUCT, TECHNICAL ADVICE, MANA GEMENT SERVICES AND ANY OTHER RELATED MATTERS. IN DEALINGS WITH IND EPENDENT PARTIES, THESE VARIOUS ASPECTS MAY BE ROLLED INTO A PACKAGE DEAL WITH ALL THE ASSOCIATED COSTS BEING INCLUDED IN THE TRANSFER PRI CE OF THE PRODUCT. THE VARIOUS ASPECTS MAY NEED TO BE CONSIDERED TOGET HER TO ACCOUNT PROPERLY FOR THE COSTS AND TO PREVENT DOUBLE COUNTI NG. IF THE INDEPENDENT DEALINGS BEING CONSIDERED AS POS SIBLE COMPARABLES CANNOT BE DISAGGREGATED, IT WOULD GENER ALLY BE APPROPRIATE TO GROUP ALL THE RELEVANT TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES SO COMPARABILITY TO THE UNCO NTROLLED PARTY PACKAGE DEAL TRANSACTION CAN BE PROPERLY DETERMINED . 30. BASED ON THE ABOVE SUBMISSIONS, THE ASSESSEE S UBMITTED THAT IN ITS CASE IT WOULD BE APPROPRIATE TO AGGREGATE ALL THE T RANSACTIONS AND ADOPT TNMM USING THE COMBINED TRANSACTION APPROACH AT THE ENTITY LEVEL. 31. THE ASSESSEE REITERATED THAT TNMM CONSIDERS T HE NET PROFIT MARGIN EARNED BY AN ORGANIZATION. ADJUSTMENTS ARE MADE TO THE NET PROFITS TO FACTOR IN THE DIFFERENCES AT THE TRANSACTION LEVEL OR THE ENTERPRISE LEVEL. ADJUSTMENTS ARE ALSO MADE FOR DIFFERENCE IN THE ACC OUNTING METHODOLOGY. TNMM MAKES A COMPARISON AT THE ENTITY / GLOBAL LEVE L AND NOT AT THE TRANSACTIONAL LEVEL. THE MERIT OF THIS METHOD IS TH AT IT IS RESILIENT TO MINOR FUNCTIONAL DIFFERENCES. AS A RESULT OF THIS CHARACT ERISTIC, EXAMINATION IS NOT MADE AT THE INDIVIDUAL COMPONENT LEVEL OF INCOME OR EXPENDITURE THAT HAS BEEN RECKONED IN ARRIVING AT THE NET PROFIT. WHEN A COMPARISON IS MADE AT THE MACRO (GLOBAL) LEVEL, WHERE MULTIPLE INTERTWINE D TRANSACTIONS EXIST, IT IS NOT POSSIBLE TO IDENTIFY OR PINPOINT THE CONTRIBUTI ON OF EACH FACET OR IT(TP)A NO.1315/BANG/2011 PAGE 24 OF 39 TRANSACTION TO THE EARNING OF NET PROFIT. THE ASSES SEE POINTED OUT THAT IN THE PROCESS OF ADOPTING THE TNMM, IT ADOPTED THE NET PR OFIT AS THE STARTING POINT. IN ARRIVING AT THIS NET PROFIT, IT HAD FACTO RED THE ROYALTY PAYMENTS / MANAGEMENT FEE / INTRA GROUP SERVICE FEES. ONCE THE NET PROFIT MARGIN IS DEMONSTRATED TO BE AT ARMS LENGTH, IT PRE-SUPPOSES THAT THE VARIOUS COMPONENTS OF INCOME AND EXPENDITURE THAT HAVE BEEN CONSIDERED IN THE PROCESS OF ARRIVING AT THE NET PROFIT ARE ALSO AT A RMS LENGTH. THE OPERATING MARGINS AS COMPUTED BY IT ARE DEMONSTRATED TO BE AT ARM'S LENGTH. ACCORDINGLY, THE ASSESSEE SUBMITTED THAT IN ITS CAS E THE TNMM IS TO BE APPLIED AT THE ENTITY LEVEL AND NOT TRANSACTION LEV EL AS PROPOSED BY YOUR HONOUR. THE ASSESSEE DREW ATTENTION OF THE TPO TO THE DECISION OF THE HONBLE PUNE ITAT DECISION IN THE CASE OF SKODA AUT O (I) PVT. LTD. VS. ACIT [2009-TIOL-214-ITAT-PUNE] WHEREIN ON IDENTICAL FACT S THE TPO ACCEPTED AGGREGATION OF INTERNATIONAL TRANSACTIONS OBSERVING THAT WHEN TNMM IS USED TO BENCH MARK THE ASSESSEES MARGIN THE ALP AD JUSTMENT BEING MADE ON THAT BASIS WILL ADEQUATELY COVER THE EXCESS EXPENDITURE ON ROYALTY AND FEES FOR TECHNICAL KNOW-HOW AND HENCE NO SEPARA TE ADJUSTMENT FOR THE TRANSACTIONS OF ROYALTY AND FEES FOR TECHNICAL KNOW -HOW WAS REQUIRED. 32. THE ASSESSEE ALSO POINTED OUT THAT THE RELIANCE PLACED BY THE TPO ON THE DECISIONS OF MUMBAI TRIBUNAL IN THE CASE OF UCB INDIA PVT LTD 317 ITR 292 (AT) AND STAR INDIA PRIVATE LIMITED 2009-TI OL-426-ITAT-MUM TO BUTTRESS THE CONTENTION THAT HE IS EMPOWERED TO APP LY APPROPRIATE METHOD FOR EACH CLASS OF THE TRANSACTIONS AFTER APPLYING T HE TNMM AT THE SEGMENT LEVEL, WAS NOT CORRECT. IN THIS REGARD THE ASSESSE E POINTED OUT THAT IN THE CASE OF UCB INDIA, THE ASSESSEE WAS A SUBSIDIARY OF A BELGIUM COMPANY IT(TP)A NO.1315/BANG/2011 PAGE 25 OF 39 ENGAGED IN THE BUSINESS OF MANUFACTURE AND DISTRIBU TION OF PHARMACEUTICAL PRODUCTS. THE ASSESSEE HAD PURCHASED ACTIVE PHARMAC EUTICAL INGREDIENTS