Asst.C.I.T., Bangalore V. M/s AO Smith India Water Products Pvt. Ltd., Bangalore

ITA 216/BANG/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0183 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 19-02-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO BENGALURU
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92C; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER IT (TP) A NO. 216/BANG/2016 ASSESSMENT YEAR : 2011 - 12 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1), BANGALORE. VS. M/S. AO SMITH INDIA WATER PRODUCTS PVT. LTD., NO.300, PHASE II, KIADB INDUSTRIAL AREA, HAROHALLI, KANAKAPURA TALUK, RAMANAGARA DIST. PAN: AAFCA 8954R APP ELL ANT RESPONDENT CO NO.58/BANG/2016 [IN IT (TP) A NO. 216/BANG/2016] A SSESSMENT YEAR : 2011 - 12 M/S. AO SMITH INDIA WATER PRODUCTS PVT. LTD., HAROHALLI. KANAKAPURA TALUK, RAMANAGARA DIST. PAN: AAFCA 8954R VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1), BANGALORE. CROSS OBJECTOR RESPONDENT REVENUE BY : S HRI D. SUDHAKAR RAO, CIT(DR)(ITAT), BENGALURU. ASSESSEE BY : SHRI K.R. VASUDEVAN, ADVOCATE DATE OF HEARING : 11.09. 201 8 DATE OF PRONOUNCEMENT : 12 .09 .201 8 IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 2 OF 17 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 21.12.2015 OF THE ACIT, CIRCLE-1(1)(1), BANGALORE, PASSED U/S.143(3) READ WITH SEC.144C(5) OF THE INCOME TAX ACT, 1961 (ACT). THE GROUNDS OF APPEAL OF THE REVENUE READS THUS:- 1. THE ORDERS OF THE DISPUTE RESOLUTION PANEL IS O PPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. MANUFACTURING SEGMENT: 2. THE DRP ERRED IN HOLDING THAT CPM IS THE MOST AP PROPRIATE METHOD, WHEN THE DIRECT AND INDIRECT COSTS REQUIRED FOR CPM ANALYSIS IS NOT AVAILABLE IN THE II ASSESSEE'S CASE OR INDEPENDENT COMPARABLES, IN THE ABSENCE OF WHICH TN MM WILL BE THE MOST APPROPRIATE METHOD FOR COMPUTATION OF ALP. 3. THE DRP ERRED IN HOLDING THAT CPM IS THE MOST AP PROPRIATE METHOD, WHEN THE ASSESSEE IS A FULL-FLEDGED MANUFAC TURER BEARING SIGNIFICANT RISK IN WHICH CASE, TNMM WILL B E THE MOST APPROPRIATE METHOD FOR COMPUTATION OF ALP TRADING SEGMENT : 4. THE DRP ERRED IN REJECTING THE TNMM AND APPLYING RPM AS THE MOST APPROPRIATE METHOD, WHEN THE ASSESSEE HAS PERFORMED HIGHER FUNCTIONS SUCH AS MARKETING AND BU SINESS PROMOTION, WHOSE COSTS HAD NOT BEEN INCLUDED IN THE COST BASE FOR RPM ANALYSIS AND THEREFORE, TNMM IS THE MO ST APPROPRIATE METHOD FOR COMPUTATION OF ALP 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URG ED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE DRP BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RE STORED. IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 3 OF 17 6. THE APPELLATE CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 2. THE ASSESSEE HAS FILED CROSS-OBJECTIONS AGAINST THE VERY SAME ORDER OF THE AO. THE GROUNDS RAISED IN THE CO READ S THUS:- 1. THE LD. TPO/ LD. DRP HAS ERRED IN NOT APPRECIAT ING THAT THE LOSSES INCURRED DURING THE YEAR ARE ON ACCOUNT OF E CONOMIC AND BUSINESS REASONS AND UNDERUTILIZATION OF CAPACI TY AND NOT DUE TO TRANSFER PRICE OF GOODS PURCHASED FROM I TS ASSOCIATED ENTERPRISE. 2. THE LD. TPO/LD. DRP, WHILE PROPOSING A TRANSFER PRICING ADJUSTMENT TO THE INTERNATIONAL TRANSACTIONS UNDERT AKEN BY THE APPELLANT WITH ITS AES, OUGHT TO HAVE ACCOUNTED THE CORRESPONDING REDUCTION/ADJUSTMENT IN CUSTOMS DUTY PAID BY THE APPELLANT. 