Lear Automotive India Private Ltd., Pune V. Deputy Commissioner of Income-tax, Circle - 8, Pune

ITA 213/PUN/2021

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 9229 (ITAT-PUNE)
• Duration Of Justice: 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2016-2017
• Appeal Filed On: 28-05-2021
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Capital expenditure; Set aside
• Section: 43; 48; 13; 22; 101; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, C PUNE VIRTUAL COURT BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NO.213/PUN/2021 / ASSESSMENT YEAR : 2016-17 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED, E-25,26, 27, BHOSARI, MIDC, PUNE 411 026 MAHARASHTRA PAN : AAACL1978K VS. DCIT, CIRCLE -8, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 08.05.2021 PASSED BY THE ASSESS ING OFFICER (AO) U/S.143(3) R.W.S.144C(13) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMEN T YEAR 2016-17. 2. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING/ASSEMBLING OF AUTOMOTIVE SEATING AND ELECTRICA L SYSTEMS. IN RESPECT OF AUTOMOTIVE SEATING SYSTEMS, THE ASSE SSEE ALSO PROVIDES DESIGN AND ENGINEERING SUPPORT SERVICES TO THE GROU P ASSESSEE BY SHRI DHANESH BAFNA REVENUE BY SHRI SHIVRAJ MOREY DATE OF HEARING 22-07-2021 DATE OF PRONOUNCEMENT 04-08-2021 ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 2 COMPANIES AND OTHER AUTOMOTIVE INDUSTRY CUSTOMERS. THE AS SESSEE HAS THREE FACTORIES IN CHAKAN, PUNE, TWO FACTORIES IN NASHIK, TWO IN CHENNAI AND ONE FACTORY IN HALOL IN ADDITION TO TWO ENGINEERING CENTRES IN BHOSARI, PUNE AND A FACILITY UNDER TOOL-MANUFAC TURING CONTRACT IN HARIDWAR. THE ASSESSEE FILED ITS RETURN DECLARIN G TOTAL INCOME OF RS.27,72,90,010/-. FIFTEEN INTERNATIONAL TRANSACTION S TOTALING RS.484,29,35,354/- WERE REPORTED IN FORM NO. 3CEB . THE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS, WHO COMPUTED TRANSFER PRICING ADJUSTMENTS OF - RS. 22,37,81,961 UNDER THE INTERNATIONAL TRANSACTION OF ALLOCATION O F RHQ COSTS; RS.82,34,00,000 UNDER THE MANUFACTURING ACTIVITY SEGMENT; AND RS.5,27,44,000 UNDER THE INTERNATIONAL TRANSACTIO N OF PAYMENT OF GLOBAL SOFTWARE CHARGES. WE WILL ESPOUSE THESE TRANSFER PRICING ADDITIONS AD SERIATIM FOR CONSIDERATION AND DECISION. A. PAYMENT OF R.H.Q. FEE 3. THE ASSESSEE PAID RS.22,37,81,961/- TOWARDS ITS SHARE AS THE REGIONAL HEAD QUARTER (RHQ) FEE. THE TPO OBSERVED THAT LE AR SHANGHAI PROVIDED CERTAIN SUPPORT SERVICES TO THE WORLDWIDE L EAR GROUP ENTITIES INCLUDING THOSE SITUATED IN ASIA PACIFIC REGION COVERING THE ASSESSEE, FOR WHICH IT WAS CHARGED THIS FEES. THE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 3 ASSESSEE SELECTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM ) AS THE MOST APPROPRIATE METHOD AND CONSIDERED THE AE, I.E., LE AR SHANGHAI, AS A TESTED PARTY FOR ESTABLISHING THE ARMS LENG TH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION. THE ASSESSEE SUBMITTED THAT THE COSTS ASSOCIATED WITH THE PROVISION OF SERVICES WERE INCRE ASED BY 5% MARK-UP. OPERATING PROFIT/TOTAL COST OF LEAR SHANGHAI AT 5% WAS COMPARED WITH OPERATING PROFIT/TOTAL COST OF CERTAIN COMPARABLES GIVING AVERAGE OF 4.48%. THAT IS HOW, THE AS SESSEE CLAIMED SUCH A TRANSACTION TO BE AT ALP. THE TPO DISCUSSE D THE FACTS OF THIS ISSUE IN A COMBINED MANNER ALONG WITH THAT OF PA YMENT OF GLOBAL SOFTWARE CHARGES, WHICH HAS BEEN DISCUSSED HERE IN INFRA . GIVING THE REASON THAT THE ASSESSEE DID NOT GET ANY BENEFIT OR NO MATERIAL WAS BROUGHT ON RECORD TO DEMONSTRATE THAT ANY SERVIC ES WERE AVAILED, THE TPO DETERMINED NIL ALP OF THE INTERNATIONAL TRANSACTION. THE DRP DID NOT ACCEPT THE ASSESSEES CLAIM A ND AFFIRMED THE VIEW TAKEN BY THE TPO. THIS LED TO THE TRANSFER P RICING ADDITION OF RS.22,37,81,961/-. 4. WE HAVE HEARD BOTH THE SIDES THROUGH VIRTUAL COURT AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, THE LD . AR SUBMITTED THAT THE ALP DETERMINATION OF RHQ FEE IS A VIRGIN ISSU E INASMUCH AS IT HAS NOT COME UP BEFORE THE TRIBUNAL SO FA R FOR ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 4 CONSIDERATION IN ANY EARLIER YEAR. IT IS NOTED THAT THE TPO H AS DETERMINED NIL ALP PRIMARILY BY HOLDING THAT THE ASSESSEE DID NOT PROVE AVAILING OF ANY RHQ SERVICES FOR WHICH PAYMENT OF R S.22.37 CRORE WAS MADE. HE FURTHER DID NOT APPROVE THE ASSESSE ES SELECTION OF FOREIGN/AE AS A TESTED PARTY. 5. WE FIRST PROCEED TO EXAMINE IF ANY SERVICES WERE AC TUALLY AVAILED BY THE ASSESSEE? THE LD. AR INVITED OUR ATTENTION TOWARDS THE AGREEMENT DATED 01-03-2014 BETWEEN LEAR SHANGHAI AND THE ASSESSEE UNDER WHICH SUCH SERVICES WERE RENDERED, A C OPY OF SUCH AGREEMENT HAS BEEN PROVIDED AT PAGE 278 ONWARDS OF THE PAPER BOOK. SCHEDULE `A TO THE AGREEMENT ENLISTS THE SERVICES PRO VIDED BY LEAR SHANGHAI. LEAR SHANGHAI HAS PROVIDED AND WILL PROVIDE THE RELEVANT CONSULTING SERVICES OF FOLLOWING ITEMS : 1) OPERATIONAL AND MANUFACTURING CONSULTING SERVICES; 2) QUALITY AND QUALITY CONTROL CONSULTING SERVICES; 3) PROGRAM MANAGEMENT AND PROGRAM LAUNCH CONSULTING SERVICES; 4) PURCHASING CONSULTING SERVICES; 5) ACCESS TO LEAR COST AND TECHNOLOGY OPTIMIZATION (CTO) SERVICES; 6) SUPPLIER MANAGEMENT CONSULTING SERVICES; 7) GENERAL ACCOUNTING CONSULTING SERVICES, INCLUDING US GAAP RECONCILIATION SERVICES; 8) TREASURY CONSULTING SERVICES AND FINANCIAL ANALYSIS SERVICES; 9) IMPLEMENTATION OF CAPITAL EXPENDITURE PROCESS; 10) TAX CONSULTING SERVICES; ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 5 11) LEGAL CONSULTING SERVICES, INCLUDING CONTRACT REVIEW AND ADMINISTRATION; 12) BOARD ADMINISTRATION SERVICES; 13) DEALING WITH ADMINISTRATIVE AUTHORITIES RELATING TO JOINT VENTURE CONTRACT ADMINISTRATION; 14) HUMAN RESOURCE CONSULTING SERVICES; 15) ENVIRONMENTAL ANALYSIS AND CONSULTING SERVICES; 16) ACCESS TO LEAR IT SYSTEMS AND SERVICES. 6. TO BUTTRESS THE CONTENTION OF HAVING AVAILED THE SERV ICES FROM LEAR SHANGHAI, THE LD. AR REFERRED TO PAGE 378 ONWARDS O F THE PAPER BOOK, BEING, CORRESPONDENCE BETWEEN THE ASSESSEE AND L EAR SHANGHAI IN RESPECT OF VARIOUS SERVICES. THERE IS A DETAILED ELABOR ATION OF VARIOUS SERVICES PROVIDED BY LEAR SHANGHAI THROUGH E-MAILS TO THE ASSESSEE AND OTHER GROUP ENTITIES. A SUMMARY OF SUCH SE RVICES HAS BEEN GIVEN AT PAGE 537 OF THE PAPER BOOK. THERE IS A REFERENCE TO NUMEROUS AUDIT SERVICES, ACCOUNT SERVICES, BUDGETING SERVIC ES, SALE SERVICES, ENGINEERING SERVICES, PURCHASE POLICY SERVICES, TECHNICAL TRAINING SERVICES AND HR SERVICES ETC. FROM THE NARRATION OF SUCH SERVICES, AS BACKED BY THE RELEVANT E-MAIL COMMUNICATIONS, IT IS AMPLY CLEAR THAT THE ASSESSEE AVAILED SERVICES FROM LEAR SHA NGHAI FOR WHICH IT MADE PAYMENT. THE SO-CALLED BENEFIT TEST APPLIED BY THE TPO HAS NO RELEVANCE IN DETERMINING IF THE ASSESSEE COULD HAVE AVAILED SERVICES OR NOT. ONCE THE FACTUM OF RECEIPT OF SER VICES IS ESTABLISHED, THE ONLY THING WHICH REMAINS IS TO DETERMINE THE ALP OF THE SERVICES. HAVING NOTICED THAT THE ASSESSEE DID AVAIL THE SERVICES, ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 6 WE NOW PROCEED TO DETERMINE THE ALP OF THE RECEIPT OF RHQ SERVICES. 7. THE ASSESSEE APPLIED THE TNM METHOD TO DEMONSTRATE TH AT THE PAYMENT OF RHQ FEE WAS AT ALP. IN SUCH A DETERMINATION, TH E ASSESSEE TREATED LEAR SHANGHAI, THE FOREIGN/AE, AS A TESTED P ARTY. CERTAIN COMPARABLES WERE CHOSEN TO SHOW THAT THE INTERNATIONAL TRANSACTION WAS AT ALP. THE TPO DID NOT ACCEPT THE SELECTION OF FOREIGN/AE AS TESTED PARTY. THE LD. AR INVITED OUR ATTENTION TO WARDS A RECENT JUDGMENT DELIVERED BY THE HONBLE MADRAS HIGH COUR T IN VIRTUSA CONSULTING SERVICES PRIVATE LTD. VS. DCIT (124 TAXMANN.COM 309) . IN THIS JUDGMENT, THE HONBLE HIGH COURT HAS ACCEPTED THE ASSESSEES CONTENTION, IN PRINCIPLE, THAT A TESTED PARTY IS NORMALLY THE ONE WHICH IS LEAST COMPLEX PARTY TO THE CONTROLLED TRANSACTION. IN THE ULTIMATE ANALYSIS, THE HONBLE HIGH COURT SENT THE MATTER BACK TO THE TPO BY OBSERVING THAT: `THE ISSUE REGARDING THE ASSESSEES PLEA TO CONSIDER FOREIGN AE AS TESTED PARTY TO D ETERMINE THE ARMS LENGTH NATURE OF THE UNDERLYING INTERNATIONAL TRANSAC TIONS STANDS REMANDED TO THE TRANSFER PRICING OFFICER FOR A FRES H DECISION ON MERITS AND IN ACCORDANCE WITH LAW .... AS IT IS A SOLITARY JUDGMENT OF ANY HONBLE HIGH COURT ON THE QUESTION AS TO WHETHER A FOREIGN/AE CAN BE TAKEN A TESTED PARTY FOR BENCHMARKING, TH E OUTRIGHT ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 7 REJECTION OF THE LEAR SHANGHAI AS A TESTED PARTY ON THE GRO UND THAT A FOREIGN/AE CAN NEVER BE A TESTED PARTY, DOES NOT STAND ANY MORE. AS THE HONBLE HIGH COURT HAS ITSELF HELD THAT THE LEAST COMPLEX ENTITY TO A TRANSACTION SHOULD BE ADOPTED AS A TESTED PARTY, FOR WHIC H ANALYSIS IT SENT THE MATTER BACK TO THE LOWER AUTHORITY, WE NEED TO EXAMIN E THAT WHICH OUT OF THE TWO ENTITIES TO THE TRANSACTION - THE ASSESS EE OR LEAR SHANGHAI - IS LEAST COMPLEX IN THE EXTANT CASE. 8. NO DEFINITION OF A `TESTED PARTY HAS BEEN GIVEN IN THE INDIAN TRANSFER PRICING PROVISIONS. THE OECD GUIDELINES IN THIS REGA RD EMPHATICALLY PROVIDE THAT: `AS A GENERAL RULE, THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED IN THE MOST RELIABLE MANNER AND FOR WHICH THE MOST RELIABLE COMPARABLES C AN BE FOUND, I.E. IT WILL MOST OFTEN BE THE ONE THAT HAS THE LESS CO MPLEX FUNCTIONAL ANALYSIS.. TWO ILLUSTRATIONS HAVE BEEN GIVEN TO IDENTIF Y A TESTED PARTY, AS UNDER: TWO ILLUSTRATIONS- CHOICE OF THE TESTED PARTY: ILLUSTRATION ASSUME THAT COMPANY A MANUFACTURES TWO TYPES OF PRODUCTS, P1 AND P2, THAT IT SELLS TO COMPANY B, AN ASSOCIATED ENTERPRISE IN ANOTHER COUNTRY. ASSUME THAT A IS FOUND TO MANUFACTURE P1 PRODUCTS USING VALUABLE, UNIQUE INTANGIBLES THAT BELONG TO B AND FOLLOWING TECHNICAL SPECIFICATIONS SET BY B. ASSUME THAT IN THIS P1 TRANSACTION, A ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NO T MAKE ANY VALUABLE UNIQUE CONTRIBUTION IN RELATION TO THE TRANSACTION. THE TESTED PARTY FOR THIS P1 TRANSACTION WOULD MOST OFTEN BE A. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 8 ASSUME NOW THAT A IS ALSO MANUFACTURING P2 PRODUCTS FOR WHICH IT OWNS AND USES VALUABLE UNIQUE INTANGIBLES SUCH AS VALUABLE PATENTS AND TRADEMARKS, AND FOR WHICH B ACTS AS A DISTRIBUTOR. ASSUME THAT IN THIS P2 TRANSACTION, B ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NOT MAKE ANY VALUABLE UNIQUE CONTRIBUTION IN RELATION TO THE TRANSACTION. THE TESTED PARTY FOR THE P2 TRANSACTION WOULD MOST OFTEN BE B. 9. AS PER THE UN MANUAL, A TESTED PARTY SHOULD HAVE THE FOLLOWING ATTRIBUTES, NAMELY, A VAILABILITY OF RELIABLE AND ACCURATE DATA FOR COMPARISON; LEAST COMPLEX (AMONGST THE PARTIES TO THE TRANSAC TION); AND THE DATA AVAILABLE CAN BE USED WITH MINIMAL ADJUSTMENTS. IT FURTHER PROVIDES THAT THE CHOICE OF A TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE TRANSACTION, AND THE CHARACTERIZATION OF THE ENTITIES. THE TESTED PARTY GENERALLY WOU LD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH MOST RELIABLE DATA FOR COMPARABILITY IS AVAILABLE. 10. BEFORE UNDERTAKING THE EXERCISE OF CHOOSING A TESTED PARTY IN THE INSTANT CASE, WE FIRST NEED TO UNDERSTAND THE CONNOTATION OF THE TERM `LEAST COMPLEX ENTITY. LEAST COMPLEX ENTITY IN AN INTERNATIONAL TRANSACTION IS THE ONE IN WHOSE HANDS THE ALP CAN BE DETERMIN ED WITH RELATIVE EASE AND IN A LESS COMPLEX MANNER. THERE CANN OT BE ANY DOUBT THAT THE COMPUTATION OF THE VALUE OF THE INTERNATIONAL TRANSACTION OR PROFIT LEVEL INDICATOR (PLI) IS ORDINARILY WORKABLE IN ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 9 THE HANDS OF BOTH THE ENTITIES DEPENDING UPON THE EXTENT OF ADJUSTMENTS TO BE CARRIED OUT. HOWEVER, ONLY SUCH AN ENTITY CAN BE SELECTED AS A TESTED PARTY, INTER ALIA, WHOSE FUNCTIONS ARE RELATIVELY SIMPLE VIS-A-VIS THE OTHER ENTITY AND AS A CONSEQUENCE THEREOF, IN WHOSE HANDS THE VALUE OF THE INTERNATIONAL TRANSACTION AND/OR TH E PLI CAN BE COMPUTED WITH RELATIVE EASE REQUIRING LEAST ADJUSTMENTS. RELATIVE EASINESS OF THE COMPUTATION PRE-SUPPOSES ITS ACCURAC Y AND, THE LATTER IS, IN FACT, EMBEDDED IN THE FORMER. IF ACCURACY IS COMPROMISED IN THE PROCESS, THEN EASINESS OF THE COMPUTATIO N IS OF NO AVAIL. 11. IN THE FIRST ILLUSTRATION GIVEN BY THE OECD GUIDELINES, WH ERE THE COMPANY A MANUFACTURES P1 PRODUCTS AND SELLS THEM TO B BY USING THE INTANGIBLES BELONGING TO B AND HENCE MAKES NO VALU ABLE CONTRIBUTION OF SELF, THE TESTED PARTY IS A. IT IS SO FOR THE REASON THAT THE FUNCTIONS OF A ARE RELATIVELY SIMPLE AND IT IS EASY TO CO MPUTE THE PLI IN ITS HANDS. IT IS B WHOSE INTANGIBLES ARE BEING USED. WHEREAS B WILL HAVE TO ACCOUNT FOR THE COST OF USAGE OF ITS INTANGIBLES IN ADDITION TO OTHER COSTS OF PROCURING PRODUCT P1 FOR DETERM INING ITS PROFIT LEVEL INDICATOR, A WILL NEED TO ACCOUNT FOR ONLY THE COS T INCURRED BY IT IN MANUFACTURING PRODUCT P1. IN THE SECOND ILLUS TRATION GIVEN BY THE OECD GUIDELINES, WHERE THE COMPANY A MANUFA CTURES ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 10 P2 PRODUCTS BY USING ITS OWN PATENTS AND TRADEMARKS AND S ELLS THEM TO B, THE TESTED PARTY IS B. IT IS SO FOR THE REASON THAT NOW THE FUNCTIONS OF B ARE RELATIVELY SIMPLE AS THAT ONLY OF DISTRIBUTOR . IT IS A WHOSE INTANGIBLES ARE BEING USED. WHEREAS A WILL HAVE TO ACC OUNT FOR THE USAGE OF ITS INTANGIBLES IN ADDITION TO OTHER COSTS INCU RRED BY IT IN MANUFACTURING PRODUCT P2 FOR DETERMINING ITS PROFIT LEVEL INDICA TOR OF THE TRANSACTION, B WILL HAVE TO ACCOUNT FOR DIRECTLY THE COST OF GOODS PURCHASED AND THE COMPUTATION OF PLI FOR THE INTERNATIO NAL OF PURCHASE OF PRODUCT P2 WILL BE RELATIVELY SIMPLE IN ITS HANDS. 12. IT, ERGO, CLEARLY TRANSPIRES THAT SELECTION OF A TESTE D PARTY PRIMARILY DEPENDS UPON TWO FACTORS, VIZ., THE LEAST COMPLE X ENTITY AND AVAILABILITY OF SUITABLE COMPARABLES. THIS COINCIDES WITH THE NORMAL ALP DETERMINATION PROCESS ENVISAGED UNDER THE ACT, AS PER WHICH WE FIND OUT THE VALUE OR PLI ETC. OF/FROM THE INTERNATION AL TRANSACTION IN THE HANDS OF THE ASSESSEE AS A FIRST STEP AND THEN THE VALUE OR THE PLI ETC. OF COMPARABLES AS A SECOND STEP. TH E FIRST STEP UNDER THE ACT IS SIMILAR TO THE FIRST FACTOR OF FINDING OUT THE LEAST COMPLEX ENTITY AS PER THE OECD GUIDELINES AND THE UN MANUAL AND THE SECOND STEP OF FINDING OUT COMPARABLES UNDER THE ACT MA TCHES WITH THE SECOND FACTOR OF THE AVAILABILITY OF SUITABLE COMPARABLE S. THE FIRST ASPECT IS MORE IMPORTANT. IF AN ENTITY CHOSEN AS TESTED PARTY ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 11 TURNS OUT TO BE MORE COMPLEX THAN THE OTHER ENTITY, THE LATER EX ERCISE OF AVAILABILITY OF COMPARABLES BECOMES MEANINGLESS. 13. THUS, THE LEAST COMPLEX PARTY IS THE ONE WHEREIN IT IS EASY TO DETERMINE THE VALUE OR THE PLI OF THE INTERNATIONAL TRANSACTION. IN THE CONTEXT OF AVAILING/RENDITION OF SERVICES TO VARIOUS ENTITIES, THE LEAST COMPLEX ENTITY WILL BE THE ONE IN WHOSE HANDS IDENTIFICATION OF COSTS INCURRED/PAID IN RENDERING THE SERVICES AND THEN ITS ALLOCATION T O VARIOUS GROUP ENTITIES CAN BE DONE EASILY. THE ASPECT OF ID ENTIFYING THE VALUE AND THE PLI COMPUTATION OF TRANSACTION OF RECEIPT OF SERVICES BY AN INDIAN ENTITY INVOLVES SIMPLY FINDING OUT THE PRICE PAID FOR RECEIPT OF SUCH SERVICES AND THEN WORKING OUT THE PLI, DEPENDING UPON THE METHOD CHOSEN FOR THE ALP DETERMINATION. ON THE OTHER HAND, SUCH AN ASPECT IN THE HANDS OF THE FOREIGN/A E INVOLVES FINDING OUT THE COSTS INCURRED BY SUCH AE IN RENDE RING SERVICES TO ALL THE RECIPIENTS OF THE SERVICES AND THEN ALLOCATIN G SUCH TOTAL COSTS TO THE INDIAN ENTITY ON SOME RATIONAL BASIS. THIS ENTA ILS NOT ONLY EXAMINING THE TOTAL COST BASE OF THE FOREIGN/AE IN RENDERING THE SERVICES BUT ALSO THE MANNER IN WHICH THE ALLOCATION IS DONE TO THE INDIAN ENTITY. IT IS ONLY AFTER THIS THAT THE PROCESS OF THE PLI DETERMINATION STARTS. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 12 14. WE NOW ADVERT TO THE DETAILS OF THE INTERNATIONAL TRANSACTIO N OF RECEIPT OF RHQ SERVICES TO FIND OUT IF THE ASSESSEE OR LEA R SHANGHAI IS LEAST COMPLEX PARTY TO THE TRANSACTION? WE HAVE SET OU T SUPRA THE NATURE OF SERVICES RENDERED BY LEAR SHANGHAI TO THE ASSE SSEE AS PER ANNEXURE `A OF THE AGREEMENT. THE AUDITORS CERTIFICATE HAS BEEN FILED IN SUPPORT OF THE ALLOCATION OF COSTS TO THE ASSESSEE IN R ESPECT OF RHQ SERVICES RENDERED BY LEAR SHANGHAI. A COPY OF SUCH CERTIFICATE HAS BEEN PLACED AT PAGES 607 ONWARDS OF THE PAPER BOOK. IN THIS CERTIFICATE, THE SERVICE RECIPIENTS OR THE BENEFICIARIES HAVE BE EN GROUPED UNDER FIVE CATEGORIES, 1. WOFE MANUFACTURER LOCATED IN CHINA (CHINA WOFE); 2. JOINT VENTURE MANUFACTURERS LOCATED IN CHINA (CHINA JV); 3. NON-CHINA ENTITIES LOCATED IN ASIA-PACIFIC REGION (ASIA NON- CHINA) [THE ASSESSEE HAS BEEN INCLUDED IN ASIA NON-CHINA] 4. LEAR CORPORATION (US) RELATED; AND 5. LCM AND LEAR RHQ 15. THERE ARE 90 COST CENTRES INVOLVED IN THE PROVISION OF THE SERVICES, WHICH HAVE BEEN GATHERED IN 7 COST POOLS, VIS., CHINA-SSD; CHINA-EPMS; APO-CS; APO-CSD; APO-EPMS; LCM & LEAR HQ; AND DIRECT COST. AS PER TABLE OF ABBREVIATIONS GIVEN ON PAG E 609 OF THE PAPER BOOK, SSD STANDS FOR SEATING SYSTEM; EPMS FOR ELECTRICA L POWER MANAGEMENT SYSTEM; APO FOR ASIA PACIFIC OFFICE; LCM FOR LEAR CORPORATION (MAURITIUS) LIMITED; AND LEAR RHQ FOR LEAR ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 13 (CHINA) HOLDING LIMITED, WHICH AT THE MATERIAL TIME WAS LEAR SHANGHAI, THE SERVICE PROVIDER. THESE COST POOLS ARE INC URRING COSTS IN PROVIDING THE RHQ SERVICES. ON A PERTINENT QUERY, THE LD. AR SUBMITTED THAT ALL THE SEVEN COST POOLS ARE DIVISIONS OF LEAR SHANGHAI AND NO OTHER LEAR GROUP COMPANY HAS CONTRIBUTED IN ANY MANNER TO THE PROVISION OF RHQ SERVICES. CHARGING MECHANISM AS PER THE AUDITORS CERTIFICATE STARTS WITH STEP 1-CLASSIFICATION OF COST CODE S, READING AS UNDER: LEAR MANAGEMENT HAS DEFINED THE 90 COST CENTERS IN RELATION TO THE PROVISION OF ALL SERVICES IN FY 2015-16. THE 90 COST CODES A RE FURTHER