FROM ITS AES. THE ASSESSEE APPLIED TNMM AT THE ENTI TY LEVEL. THE TPO APPLIED CUP BASED ON INFORMATION RECEIVED FROM CERT AIN COMPETITORS OF THE ASSESSEE U/S 133(6). BASED ON THESE FACTS THE TRIBU NAL HELD THAT TNMM CANNOT BE APPLIED AT THE ENTITY LEVEL AND SHOULD BE APPLIED TO AE RELATED SEGMENT. THIS WAS FOR THE REASON THAT THE ASSESSEE WAS ENGAGED IN VARIOUS ACTIVITIES OTHER THAN AE TRANSACTIONS. THE TRIBUNAL ALSO REJECTED THE APPLICATION OF CUP METHOD ON THE GROUND THAT IT SUF FERS FROM VARIOUS DEFICIENCIES, INFIRMITIES AND LACK OF INFORMATION O N COMPARABILITY. 33. SIMILARLY IN CASE OF STAR INDIA, THE ASSESSEE WAS ENGAGED IN THREE DISTINCT BUSINESSES VIZ DISTRIBUTION OF STAR CHANNELS, MARKETING FOR ADVERTISEMENT SALES AND CONTENT DEVELOPMENT FOR TEL EVISION PROGRAMMES. THE TPO IN THAT CASE CLUBBED THE THREE DISTINCT BUS INESSES AND DETERMINED ALP. IT WAS NOT DEMONSTRATED BY THE TPO THAT THE AC TIVITIES ARE CLOSELY LINKED. THE ASSESSEE DEMONSTRATED THAT THE ACTIVITI ES ARE INDEPENDENT ACTIVITIES. IN THAT CONTEXT IT WAS HELD THAT ALP IS TO BE DETERMINED FOR EACH SEGMENT SEPARATELY. IN THIS CASE, THE TRIBUNAL RELY ING ON THE BANGALORE SPECIAL BENCH DECISION IN THE CASE OF AZTEC SOFTWAR E AND TECHNOLOGIES LIMITED 107 ITD 141 (SB)(BANG.) HELD THAT WHERE TRA NSACTIONS ARE CLOSELY LINKED THAT HAVE TO BE EVALUATED TOGETHER. THE RELE VANT OBSERVATIONS ARE EXTRACTED BELOW: 64. WE HAVE THOROUGHLY EXAMINED THE ORDER OF THE S PECIAL BENCH IN THE CASE OF AZTEC SOFTWARE AND TECHNOLOGIES LTD. (S UPRA) AND WE FIND THAT THE TRIBUNAL HAS EXAMINED THE CHAPTER-X O F THE INCOME TAX ACT, RELATING SPECIAL PROVISIONS RELATING TO AVOIDA NCE OF TAX IN DETAIL AND THE TRIBUNAL HAS HELD THAT IDEALLY IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE ARMS LEN GTH PRINCIPLE IT(TP)A NO.1315/BANG/2011 PAGE 26 OF 39 SHOULD BE APPLIED ON TRANSACTION TO TRANSACTION BAS IS. HOWEVER, THERE ARE OFTEN SITUATIONS WHERE SEPARATE TRANSACTI ONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE ADEQUATELY DEALT WITH ON A SEPARATE BASIS. THE TRIBUNAL HAS ALSO HELD THAT THE BURDEN OF PROVING AND ESTABLISHING ARMS LENGTH PRICE AND TO F URNISH THE RELEVANT INFORMATION LIES INITIALLY ON THE ASSESSEE . 34. THE ASSESSEE SUBMITTED THAT THE DECISION IN THE CASE OF AZTEC SOFTWARE (SUPRA) IS BINDING AND NEEDS TO BE FOLLOWE D. 35. THE ASSESSEE REITERATED THAT IT HAD ALREADY DEM ONSTRATED THAT ALL ITS ACTIVITIES ARE CLOSELY LINKED AND INTERDEPENDENT. T HE ASSESSEE SUBMITTED THAT THE DECISIONS IN THE CASE OF STAR AND UCB INDI A ARE APPLICABLE ONLY WHEN THE ACTIVITIES CLUBBED ARE DISSIMILAR OR ARE N OT CLOSELY LINKED. IT WAS SUBMITTED THAT EVEN OTHERWISE, THE TRIBUNAL IN THE ABOVE CASES HAS NOWHERE HELD THAT AFTER APPLYING TNMM AT ENTITY LEV EL, AN ITEM OUT OF THAT SEGMENT CAN BE SEPARATELY EVALUATED. THE OBSERVATIO NS OF THE ITAT DO NOT SUPPORT THE PROPOSITION ADOPTED BY THE TPO IN THE I NSTANT CASE. THE CONCLUSION IS THEREFORE WITHOUT BASIS AND OUGHT TO BE REJECTED. 36. WITH REGARD TO THE ACTION OF THE TPO IN APPLYIN G TNMM TO THE MANUFACTURING SEGMENT AND MAKING AN ADDITION ON ACC OUNT OF ALP AND THEREAFTER SEPARATELY EVALUATING THE ROYALTY TRANSA CTION, WHICH WAS ALSO CONSIDERED AS PART OF THE MANUFACTURING SEGMENT, TH E ASSESSEE SUBMITTED THAT THE ACTION OF THE AO IN SEGREGATING THE ROYALT Y TRANSACTION FROM THE MANUFACTURING SEGMENT RESULTS WAS NOT IN ACCORDANCE WITH LAW. IN THIS REGARD, IT HAS TO BE MENTIONED THAT AFTER SEGREGATI NG THE ROYALTY TRANSACTION, THE TPO UPHELD CUP METHOD OF DETERMINING ALP AND AR RIVED AT AN ALP OF RS. NIL ON THE GROUND THAT THE ASSESSEE HAS NOT BEE N ABLE TO SHOW THAT IT IT(TP)A NO.1315/BANG/2011 PAGE 27 OF 39 HAD RECEIVED ANY ECONOMIC BENEFIT AND ALSO FOR THE REASON THAT ASSESSEE DID NOT PRODUCE