3. THE LD. TPO / LD. DRP HAS ERRED IN NOT CONSIDERI NG THE USE OF MULTIPLE YEAR DATA FOR COMPUTING THE FINAL MARGI N OF THE COMPARABLE AND TO DETERMINE THE PROFIT LEVEL INDICA TOR ('PLI'). 4. THE LD. TPO/LD. DRP ERRED IN WRONGLY COMPUTING T HE MARGIN OF FOLLOWING COMPANIES: MANUFACTURING: A) GENUS POWER INFRASTRUCTURES LIMITED B) INCAP LIMITED C) REMI ELEKTROTECHNIK LIMITED D) SALZER ELECTRONICS LIMITED TRADING: A) CUPRUM BAGRODIA LIMITED B) G P LIGHTNING LIMITED C) K DHANDAPANI & CO. LIMITED IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 4 OF 17 THE RESPONDENT CRAVES LEAVE TO ADD, ALTER, AMEND AN D/OR DELETE ANY OF THE GROUND MENTIONED ABOVE. 3. THE GROUNDS RAISED BY THE REVENUE AND THE ASSESS EE ARISE IN THE CONTEXT OF DETERMINATION OF ARMS LENGTH PRICE (ALP ) IN RESPECT OF THE TWO INTERNATIONAL TRANSACTIONS ENTERED INTO BETWEEN THE ASSESSEE AND ITS AE. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF AOS NE THERLANDS. THE TWO INTERNATIONAL TRANSACTIONS IN DISPUTE ARE:- (A) THE TRANSACTION OF DISTRIBUTION AND MARKETING OF PRODUCTS OF AOS GROUPS PRODUCTS (WATER HEATERS) IN INDIA BY THE AS SESSEE, AND (B) THE TRANSACTION OF PURCHASE OF RAW MATERIALS BY THE ASSESSEE FROM AOS NETHERLANDS FOR MANUFACTURING WATER HEATERS. 4. THE DETAILS OF THE INTERNATIONAL TRANSACTIONS AN D THE PROFIT MARGIN IN SUCH TRANSACTIONS ARE GIVEN BELOW:- PARTICULARS MANUFACTURING TRADING TOTAL TOTAL INCOME 339,613,742 75,887,398 415,501,140 TOTAL EXPENDITURE 398,458,438 89,611,448 488,069,886 OPERATING PROFIT (5 8,844,696) (13,724,050) (72,568,746) OP/OC - 14.77% - 15.32% - 14.87% OP/SALES - 17.33% - 18.08% - 17.47% GROSS PROFIT 75,460,643 12,049,558 22.22% 15.88% 5. SEC.92(1) PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE (ALP). SECTION 92C LAYS DOWN PROVISIONS FOR COMPUTA TION OF ALP. IT IS NOT IN DISPUTE THAT THE TRANSACTIONS OF ( A ) PURCHASE OF RAW MATERIALS BY THE ASSESSEE FROM ITS WHOLLY OWNED HOLDING COMPANY AOS NETHERLANDS, AND ( B ) THE TRANSACTION OF TRADING IN WATER HEATERS MANUF ACTURED BY THE WHOLLY IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 5 OF 17 OWNED HOLDING COMPANY WERE AN INTERNATIONAL TRANSAC TIONS AND INCOME FROM SUCH TRANSACTIONS HAD TO PASS THE ALP TEST U/S .92(1) OF THE ACT. 6. SEC.92C (1) LAYS DOWN THAT THE ARMS LENGTH PRICE IN RELAT ION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER R ELEVANT FACTORS AS THE BOARD MAY PRESCRIBE , NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. SEC.92C(2) LAYS DOWN THAT THE MOST APPROPRIATE METH OD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED AS FOLLOWS :- PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHA LL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNAT IONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER , THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LEN GTH PRICE. 