CLASSIFIED INTO 7 COST POOLS AS LISTED BELOW, ACCORDINGLY TO THE MAJO R FUNCTIONS PERFORMED. COST POOLS CODES BEGINS WITH SERVICES BENEFICIAL LEAR ENTITIES NUMBER OF BENE- FICIAL LEAR ENTITIES CHINA-SSD 81 -SALES & BUSINESS DEVELOPMENT SERVICES; -FINANCE SERVICES; -COMMERCIAL SERVICES; -HUMAN RESOURCE SERVICES; -OPERATIONS SERVICES; AND -PURCHASING SERVICES -MAJOR: CHINA SSD MANUFACTURERS; -OTHERS: US, LCM & RHQ, AND ASIA NON-CHINA; 12 CHINA-EPMS 42 -SALES & BUSINESS DEVELOPMENT SERVICES; -COMMERCIAL SERVICES; ENGINEERING SERVICES; -FINANCE SERVICES; -HUMAN RESOURCE SERVICES; -IT SERVICES; -OPERATIONS SERVICES; -PURCHASING SERVICES; -PROGRAM MANAGEMENT SERVICES; AND -QUALITY CONTROL SERVICES -MAJOR: CHINA ESD MANUFACTURERS; -OTHERS: US, LCM & RHQ, AND ASIA NON-CHINA; 5 APO-CS 31 AND 61 -APO CORPORATE SERVICES -MAJOR:ASIA- PACIFIC MANUFACTURERS; 3 ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 14 -OTHERS: US, LCM & RHQ; APO-SSD 91 -SALES & BUSINESS DEVELOPMENT SERVICES; -PROGRAM MANAGEMENT SERVICES; -ENGINEERING SERVICES; -FINANCE SERVICES; -HUMAN RESOURCE SERVICES; -IT SERVICES; -OPERATION SERVICES; AND -PURCHASING SERVICES; -MAJOR: ASIA- PACIFIC SSD MANUFACTURERS; -OTHERS: US, LCM & RHQ, AND ASIA NON-CHINA; 16 APO-EPMS 54 -SALES SERVICES; -ENGINEERING SERVICES; -FINANCE SERVICES; -COMMERCIAL SERVICES; -PURCHASING SERVICES; -HUMAN RESOURCE SERVICES; -IT SERVICES; -QUALITY CONTROL SERVICES; AND -OPERATIONS SERVICES; -MAJOR: ASIA- PACIFIC ESD MANUFACTURERS; -OTHERS: US, LCM & RHQ, AND ASIA NON-CHINA; 8 LCM & LEAR RHQ 11F,11 A,11H AND 11R -EXPENSE INCURRED FOR LCM & RHQ -LCM & RHQ 3 DIRECT COST 42M AND 81M -COST DIRECTLY RELATED TO CHINA JV MANUFACTURERS -CHINA JV MANUFACTURERS / 16. IT CAN BE SEEN FROM THE AUDITORS CERTIFICATE THAT FIRSTLY THERE ARE COST POOLS FOLLOWED BY THE COST CODES THAT HAVE CONTRIBU TED TO THE GENERATION OF SERVICES, WHOSE DESCRIPTION IS GIVEN IN THE NEXT COLUMN AND THEN THERE IS A LIST OF LEAR GROUP BENEFICIARY E NTITIES AVAILING THE SERVICES. THE LD. AR EXPLAINED THE AUDITORS C ERTIFICATE BY SUBMITTING THAT IN THE FIRST ROW UNDER THE FIRST COLUMN OF ` COST POOL, CHINA SSD (CHINA SEATING SYSTEM) INCURRED COSTS IN RENDERING THE SERVICES MENTIONED IN NEXT COLUMN AND THE BENEFICIARIES OF SUCH SERVICES ARE CHINA SSD MANUFACTURERS , US, ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 15 LCM & RHQ AND ASIA NON-CHINA. SIMILARLY, IN THE THIRD ROW, THE `COST POOL OF APO-CS (ASIA PACIFIC OFFICER CORPORATE S ERVICES) INCURRED THE COSTS; THE SERVICES GENERATED BY SUCH COSTS A RE CORPORATE SERVICES; AND THE BENEFICIARIES OF SUCH SERVICES ARE ASIA P ACIFIC MANUFACTURERS, US, LCM AND RHQ. SIMILARLY, IN THE FOURTH R OW, THE COST POOL OF APO-SSD (ASIA PACIFIC SEATING SYSTEM) INCURRED THE COSTS; THE SERVICES GENERATED ARE SALES AND BUSINESS DEVELO PMENT, PROGRAM MANAGEMENT, ENGINEERING, FINANCE AND HUMAN RESO URCES ETC.; AND THE BENEFICIARIES OF SUCH SERVICES ARE ASIA PACIF IC SSD MANUFACTURERS, US, LCM & RHQ AND ASIA NON-CHINA. THE ` COST POOL IN THE SECOND LAST ROW IS LCM & LEAR RHQ; AND THE BENEFICIARIES ARE ALSO LCM & LEAR RHQ. THE LAST ROW HAS ` COST POOL DESIGNATED AS `DIRECT COST WITH THE BENEFICIARIES, BE ING, CHINA JV MANUFACTURERS. THE ABOVE TABLE CLEARLY DEPICTS THAT VAR IOUS COST POOLS RENDERED SPECTRUM OF SERVICES AND THE BENEFICIARIES ARE ALSO NOT SIMILAR IN ALL OF THEM. SOME COST POOLS RESULTED IN RENDERING SE RVICES TO SOME OF THE LEAR GROUP ENTITIES WHILE SOME OTHERS RENDE RED SERVICES TO ANOTHER SET OF BENEFICIARIES. 17. NOW WE TURN TO THE ALLOCATION OF COSTS MECHANISM GIVE N IN THE AUDITORS CERTIFICATE ON PAGES 614 AND 615 OF THE PAPER B OOK. THE LD. AR EXPLAINED THAT TOTAL COSTS INCURRED BY LEAR SHANGHAI AMOUN TED ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 16 TO 32.71 CRORE RMB, OUT OF WHICH DIRECT COSTS CHARGED TO U S WERE 5.38 CRORE RMB, THEREBY LEAVING 27.33 CRORE RMB THAT HAV E BEEN ALLOCATED TO VARIOUS LEAR GROUP ENTITIES. THE AUDITORS REPOR T ON PAGE 614 OF THE PAPER BOOK RECORDS THAT: ` CERTAIN COSTS CENTRES WILL CONTINUE TO FOLLOW THE CURRENT APPROACH AND ALLOCATE THEIR COSTS ACCORDINGLY BE EITHER THE REVENUE OR ENTITY NUMBER. THE CASE OF THE ASSESSEE IS THAT THE RHQ SERVICES RENDERED BY LEAR SHANG HAI INVOLVED THE USE OF ITS WORK FORCE OF 364 EMPLOYEES, CON SISTING OF STAFF OF 270 AND DEP. HEADERS OF 94. THE COST ALLOCATION HAS BEEN DONE TO THE FIVE MAJOR ZONES, THAT IS, CHINA WOFE, CHINA JV, U.S., LCM & LEAR RHQ AND ASIA NON-CHINA ON THE BASIS OF WORK TIME/EFFORT SPENT BY THESE TWO CATEGORIES OF EMPLOYEES IN REN DERING RHQ SERVICES IN A RATIO GIVEN IN THE SECOND TABLE GIVEN ON TH E SAME PAGE, WHICH IS AS UNDER:- WORK TIME/ EFFORT SPENT (%) CHINA WFOE CHINA JV U.S LCM & LEAR RHQ ASIA NON- CHINA STAFF SPLIT THEIR TIME AS 50% NA NA 50% DEP. HEADERS SPLIT THEIR TIME AS 50% 25% 5% 20% 18. THE KEY FIGURES IN ALL THE COST ALLOCATIONS ARE FOUNDE D ON THE PREMISE THAT 50% OF STAFF AND 20% OF DEP. HEADERS SPENT T IME EXCLUSIVELY FOR ASIA NON-CHINA. THIS DECIPHERS THAT THE BALAN CE FOUR ZONES WERE SERVED BY THE REMAINING 50% AND 80% OF STAFF AND DEP. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 17 HEADERS. ON A SPECIFIC QUERY, AS TO HOW THE PERCENTAGES OF 50% AND 20% OF THE STAFF AND DEP. HEADERS WERE ALLOCATED TO THE AS IA NON- CHINA ZONE, THE LD. AR SUBMITTED THAT IT WAS ON THE BASIS OF THE TIME SPENT BY THEM. HOWEVER, NO RECORD OF ANY SORT WAS PROD UCED TO JUSTIFY THE ALLOCATION OF SUCH HIGH PERCENTAGES OF TIME TO AS IA NON- CHINA ZONE. WHAT TO TALK OF FURNISHING SUCH DETAILS OF TIME S PENT FOR DIFFERENT ZONES BEFORE THE AUTHORITIES BELOW, THIS INFORMATION W AS NOT EVEN SHARED WITH THE AUDITOR, WHO HAS REPORTED IMMEDIATELY A BOVE THE TABLE OF TIME ALLOCATION OF 50% AND 20% ON PAGE 614 OF THE PAPER BOOK THAT: ` ACCORDINGLY TO THE INFORMATION PROVIDED BY THE LEAR RHQ MANAGEMENT, THE PERCENTAGE OF THE COST ALLOCATED TO THE FIVE CATEGORIES, ACCORDINGLY TO THE WORK TIME AND EFFORT SPENT ON THE RELEVANT REGIONS ARE LISTED AS BELOW. THUS, IT IS GRAPHICALLY CLEAR THAT THE ENTIRE EXERCISE OF COST ALLOCATION TO THE RESPECTIVE ZON ES IS BASED ON THE TIME SPENT BY STAFF AND DEP. HEADERS AND TH ERE EXISTS NO BASIS EXCEPT `THE INFORMATION PROVIDED BY THE LEAR RHQ MANAGEMENT . SINCE THE FOUNDATIONAL FIGURES OF ALLOCATION OF COSTS TO ASIA-NON CHINA, THAT HAVE BEEN SUB-ALLOCATED TO THE ASSESSEE IN INDIA, IS ITSELF OPEN TO QUESTION AND IS NOT BASED ON ANY AUTH ENTIC DOCUMENT/EVIDENCE, WE ARE UNABLE TO APPRECIATE AS TO HOW S UCH COST ALLOCATION CAN BE CONSIDERED AS PROPER. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 18 19. IT IS IN THE ABOVE MANNER THAT COSTS WITH CODE 31 H AVE BEEN ALLOCATED AT 37% TO ASIA NON-CHINA REGION BY TAKING STAFF COSTS AT 29% (50% OF 58%) AND DEP. HEADER COSTS AT 8% (20% OF 42%). COSTS UNDER CODE 61 HAVE BEEN ALLOCATED ACCORDINGLY AT 47 % TO ASIA- NON CHINA REGION. COSTS UNDER CODES 81, 91, 42 AND 54 HAVE BEEN ALLOCATED AT 42%, 41%, 42% AND 38% TO ASIA-NON CHINA REGION . AVERAGE OF SUCH ALLOCATION OF COSTS UNDER ALL THE ABOVE COD ES COMES TO MORE THAN 41%, WHICH MEANS THAT AROUND 41% OF TOTAL CO STS HAVE BEEN ALLOCATED ONLY TO ASIA NON-CHINA ZONE, WHILE ALL OTHER FO UR ZONES SHARED 59% OF COSTS IN A COMBINED MANNER, WITH AVE RAGE OF LESS THAN 15% EACH. THE TRAVESTY OF COST ALLOCATION CAN BE G AUGED FROM THE FACT THAT ASIA NON-CHINA ZONE HAS BEEN SADDLED WITH COSTS AT A LITTLE LESS THAN THE COSTS SHARED BY THREE ZONES TAKEN TOGE THER. SUCH A COST ALLOCATION MECHANISM RAISES A SERIOUS QUESTION MA RK ON ITS VERACITY. 20. AT THIS JUNCTURE, IT IS PERTINENT TO ACCENTUATE THAT THE BENCHMARKING REQUIRES NOT ONLY A MARK-UP IN THE INTERNATIONA L TRANSACTION WHICH IS COMPARABLE WITH UNCONTROLLED TRANSACTIONS B UT ALSO AN ACCURATE COST ALLOCATION. SIMPLY A COMPARABLE MARK-UP , AS IS 5% IN THE INSTANT CASE, DOES NOT MAKE THE INTERNATIONAL TRANSAC TION AT ALP. COST ALLOCATION ALSO PLAYS A PIVOTAL ROLE. IF THE COST ALLOCA TION IS ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 19 NOT CORRECT, THE COMPARABLE MARK-UP HARDLY PUSHES THE ENV ELOPE. IT CAN BE UNDERSTOOD WITH THE HELP OF AN EXAMPLE. SUPPOSE, A FOREIGN/AE WHICH IS RENDERING SERVICES TO FIVE ENTITIES WORLDWID E, INCLUDING THE ONE IN INDIA, HAS INCURRED COSTS OF 1000 US $ ON WHICH IT ADDS 5% MARK-UP. FURTHER SUPPOSE THAT ALL THE FIVE ENTITIES AR E EQUALLY SERVED. IN SUCH A SITUATION, THE INDIAN ENTITY SHOULD BE CHARGED 200US$ PLUS 5% MARK-UP OF 10 US$. SUPPOSE THE FOREIGN/AE ACTUALLY ALLOCATES 500 US$ PLUS 5% MARK UP. UNDE R THE TNMM, AS HAS BEEN APPLIED BY THE ASSESSEE, THOUGH THE 5% PLI WILL SHOW THE INTERNATIONAL TRANSACTION AT ALP, BUT THE REALITY OF THE FACT IS THAT THE INDIAN ENTITY HAS BEEN CHARGED 300 US$ EXTRA , RESULTING INTO SIPHONING AWAY OF PROFIT FROM THE INDIAN TAX NET TO THIS EXTENT. UNLESS THE COST ALLOCATION IS DONE CORRECTLY, THE MERE COMPARISON OF PROFIT RATE FROM THE INTERNATIONAL TRANSACTION WITH THAT OF COMPARABLES WILL BE AN EXERCISE IN FUTILITY. THAT IS THE RE ASON FOR WHICH ACCURACY HAS PRIMACY OVER THE RELATIVE EASINESS IN AN EXERCISE OF FINDING OUT A LEAST COMPLEX ENTITY. 