ANY EVIDENCE TO SHOW THAT IT HAD AC TUALLY RECEIVED TECHNICAL KNOW-HOW DURING THE YEAR. IT WAS SUBMITTED BY THE A SSESSEE THAT THE DETAILS OF ROYALTY PAYMENTS ALONG WITH THE AGREEMEN TS HAD BEEN SUBMITTED BEFORE THE TPO. THE ASSESSEE POINTED OUT THAT AS PER THE AGREEMENT, ROYALTY AT 6% ON MANUFACTURE OF LICENCED PRODUCTS A ND 3% ON ACCESSORIES, SPARES AND COMPONENTS WAS TO BE PAID BY THE ASSESSE E. THIS IS A STANDARD AGREEMENT ADOPTED BY THE TMC FOR CALCULATI ON OF ROYALTY PAYABLE FOR USE OF KNOW-HOW. THE ASSESSEE, HOWEVER, PAID O NLY 5% WHICH IS LESS THAN THE STANDARD RATE CHARGED. THE ASSESSEE SUBMI TTED THAT THE TPO PROCEEDED IGNORING THE BUSINESS REALITIES. IT WAS SUBMITTED THAT THE ASSESSEES VERY EXISTENCE WAS BASED ON KNOW-HOW PRO VIDED BY THE AE AND THERE WAS NO ALTERNATIVE SOURCE FROM WHICH AUTO MOBILE TECHNOLOGY COULD BE SOURCED OR OBTAINED. THE ASSESSEE ALSO PL ACED RELIANCE ON THE DECISION OF THE MUMBAI ITAT IN THE CASE OF DRESSER RAND (INDIA) PVT. LTD. V. ACIT, ITA NO.8753/MUM/2010 , WHEREIN THE TRIBUNAL HELD THAT THE TPO CANNOT COMPUTE ALP AT NIL ON THE GROUND THAT NO REA L SERVICES WERE RECEIVED BY THE ASSESSEE OR THAT THE ASSESSEE HAS N OT RECEIVED ANY BENEFIT UNDER COST CONTRIBUTION ARRANGEMENT. THE FOLLOWING OBSERVATIONS WERE BROUGHT TO THE NOTICE OF THE DRP. WE FIND THAT THE BASIC REASON OF THE TRANSFER PRIC ING OFFICER'S DETERMINATION OF ALP OF THE SERVICES RECEIVED UNDER COST CONTRIBUTION ARRANGEMENT AS 'NIL' IS HIS PERCEPTION THAT THE ASSESSEE DID NOT NEED THESE SERVICES AT ALL, AS THE ASSESSEE HAD SUFFICIENT EXPERTS OF HIS OWN WHO WERE COMPETENT ENOUGH TO DO THIS WORK. FOR EXAMPLE, THE TRANSFER PRICING OFFICER HAD POINTED O UT THAT THE ASSESSEE HAS QUALIFIED ACCOUNTING STAFF WHICH COULD HAVE HANDLED THE AUDIT WORK AND IN ANY CASE THE ASSESSEE HAS PAI D AUDIT FEES TO IT(TP)A NO.1315/BANG/2011 PAGE 28 OF 39 EXTERNAL FIRM. SIMILARLY, THE TRANSFER PRICING OFFI CER WAS OF THE VIEW THAT THE ASSESSEE HAD MANAGEMENT EXPERTS ON ITS ROL LS, AND, THEREFORE, GLOBAL BUSINESS OVERSIGHT SERVICES WERE NOT NEEDED. IT IS DIFFICULT TO UNDERSTAND, MUCH LESS APPROVE, THIS LI NE OF REASONING. IT IS ONLY ELEMENTARY THAT HOW AN ASSESSEE CONDUCTS HIS B USINESS IS ENTIRELY HIS PREROGATIVE AND IT IS NOT FOR THE REVE NUE AUTHORITIES TO DECIDE WHAT IS NECESSARY FOR AN ASSESSEE AND WHAT I S NOT. AN ASSESSEE MAY HAVE ANY NUMBER OF QUALIFIED ACCOUNTAN TS AND MANAGEMENT EXPERTS ON HIS ROLLS, AND YET HE MAY DEC IDE TO ENGAGE SERVICES OF OUTSIDE EXPERTS FOR AUDITING AND MANAGE MENT CONSULTANCY; IT IS NOT FOR THE REVENUE OFFICERS TO QUESTION ASSESSEE'S WISDOM IN DOING SO. THE TRANSFER PRICING OFFICER WA S NOT ONLY GOING MUCH BEYOND HIS POWERS IN QUESTIONING COMMERCIAL WI SDOM OF ASSESSEE'S DECISION TO TAKE BENEFIT OF EXPERTISE OF DRESSER RAND US, BUT ALSO BEYOND THE POWERS OF THE ASSESSING OFFICER . WE DO NOT APPROVE THIS APPROACH OF THE REVENUE AUTHORITIES. W E HAVE FURTHER NOTICED THAT THE TRANSFER PRICING OFFICER HAS MADE SEVERAL OBSERVATIONS TO THE EFFECT THAT, AS EVIDENT FROM TH E ANALYSIS OF FINANCIAL PERFORMANCE, THE ASSESSEE DID NOT BENEFIT , IN TERMS OF FINANCIAL RESULTS, FROM THESE SERVICES. THIS ANALYS IS IS ALSO COMPLETELY IRRELEVANT, BECAUSE WHETHER A PARTICULAR EXPENSE ON SERVICES RECEIVED ACTUALLY BENEFITS AN ASSESSEE IN MONETARY TERMS OR NOT EVEN A CONSIDERATION FOR ITS BEING ALLOWED A S A DEDUCTION IN COMPUTATION OF INCOME, AND, BY NO STRETCH OF LOGIC, IT CAN HAVE ANY ROLE IN DETERMINING ARM'S LENGTH PRICE OF THAT SERV ICE. WHEN EVALUATING THE ARM'S LENGTH PRICE OF A SERVICE, IT IS WHOLLY IRRELEVANT AS TO WHETHER THE ASSESSEE BENEFITS FROM IT OR NOT; THE REAL QUESTION WHICH IS TO BE DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF THIS SERVICE IS WHAT AN INDEPENDENT ENTERPRISE