7. RULE 10B OF THE INCOME TAX RULES, 1962 (RULES) L AYS DOWN THE DETAILS OF THE VARIOUS METHODS THAT ARE TO BE USED IN DETERMINATION OF ALP. IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 6 OF 17 FOR THE PRESENT APPEAL, WHAT ARE RELEVANT ARE RESAL E PRICE METHOD ( RPM ), COST PLUS METHOD ( CPM ) AND TRANSACTION NET MARGIN METHOD ( TNMM ). RULE 10B IN SO FAR AS THE ABOVE METHODS ARE CONCERN ED LAYS DOWN AS FOLLOWS:- 10B. DETERMINATION OF ARM'S LENGTH PRICE UNDER SECT ION 92C . (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARM'S 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) .. (B) RESALE PRICE METHOD, BY WHICH, (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERV ICES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIF IED; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR T O AN UNRELATED ENTERPRISE FROM THE PURCHASE AND RESALE O F THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROV IDING THE SAME OR SIMILAR SERVICES, IN A COMPARABLE UNCON TROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED B Y THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE P URCHASE OF PROPERTY OR OBTAINING OF SERVICES; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE I NTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERE NCES IN ACCOUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATI ONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS P ROFIT MARGIN IN THE OPEN MARKET; IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 7 OF 17 (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (IV) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PURCH ASE OF THE PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERP RISE FROM THE ASSOCIATED ENTERPRISE; (C) COST PLUS METHOD, BY WHICH, (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION I NCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SE RVICES PROVIDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINE D; (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) ARISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONA L AND OTHER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COM PARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT SUCH PROFIT MARK-UP IN THE OPEN MARKET; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III); (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S L ENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE; (D) (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE FROM AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 8 OF 17 TRANSACTION] ENTERED INTO WITH AN ASSOCIATED ENTERP RISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLA USE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTI C TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSA CTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PRO FIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTI C TRANSACTION]; 8. RULE 10C LAYS DOWN THE CRITERIA FOR CHOOSING THE MOST APPROPRIATE METHOD AS IT READS THUS:- MOST APPROPRIATE METHOD. 10C. (1) FOR THE PURPOSES OF SUB-SECTION (1) OF SEC TION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH I S BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR I NTERNATIONAL TRANSACTION [OR SPECIFIED DOMESTIC TRANSACTION], AN D WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 9 OF 17 INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTI C TRANSACTION, AS THE CASE MAY BE]. (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPE CIFIED IN SUB- RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRAN SACTION [OR THE SPECIFIED DOMESTIC TRANSACTION]; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOY ED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN TH E INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTI C TRANSACTION] AND THE UNCONTROLLED TRANSACTION AND B ETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUS TMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTI C TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSA CTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIO NS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. 