21. THE ASSESSEE HAS TRIED TO SHOW THE INTERNATIONAL TRAN SACTION AT ALP WITH THE FOREIGN/AE AS A TESTED PARTY BY SHOWING THAT THE PLI OF 5% IN THE HANDS OF LEAR SHANGHAI IS BETTER THAN AROUND 4 .5% OF COMPARABLES. THIS METHODOLOGY OVERLOOKS PROPER ALLOCATION OF THE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 20 COST BASE. WE HAVE NOTED ABOVE THAT THERE IS NO RELIABLE R ATIONALE OF THE COST ALLOCATION TO THE ASIA NON-CHINA ZONE AT 37% UNDER THE CONCERNED CODE. THE PERCENTAGES OF 50% OF STAFF AND 20 % OF DEP. HEADERS, WHICH FORM THE BASIS FOR THE COST ALLOCATION, ARE JU ST THE WORDS OF MOUTH OF THE MANAGEMENT DE HORS A PROPER SUBSTANTIATION BY ANY EVIDENCE CAPABLE OF EXAMINATION. THE IMPROPER COS T ALLOCATION HAS JEOPARDIZED THE BENCHMARKING OF THE TRANSACTION RESULTING INTO PROFIT SHIFTING FROM INDIA BY BOOKING HIGHER EXP ENSES AND THUS TAKING AWAY THE RIGHTFUL TAX DUE TO THE INDIAN EXCHEQ UER. 22. THE AUDITORS CERTIFICATE, WHICH IS THE SELF CLAIMED EVID ENCE OF PROPER COST ALLOCATION, IS ITSELF RIDDLED WITH SEVERAL DISCLAIMER S. PARA 1.1 WITH THE `LIMITATION HEADING STARTS BY STATING THAT: ` THIS STUDY RELIES UPON SUBSTANTIAL INPUT AND INFORMATION PROVIDED BY LEAR RH Q. EY CHINA ASSUMES NO RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF SUCH INFORMATION . EY CHINA IS THE AUDITOR FIRM WHICH HAS ISSUED COST ALLOCATION CERTIFICATE. IT IS FURTHER PERTINE NT TO NOTE THAT THE AUDITOR HAS MADE THE FOLLOWING DISCLAIMERS READIN G AS UNDER: LEAR RHQ HAS REPRESENTED, ON BEHALF OF ITSELF AND ITS AFFILIATED COMPANIES, THAT SUCH FACTS, ASSUMPTIONS AND REPRESENTATIVES ARE TRUE, CORRECT AND COMPLETE . HOWEVER, EY CHINA HAS NOT INDEPENDENTLY AUDITED OR OTHERWISE VERIFIED ANY OF THESE FACTS, ASSUMPTIONS OR REPRESENTATION. A MISSTATEMENT OR OMISSION OF ANY FACT OR A CHANGE OR AMENDMENT IN ANY OF THE FACTS, ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 21 ASSUMPTIONS OR REPRESENTATIONS WE HAVE RELIED UPON MAY REQUIRE A MODIFICATION OF ALL OR PART OF THIS ADVICE. IN ADD ITION, OUR ADVICE IS BASED ON SUCH FACTS, ASSUMPTIONS AND REPRESENTATIONS AS REPRESENTED TO US AS OF THE DATE OF THIS PLANNING REPORT. ANY CHANGES IN THE FACTS, ASSUMPTIONS OR REPRESENTATIONS UPON WHICH WE HAVE RELIED MAY REQUIRE A MODIFICATION OF ALL OR PART OF THIS ADVICE. OUR ADVICE ASSUM ES THAT THE DOCUMENTS ARE LEGALLY VALID AND ENFORCEABLE ACCORDIN G TO THEIR TERMS. WE HAVE NO RESPONSIBILITY TO UPDATE OUR ADVIC E FOR EVENTS, CIRCUMSTANCES OR CHANGES IN ANY OF THE FACTS, ASSUMPTIONS, REPRESENTATIONS OR CHANGES IN APPLICABLE LAW OR AUTHORITIES OCCURRING AFTER THIS DATE. WHILE EY CHINA BELIEVES THAT THE CONCLUSIONS IN THIS REPORT ARE SUPPORTABLE, THERE CAN BE NO GUARANTEE THAT TAX AUTHORITIES WILL AGREE. ... . MOREOVER, THE REPORT CONTAINS INFORMATION OBTAINED FROM THIRD PARTY SOURCES SUCH AS INFORMATION DATABASES, FILED ANNUAL ACCOUNTS, AND INDUSTRY RELEVANT PUBLICATIONS. ALTHOUGH EY CHINA USES ITS EXPERIENCE TO ASSESS THE RELIABILITY AND SUITABILITY OF SUCH THIRD PARTY DATA AS FAR AS IS REASONABLY POSSIBLE, WE CANNOT GUARANTEE ITS ACCURACY. SINCE THE WORK PERFORMED HEREIN DOES NOT CONSTITUTE AN ATTEST ENGAGEMENT IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITED STANDARDS, THE ANALYSES AND A NY RESULTING REPORTS HAVE BEEN PREPARED SOLELY FOR THE PURPOS E STATED HEREIN. 23. THE ABOVE REMARKS OF THE AUDITOR ARE GOOD ENOU GH TO PROVE THE POINT THAT THE AUDITOR HAS DONE COST ALLOCATION ONLY ON THE STR ENGTH OF REPRESENTATIONS MADE BY LEAR RHQ AND ITS AFFILIATED COMPANIES. THE AUDITOR HAS NOT INDEPENDENTLY AUDITED OR OTHERWISE VERIFIED ANY OF THESE FACTS, ASSUMPTIONS OR REPRESENTATION. AND FURTHER, EVEN THE AUDITOR CANNOT GUARANTEE ITS ACCURACY. 24. WE HAVE REPRODUCED ABOVE 16 SERVICES, CLASSIFIED AS RHQ SERVICES, RENDERED BY LEAR SHANGHAI AS PER THE AGREEMEN T. WHEN WE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 22 EXAMINE THE NATURE OF THE SERVICES RENDERED BY LEAR SHANG HAI, TABULATED ABOVE FROM THE AGREEMENT, IT CAN BE SEEN THAT THE SERVICES AT SL.NO.1 TO 3, 4, 6, 7, 8, 10, 11, 14 AND 15 ARE IN THE NATURE OF CONSULTING SERVICES THEREBY LEAVING FIVE NON-CONSULTING SER VICES. TWO OUT OF SUCH FIVE SERVICES GIVEN AT SL. NOS. 5 AND 16 A RE RELATING TO ACCESS TO LEAR COST AND TECHNOLOGY OPTIMIZATION SERVIC ES AND `ACCESS TO LEAR IT SYSTEMS AND SERVICES. LEAR SHANGHA I IS NOT OWNING ANY GLOBAL IT SYSTEM, WHICH IMPLIES THAT THE SAME IS O WNED BY SOME OTHER MAJOR LEAR GROUP ENTITY. GIVING THE ASSESSEE AN `ACCESS TO LEAR IT SYSTEMS WOULD THUS MEAN THAT LEAR SH ANGHAI FIRST GOT ACCESS TO THE SAME BY PAYING SOME CONSIDERATION. THE SAME HOLDS GOOD FOR ALLOWING THE ASSESSEE AN ACCESS TO LEAR CO ST AND TECHNOLOGY OPTIMIZATION. IN ORDER TO VERIFY AS TO WHAT WER E THE COSTS INCURRED BY THE ASSESSEE FOR AVAILING ACCESS TO THE LEAR IT SYSTEMS AND LEAR COST AND TECHNOLOGY OPTIMIZATION, THE LD. A R WAS ASKED TO PLACE ON RECORD THE ANNUAL ACCOUNTS OF LEAR SHAN GHAI. ON PERUSAL OF THE INCOME AND PROFIT APPROPRIATION STATEMENT OF LEAR SHANGHAI, IT CAN BE SEEN THAT THERE IS A COMPOSITE FIGURE OF COST OF SALES AT RS.15,87,01,208/-. THERE IS NO NOTE APPENDED T O THE COST OF SALES WHICH COULD SHOW THE COST AT WHICH LEAR SHANGHAI OBTAIN ED ACCESS TO THE LEAR IT SYSTEMS ETC., FOR PROVIDING, IN TURN , ACCESS TO ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 23 LEAR ENTITIES INCLUDING THE ASSESSEE. ANOTHER WAY TO EXTRACT TH IS INFORMATION WAS TO ASCERTAIN THE RELATED PARTY TRANSACTIONS OF LEAR SHANGHAI WITH THE OTHER GROUP ENTITIES. THE LD. AR EXPRESS ED HIS INABILITY TO PROVIDE ANY SUCH DETAILS. ON A POINTED QUERY, THE LD . AR CATEGORICALLY SUBMITTED THAT LEAR SHANGHAI DID NOT PAY ANY AMO UNT TO ANY LEAR GROUP ENTITY AND ALL THE COSTS WERE INCURRED BY ITSE LF ALONE. IF THAT IS THE CASE, THEN THERE CAN BE TWO THINGS. FIRST, THAT SU CH AN ACCESS WAS NOT PROVIDED AT ALL AND IT WAS WRONGLY MENTIONED IN THE AGREEMENT FOR WHICH A COMPOSITE CHARGE WAS MADE OR IN A LTERNATE THAT THE ACCESS WAS OBTAINED AND PROVIDED BUT THE CONSIDERATIO N PAID FOR GETTING SUCH AN ACCESS WAS CLUBBED WITH OTHER COSTS AN D NOT PROPERLY ALLOCATED. 25. ON AN OVERVIEW OF THE MATTER, IT IS PALPABLE THAT ASCER TAINING THE VALUE OF INTERNATIONAL TRANSACTION OF RHQ SERVICES WITH THE H ELP OF COST ALLOCATION, WHICH IS A FIRST STEP IN THE PROCESS OF DETE RMINING THE PLI, BY TREATING LEAR SHANGHAI AS A TESTED PARTY, IS SO CO MPLEX AND TEDIOUS INVOLVING GATHERING INFORMATION FROM SO MANY CO ST POOLS AND THEN ITS ALLOCATION BETWEEN SEVERAL GROUP ENTITIES HAS BEEN DONE IN AN ARBITRARY AND UNSUBSTANTIATED MANNER, WHICH IS R ATHER INACCURATE. THIS MAKES LEAR SHANGHAI AS A COMPLEX ENTITY VIS-A-VIS THE ASSESSEE. ON THE OTHER HAND, THE COMPUTATION OF THE VA LUE OF THE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 24 INTERNATIONAL TRANSACTION BY TREATING THE ASSESSEE ITSELF AS A TESTE D PARTY IS MORE ACCURATE AND ALSO RELATIVELY EASY SINCE A PREC ISE AND STRAIGHT FIGURE OF THE RHQ FEE CHARGED BY LEAR SHANGHAI IS AVAILABLE, WHICH CAN BE ADOPTED FOR THE ALP DETERMINATION UNDER A SUITA BLE METHOD. EX CONSEQUENTI , IT IS THE INDIAN ENTITY, I.E. THE ASSESSEE WHICH IS LEAST COMPLEX IN THE TRANSACTION OF RHQ SERVICES. WE, THER EFORE, ACCORD OUR IMPRIMATUR TO THE VIEW POINT OF THE LOWER AUTHO RITIES THAT THE ASSESSEE WRONGLY SELECTED LEAR SHANGHAI AS THE TESTED PA RTY. 26. WE HAVE NOTED ABOVE THAT A TESTED PARTY IS THE ONE WHICH IS LEAST COMPLEX IN THE TRANSACTION AND FOR WHOM SUITABLE COMPARA BLES ARE AVAILABLE. HAVING SEEN THAT FOREIGN/AE IS NOT A LEAST COMP LEX ENTITY TO THE TRANSACTION, NOW WE PROCEED TO THE SECOND ASPEC T OF EXAMINING IF THE CORRECT COMPARABLES WERE CHOSEN. 27. THE ASSESSEE, AFTER CHOOSING LEAR SHANGHAI, CHINA AS THE TESTED PARTY, WENT ON TO SELECT THREE COMPARABLES, NAMELY, B USINESS BRAIN SHOWA-OTA-INC; S.POOL INC; AND TEMP HOLDINGS COMPANY LTD. ALL THE THREE COMPANIES CHOSEN AS COMPARABLE ARE LOCATE D IN JAPAN AS AGAINST LEAR SHANGHAI LOCATED IN CHINA. WE HAVE TABULATED ABOVE THE NATURE OF INTERNATIONAL TRANSACTION OF RENDERING RHQ SERVICES. THE FIRST COMPANY TAKEN AS COMPARABLE IS BUSINE SS BRAIN SHOWA OTA INC., WHOSE CONSOLIDATED REPORT HAS BEEN PLAC ED AT ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 25 PAGE 2247 ONWARDS OF THE PAPER BOOK. THIS COMPANY SITU ATED IN TOKYO, JAPAN HAS SHOWN ITS NATURE OF BUSINESS UNDER THE NOMENCLATURE OF BUSINESS SERVICES. HOWEVER, THE DETAILS O F ITS ACTIVITIES HAVE BEEN SET OUT AT PAGE 2249 OF THE PAPER BOOK GIVING CERTAIN CODES UNDER WHICH IT RENDERED SERVICES - CODE 737 REPRESENTS `COMPUTER PROGRAMMING, DATA PROCESSING AND OTHER COMPUTE R RELATED SERVICES; CODE 7379 REPRESENTS `COMPUTER RELATED SERVICE S, NOT ELSEWHERE CLASSIFIED; CODE 6209 COVERS `OTHER INFORMATION TECHNOLOGY AND COMPUTER SERVICE ACTIVITIES; CODE 5415 COVER S `COMPUTER SYSTEMS DESIGN AND RELATED SERVICES; CODE 54151 9 REPRESENTS `OTHER COMPUTED RELATED SERVICES. ON GOING TH ROUGH THE NATURE OF SERVICES PROVIDED BY THIS COMPANY, IT IS CLEAR THAT THESE ARE IN THE NATURE OF IT AND ITES. AS AGAINST THAT, THE INTERNATIONA L TRANSACTION UNDER CONSIDERATION IS OF RHQ SERVICES AND THERE IS A SEPARATE INTERNATIONAL TRANSACTION OF `IT SERVICES OF THE ASS ESSEE WITH VALUE OF RS.2,96,16,174/- THAT HAS BEEN ACCEPTED BY THE TPO AT ALP. THUS, THIS COMPANY CHOSEN FROM JAPAN IS FUNCTIONALLY DISSIMILAR. 