WOULD HAV E PAID FOR THE SAME. SIMILARLY, WHETHER THE AE GAVE THE SAME SERVI CES TO THE ASSESSEE IN THE PRECEDING YEARS WITHOUT ANY CONSIDE RATION OR NOT IS ALSO IRRELEVANT. THE AE MAY HAVE GIVEN THE SAME SER VICE ON GRATUITOUS BASIS IN THE EARLIER PERIOD, BUT THAT DO ES NOT MEAN THAT ARM'S LENGTH PRICE OF THESE SERVICES IS 'NIL'. THE AUTHORITIES BELOW HAVE BEEN SWAYED BY THE CONSIDERATIONS WHICH ARE NO T AT ALL RELEVANT IN THE CONTEXT OF DETERMINING THE ARM'S LE NGTH PRICE OF THE COSTS INCURRED BY THE ASSESSEE IN COST CONTRIBUTION ARRANGEMENT. IT(TP)A NO.1315/BANG/2011 PAGE 29 OF 39 37. THE DRP ON THE ISSUE OF CONCLUSIONS OF THE TPO THAT THE TRADING AND MANUFACTURING SEGMENT OF THE ASSESSEE ARE DISTINCT AND NOT INTER-RELATED WARRANTING COMBINED TRANSACTION APPROACH, HELD AS F OLLOWS:- THE FACTS, ARGUMENTS AND CONTENTIONS OF THE ELIGIB LE ASSESSEE HAVE BEEN CONSIDERED AND DELIBERATED UPON IN GREAT DETAI L AFTER GIVING DUE OPPORTUNITIES IN A SPEAKING MANNER BY THE TRANS FER PRICING AUTHORITY. FOR ECONOMY OF WORDS, THE SAME ARE NOT B EING REPLICATED IN THIS ORDER. HOWEVER THERE IS NO REASON FOR ANY DEVIATION FROM THE POSITION TAKEN BY THE TRANSFER PRICING OFFICER IN T HE GIVEN CONTEXT. MOREOVER, THE CONTEXT OF THE ELIGIBLE ASSESSEE BEFO RE THE DISPUTE RESOLUTION PANEL ARE MERE REPETITION OF THOSE PUT F ORTH BEFORE THE TRANSFER PRICING OFFICER. AS SUCH, THERE IS NO FRE SH REASON FOR RECONSIDERATION OF THE MATTER. NO INTERFERENCE IS CALLED FOR ON THIS ACCOUNT. 38. WITH REGARD TO THE ACTION OF THE TPO IN DETERMI NING THE ROYALTY PAYMENT AT NIL, THE DRP UPHELD THE ORDER OF THE TPO . REASONS GIVEN BY THE DRP IN THIS REGARD ARE IDENTICAL TO THE REASONS GIVEN FOR REJECTING THE CLAIM OF THE ASSESSEE FOR A COMBINED TRANSACTION AP PROACH SET OUT IN THE EARLIER PARAGRAPH. THE DRP ALSO MADE AN OBSERVATIO N THAT SIMILAR ISSUES WERE SUB-JUDICE BEFORE DIFFERENT HIGHER APPELLATE A ND JUDICIAL FORUMS AND TAKING ANY OTHER VIEW WOULD PREJUDICE THE PENDING P ROCEEDINGS ON THE ISSUE FOR THE REVENUE. 39. AGGRIEVED BY THE AFORESAID DIRECTIONS OF THE DRP, THE ASSESSEE HAS RAISED GROUND NO.12, 22 TO 24 BEFORE THE TRIBUN AL. IT(TP)A NO.1315/BANG/2011 PAGE 30 OF 39 40. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE AND THE LEARNED DEPARTMENTAL REPRESENTATIV E. THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE WERE REITER ATION OF THE STAND OF THE ASSESSEE BEFORE THE REVENUE AUTHORITIES BESIDES REL IANCE ON SOME DECISIONS OF ITAT AND HONBLE HIGH COURT. THE LEAR NED DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE TPO, DRP AND THE AO. IT WAS FURTHER SUBMITTED THAT THE TPO CAN HOLD THAT THE AL P OF AN INTERNATIONAL TRANSACTION IS NIL. 41. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. ON THE ISSUE AS TO WHETHER THE INTERNATIONAL TRANSA CTIONS HAVE TO BE CONSIDERED SEPARATELY OR INDEPENDENTLY WITHOUT AGGR EGATING THEM AS PART OF THE SEGMENT TO WHICH THEY RELATE, WE FIND THAT THE TERM INTERNATIONAL TRANSACTION HAS BEEN DEFINED IN SECTION 92B OF THE ACT TO MEAN AND INCLUDE TRANSACTIONS BETWEEN TWO OR MORE AES, EITHER OR BOT H OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEA SE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR B ORROWING MONEY OR ANY OTHER TRANSACTION HAVING BEARING ON THE PROFITS, IN COME, LOSSES OR ASSETS OF SUCH ENTERPRISE. SECTION 92 OF THE ACT PROVIDES TH AT INCOME FROM INTERNATIONAL TRANSACTIONS BETWEEN AES SHALL BE COM PUTED HAVING REGARD TO ALP. SECTION 92-C OF THE ACT PRESCRIBES THE METHOD S OF DETERMINING ALP, HAVING REGARD TO THE MOST APPROPRIATE METHOD WHICH WILL BE DECIDED IN ACCORDANCE WITH THE RULES PRESCRIBED. RULE 10A(D) OF THE INCOME-TAX RULES 1962 [THE RULES] PROVIDES THAT TRANSACTION WOUL D INCLUDE A NUMBER OF CLOSELY LINKED TRANSACTIONS. RULE 