9. THE ASSESSEE FILED ITS TRANSFER PRICING DOCUMENT ATION TO SUPPORT ITS CLAIM THAT THE PRICE PAID IN THE INTERNATIONAL TRAN SACTION WAS AT ARMS LENGTH. AS FAR AS THE TRANSACTION OF TRADING IN WA TER HEATERS BY THE ASSESSEE AFTER PURCHASE FROM THE AE, THE ASSESSEE A DOPTED RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIATE METHOD (MAM) F OR DETERMINATION OF ALP. AS FAR AS THE TRANSACTION OF PURCHASE OF RAW MATERIALS FROM AE IS CONCERNED, THE ASSESSEE ADOPTED CPM AS THE MAM. IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 10 OF 17 10. THE TPO REJECTED ADOPTION OF CPM AS THE MAM FOR DETERMINATION OF ALP FOR THE TRANSACTION OF PURCHASE OF RAW MATERIAL S FOR THE REASON THAT THE ASSESSEE HAS NOT GIVEN HOW ITS GROSS PROFIT WAS COM PUTED. THE TPO ADOPTED TNMM AS THE MAM AND DETERMINED THE ALP OF T HE TRANSACTION OF PURCHASE OF RAW MATERIALS. 11. AS FAR AS TRANSACTION OF TRADING IS CONCERNED, THE ASSESSEE HAD ADOPTED RPM AS THE MAM FOR DETERMINATION OF ALP. T HE TPO REJECTED THE MAM ADOPTED BY THE ASSESSEE FOR THE REASON THAT FUN CTIONS PERFORMED BY THE ASSESSEE BEFORE RESELLING THE PRODUCTS OF ITS A E AND COSTS FOR PERFORMING SUCH FUNCTIONS WERE NOT AVAILABLE. THE TPO ADOPTED TNMM AS THE MAM AND DETERMINED THE ALP OF THE TRANSACTION O F TRADING. 12. IT IS RELEVANT TO POINT OUT THAT IN RESPECT OF BOTH THE INTERNATIONAL TRANSACTIONS, THE TPO ACCEPTED THE COMPARABLE COMPA NIES CHOSEN BY THE ASSESSEE BUT ONLY CHANGED THE MAM. 13. THE MANNER OF DETERMINATION OF ALP BY TPO FOR B OTH THE INTERNATIONAL TRANSACTIONS WERE AS GIVEN BELOW:- 9.5.2 THE COMPARABLES CONSIDERED BY THE TPO FOR SU CH ANALYSIS IN THE CASE OF THE TAXPAYER FOR DETERMINING ALP OF INT ERNATIONAL TRANSACTIONS IN THE MANUFACTURING AND TRADING SEGME NTS, ARE AS UNDER: MANUFACTURING SEGMENT: SI . NO. COMPARABLES' NAME SALES OP OC OP /OC OP/SALES 1 AMTECH POWER LTD. 7.72 0.19 7.53 2.52% 2.46% 2 GENUS POWER INFRASTRUCTURES LTD. 722.73 98.65 624.08 15.81% 13.65% 3 INCAP LTD. 15.54 0.03 15.51 0.19% 0.19% 4 KIRLOSKAR ELECTRIC CO, LTD. 895.72 17.72 878 2.02% 1.98% 5 REMI ELEKTROTECHNIK LTD. 75.43 5.9 69.53 8.49% 7.82% 6 SALZER ELECTRONICS LTD. 199.39 19.64 179.75 10.93% 9.85% ARITHMETIC MEAN MARGIN 6.66% 5.99% IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 11 OF 17 TRADING SEGMENT: SL NO COMPANY NAME SALES OP OC OP/OC OP/SALES 1 CUPRUM BAGRODIA LTD. 49.84 6.88 42.96 16.01% 13.8 0% 2 G P LIGHTING LTD. 1.51 0.04 1.47 2.72% 2.65% 3 GLOBUS CORPORATION LTD. 23.16 0.54 22.62 2.39% 2. 