28. THE NEXT COMPANY CHOSEN IS S-POOL INC. A COPY OF THE ANNUAL REPORT OF THIS COMPANY HAS BEEN PLACED AT PAGE 233 0 ONWARDS. THE BROAD NATURE OF ITS SERVICES HAS BEEN GIVEN AS BUSIN ESS ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 26 SERVICES. HOWEVER THE CODES SHOW THAT THE PRECISE NATURE OF SERVICES AS GIVEN ON PAGE 2332 IS QUITE DIFFERENT FROM THE RHQ SERVICES AVAILED BY THE ASSESSEE. CODE NO.736 IS `PERSON NEL SUPPLY SERVICES; CODE 7361 IS `EMPLOYMENT AGENCIES; CODE 7810 IS `ACTIVITIES OF EMPLOYMENT PLACEMENT AGENCIES; CODE 5613 IS `EMPLOYMENT SERVICES; AND CODE 561311 IS `EMPLOYMENT PLACEMENT AGENCIES. IT HAS FURTHER BEEN MENTIONED THAT CO MPANY IS MAINLY ENGAGED IN THE PERSONNEL OUTSOURCING BUSINESS AS WE LL AS THE MOBILE MARKETING BUSINESS. THERE IS HARDLY ANY NEED TO EMP HASIZE THAT THE SERVICES RENDERED BY THIS COMPANY ARE MILES APART F ROM THE RHQ SERVICES IN QUESTION. 29. THE LAST COMPANY CHOSEN AS COMPARABLE IS TEMP H OLDINGS CO., WHOSE REPORT HAS BEEN PLACED AT PAGE 2418 OF THE PAPER BOOK. HERE AGAIN UNDER THE BROAD HEADING OF BUSINESS SERVICE, COD E NO.736 SHOWS `PERSONNEL SUPPLY SERVICES; CODE 7363 INDICATES `HELP SUPPLY SERVICES; CODE 7820 IS OF `TEMPORARY EMPLOYMENT AGENCY ACTIVITIES; CODE 5613 IS OF `EMPLOYMENT SERVICES; AND CODE 561320 IS OF `TEMPORARY HELP SERVICES. IT CLEARLY DELINE ATES THAT THIS COMPANY SITUATED IN TOKYO, JAPAN IS OF NO MATCH TO THE L EAR SHANGHAI RENDERING RHQ SERVICES. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 27 30. ON A PERTINENT QUESTION AS TO WHY NO COMPARABLE FROM CHINA WAS SELECTED AND ALL THE THREE COMPANIES CHOSEN WERE FROM JAPAN AS AGAINST LEAR SHANGHAI SITUATED IN CHINA, THE LD. AR SUBMITTED THA T NO SUITABLE COMPARABLE WAS FOUND FROM CHINA AND FURTHER SUC H A COURSE OF ACTION CHOSEN BY THE ASSESSEE IS PROPER AND PERMISSIB LE. IT GOES WITHOUT SAYING THAT LOCATION OF COMPARABLES PLAYS A SIGNIFICANT ROLE IN MAKING COMPARISON. PAYMENT FOR AVAILING SERVICES IN INDIA CAN NOT BE COMPARED WITH THAT PAID BY A COMPANY AVAILING SIMILAR SERVICES SITUATED IN JAPAN OR USA OR UK. MOREOVER, THE INDIAN TRAN SFER PRICING REGULATIONS DO NOT ADMIT OF SUCH A POSITION AND ATTACH D UE IMPORTANCE TO GEOGRAPHICAL LOCATION OF COMPARABLES AS IS MAN IFEST FROM RULE 10B(2). IT PROVIDES THAT THE COMPARABLE OF AN INTE RNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO FOUR SUB-CLAUSES AND CLAUSE (D) STATES : CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COS TS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LE VEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL . ON GOING THROUGH RULE 10B(2), WHICH DEALS WITH THE DETERMINATIO N OF ALP UNDER SECTION 92C, IT GETS ABSOLUTELY EVIDENT THAT THE CONDITIO N ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 28 PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTION OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION, IS AN IMPORTANT FACTOR TO JUDGE AN UNCONTROLLED TRANSACTION. THUS, IT IS OVERT THAT THE INDIAN TRANSFER PRICING REGULATIONS ATTACH NECESS ARY IMPORTANCE TO GEOGRAPHICAL LOCATION OF THE COMPARABLE ENTITIES VIS-A- VIS THE TRANSACTION UNDER CONSIDERATION. 31. IT IS CLEAR THAT NOT ONLY ALL THE THREE COMPARABLES CHO SEN BY THE ASSESSEE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF R HQ SERVICES ARE LOCATED AT DIFFERENT GEOGRAPHICAL LOCATIONS BUT EV EN THEIR FUNCTIONAL PROFILES ALSO DO NOT MATCH WITH THE RHQ SERVICES. 32. TO SUM UP, LEAR SHANGHAI IS NEITHER A LEAST COMPLEX ENTITY TO THE TRANSACTION NOR IS THE ONE FOR WHOM THE SUITABLE COMPARAB LES ARE AVAILABLE FROM CHINA AS PER THE ASSESSEES OWN ADMISSION. WE, THEREFORE, APPROVE THE VIEW OF THE AUTHORITIES BELOW IN REJE CTING LEAR SHANGHAI AS THE TESTED PARTY FOR THE INTERNATIONAL TRANSACTION OF RECEIPT OF RHQ SERVICES. 33. REVERTING TO THIS INTERNATIONAL TRANSACTION IN TOTALITY, WE H AVE FOUND ABOVE THAT THE RHQ SERVICES WERE ACTUALLY AVAILED A ND HENCE NIL ALP DETERMINATION BY THE TPO IS INCORRECT. INSOFAR AS THE BENCHMARKING OF THIS TRANSACTION IS CONCERNED, THE ASSESSEE BENCHMARKED IT BY TAKING FOREIGN/AE AS TESTED PARTY, WHICH HAS ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 29 BEEN FOUND ABOVE TO BE INCORRECT. THUS, THE INTERNATIONAL TRANSACTION OF RECEIPT OF RHQ SERVICES IS REQUIRED TO BE BENCHMARKED BY TAKING THE ASSESSEE AS A TESTED PARTY. WE, THEREFORE, SET-AS IDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR RE- DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF RECEIPT OF RHQ SERVICES UNDER THE MOST APPROPRIATE METHOD BY TAKING THE ASSESSEE AS A TESTED PARTY. NEEDLESS TO SAY, THE ASSESSE E WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN THIS REGARD. B. PAYMENT OF GLOBAL SOFTWARE CHARGES 34. THE NEXT INTERNATIONAL TRANSACTION IN WHICH TRANSFER P RICING ADDITION HAS BEEN MADE IS `PAYMENT OF GLOBAL SOFTWARE CHARGE S AMOUNTING TO RS.5,27,44,000/-. THE TPO REQUIRED THE ASSE SSEE TO FURNISH THE EVIDENCE OF RECEIPT OF SERVICES UNDER THIS TRAN SACTION AND ALSO THE BENEFIT DERIVED THEREFROM. APPLYING THE BENEFIT TEST, THE TPO HELD THAT NO INDEPENDENT PARTY WOULD HAVE PAID FOR SUCH SERVICES. DETERMINING NIL ALP, THE TPO PROPOSED TRANSFER PR ICING ADJUSTMENT OF RS.5.27 CRORE. THE ASSESSEE ASSAILED SUC H ADDITION BEFORE THE DRP BUT WITHOUT ANY SUCCESS. 35. IT IS OBSERVED THAT THE TPO PROPOSED SUCH ADJUSTME NT BY RELYING ON THE VIEW TAKEN BY HIM ON THIS VERY ISSUE IN EARLIE R YEARS. THE LD. AR SUBMITTED THAT IT IS A RECURRING ISSUE WHICH CAME UP ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 30 BEFORE THE TRIBUNAL FOR THE FIRST TIME FOR THE ASSESSMENT YE ARS 2005- 06, 2006-07 & 2008-09, FOR WHICH A COMBINED ORDER WAS PASSED. THEN, IT AGAIN CAME UP FOR THE ASSESSMENT YEAR 2007-08. THE LD. AR TOOK US THROUGH THE ORDER PASSED BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 2007-08, A COPY OF WHICH HAS BEEN PLACED AT PAGE 101 ONWARDS OF THE PAPER BOOK. RELEVANT DISCUSSION HAS BEEN MADE AT PARA 2.2 ONWARDS OF THE ORDER AND EVENTUALLY THE MATTER HAS BEEN SENT BACK IN LINE WITH THE VIEW TAKEN BY THE TRIBUNAL IN ITS ORDER FOR EARLIER YEARS, NAMELY, 2005-06, 2006-07 & 2008-09. BOTH THE SIDES AR E IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND A RE SIMILAR TO THOSE OF EARLIER YEARS. RESPECTFULLY FOLLOWING THE PRECED ENTS, WE SET-ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR RE-DECIDING IT IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE TRIBUNAL IN ITS AFORENOTED EARLIER ORDER S. C. MANUFACTRURING ACTIVITY SEGMENT 36. THE AO MADE TRANSFER PRICING ADDITION OF RS.82,34,00, 000/- UNDER THE MANUFACTURING ACTIVITY SEGMENT. THE ASSESSEE, INTER ALIA, HAD THREE INTERNATIONAL TRANSACTIONS VIZ., `EXPORT OF SEATING COMPONENTS AMOUNTING TO RS.47,63,29,917/-; `IMPORT OF CK D COMPONENTS AMOUNTING TO RS.66,09,76,639/-; AND `IMPORT OF RAW MATERIALS AND COMPONENTS AMOUNTING TO RS.27,62,33,311/-, ALL OF ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 31 WHICH WERE BENCHMARKED BY THE ASSESSEE INDEPENDENTLY. TH E ASSESSEES TOTAL REVENUE FROM OPERATIONS, INCLUDING PROVISION OF SERVICES, STOOD AT RS.1942.19 CRORE. THOUGH THE ACCOU NTS WERE MAINTAINED IN A COMPOSITE MANNER BUT FOR THE PURPOSES OF BENCHMARKING THIS SET OF TRANSACTIONS, THE ASSESSEE DIVIDED ITS TOTAL BUSINESS INTO FOUR SEGMENTS VIZ., EXPORT OF SEATING COMPON ENTS; IMPORT OF CKD UNITS; OTHER MANUFACTURING; AND PROVISION OF SERVICES. THERE IS NO DISPUTE ON THE INTERNATIONAL TRANSACTIO N OF `PROVISION OF SERVICES WHICH HAS BEEN ACCEPTED BY THE T PO AT ALP. TO BE MORE SPECIFIC, THE ASSESSEE AGGREGATED THE INTERNATION AL TRANSACTION OF `EXPORT OF SEATING COMPONENTS WITH A PART OF THE INTERNATIONAL TRANSACTION OF `IMPORT OF RAW MATERIAL AND COMPO NENTS AND DETERMINED ITS ALP AS ONE UNIT. THE REMAINING PART OF THE INTERNATIONAL TRANSACTION OF `IMPORT OF RAW MATERIAL AND COMP ONENTS WAS TAKEN TO `OTHER MANUFACTURING SEGMENT, WHICH DOES NOT HAVE ANY ASSOCIATED ENTERPRISE (AE) TRANSACTIONS AND HENCE NO BENCHMARKING OF THIS SEGMENT WAS NECESSITATED. THE THIRD INTERNATIONAL TRANSACTION OF `IMPORT OF CKD COMPONENTS WAS A LSO SEPARATELY BENCHMARKED. THE ALP DETERMINATION WAS DONE BY THE ASSESSEE APPLYING THE TNMM AS THE MOST APPROPRIATE METHOD. IN THE SEGMENTAL APPROACH SO ADOPTED FOR SHOWING THESE INTERNATIONA L ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 32 TRANSACTIONS AT THE ALP, THE ASSESSEE WORKED OUT THE REVENU ES, THE OPERATING PROFIT AND OP/TC OF THE THREE SEGMENTS AS UNDER: DESCRIPTION REVENUE OPERATING P ROFIT OP/TC (IN CR ORE) (IN CRORE) EXPORT OF SEATING COMPONENTS 47.6 7.25 17.80% IMPORT OF CKD UNITS 113.23 4.7 4 4.37% OTHER MANUFACTURING 1701.69 0.78 0.05% 37. WITH THE ABOVE CALCULATED PLIS AT 17.80% AND 4.37% F ROM THE TRANSACTIONS REQUIRING THE ALP DETERMINATION, THE ASSESSEE CHOS E CERTAIN COMPARABLES AND DECLARED THE INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION AT ALP. THE TPO DID NOT ACCEPT THE SPLITTING UP OF ACCOUNTS FOR THE PURPOSE OF BENCHMARKING BY OBSERVING TH AT SEVERAL QUESTIONS GOING INTO THE VERACITY OF THE SEGMENTAL APPROACH W ERE UNANSWERED. HE REJECTED THE SEGREGATION DONE BY THE ASSE SSEE. BY TAKING THE OVERALL MANUFACTURING ACTIVITY AS ONE UNIT, HE COMPUTE D ASSESSEES PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO OPERATING COST (OP/OC) AT 0.69%. CERTAIN COMPARABLES WERE SELECTED WHOSE ADJUSTED MARGIN WAS COMPUTED AT 5.71%. AS A RESULT OF THAT, THE TRANSFER PRICING ADJUSTMENT OF RS.82,34,00,000/ - WAS RECOMMENDED. THE ASSESSEE REMAINED UNSUCCESSFUL BEFO RE THE DISPUTE RESOLUTION PANEL (DRP), WHICH LED TO THE MAKING OF TRA NSFER ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 33 PRICING ADDITION OF RS.82.34 CRORE IN THE IMPUGNED ORDER ON THIS SCORE. AGGRIEVED THEREBY, THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 38. THE ASSESSEE IS ENGAGED IN MANUFACTURING AND ASSEMB LING OF AUTOMOTIVE SEATING AND ELECTRICAL SYSTEMS. THE ASSESSEE MAIN TAINED A COMPOSITE SET OF BOOKS OF ACCOUNT WITH ONE PROFIT AND LOSS AC COUNT. ITS TOTAL REVENUE FOR THE YEAR STOOD AT RS. 1942.19 CRORE, OUT OF WHICH THE MAJOR PORTION (MORE THAN 95%) WAS CONTRIBUTED BY THE MANUFACTURING ACTIVITY AT RS.1862.52 CRORE. OUT OF SUCH MANUFACTURING REVENUE, THE ASSESSEE MADE SALES TO NON-AS SOCIATED ENTERPRISES UNDER THE HEAD OTHER MANUFACTURING AT RS.17 01.69 CRORE, WHICH IS MORE THAN 91% OF THE TOTAL SALES, MEANING T HEREBY THAT THE SALES TO ASSOCIATED ENTERPRISES ARE LESS THAN 4%. I T IS ONLY FOR THE PURPOSE OF BENCHMARKING THAT THE ASSESSEE DIVIDED ITS FINANCIALS INTO SEPARATE SEGMENTS, INTER ALIA, EXPORT OF SEATING COMPONENTS (HEREINAFTER CALLED SC-AE), IMPORT OF CDK UNITS (HEREINAFTER CALLED CDK-AE) AND OTHER MANUFACTURING OF DOM ESTIC SALES ONLY TO NON-ASSOCIATED ENTERPRISES (HEREINAFTER CALLED DS- NONAE) AS REPRODUCED ON PAGES 2 TO 4 OF THE TPOS ORDE R UNDER: ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 34 PARTICULARS EXPORT SEATING COMPONENTS IMPORT OF CKD UNITS OTHER MANUFACTU RING NON AES PROVISION OF SERVICES TOTAL OPERATING INCOME REVENUE FROM OPERATIONS (GROSS) 47.6 113.23 1701.69 79.67 1942.19 OTHER INCOME 0.38 0.42 0.80 TOTAL OPERATING INCOME (A) 47.98 113.23. 1701.69 80.09 1942.99 OPERATING EXPENSES EXCISE DUTY 0.00 13.14 186.23 - 199.37 COST OF RAW MATERIAL AND COMPONENTS CONSUMED 28.87 86.20 1182.00 - 1297.07 INCREASE/DECREASE IN INVENTORIES OF FINISHED GOODS AND WORK-IN- PROGRESS 0.09 0.13 1.16 - 1.12 EMPLOYEE BENEFITS EXPENSE 4.43 1.85 135.05 38.36 179.69 OTHER EXPENSES 2.65 1.82 80.98 16.16 101.61 DEPRECIATION AND AMORTISATION EXPENSES 1.98 0.65 30.62 3.61 36.86 BANK CHARGES 0.05 0.01 0.39 0.05 0.50 TOTAL 38.07 103.54 1616.43 58.18 1816.22 ALLOCATION OF COMMON EXPENSES ALLOCATION OF COMMON EXPENSES (SALARY) 0.15 0.32 4.92 0.26 5.66 ALLOCATION OF COMMON EXPENSES (OTHER THAN SALARIES) 0.77 1.61 24.44 1.28 28.11 ALLOCATION OF ROYALTY 1.89 3.98 60.34 - 66.22 SUB TOTAL 40.89 109.46 1706.13 59.73 1916.21 LESS :NON-OPERATING EXPENSES CSR EXPENSES 0.01 0.03 0.43 0.02 0.49 FIXED ASSETS WRITTEN OFF 0.32 0.00 0.02 -0.01 0.33 EXCHANGE DIFFERENCE, NET -0.18 0.94 4.77 -0.30 5.23 TOTAL OPERATING EXPENSES (B) 40.73 108.49 1700.91 60.02 1910.16 OPERATING PROFIT (=A-B) 7.25 4.74 0.78 20.07 32.83 OPERATING PROFIT/OPERATING INCOME (OP/SALES) (D=C/A) 15.11 4.19 0.05 25.06 1.69 OPERATING PROFIT/TOTAL COST (OP/TC) (E-C/B) 17.80 4.37 0.05 33.44 1.72 ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 35 39. THAT IS HOW, THE ASSESSEE WORKED OUT THE AMOUNT OF OPERATING PROFIT (PLI) OF RS.7.25 CRORE (17.80%) IN SC-AE SEGMENT; RS.4.74 CRORE (4.37%) IN CKD-AE SEGMENT; AND RS.0.78 CRORE ( 0.05%) IN DS-NONAE SEGMENT. WE NEED TO ASCERTAIN IF THE ASSESSEE D REW SEGMENTAL PROFITS CORRECTLY OR THE AUTHORITIES BELOW WERE JUSTIFIE D IN JETTISONING THE ASSESSEES POINT OF VIEW AND DETERMINING THE A LP OF THE THREE INTERNATIONAL TRANSACTIONS UNDER THE OVERALL MANUFACTU RING ACTIVITY SEGMENT AS ONE UNIT. 40. OPERATING REVENUES IN THE ABOVE TABLE HAVE BEEN GIVEN UNDER THE ABOVE THREE SEGMENTS PERTAINING TO THE MANUFACTURING ACTIVITY AT GROSS AS WELL AS NET OF EXCISE DUTY LEVELS. ON A SPECIFIC Q UERY, THE LD. AR SUBMITTED THAT THE ALLOCATION OF COSTS TO THE THREE SEGMENTS W AS DONE BY BOOKING DIRECT COSTS TO THE RELATED SEGMENTS AND COMMON COSTS BY WAY OF ALLOCATION IN THE RATIO OF THEIR REVENUES ON NET BASIS. NET REVENUE FROM THE SC-AE SEGMENT STANDS AT RS.47.60 CRO RE; CKD-AE SEGMENT AT RS.100.09 CRORE; AND DS-NONAE SEGME NT AT RS.1515.46 CRORE. THE FIRST MAJOR ITEM IN THE ABOVE TABLE UNDER THE HEAD OPERATING EXPENSE IS `COST OF RAW MATERIAL AND CO MPONENTS CONSUMED THAT HAS BEEN SHOWN AT RS.28.87 CRORE; RS.86. 20 CRORE; AND RS.1182.00 CRORE RESPECTIVELY. THE LD. AR SUBMITTED THA T THE FIGURE UNDER THE CKD-AE SEGMENT AT RS.86.20 CRORE WAS O N ACTUAL ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 36 BASIS PERTAINING SOLELY TO THE CKD COMPONENTS AND THE BALANCE COST OF RAW MATERIALS AT RS.1210.87 CRORE (RS.1297.07 TOTAL CO ST OF RAW MATERIAL MINUS RS.86.20 CRORE CKD RAW MATERIAL COST) WAS BIFURCATED ON ACTUAL BASIS BETWEEN THE OTHER TWO SEGMENTS. ON A QUESTION AS TO HOW THE ACTUAL COST OF RAW MATERIAL OF THE OTHER TWO SEGMENTS WAS ASCERTAINED, THE LD. AR SUBMITTED THAT THE FACTO RIES MANUFACTURE SPECIFIC PRODUCTS PERTAINING TO A PARTICULAR SEGME NT ONLY AND COST OF RAW MATERIAL RELATING TO EACH FACTORY HAS BEEN CLUBBED UNDER THE RESPECTIVE SEGMENT MANUFACTURING THE REQUISITE PR ODUCTS. ON A FURTHER QUERY, IT WAS FAIRLY CONCEDED THAT THREE FACTOR IES OF THE ASSESSEE WERE EXCLUSIVELY IN MANUFACTURING THE PRODUCTS UN DER DS- NONAE SEGMENT AND THE ONE FACTORY WITH CODE NO.175 AT CHA KAN, PUNE WAS SERVING BOTH THE DS-NONAE AND SC-AE SEGMENTS. OUR ATTENTION HAS NOT BEEN DRAWN TOWARDS ANY DOCUMENT TO INDICA TE THAT THE RAW MATERIALS MEANT FOR THESE TWO SEGMENTS WERE SEPARATE LY PURCHASED OR SEPARATELY RECORDED. IN THAT VIEW OF THE M ATTER, THERE REMAINS NO BASIS TO SUPPORT THE CONTENTION THAT ACTUAL COST OF R AW MATERIAL AND COMPONENTS WAS PROPERLY ACCOUNTED FOR UNDER SC-AE AND DS-NONAE SEGMENTS. THE LD. AR SUBMITTED THAT WHEREVER THE SEGMENT-WISE FIGURES WERE NOT AVAILABLE ON ACTUAL BASIS, THE ASSESSEE BIFURCATED SUCH COSTS ON THE BASIS OF NET REVENUE OF THE RESPECTIVE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 37 SEGMENTS. IF WE GO WITH THE BIFURCATION OF RAW MATERIAL COST IN THE RATIO OF REVENUE FROM THESE TWO SEGMENTS, THE COST OF RAW MATERIAL AND COMPONENTS CONSUMED UNDER SC-AE SEGMENT COMES TO RS .36.87 CRORE, BEING RS.1210.87 CRORE BIFURCATED BETWEEN SC-AE A ND DS- NONAE SEGMENTS IN THE RATIO OF THEIR NET REVENUE AT RS.47.6 0 CRORE: RS.1515.46 CRORE. AS AGAINST THE ALLOCATED FIGURE OF RS .36.87 CRORE, THE ASSESSEE HAS RECORDED ONLY A FIGURE OF RS.28.87 CR ORE UNDER THE SC-AE SEGMENT. THUS, IT IS PALPABLE THAT THE ASSESSEE BOOKE D LOWER COST OF RAW MATERIAL AND COMPONENTS UNDER THE SC-AE SEG MENT BY RS.8.00 CRORE AND CORRESPONDINGLY ALLOWED SUCH EXCESS C OST TO BE ABSORBED BY THE DS-NONAE SEGMENT, WITH THE RESULT THAT THE P ROFIT IN THE SC-AE SEGMENT GOT ARTIFICIALLY BOOSTED AT THE EXPENSE OF THE DS- NONAE SEGMENT SO AS TO PRESENT A ROSY PICTURE IN THE EXPO RT SEGMENT WITH THE INTENTION OF PROJECTING THAT THE ASSESSEE EARNED HAND SOME OPERATING PROFIT UNDER THIS SEGMENT OF INTERNATIONAL TRANSACTION S INCE THE OTHER SEGMENT OF DS-NONAE IS NOT REQUIRED TO BE BENCHM ARKED. THE NEXT ITEM IS THE EMPLOYEES BENEFIT EXPENSES. HERE AGA IN, THE ASSESSEE CONTENDED THAT THESE EXPENSES WERE BIFURCATED ON ACTUAL BASIS. NO RECORD WHATSOEVER HAS BEEN PLACED BEFORE TH E AUTHORITIES BELOW OR THE TRIBUNAL TO DEMONSTRATE THAT THE EXPENSES RECOR DED UNDER THESE THREE SEGMENTS WERE ON ACTUAL BASIS. BE THAT AS IT MAY, ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 38 WE HAVE NOTICED ABOVE THAT ONE FACTORY AT CHAKAN, PUNE WAS PRODUCING GOODS MEANT FOR SC-AE AS WELL AS DS-NONAE SEGM ENTS. THE RAISON DETRE GIVEN ABOVE QUA THE RAW MATERIAL COST APPLIES TO THIS COST AS WELL. SIMILAR IS THE POSITION REGARDING THE OTHER EX PENSES CLAIMED BY THE ASSESSEE IN DETERMINING THE OPERATING PROFIT F ROM THE THREE SEGMENTS UNDER CONSIDERATION. 