10B(1)(D) OF THE RULES ADVOCATE PROFIT SPLIT METHOD OF DETERMINING ALP WHERE INTERNATIONAL TRANSACTIONS INVOLVE TRANSFER OF UNIQUE INTANGIBLE OR IN MULTIPLE INTERN ATIONAL TRANSACTIONS WHICH IT(TP)A NO.1315/BANG/2011 PAGE 31 OF 39 ARE SO INTER-RELATED THAT THEY CANNOT BE EVALUATED SEPARATELY FOR THE PURPOSE OF DETERMINING ALP OF ANY ONE TRANSACTION. IT THUS APPEARS THAT THE ACT AND THE RULES CONTEMPLATE DETERMINING ALP B Y AGGREGATING INTERNATIONAL TRANSACTIONS WHICH ARE MULTIPLE, INTE RLINKED OR INTER-RELATED TO EACH OTHER AND CANNOT BE EVALUATED SEPARATELY. TO THIS EXTENT THE CONCLUSIONS OF THE TPO REGARDING DETERMINATION OF A LP BY TAKING SEGMENTAL RESULTS WITHOUT LOOKING INTO AS TO WHETHE R THE TWO SEGMENTS ARE INTERLINKED OR INTER-RELATED CANNOT BE SUSTAINED. AS TO WHAT WOULD BE THE MOST APPROPRIATE METHOD IN SUCH CASES IS AGAIN DEPE NDENT ON RULES 10B(2) AND (3) OF THE RULES. 42. THE OECD GUIDELINES AS WELL AS THE AUSTRALIAN TAX OFFICER (ATO) TAXATION RULE 97/20 ON INTERNATIONAL TRANSFER PRICI NG PARA.2.74(1) REFERRED TO BY THE ASSESSEE BEFORE THE REVENUE AUTHORITIES W HICH HAVE BEEN SET OUT IN THE EARLIER PART OF THIS ORDER SEEMS TO SUPPORT COMBINED TRANSACTION APPROACH WHERE THE TRANSACTIONS ARE CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON AN INDIVIDUAL BAS IS. IN SUCH A SITUATION, RATHER THAN ASSESSING THE ALP OF THE TRANSACTIONS I NDIVIDUALLY, THE TRANSACTIONS COULD BE EVALUATED TOGETHER USING THE MOST APPROPRIATE METHOD. 43. THE ABOVE BEING THE LEGAL POSITION, IT BECOMES NECESSARY TO EXAMINE THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE A SSESSEE WITH ITS AE DURING THE PREVIOUS YEAR WHICH HAVE BEEN CATEGORIZED INTO 2 SEGMENTS BY THE TPO IN HIS ORDER AND FIND OUT IF THEY ARE INTERLINK ED OR INTERCONNECTED SO THAT THE TRANSACTIONS NEED TO BE EVALUATED TOGETHER RATHER THAN INDIVIDUALLY. IN THIS REGARD, WE FIND THAT THE SUBMISSIONS MADE B Y THE ASSESSEE BEFORE IT(TP)A NO.1315/BANG/2011 PAGE 32 OF 39 TPO AS WELL AS BEFORE DRP HAVE NOT BEEN CONSIDERED AT ALL. THE TPO PROCEEDED ON THE BASIS THAT ALP OF EACH TRANSACTION HAS TO BE EXAMINED INDEPENDENTLY/INDIVIDUALLY BY PLACING RELIANCE ON T HE DECISIONS OF TRIBUNAL IN THE CASE OF STAR INDIA LTD. (SUPRA) AND UKB(I) ( P) LTD. (SUPRA). WE AGREE WITH THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THESE DECISIONS HAVE IN FACT ACCEPTED IN PRINCIPLE THAT A GGREGATION OF TRANSACTIONS HAVE TO BE DONE WHERE THEY ARE INTERLINKED BUT HAVE ON FACTS FOUND THAT TRANSACTIONS WERE NOT INTERLINKED AND THEREFORE HEL D THAT ALP OF TRANSACTIONS HAVE TO BE DETERMINED INDIVIDUALLY. T HE FOLLOWING DECISIONS RELIED UPON THE LEARNED COUNSEL FOR THE ASSESSEE AL SO SUPPORTS THE PLEA OF THE LEARNED COUNSEL FOR THE ASSESSEE. : I. M/S.THYSSEN KRUPP INDUSTRIES VS. ACIT (ITA NO.7032/MUM/2011), II. HINDUSTAN UNILEVER LTD. VS. ACIT (ITA NO.7868/M UM/2010), AND III. DCIT VS. CMA CGM GLOBAL INDIA (P) LTD. (ITA NO.5979/MUM/2010) 44. THE DRP WITHOUT EXAMINING THE SUBMISSIONS ON BEHALF OF THE ASSESSEE HAS SIMPLY ENDORSED THE FINDINGS OF THE TP O. WITH REGARD TO THE CONCLUSIONS OF THE DRP, UPHOLDING THE ORDER OF THE TPO THAT THE TRADING AND MANUFACTURING SEGMENT OF THE ASSESSEE ARE DISTI NCT AND NOT INTER- RELATED WARRANTING COMBINED TRANSACTION APPROACH, T HE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE ORDER OF THE TRI BUNAL IN ASSESSEES OWN CASE FOR A.Y. 2003-04 IN ITA NO.828/B/2010, WHEREIN IDENTICAL ISSUE WAS CONSIDERED AND DECIDED BY THIS TRIBUNAL AS FOLLOWS: - '14.5.2 TAKING INTO CONSIDERATION THE SUBMISSIONS M ADE AND THE FACTS AND CIRCUMSTANCES OF THE CASE, WE AGREE WITH THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE . WHILE IT IS TRUE THAT FUNCTION, ASSETS AND RISKS OF THE TRADING AND IT(TP)A NO.1315/BANG/2011 PAGE 33 OF 39 MANUFACTURING SEGMENTS GENERALLY DIFFER, HOWEVER CI RCUMSTANCES MAY WARRANT COMBINING BOTH OF THEM. IT IS ONLY IN THE SPECIFIC FACTS OF THE CASE THAT THE COMBINING OF BOTH SEGMEN TS IS ADVISABLE. IN THE INSTANT CASE OF THE ASSESSEE, THE SALE OF SPARE PARTS IS TRIGGERED AS A RESULT OF THE MANUFACTURING ACTIVITIES, INCLUDING WARRANTY COMMITMENTS. THEREFORE, WE ARE O F THE VIEW THAT IT WOULD NOT BE IN THE FITNESS OF THINGS FOR T HE SALE OF SPARE PARTS AND COMPONENTS TO BE CONSIDERED IN ISOLATION FROM THE SALE OF MANUFACTURED VEHICLES. THIS VIEW IS SUPPORTED BY THE OECD T.P. GUIDELINES, 2010, RELIED ON BY THE ASSESSEE. T HIS VIEW IS ALSO BUTTRESSED BY THE FACT THAT THE COMPARABLE COM PANIES ARE ALSO TRADING IN SPARE PARTS AND COMPONENTS. ON A OV ERALL CONSIDERATION, IT CAN BE CONCLUDED THAT TRADING IN SPARE PARTS IS CLOSELY INTER-LINKED WITH THE MANUFACTURING SEGMENT OF THE ASSESSEE. WE ARE OF THE VIEW THAT NO MEANINGFUL PUR POSE WOULD BE SERVED IN SEGREGATING THE TRADING AND MANUFACTUR ING SEGMENTS, PARTICULARLY WHEN THE ASSESSEE AND THE CO MPARABLE COMPANIES ARE AT PAR WITH REGARD TO THE NATURE AND SCALE OF COMBINED ACTIVITIES. NEEDLESS TO ADD THAT THIS FIND ING / DECISION BY ITS VERY NATURE HAS TO BE CASE-SPECIFIC AND YEAR-SP ECIFIC AS THE DECISION IS BASED ON THE FACTS AND CIRCUMSTANCES OF THIS PARTICULAR CASE AND OF THIS PARTICULAR YEAR AND IS NOT TO BE C ONSTRUED AS LAYING DOWN THE PRINCIPLE IN THIS REGARD. WE, THERE FORE, DIRECT THE ASSESSING OFFICER / TPO TO COMPUTE THE ALP AT THE E NTITY / ENTERPRISE LEVEL BY COMBINING THE TRADING AND MANUF ACTURING SEGMENTS.' 45. IT IS NO DOUBT TRUE THAT THE TRIBUNAL HAS OBSER VED THAT THE RULING GIVEN IN THAT YEAR IS BASED ON THE FACTS THAT PREVA ILED IN THAT YEAR. WE FIND THAT THE FACTS IN THE PRESENT ASSESSMENT YEAR ARE A LSO IDENTICAL AND THERE HAS BEEN NO CHANGE WHATSOEVER IN THE BUSINESS MODEL OF THE ASSESSEE. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE DE CISION RENDERED BY THE TRIBUNAL WOULD BE APPLICABLE FOR THIS ASSESSMENT YE AR ALSO. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL, WE HOLD THA T THE TRADING AND MANUFACTURING SEGMENT OF THE ASSESSEE ARE NOT DISTI NCT AND ARE INTER- RELATED WARRANTING COMBINED TRANSACTION APPROACH. 46. WE HAVE ALREADY SEEN IN PARA 9 OF THIS ORDER TH AT THE TPO HAS ARRIVED AT THE BIFURCATION OF THE MANUFACTURING AND TRADING SEGMENTAL OPERATING RESULTS. IN VIEW OF OUR CONCLUSIONS THAT THE TRADING AND IT(TP)A NO.1315/BANG/2011 PAGE 34 OF 39 MANUFACTURING SEGMENTS ARE INTERLINKED AND THEREFOR E A COMBINED TRANSACTION APPROACH HAS TO BE ADOPTED, WE COMBINE THE RESULTS SO ARRIVED AT BY THE TPO, WHICH IS GIVEN IN PARA 9 OF THIS ORD ER. IF THE SEGMENTAL RESULTS ARE COMBINED, THE OPERATING REVENUE OF THE ASSESSEE WOULD BE 3767.91 CRORES AND THE OPERATING PROFIT WOULD BE RS .94.34 CRORES. THUS, THE OPERATING PROFIT MARGIN ON SALES WOULD BE 2.517 . 47. EVEN ASSUMING THAT THE ADJUSTMENT ON ACCOUNT OF OPERATIONAL EFFICIENCY MADE BY THE TPO IS TO BE ACCEPTED, THEN THE COMBINED MARGIN AFTER ADJUSTMENT OF THE FIVE COMPARABLES WHICH IS G IVEN IN PARA-20 OF THIS ORDER, WOULD BE 7.10%. IF THE ARITHMETIC MEAN OF T HE FIVE COMPARABLES AS ABOVE IS TESTED AS AGAINST THE OPERATING PROFIT MAR GIN ON SALES OF THE ASSESSEE AT 2.517%, THEN THE SAME WOULD BE WITHIN T HE (+)/(-) 5% RANGE OF THE ARITHMETIC MEAN AND THEREFORE NO ADDITION BY WA Y OF ADJUSTMENT TO THE ALP CAN BE MADE. IN THIS VIEW OF THE MATTER, WE AR E OF THE VIEW THAT THE ADDITION SUSTAINED BY THE DRP DESERVES TO BE DELETE D AND IS HEREBY DELETED. GR.NO.12 IS ACCORDINGLY ALLOWED 48. ON THE ISSUE WHETHER THE TPO CAN COME TO A CON CLUSION THAT THE ALP OF AN INTERNATIONAL TRANSACTION IS NIL BECAUSE NO SERVICES WERE RENDERED OR THAT THE ASSESSEE DID NOT DERIVE ANY BE NEFIT FROM THE AE FOR WHICH PAYMENTS WERE MADE, WE HAVE CONSIDERED THE SU BMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE. THIS ISSUE IS PURELY ACADEMIC BECAUSE WE HAVE ALREADY HELD THAT THE CONCLUSIONS OF THE TP O/DRP THAT THE TRADING AND MANUFACTURING SEGMENT OF THE ASSESSEE ARE DISTI NCT AND NOT INTER RELATED WARRANTING COMBINED TRANSACTION APPROACH IS NOT CORRECT AND THAT A IT(TP)A NO.1315/BANG/2011 PAGE 35 OF 39 COMBINED TRANSACTION APPROACH HAS TO BE ADOPTED AND THAT ON THE BASIS OF COMBINED TRANSACTION APPROACH THE PRICE PAID FOR TH E INTERNATIONAL TRANSACTION IS AT ARMS LENGTH. WE MAY ALSO THAT L EGALLY THE TPO SHOULD ADOPT THE ALP AS NIL. ON SIMILAR APPROACH BY TPO A DOPTING ALP AT NIL THE ITAT, BANGALORE BENCH, IN THE CASE OF M/S.FESTO CON TROLS PVT. LTD. VS. DCIT IN ITA NO.969/BANG/2011 (AY: 2007-08) DATED 4- 1-2013, THE TRIBUNAL EXAMINED THE QUESTION AS TO WHETHER THE TPO CAN DET ERMINE THE ALP AT NIL ON THE GROUND THAT NO SERVICES WERE RENDERED. THE TRIBUNAL, ON THE ABOVE ISSUE FOLLOWED THE DECISION OF THE MUMBAI BENCH OF THE ITAT IN THE CASE OF CASTROL INDIA LTD. V. ACIT IN ITA NO.3938/MUM/2010 DATED 14.09.2012 WHEREIN IT WAS HELD THAT IT WAS INCUMBENT UPON THE TPO TO WORK OUT THE ALP OF THE RELEVANT TRANSACTIONS BY FOLLOWING SOME AUTHORIZED METHOD AND THE ENTIRE COST BORNE BY THE ASSESSEE CANNOT BE DIS ALLOWED BY TAKING THE ALP AT NIL. THE TRIBUNAL ALSO REFERRED TO THE DECI SION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. EKL APPLIANCES LTD ., ITA NO.1068/2011 DATED 29.03.2012. IN THE AFORESAID DECISION, THE A SSESSEE ENTERED INTO AN AGREEMENT PURSUANT TO WHICH IT PAID BRAND FEE/ ROYA LTY TO AN ASSOCIATED ENTERPRISE. THE TPO DISALLOWED THE PAYMENT ON THE G ROUND THAT AS THE ASSESSEE WAS REGULARLY INCURRING HUGE LOSSES, THE K NOW-HOW/ BRAND HAD NOT BENEFITED THE ASSESSEE AND SO THE PAYMENT WAS N OT JUSTIFIED. THIS WAS REVERSED BY THE CIT (A) & TRIBUNAL ON THE GROUND TH AT AS THE PAYMENT WAS GENUINE, THE TPO COULD NOT QUESTION COMMERCIAL EXPE DIENCY. ON APPEAL BY THE DEPARTMENT, THE HONBLE DELHI HIGH COURT HEL D THAT THE TRANSFER PRICING GUIDELINES LAID DOWN BY THE OECD MAKE IT C LEAR THAT BARRING EXCEPTIONAL CASES, THE TAX ADMINISTRATION CANNOT DI SREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR TH EM AND THE EXAMINATION OF IT(TP)A NO.1315/BANG/2011 PAGE 36 OF 39 A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. THE GUIDELINES DISCOURAGE RE-STRUCTURING OF LEGITIM ATE BUSINESS TRANSACTIONS EXCEPT WHERE (I) THE ECONOMIC SUBSTANCE OF A TRANSA CTION DIFFERS FROM ITS FORM AND (II) THE FORM AND SUBSTANCE OF THE TRANSAC TION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, V IEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MAN NER. THE OECD GUIDELINES SHOULD BE TAKEN AS A VALID INPUT IN JUDG ING THE ACTION OF THE TPO BECAUSE, IN A DIFFERENT FORM, THEY HAVE BEEN RECOGN IZED IN INDIAS TAX JURISPRUDENCE. THE HONBLE COURT HELD THAT IT IS WE LL SETTLED THAT THE REVENUE CANNOT DICTATE TO THE ASSESSEE AS TO HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSEE AS TO W HAT EXPENDITURE THE ASSESSEE CAN INCUR (EASTERN INVESTMENT LTD 20 ITR 1 (SC), WALCHAND & CO 65 ITR 381 (SC) FOLLOWED). EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALLOWANCE OF EXPENDITURE ON THE GROUND THAT IT W AS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME. IN LIGHT OF THE AFORESAID DECISIONS, WE ARE OF THE VIEW THAT THE ST AND TAKEN BY THE ASSESSEE IN THIS REGARD DESERVES TO BE ACCEPTED. I T IS CLEAR FROM THE DECISIONS REFERRED TO ABOVE THAT THE TPO HAS TO WOR K OUT THE ALP OF THE INTERNATIONAL TRANSACTION BY APPLYING THE METHODS R ECOGNIZED UNDER THE ACT. HE IS NOT COMPETENT TO HOLD THAT THE EXPENDITURE IN QUESTION HAS NOT BEEN INCURRED BY THE ASSESSEE OR THAT THE ASSESSEE HAS N OT DERIVED ANY BENEFITS FOR THE PAYMENT MADE BY THE ASSESSEE AND THEREFORE HE CANNOT CONSIDER THE ALP AS NIL. WE HOLD ACCORDINGLY. IT(TP)A NO.1315/BANG/2011 PAGE 37 OF 39 49. BESIDES THE ABOVE, EVEN ON FACTS THE DETERMINAT ION OF ALP AT NIL IN RESPECT OF ROYALTY PAYMENTS CANNOT BE SUSTAINED. I N THIS REGARD, IT WAS BROUGHT TO OUR NOTICE BY THE LD. COUNSEL FOR THE AS SESSEE THAT SIMILAR PAYMENT MADE IN A.Y. 2009-10, THE DRP IN ITS DIRECT IONS DATED 19.11.2013 WAS PLEASED TO HOLD THAT THE PAYMENT OF ROYALTY WAS SUPPORTED BY THE SERVICES RENDERED BY THE AE AND WAS JUSTIFIED. THE AFORESAID ORDER OF THE DRP WAS CONSIDERED BY THE CIT(A), LTU, BANGALORE IN A.Y. 2005-06 AND IN HER ORDER DATED 20.3.2014, THE CIT(A) HELD AS FOLLO WS:- 10.3 THE ABOVE MATER HAD COME UP FOR ADJUDICATION BEFORE THE DRP IN THE APPEALS FOR OTHER YEARS ALSO. FOR AY 20 06-07 I FIND THAT THE DRP HAS CONFIRMED THE TPOS DETERMINATION OF AL P OF ROYALTY AT NIL THROUGH ORDER DT. 30.09.2010. IN THIS ORDER, HOWEVER, AT PAGE 10 WHILE RECORDING ITS DIRECTIONS, THE DRP MENTIONS TH E TPOS ADMISSION THAT IN VIEW OF THE TIME BARRING SITUATIO N HE WAS UNABLE TO EXAMINE THE OBJECTIONS RAISED BY THE ASSESSEE. AFT ER INDEPENDENTLY STUDYING THESE OBJECTIONS, THE DRP CRYPTICALLY APPR OVED THE TPOS POSITION OF NIL ALP. IN AY 2009-10 HOWEVER, THE DRP HAS DISCUSSED IN ELABORATE DETAIL THE ASSESSEES OBJECT IONS ON SIMILAR GROUNDS AND HAS ARRIVED AT THE CONCLUSION THAT THE ASSESSEE NOT ONLY RECEIVED THE TECHNOLOGY SUPPORT AS WELL AS THE RELATED INTANGIBLES IN TERMS OF PRODUCTION PROCESSES, BUT H AS ALSO BENEFITTED FROM THESE TECHNOLOGICAL PRACTICES, STANDARDS AND K NOW-HOW WHICH WERE NOT CREATED LOCALLY BY ITSELF. THE TOYOTA PRO DUCTION SYSTEM, STANDARDIZED ON A WORLD-WIDE BASIS, HAS ALSO BEEN S TUDIED FOR ITS OPERATIONAL EFFICIENCY BY PREMIER ACADEMIC INSTITUT IONS. I AM INCLINED TO AGREE WITH THIS CONCLUSION AFTER EXAMINING THE F ACTS OF THE APPELLANTS CASE AND THE EVIDENCES AVAILABLE. THE TPOS ARGUMENT THAT NO BENEFIT WAS DERIVED BY THE APPELLANT FROM T HE TECHNOLOGY FOR WHICH ROYALTY WAS PAID IS NOT SUPPORTED BY FACTS AN D EVIDENCES. THE FACT THAT THE ROYALTY RATE WAS WITHIN THE PERMISSIB LE LIMIT SPECIFIED BY THE GOVT. OF INDIA AND APPROVED BY THE RBI IS AN AD DITIONAL ARGUMENT IN SUPPORT OF THE LEGITIMACY OF THE SAID PAYMENT. 10.4 IN VIEW OF THE ABOVE DISCUSSION, THE TPOS DE TERMINATION OF THE ALP OF THE ROYALTY PAYMENT AT NIL CANNOT BE S UPPORTED. FOR SUCH ALP DETERMINATION, A PROPER ANALYSIS OF COMPAR ABLES IS REQUIRED TO BE PERFORMED FOR FY 2004-05 AND THE TPO IS DIRECTED TO IDENTIFY SUITABLE COMPARABLES AND, AFTER PROVIDING ADEQUATE OPPORTUNITY TO THE APPELLANT TO DETERMINE THE APPRO PRIATE ALP OF ROYALTY PAYMENT. FOR STATISTICAL PURPOSES, THE GRO UNDS RAISED IN THIS REGARD ARE TREATED AS ALLOWED. IT(TP)A NO.1315/BANG/2011 PAGE 38 OF 39 50. THE FACTS AND CIRCUMSTANCES REMAIN THE SAME IN THE PRESENT ASSESSMENT YEAR AS IT PREVAILED IN THE EARLIER ASSE SSMENT YEAR DECIDED BY THE CIT(A)/DRP REFERRED TO ABOVE. WE ARE OF THE VI EW THAT THE FINDINGS OF THE CIT(A)/DRP HAVE TO BE UPHELD AND IS ACCORDINGLY UPHELD. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT GR.NO.22 TO 24 H AS TO BE ALLOWED, THOUGH IT IS ONLY ACADEMIC. 51. IN VIEW OF OUR CONCLUSIONS ON GR.NO.12, 22 TO 24, WE ARE OF THE VIEW THAT THE OTHER ISSUES RAISED BY THE ASSESSEE IN THE VARIOUS GROUNDS OF APPEAL DO NOT REQUIRE ANY ADJUDICATION AND ARE LEFT OPEN. 52. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DAY OF JULY, 2014. SD/- SD/- ( RAJENDRA) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE, DATED, THE 11 TH JULY, 2014. /D S/ IT(TP)A NO.1315/BANG/2011 PAGE 39 OF 39 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALO RE.