33% 4 K DHANDAPANI & CO. LTD. 40.99 0.4 40.59 0.99% 0.9 8% 5 SUZLON ENGITECH LTD. 8.33 -0.16 8.49 -1.88% -1.92 % ARITHMETIC MEAN MARGIN 4.04% 3.57% DETERMINATION OF ARM'S LENGTH PRICE: MANUFACTURING SEGMENT: ARITHMETIC MEAN PLI : 5.99% ON SALES DESCRIPTIONS AMOUNT OPERATING REVENUE 339,613,742 ARMS LENGTH MARGIN 5.99% ON SALES ARMS LENGTH COST @P00-5.99=94.01M 319,270,879 COST INVOLVED IN INTERNATIONAL TRANSACTION 398,458,438 ADJUSTMENT U/S 92CA 79,187,559 TRADING SEGMENT: ARITHMETIC MEAN PLI : 3.57% ON SALES DESCRIPTIONS AMOUNT OPERATING REVENUE 75,887,398 ARMS LENGTH MARGIN 3.57% ON SALES ARMS LENGTH COST @1100-3.57=96.43%] 73,178,218 COST INVOLVED IN INTERNATIONAL TRANSACTION 89,611,448 ADJUSTMENT U/S 92CA 16,433,230 IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 12 OF 17 TOTAL ADJUSTMENT: MANUFACTURING SEGMENT 79,187,559 TRADING SEGMENT 16,433,230 TOTAL ADJUSTMENT 95,620,789 THUS THE ABOVE SHORTFALL OF RS.95,620,798/- (RUPEES NINE CRORES, FIFTY SIX LAKHS, TWENTY THOUSAND, SEVEN HUN DRED AND EIGHTY NINE ONLY) IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S. 92CA OF THE INCOME-TAX ACT, 1961. 14. AGGRIEVED BY THE ORDER OF THE TPO WHICH WAS INC ORPORATED BY THE AO IN THE DRAFT ORDER OF ASSESSMENT, THE ASSESSEE P REFERRED OBJECTIONS BEFORE THE DRP. BEFORE DRP THE ASSESSEE SUBMITTED THAT IF THE ADJUSTMENTS PROPOSED BY THE TPO IS ACCEPTED THEN IT WILL RESULT IN VERY ABNORMAL PROFIT LEVEL OF THE ASSESSEE. THE ASSESSE E GAVE THE FOLLOWING DETAILS IN THIS REGARD:- MANUFACTURING SEGMENT GROSS MARGIN AS PER TP DOCUMENTATION GROSS MARGIN AFTER GIVING EFFECT TO THE ADJUSTMENT OF THE TPO SALES- (A) 339,613,742 339,613,742 TOTAL DIRECT EXPENSES- (B) 264,153,099 184,965,540 GROSS PROFIT (A) (B) 75,460,643 154,648,202 GROSS MARGIN 22.22% 133.61% TRADING SEGMENT GROSS MARGIN COMPUTATION AS PER TP DOCUMENTATION GROSS MARGIN ON GIVING EFFECT TO THE ADJUSTMENT MADE BY THE TPO SALES - (A) 75,887,398 7.5,887,398 TOTAL DIRECT EXPENSES - (B) 63,837,839 47,404,699 GROSS PROFIT (A) (B) 12,049,558 28,482,789 GROSS MARGIN 15.88% 60,08% IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 13 OF 17 15. THE DRP AGREED WITH THE CONTENTION OF THE ASSES SEE AND HELD THAT THE MAM ADOPTED BY THE ASSESSEE FOR BOTH THE INTERN ATIONAL TRANSACTION WAS CORRECT AND SHOULD BE ACCEPTED. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE DRP:- BASED ON THE ABOVE ANALYSIS, IT IS SUBMITTED BY TH E ASSESSEE THAT THE ADJUSTMENT PROPOSED BY THE TPO WOULD RESULT IN AN ABNORMAL GROSS MARGIN OF THE ASSESSEE I.E. 83.61 PER CENT IN THE MANUFACTURING SEGMENT AND 60.08 PER CENT IN THE TRA DING SEGMENT AS COMPARED TO THE AVERAGE GROSS MARGIN OF THE COMP ARABLE COMPANIES WHICH COMES OUT TO BE 25.53 PERCENT AND 1 1.38 PER CENT RESPECTIVELY AS STATED IN THE TP DOCUMENTATION. THU S IT IS CLEAR THAT THE ADJUSTMENT PROPOSED BY THE TPO IS EXTRAORDINARY . HAVING CONSIDERED THE SUBMISSION, EXAMINED THE ORDE R OF THE TPO, TP DOCUMENTATION SUBMITTED BY THE ASSESSEE, FROM WH ICH THE FOLLOWING FACTS ARE NOTICED BY US:- NATURE OF THE INTERNATIONAL TRANSACTION MANUFACTURI NG SEGMENT IN RS. TRADING SEGMENT IN RS. PURCHASE OF RAW MATERIAL FOR MANUFACTURING & PURCHASE OF HEATERS FOR TRADING 7,27,56,725 1,03,77,654 ADJUSTMENT PROPOSED BY THE TPO 7,91,87,559 1,64,33,230 THE ANALYSIS MADE IN THE ABOVE TABLE, CLEARLY IN DICATES THAT THE ADJUSTMENT PROPOSED BY THE TPO U/S 92CA(3) IS E VEN MORE THAN THE INTERNATIONAL TRANSACTION ENTERED IN THAT SEGMENT. IN THE ABOVE CIRCUMSTANCES, THE ADJUSTMENT MADE BY APPLYIN G TNMM IN THE ABOVE 2 SEGMENTS RESULT IN A SITUATION WHERE, T HE ADJUSTMENT RESULT IN DENIAL OF THE IMPORT OF RAIN MATERIAL AND THE HEATERS, WHICH IS NOT CORRECT AS IT HAS NOT BEEN DENIED THAT THE IMPORT OF SUCH GOODS HAVE NOT BEEN MADE, THIS IS THE REASON D UE TO WHICH THE ABNORMAL GROSS PROFIT MARGIN WORKS OUT ON GIVING EF FECT TO THE IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 14 OF 17 ADJUSTMENT PROPOSED BY THE A.O. IT ALSO ESTABLISHES THAT IN THE FACT AND CIRCUMSTANCES OF THE CASE, THE APPLICATION OF T NMM (AT SEGMENT LEVEL) WHICH RESULT IN DENIAL OF THE ENTIRE IMPORT, IS NOT A MOST APPROPRIATE METHOD. THEREFORE, IN OUR VIEW, TH E OBJECTION OF THE ASSESSEE IN REJECTION OF THE CPM FOR MANUFACTUR ING SEGMENT AND RPM FOR TRADING SEGMENT IS ACCEPTABLE. IN VIEW OF THE ABOVE, WE DIRECT THE A.O. TO COMPU TE THE ALP BY APPLYING CPM FOR MANUFACTURING SEGMENT AND RPM FOR THE TRADING SEGMENT BY USING THE DATA RELEVANT TO F.Y. 2010-11 BASED ON THE COMPARABLES USED BY THE TPO FOR APPLICATION OF THE TNMM IN RESPECT OF THE ABOVE TWO SEGMENTS. 16. AGGRIEVED BY THE ORDER OF THE DRP AS AFORESAID, THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 17. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. D R SUBMITTED THAT THE BASIS ON WHICH THE DRP DELETED THE TP ADJUSTMENT MA DE BY THE AO WAS NOT CORRECT. IN THIS REGARD, THE LD. DR SUBMITTED THAT THE REQUIREMENT OF SECTION 92(1) OF THE ACT FOR DETERMINATION OF ALP I N RESPECT OF AN INTERNATIONAL TRANSACTION HAS TO BE FOLLOWED AND ME RELY FOR THE REASON THAT ON SUCH DETERMINATION, THE PROFIT MARGIN OF THE ASS ESSEE WILL BE EXORBITANT CANNOT BE THE BASIS TO DELETE THE ADDITION MADE ON ACCOUNT OF DETERMINATION OF ALP. HIS SUBMISSION THAT IF THE D RP FINDS THAT THE MAM IS CPM FOR INTERNATIONAL TRANSACTION FOR PURCHASE OF R AW MATERIALS AND RPM FOR INTERNATIONAL TRANSACTION FOR TRADING IN WATER HEATERS IS APPROPRIATE, THEN THE DRP OUGHT TO HAVE EMBARKED UPON AN ENQUIRY AS T O WHETHER THE ALP COMPUTED BY THE ASSESSEE IN ACCORDANCE WITH THOSE M ETHODS WAS CORRECT. IT WAS SUBMITTED BY HIM THAT BY DEFAULT PRICE PAID IN INTERNATIONAL TRANSACTION CANNOT BE CONSIDERED AS AT ARMS LENGTH . IT WAS THEREFORE SUBMITTED BY HIM THAT DETERMINATION OF MAM AND DETE RMINATION OF ALP BASED ON THE MAM SHOULD BE DIRECTED TO BE CARRIED O UT. IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 15 OF 17 18. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, POINTED OUT THAT AS FAR AS INTERNATIONAL TRANSACTION OF TRADING IN H EATERS IS CONCERNED, IN ASSESSEES OWN CASE, THIS TRIBUNAL HAS HELD THAT RP M IS THE MAM FOR DETERMINING THE ALP. THE DECISION OF ITAT IN IT(TP )A 332 & 176/BANG/2015 FOR AY 2010-11 DATED 8.2.2018 WAS SOU GHT TO BE RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE. WITH REG ARD TO THE INTERNATIONAL TRANSACTION OF PURCHASE OF RAW MATERIALS, THE LD. C OUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE ONLY REASON GIVEN BY THE TPO FOR REJECTING THE CPM AS MAM IS THE ABSENCE OF DETAILS REGARDING COMP UTATION OF GROSS PROFIT OF THE ASSESSEE. IN THIS REGARD, OUR ATTENT ION WAS DRAWN TO THE TP STUDY WHERE THE GROSS MARGINS EARNED BY THE ASSESSE E HAVE BEEN CLEARLY GIVEN. THESE DETAILS HAVE ALREADY BEEN EXTRACTED W HILE DEALING WITH THE CONTENTIONS OF THE ASSESSEE BEFORE THE DRP IN THE E ARLIER PART OF THIS ORDER. IT WAS THEREFORE SUBMITTED BY THE LD. COUNSEL FOR T HE ASSESSEE THAT THE CONCLUSIONS OF THE TPO THAT CPM IS NOT THE MAM IN R ESPECT OF INTERNATIONAL TRANSACTION FOR PURCHASE OF RAW MATERIALS IS NOT CO RRECT. THE LD. COUNSEL FOR THE ASSESSEE THEREFORE PRAYED THAT THE ORDER OF THE DRP SHOULD BE UPHELD. 19. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. AS FAR AS INTERNATIONAL TRANSACTIONS FOR PURCHASE OF R AW MATERIALS IS CONCERNED, THE ONLY REASON GIVEN BY THE TPO IN REJECTING CPM A S MAM IS THE ABSENCE OF GROSS MARGINS OF THE ASSESSEE AND THE MANNER IN WHICH IT WAS COMPUTED. IN THIS REGARD, WE FIND THAT IN A LETTER DATED 14.10.2014 FILED BY THE ASSESSEE BEFORE THE TPO IN ANNEXURE-2, THE ASSE SSEE HAS GIVEN COST OF SALES AND OTHER INDIRECT COST. THE SAME IS AT P AGE 525 OF ASSESSEES PB. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THA T THE REASONS GIVEN BY THE TPO FOR REJECTING CPM AS MAM CANNOT BE SUSTAINE D. 20. AS FAR AS INTERNATIONAL TRANSACTION OF TRADING IN WATER HEATERS IS CONCERNED, THIS TRIBUNAL HAS ALREADY TAKEN A VIEW I N ASSESSEES OWN CASE IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 16 OF 17 FOR AY 2010-11 THAT RPM IS THE MAM. FOLLOWING THE AFORESAID ORDER, WE HOLD THAT THE TPO IS NOT CORRECT IN REJECTING THE R PM AS MAM. 21. AS FAR AS DETERMINATION OF ALP FOR BOTH INTERNA TIONAL TRANSACTIONS ARE CONCERNED, WE ARE OF THE VIEW THAT THE PROVISIONS O F SECTION 92 MANDATE DETERMINATION OF ALP. THE FACT THAT AFTER CARRYING OUT SUCH EXERCISE, THE PROFIT MARGINS OF THE ASSESSEE WOULD BE ABNORMAL CA NNOT BE THE BASIS TO ACCEPT THE PRICE PAID IN THE INTERNATIONAL TRANSACT IONS AS AT ARMS LENGTH. IN OTHER WORDS, IT IS MANDATORY TO DETERMINE THE ALP I N THE MANNER CONTEMPLATED BY THE ACT AND THE RULES. IN OUR VIEW , THE DRP FELL INTO AN ERROR IN ACCEPTING THE PRICE RECEIVED BY THE ASSESS EE IN INTERNATIONAL TRANSACTIONS AS AT ARMS LENGTH WITHOUT CARRYING OU T SUCH AN EXERCISE. WE THEREFORE FEEL IT PROPER TO SET ASIDE THE ORDER OF DRP AND REMAND TO THE AO/TPO FOR FRESH CONSIDERATION THE DETERMINATION OF ALP ON THE BASIS OF MAM AS ADOPTED BY THE ASSESSEE IN ITS TP STUDY. 22. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT THE COMPARABLES CHOSEN BY THE ASSESSEE IN ITS TP STUDY WERE ALSO CHOSEN BY THE TPO, WHEN HE ADOPTED TNMM. HIS PRAYER WAS THAT PURSUANT TO THE REMAND BY THE TRIBUNAL, THE TPO SHOULD BE DIRECTED TO RESTRICT HIMSELF FROM CHOOSING ANY FRESH COMPARABLES. IN OUR VIEW, THE T PO HAS TO CARRY OUT THE EXERCISE IN ACCORDANCE WITH THE LAW AND NO RESTRICT ION CAN BE PLACED ON HIS POWERS TO BRING ANY RELEVANT AND APPROPRIATE DATA O N RECORD IN THE MATTER OF DETERMINATION OF ALP. 23. IN THE RESULT, THE APPEAL BY THE REVENUE IS ALL OWED FOR STATISTICAL PURPOSES. 24. AS FAR AS CROSS OBJECTION FILED BY THE ASSESSEE IS CONCERNED, WE FEEL THAT THE GROUNDS RAISED IN THE CO ARE ON THE M ANNER OF DETERMINATION OF ALP. WE ARE OF THE VIEW THAT IT WOULD BE JUST A ND APPROPRIATE TO GIVE IT(TP)A NO.216/BANG/2016 & CO NO.58/BANG/2016 PAGE 17 OF 17 LIBERTY TO RAISE ALL THE PLEAS PUT FORTH IN THE CRO SS OBJECTIONS IN THE SET ASIDE PROCEEDINGS BEFORE THE AO/TPO. WITH THESE OBSERVAT IONS, THE CO IS DISMISSED. 25. IN THE RESULT, IT(TP)A NO.216/BANG/2016 IS ALLO WED FOR STATISTICAL PURPOSES, WHILE CO NO.58/BANG/2016 IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF SEPTEMBER, 2018. SD/- SD/- ( G. MANJUNATHA ) ( N.V. VASUDEVAN ) AC COUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 12 TH SEPTEMBER, 2018. / D ESAI S MURTHY / COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.