41. THE ASSESSEE HAS DRAWN SC-AE AND CKS-AE SEGM ENTS TO SHOW THAT THE THREE INTERNATIONAL TRANSACTIONS UNDER THE MANUFACTURING ACTIVITY WERE AT ALP. WE HAVE NOTED ABOVE THAT THERE IS A SEPARATE INTERNATIONAL TRANSACTION OF `IMPORT OF RAW MATE RIAL WITH VALUE OF RS.27,62,33,311/-. ON A PERTINENT QUERY, A S TO HOW THE ALP OF THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL WA S DONE, THE LD. AR SUBMITTED RAW MATERIAL COST OF RS.2.16 CRO RE PERTAINING TO THE SC-AE SEGMENT WAS ABSORBED ALONG WITH THE O THER RAW MATERIAL COSTS OF THE SAME SEGMENT AND THE REMAINING AMO UNT OF RS.25.46 CRORE WAS TAKEN TO DS-NONAE SEGMENT. ON WHAT B ASIS, THE SEGREGATION OF THE INTERNATIONAL TRANSACTION OF `IMPORT OF RAW MATERIAL AND COMPONENTS UNDER THE SC-AE SEGMENT WAS DONE WAS EX PLAINED TO BE AS PER ACTUAL BASIS. HOWEVER, NO MATERIAL HAS BE EN BROUGHT ON RECORD TO DEMONSTRATE THAT THE RAW MATERIAL CONSUMED IN SC-AE AND DS-NONAE SEGMENTS WERE SEPARATELY RECEIVED AND RECORDE D - VALUE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 39 WISE AND QUANTITY WISE. WHEN THERE IS NO AUTHENTICITY OF IMPOR T OF RAW MATERIAL COMPONENTS GOING TO SC-AE AND DS-NON-AE SEGMENTS, THE BIFURCATION OF THIS COST TO THE TWO SEGMENTS GETS DISTORTED. 42. WE HAVE NOTED ABOVE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING AUTOMOTIVE SEATING SYSTEMS. SEATING COMPONENTS, CONSTITUTING SC-AE SEGMENT, ARE PART OF THE WHOLE OF THE SEATIN G SYSTEMS. THE DS-NONAE SEGMENT OF THE ASSESSEE HAS O NLY NON-AE TRANSACTIONS AND AS SUCH THERE IS NO REQUIREMENT TO DETERMIN E ITS ALP. THE ASSESSEE HAS SHOWN OPERATING PROFIT OF RS.7.25 CRORE (17.80%) WITH GROSS SALES OF RS. 47.6 CRORE UNDER THE SC-AE SEGMENT FOR BENCHMARKING. AS AGAINST THAT, DS-NONAE SEG MENT HAS GROSS SALES OF RS. 1701.69 CRORE WITH OPERATING PRO FIT OF JUST RS.0.78 CRORE (0.05%). FROM THESE FIGURES, IT IS MANIFEST THAT THE ASSESSEE MADE THE CALCULATIONS OF THE SEGMENT WISE PROFITS IN SUCH A MANNER SO AS TO REFLECT HIGHER MARGIN OF PROFITS UNDER THE SC-AE AND CKD-AE SEGMENTS WHICH REQUIRED ALP DETERMINATION. AS AGAINST THAT, THE DS-NONAE SEGMENT, WHICH IS THE PRIME SOURC E OF THE ASSESSEES REVENUE BUT DOES NOT REQUIRE ANY BENCH MARKING AS IT IS DE HORS ANY AE TRANSACTIONS, HAS SHOWN MICROSCOPIC OPERATING PROF IT. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 40 IT IS A CLEAR-CUT CASE OF ARTIFICIAL AND HIGHLY MANOEUVRED SEG MENTAL PROFITABILITY. 43. AT THIS STAGE, IT WOULD BE SIGNIFICANT TO NOTE THAT THE TP O REQUIRED THE ASSESSEE TO FURNISH PER-UNIT COST AND SALE PRIC E OF MAJOR PRODUCTS MANUFACTURED BY IT DURING THE COURSE OF TRANSFER PRICING PROCEEDINGS. THE ASSESSEE, VIDE ITS REPLY DATED 17-10-20 09 WHOSE COPY HAS BEEN GIVEN AT PAGE 443 ONWARDS OF THE PAPER B OOK, SUBMITTED SUCH DETAILS THROUGH TWO DIFFERENT SETS OF CALCULATIONS BY COMPUTING `OPERATING INCOME IN AMOUNT AND PERCENTAGE IN RES PECT OF MAJOR 13 PRODUCTS IN ONE CHART GIVEN AT PAGE 445 WITH W EIGHTED AVERAGE OPERATING PROFIT AT 3.64% AND FROM MAJOR 11 PRODU CTS IN ANOTHER CHART WITH WEIGHTED AVERAGE PROFIT OF 7.65%. THE TPO AGGREGATED SUCH INDIVIDUAL PRODUCT-WISE PROFIT RATES AND FO UND OUT THE AVERAGE PROFIT OF ALL THE MAJOR PRODUCTS MANUFACTURED A T 5%. IT WAS THUS OBSERVED THAT AS AGAINST THE MAJOR PRODUCT-WISE `O PERATING PROFIT CALCULATED BY THE ASSESSEE ITSELF AT 5% IN SUCH CALCULA TION SHEET, IT HAD SHOWN `OPERATING PROFIT ONLY AT 0.05% IN THE MANUFACTURING SEGMENT IN THE SEGMENTAL PROFIT SHEET MEANT FOR TRANSFER PRICING PURPOSE. THIS FURTHER SUBSTANTIATES THAT THE WORKING DONE BY THE ASSESSEE IN CALCULATING THE OPERATING PROFIT FROM THE THREE SEGMENTS FOR BENCHMARKING IS MISPLACED. POR UNA PARTE , THE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 41 ASSESSEE ITSELF PRESENTED FIGURES BEFORE THE TPO GIVING AVER AGE OPERATING PROFIT AT 5% AND POR OTRA PARTE IT AGAIN ITSELF COMPUTED OPERATING PROFIT AT 0.05%. IN THE SEGMENTAL CALCULATION. 44. THE LD. AR TRIED TO CLARIFY THE POSITION BY SUBMITTING TH AT THE PROFIT RATE OF 5%, AS SUBMITTED BEFORE THE TPO, WAS EXCLUSIVE OF COMMON EXPENSES, WHEREAS IT WAS NOT SO IN THE WORKING DON E FOR BENCHMARKING. FROM THE WORKING SO GIVEN AT PAGE 445 AN D 446 OF THE PAPER BOOK, IT IS SEEN THAT THE ASSESSEE HAS TAKEN 24 M AJOR PRODUCTS DEALT WITH BY IT WITH VOLUME, PER UNIT SALE PRICE, PER U NIT MATERIAL COST, PER UNIT VARIABLE OVERHEADS AND PER UNIT FIXED OVERHEADS. IT IS THEREAFTER THAT THE ASSESSEE FIRST COMPUTE D ` OPERATING INCOME AND THEN `OI%, GIVING AVERAGE OF 5%. WHEN THE ASSESSEE ITSELF COMPUTED ITS ` OPERATING INCOME, IT IS BUT NATURAL THAT THE SAME WAS LOADED WITH ALL THE OPERATING COSTS INCLUDING COMMON COSTS ALSO. NO FRESH CALCULATION HAS BEEN BROUGHT ON RECORD TO SHOW THAT THE PER UNIT PROFIT WORKING GIVEN BY THE ASSESSEE TO THE TPO IN RESPECT OF MAJOR PRODUCTS WAS EXCLUSIVE OF COMMON EXPENSES. SINCE IN BOTH THE CALCULATIONS, THE ASSESSEE HAS ITS ELF COMPUTED `OPERATING INCOME FIRSTLY, ON THE PRODUCT WISE DETAILS AND THEN IN THE BIFURCATION OF BUSINESS OPERATIONS INTO FOUR SEG MENTS FOR BENCHMARKING, WE ARE UNCONVINCED THAT THE PER UNIT OPERATING ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 42 INCOME SEPARATELY GIVEN TO THE TPO WAS EXCLUSIVE OF COMMON EXPENSES. 45. THE LD. AR TRIED TO JUSTIFY THE SEGREGATION APPROAC H ADOPTED BY THE ASSESSEE BY SUBMITTING THAT THE THREE INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION HAVE NO RELATION WITH EACH OTHER AND HEN CE COULD NOT HAVE BEEN AGGREGATED BY THE TPO. TO FORTIFY HIS POINT OF VIEW, HE REFERRED TO DEFINITION OF TRANSACTION UNDER RULE 10A(D ) TO MEAN TRANSACTION INCLUDING NUMBER OF CLOSELY LINKED TRANSACTIONS. 46. WE AGREE WITH THE LD. AR ON THE DEFINITION OF THE TERM `TRANSACTION, WHICH CLEARLY STATES THAT CLOSELY LINKED TRANSACTIONS ARE TO BE TAKEN AS ONE AND HENCE AGGREGATED. HOWEVER, THE S AME IS NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES AS ARE INSTANTLY OB TAINING. IT HAS BEEN NOTICED SUPRA THAT THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL AND COMPONENTS AMOUNTING TO RS.27.62 CROR E HAS BEEN DIVIDED BY THE ASSESSEE INTO TWO PARTS, ONE PART OF RS .2.16 CRORE TAKEN TO SC-AE SEGMENT AND THE OTHER PART OF RS.25.46 CROR E TAKEN TO DS-NONAE SEGMENT. WHEN THE SUBSTANTIAL AMOUNT FROM THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIALS HAS BEEN ABSORBED IN THE DS-NONAE SEGMENT, A CLEAR AND DIRECT RELA TION BETWEEN THE DOMESTIC SALES SEGMENT AND THE INTERNATIONAL TRANSA CTION OF `IMPORT OF RAW MATERIALS GETS ESTABLISHED. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 43 47. IN ORDER TO SUBSTANTIATE ITS CLAIM OF PROPER SEGME NTATION AND THE RESULTANT BENCHMARKING , THE LD. AR RELIED ON AN ORDER PASSED BY THE KOLKATA BENCH OF THE TRIBUNAL IN DCIT VS. LANDIS+ GYR LTD. (2017) 86 TAXMANN.COM 109 (KOLKATA TRIBUNAL) . IN THAT CASE, THE ASSESSEE BENCHMARKED THE INTERNATIONAL TRANSACTIONS BY SEGRE GATING THEM INTO MANUFACTURING, TRADING AND SERVICE. THE LD. AR SUBMITTED THAT THE TPO IN THAT CASE ALSO CLUBBED THE TRANSACTIONS AND WHEN THE MATTER FINALLY CAME UP BEFORE THE TRIBUNAL, THE SEPA RATE BENCHMARKING OF THE THREE SEGMENTS WAS COUNTENANCED. 48. THE FACTS OF THAT CASE ARE DISTINGUISHABLE FROM THOSE OF THE ASSESSEE INASMUCH AS IN THAT CASE THERE WAS NO DISPUTE ABO UT THE ALLOCATION OF EXPENSES TO DIFFERENT SEGMENTS AND FURTHER THE TRANSACTIONS OF THAT ASSESSEE WERE SUBJECT TO BENCHMARKING. IN CONTRAST, THE ALLOCATION OF EXPENSES DONE BY THE ASSESSEE IN THIS CASE IS APPARENTLY NOT CORRECT AS HAS BEEN DISCUSSED ABOVE AND FURTHER ITS DS-NONAE SEGMENT, WHICH HAS SHOWN THE LEAST PROFIT, IS NO N AE SEGMENT REQUIRING NO BENCHMARKING. AS SUCH, THE RATIO IN THE CASE OF KOLKATA TRIBUNAL REFERRED ABOVE IS NOT APPLICABLE TO THE FACTS OF THE EXTANT CASE. 49. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE SATISF IED THAT THE AUTHORITIES BELOW WERE JUSTIFIED IN REJECTING THE SEGREGATION APPRO ACH ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 44 ADOPTED BY THE ASSESSEE AND RIGHTLY COMBINED THE THREE INTERN ATIONAL TRANSACTIONS UNDER THE OVERALL `MANUFACTURING ACTIVITY FOR BENCHMARKING. 50. NOTWITHSTANDING HAVING FOUND THAT THE PREPARATION OF THE SEGMENTAL PROFITABILITY STATEMENT BY THE ASSESSEE IS FLAWED, WE S TILL PROCEED TO EXAMINE IF THE ASSESSEE DID BENCHMARKING IN A CORRECT MANNER EVEN OF SUCH A FALLACIOUS SEGMENTAL PROFITABILITY. 51. UNDER THE CKD-AE SEGMENT, ALL THE COMPARABLES CHO SEN BY THE ASSESSEE ARE, BY AND LARGE, DISTRIBUTORS OF AUTOMOBILES , SUCH AS, MARUTI AND HYUNDAI CARS. ON A PERTINENT QUERY, THE LD. AR SUBMITTED THAT THE CKD-AE SEGMENT IS IN THE NATURE OF DISTRIBUTION ACTIVITY. IT IS AN ADMITTED POSITION THAT UNDER THE CKD SEGMENT, THE ASSES SEE IMPORTED COMPLETELY KNOCKED DOWN PRODUCTS AND THEN ASSE MBLED THEM AS FULL-FLEDGED PRODUCTS AS THESE WERE BEFORE THE KNOCKING DOWN CONDITION. THE PROCESS OF REMAKING FALLS UNDER THE B ROADER MANUFACTURING ACTIVITY. THIS FURTHER GETS FORTIFIED ON PERUSAL O F THE ASSESSEES SEGMENTAL PROFITABILITY STATEMENT DRAWN FOR BENCHM ARKING CKD-AE SEGMENT, WHICH INCLUDES EXCISE DUTY OF RS.13.14 C RORE; ROYALTY OF RS.3.98 CRORE IN ADDITION TO CERTAIN OTHER MANUFAC TURING PECULIAR COSTS UNDER THE SAME. AS SUCH, NONE OF THE CHOS EN COMPARABLES IS A FUNCTIONAL MATCH TO THE CKD SEGMENT. ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 45 52. THE INTERNATIONAL TRANSACTION OF `IMPORT OF RAW MATERIA L AND COMPONENTS WAS BIFURCATED BY THE ASSESSEE INTO TWO PARTS. THE FIRST ONE OF RS.2.16 CRORE WAS TAKEN TO SC-AE SEGMENT AND ITS BENCHMARKING WAS DONE UNDER THE TNMM. FOR THE REMAINING COST OF RS.25.64 CRORE, WHICH WAS TAKEN TO THE DS-NONAE SEGMENT, THE LD. AR SUBMITTED THAT THE ALP OF THE SAME WAS DETERMINED UNDER TH E ANY OTHER METHOD AS PRESCRIBED IN THE RULE 10AB OF THE I NCOME- TAX RULES, 1962. IN ORDER TO PROPERLY APPRECIATE THE VIEW POINT OF THE ASSESSEE, WE CONSIDER IT EXPEDIENT TO REPRODUCE THE RELEVA NT RULE AS UNDER: `OTHER METHOD OF DETERMINATION OF ARMS LENGTH PRIC E.FOR THE PURPOSES OF CLAUSE (F) OF SUB-SECTION (1) OF SECTIO N 92C, THE OTHER METHOD FOR DETERMINATION OF THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC T RANSACTION SHALL BE ANY METHOD WHICH TAKES INTO ACCOUNT THE PRICE WHICH HAS BEEN CHARGED OR PAID, OR WOULD HAVE BEEN CHARGED OR PAID , FOR THE SAME OR SIMILAR UNCONTROLLED TRANSACTION, WITH OR BETWEE N NON-ASSOCIATED ENTERPRISES, UNDER SIMILAR CIRCUMSTANCES, CONSIDERI NG ALL THE RELEVANT FACTS. R D . 1 53. ON GOING THROUGH THE ABOVE RULE, IT CLEARLY EMERGES TH AT THIS METHOD CONTEMPLATES TAKING INTO ACCOUNT THE PRICE WHICH HAS BE EN CHARGED OR WOULD HAVE BEEN CHARGED FOR THE SAME OR SIMILAR UNCONTROLLED TRANSACTIONS AS ARE BETWEEN NON-AES UNDER SIM ILAR CIRCUMSTANCES. IN OTHER WORDS, THIS METHOD REQUIRES FIRSTLY, IDENTIFYING THE INTERNATIONAL TRANSACTION OF THE ASSESSEE AND THEN ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 46 COMPARING IT WITH SOME PRICE CHARGED OR CHARGEABLE UNDER SIMILAR UNCONTROLLED SITUATION. 54. THE LD. AR TOOK US THROUGH THE TRANSFER PRICING STU DY REPORT, WHICH REFERS TO FOUR TRANSACTIONS WITHIN ITS AMBIT. THE FIRST TRANSACTION IS IMPORT OF RAW MATERIALS AND COMPONENTS FROM LEAR AUTOMOTIVE, MALAYSIA AMOUNTING TO RS.1.56 CRORE. IT IS MENTION ED IN THE TRANSFER PRICING STUDY REPORT THAT RAW MATERIAL AND COMPO NENTS (SHEET FOAM WORTH RS.1.56 CRORE) WERE IMPORTED FROM LE AR MALAYSIA ON SPECIFIC DIRECTIONS FROM VOLKSWAGON, INDIA, ITS CUSTOMER . IT HAS FURTHER BEEN MENTIONED THAT VOLKSWAGON, INDIA DIRECTED THE ASSESSEE TO PROCURE THE RELEVANT RAW MATERIAL AND COMPONENTS AND THE PRICES WERE MUTUALLY AGREED BETWEEN VOLKSWAGON AND LEAR MALAYS IA AND THAT THE PRICE AT WHICH IT HAS BEEN IMPORTED BY THE ASSESSEE AND THE PRICE AT WHICH IT SOLD THE SAME TO VOLKSWAGON, INDIA ENSURED THAT IT EARNED A REASONABLE MARKUP . IT HAS STILL FURTHER BEEN MENTIONED: ACCORDINGLY THE COMPANY BELIEVES THAT SINCE THE PRICE AT WHICH IT IMPORTS IS A DIRECT PRICE AGREED BETWEEN VOLKSWAGON, INDIA (THIRD PARTY) AND THE COMPANIES AE, THE PRICE ITSELF IS AT ARMS LENGTH . WE ARE UNABLE TO FIND OUT AS TO HOW THE ASSESSEE CAN BE SAID TO HAVE BENCHMARKED THIS TRANSACTION UNDER ANY OTHER METHOD. NO BASIS WHATSOEVER HAS BEEN POINTED OUT FOR MAKING A COMPARISON W ITH ANY ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 47 COMPARABLE PRICE PAID OR PAYABLE. EXCEPT FOR STATING THAT THE ASSESSEE EARNED REASONABLE MARKUP , THERE IS NO MENTION WHATSOEVER AS TO WHAT IS THAT REASONABLE MARKUP AND ITS YAR DSTICK AND FURTHER HOW ANY ARRANGEMENT WAS ENTERED INTO BETWEEN VOLK SWAGON, INDIA AND LEAR MALAYSIA. NO DOCUMENTATION IN SUPPORT OF THE SAID ASSERTION HAS BEEN MADE AVAILABLE. 55. THE NEXT TRANSACTION IS IMPORT OF RAW MATERIALS AND COMPONENTS FROM LEAR, SHANGHAI AUTOMOTIVE METALS COMPANY LTD. AND LEAR CORPORATION, POLAND AMOUNTING TO RS.20.99 CRORE. THE ASSE SSEE HAS MENTIONED IN ITS TRANSFER PRICING STUDY REPORT THAT IT IMPORTED C ERTAIN RAW MATERIAL AND COMPONENTS (ELECTRIC TRUCKS AND ASM ADJUS TORS). IN THE NAME OF BENCHMARKING, IT HAS BEEN MENTIONED THAT THE PRICING POLICY ADOPTED BY THE AE IN CONNECTION WITH THE SUPPLY TO THE COMPANY YIELDS A MARGIN FOR THE AE WHICH IS IN LINE WITH THE M ARGIN EARNED BY THE COMPARABLE COMPANIES . THERE IS NO REFERENCE TO WHAT WAS THE MARGIN EARNED BY THE AE AND WHAT WAS THE MARGIN E ARNED BY THE COMPARABLE COMPANIES. 56. THE NEXT TRANSACTION IS IMPORT OF OTHER MATERIALS AND COMPONENTS. IT HAS BEEN MENTIONED IN THE TRANSFER PRICING STUDY REPORT THAT THE ASSESSEE HAS IMPORTED CERTAIN RAW MATERIALS AND COMPONENTS FROM ITS AES FOR ITS MANUFACTURING ACTIVITIES ON A N EED ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 48 BASIS. IT HAS FURTHER BEEN MENTIONED THAT THE PRICE AT WHICH RAW MATERIALS AND COMPONENTS ARE SUPPLIED BY THE AE ARE FAIR AND REASONABLE AND THAT THE COMPANY HAS REPRESENTED THAT IT IS IN THE PROCESS OF COLLATING RELEVANT DOCUMENTATION TO SUBSTANTIATE THE SAME. NO SUCH DOCUMENTS, WHICH WERE BEING COLLATED AT THE STAGE OF PREPARING THE TRANSFER PRICING STUDY REPORT, HAVE SEE N THE LIGHT OF THE DAY SO FAR. AGAIN, THERE IS QUESTION AS TO HOW THE PRIC E IS FAIR AND REASONABLE WITHOUT ANY THING FURTHER TO MAKE COMPARISON WITH TH E PRICE CHARGED OR CHARGEABLE UNDER COMPARABLE UNCONTROLLED SITUATIONS. 57. IT IS THUS APPARENT THAT NONE OF THE TRANSACTIONS OF `IMPORT OF RAW MATERIAL AND COMPONENTS TO THE EXTENT OF RS.25.46 CRO RE WAS BENCHMARKED UNDER THE GUISE OF ADOPTION OF ANY OTHER ME THOD. 58. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS FOR APPROVIN G THE SEGREGATION APPROACH, THE LD. AR SUBMITTED THAT THE TPO WENT WRONG IN COMPUTING THE TRANSFER PRICING ADJUSTMENT BY CONSIDERING TH E ENTITY LEVEL FIGURES UNDER THE MANUFACTURING ACTIVITY WHEREAS HE OUGHT TO HAVE RESTRICTED THE ADDITION ONLY TO THE INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION. IT WAS STATED THAT IF THE TR ANSFER PRICING ADJUSTMENT IS RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIO NS UNDER CONSIDERATION AS AGAINST THE ENTITY LEVEL TRANSACTION UNDER THE ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 49 MANUFACTURING ACTIVITY, THE AMOUNT OF THE TRANSFER PRICING ADJUS TMENT WOULD GET REDUCED TO AROUND RUPEES FIVE CRORE. 59. IT IS OVERT THAT THE TPO DETERMINED THE ALP BY CONSIDE RING THE ENTITY LEVEL PLI OF THE ASSESSEE UNDER THE MANUFACTURING ACTIVITY AND CHOSE CERTAIN COMPARABLES FOR WORKING OUT THE AMOUNT OF TRANSFER PRICING ADJUSTMENT. IT IS ESSENTIAL TO NOTE THAT THE LD. AR DID NOT POINT OUT ANYTHING AMISS IN THE SELECTION OF COMPARABLES OR THE COMPUTATION OF PLI OF THE ASSESSEE OR COMPARABLES. THE GR IEVANCE IS CONFINED ONLY TO THE MAKING OF TRANSFER PRICING ADJUSTMENT ON ENTITY LEVEL. 60. THE ISSUE OF RESTRICTING THE TRANSFER PRICING ADJUSTM ENT TO THE TRANSACTION LEVEL RATHER THAN THE ENTITY LEVEL IS NO MORE RES INTEGRA IN VIEW OF SEVERAL JUDGMENTS RENDERED BY VARIOUS HIGHER FOR UMS INCLUDING THE HONBLE JURISDICTIONAL HIGH COURT HOLDING THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS AND NOT THE ENTITY LEVEL TRANSACTIONS. TH E HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. PHOENIX MECANO (INDIA) PVT. LTD. (2019) 414 ITR 704 (BOM.) HAS HELD THAT THE TRANSFER PRICING ADJUSTMENT MADE AT ENTITY LEVEL SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTIONS ONLY. HERE, IT IS PERTINENT TO MENTION THA T THE DEPARTMENTS SLP AGAINST THE JUDGMENT IN THE CASE OF PHOENIX ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 50 MECANO (INDIA) PVT. LTD. HAS SINCE BEEN DISMISSED BY THE HONBLE SUPREME COURT IN CIT VS. PHOENIX MECANO (INDIA) PVT. LTD. (2018) 402 ITR 32 (ST.). SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KRUPP INDUSTRIES PVT. LTD. (2016) 381 ITR 413 (BOM.) AND CIT VS. TARA JEWELS EXPORTS (P). LTD. (2010) 381 ITR 404 (BOM.) . WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND DIRECT TO RESTRICT THE TRANS FER PRICING ADDITION ONLY IN RESPECT OF TRANSACTIONS WITH ASSOCIATED ENTERPR ISES UNDER THE MANUFACTURING ACTIVITY AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 61. BEFORE PARTING, WE PLACE ON RECORD OUR APPRECIATIO N FOR THE ILLUMINATING ARGUMENTS AND COPIOUS DETAILS PUT FORTH DURING THE COURSE OF HEARING BY SH. DHANESH BAFNA, THE LD. AR AND THE LD. DR, WHICH ASSISTED THE TRIBUNAL IN DISPOSING OFF THE ISSUES IN A WE LL INFORMED MANNER. 62. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH AUGUST, 2021. SD/- SD/- ( S.S. VISWANETHRA RAVI ) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 04 TH AUGUST, 2021 ITA NO.213/PUN/2021 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED 51 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT (DRP-3), MUMBAI-1/ CIT (DRP-3), MUMBAI- 2/ CIT (DRP-3), MUMBAI-3 4. 5. DR, ITAT, C BENCH, PUNE / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 22/23-07-21 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 24-07-2021/ 02-08-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *