Assistant Commissioner of Income tax, Bangalore V. M/s toyota Kirloskar Motor (P) Ltd, Bangalore

MA 7/BANG/2015

• Counselvise Citation: [2015] 124 COUNSELVISE.COM (IT) 2734 (ITAT-BANGALORE)
• Duration Of Justice: 1 month(s) 7 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 20-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 13-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Assessee Lawyers: H N KHINCHA
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER M.P. NO.7/BANG/2015 [IN IT(TP)A NO.1315/BANG/2011] ASSESSMENT YEAR : 2007-08 THE ASSISTANT COMMISSIONER OF INCOME TAX, LTU, BANGALORE. VS. M/S. TOYOTA KIRLOSKAR MOTOR (P) LTD., PLOT NO.1, BIDADI INDUSTRIAL AREA, RAMANAGAR DISTRICT, BANGALORE 562 109. PAN : AAACT 5415B APPELLANT RESPONDENT APPLICANT BY : SHRI C.H. SUNDAR RAO, CIT-I(DR) RESPONDENT BY : SHRI H.N. KHINCHA, C.A. DATE OF HEARING : 06.02.2015 DATE OF PRONOUNCEMENT : 20.02.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS A MISCELLANEOUS PETITION FILED BY THE REV ENUE U/S. 254(2) OF THE ACT, PRAYING FOR SOME CLARIFICATION ON THE ORDE R DATED 11.7.2014 PASSED BY THIS TRIBUNAL IN THE APPEAL OF THE ASSESSEE IN I T(TP)A NO.1315/BANG/2011. 2. THE ONLY ISSUE THAT AROSE FOR CONSIDERATION IN T HE AFORESAID APPEAL WAS DETERMINATION OF ALP OF AN INTERNATIONAL TRANSA CTION CARRIED OUT BY THE ASSESSEE WITH ITS AE. MP NO.7/BANG/2015 PAGE 2 OF 16 3. THE ASSESSEE IS A COMPANY. IT IS IN THE BUSINES S OF MANUFACTURE AND SELLING MULTI UTILITY VEHICLES UNDER THE MODEL NAME INNOVA AND PASSENGER CARS UNDER THE MODEL CAMRY AND COROLLA . FOR THE A.Y. 2007- 08, IT FILED A RETURN OF INCOME ON 19.10.2007, WHIC H WAS REVISED ON 3.1.2008 DECLARING AN INCOME OF RS.118,56,65,783. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE IS A SUBSIDIARY OF TOYOTA MOTOR CORPORATION, JAPAN AND HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS HOLDING COMPANY DURING THE PREVIOUS YEAR. THE TRANSACTION WITH THE HOLDING COMPANY WAS AN INT ERNATIONAL TRANSACTION WITH AN ASSOCIATED ENTERPRISE (AE) AND THEREFORE TH E PRICE AT WHICH THE INTERNATIONAL TRANSACTION WAS CARRIED OUT HAS TO PA SS THE ARMS LENGTH PRICE TEST LAID DOWN IN SEC.92 OF THE ACT. 4. AS ALREADY STATED THE ASSESSEE IS A SUBSIDIARY OF TOYOTA MOTOR CORPORATION, JAPAN (TMC), MANUFACTURES AND SELLS MU LTI-UTILITY VEHICLES UNDER MODEL NAME INNOVA AND PASSENGER CARS UNDER THE MODEL NAME CAMRY/COROLLA. 5. DURING THE PREVIOUS YEAR, THE ASSESSEE WAS ENGA GED IN CARRYING OUT TWO ACTIVITIES: 1. MANUFACTURING AND 2. TRADING THE FINANCIALS OF ASSESSEE FOR THE FY 2006-07 AT TH E ENTITY LEVEL RELEVANT TO AY 07-08 (INCLUDES TRANSACTIONS WITH AE AS WELL AS NON-AE) :- MP NO.7/BANG/2015 PAGE 3 OF 16 DESCRIPTION RS. IN (000) OPERATING REVENUE (EXCLUDING OTHER INCOME) 37633754 OPERATING EXPENSES (EXCLUDING INTEREST AND LOSS ON SALE OF ASSETS) 36847765 OPERATING PROFIT (PBIT) 785989 OP ON COST 2.13% OP ON SALES 2.09% THE SEGMENTAL RESULTS IN RESPECT OF ITS TRADING SEG MENT AND MANUFACTURING SEGMENT WERE AS UNDER:- DESCRIPTION MANUFACTURING RS. TRADING RS. TOTAL RS. OPERATING REVENUES 76.55% 23.45% 100% NET SALES 2858,56,48,000 875,81,13,000 3734,37,61,000 SCRAP SALES 28,99,93,000 0 28,99,93,000 2887,56,41,000 875,81,13,000 3763,37,54,000 COST OF GOODS SOLD / CONSUMPTION OF MATERIAL 2419,28,33,000 715,82,34,000 3135,10,67,000 GROSS PROFIT 468,28,08,000 159,98,79,000 628,26,87,000 GROSS PROFIT ON SALES 16.22% 18.27% 16.69% OTHER EXPENSES MANUFACTURING EXPENSES 90,35,91,000 0 90,35,91,000 EXPENSES ON EMPLOYEES 86,54,98,000 26,51,33,000 113,06,31,000 DEPRECIATION 94,24,11,000 0 94,24,11,000 ROYALTY 78,01,61,000 0 78,01,61,000 OTHER OPERATING EXPENSES 133,18,97,000 40,80,07,000 173,99,04,000 482,35,58,000 67,31,40,000 549,66,98,000 TOTAL COST 2901,63,91,000 783,13,74,000 3684,77,65,000 OPERATING PROFIT (PBIT) (-)14,07,50,000 92,67,39,000 78,59,89,000 OP ON SALES (-) 0.49% 10.58% OP ON COST (-) 0.48% 11.83% THE ABOVE FINANCIALS MAY NOT BE RELEVANT FOR THE PU RPOSE OF DECIDING THE ISSUES RAISED BY THE ASSESSEE IN GR.NO.12, 22 TO 24 BUT HAS BEEN GIVEN JUST TO GIVE A BROAD PICTURE. THE ABOVE DETAILS MA Y BE RELEVANT. MP NO.7/BANG/2015 PAGE 4 OF 16 6. AS ALREADY STATED, THE ASSESSEE WAS ENGAGED IN T HE FOLLOWING ACTIVITIES; VIZ., (I) MANUFACTURING, AND (II) TRA DING. THE ASSESSEE PURCHASES VARIOUS SPARES AND COMPONENTS FROM THE AS SOCIATED ENTERPRISES, WHICH FORM PART OF THE MULTI UTILITY V EHICLE (MUV) AND PASSENGER CAR MANUFACTURED BY THE ASSESSEE. THE AS SESSEE ALSO MADE PAYMENTS TOWARDS ROYALTY AS ALSO FOR VARIOUS SERVIC ES RECEIVED FROM ASSOCIATED ENTERPRISES. THE ASSESSEE ALSO PURCHASE S CERTAIN PARTS AND COMPONENTS LOCALLY AND EXPORTS THE SAME TO ASSOCIAT ED ENTERPRISES. THE ASSESSEE ALSO IMPORTS CBUS AND SELLS THE SAME LOCA LLY. THE ASSESSEE SELECTED TRANSACTIONAL NET MARGIN METHOD(TNMM) AS T HE MOST APPROPRIATE METHOD. THE TP ANALYSIS WAS DONE AT THE ENTITY LEV EL COMBINING ALL THE TRANSACTIONS INCLUDING THOSE AS A DISTRIBUTOR. THE ASSESSEE IN HIS TRANSFER PRICING ANALYSIS TOOK AS COMPARABLE COMPANIES 7 COM PANIES WHO HAD BUSINESS SIMILAR TO THAT OF THE ASSESSEE I.E., THEY WERE ALSO ENGAGED IN MANUFACTURING OF MOTOR VEHICLES AS WELL AS TRADING IN PARTS AND ACCESSORIES. THE PROFIT LEVEL INDICATOR (PLI) ADOP TED WAS CASH PROFIT TO SALES. THE ASSESSEE ARRIVED AT THE CASH AND OPERAT ING PROFIT MARGIN OF THE 7 COMPARABLE AND ARRIVED AT AN ARITHMETIC MEAN OF 5 .28% AND 2.87% RESPECTIVELY OF CASH PROFIT MARGIN AND OPERATING PR OFIT MARGIN OF THE 7 COMPARABLE. THE ASSESSEES CASH PROFIT MARGIN AND OPERATING PROFIT MARGIN WERE ARRIVED AT 11.36% AND 8.84% RESPECTIVEL Y. IT WAS SUBMITTED BY THE ASSESSEE THAT ON A COMPARISON AT THE ENTITY LEVEL, THE PROFIT MARGINS OF THE ASSESSEE WAS MUCH HIGHER THAN THE ARITHMETIC MEAN OF THE COMPARABLE AND THEREFORE THE INTERNATIONAL TRANSACT ION WITH THE AE SHOULD BE CONSIDERED AS AT ARMS LENGTH. MP NO.7/BANG/2015 PAGE 5 OF 16 7. THEREAFTER THE TPO CLASSIFIED THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE TAXPAYER DURING THE FY 2006-07 BASED ON THEIR NATURE AS BELOW:- (I) SALE OF SPARE PARTS AND COMPONENTS MANUFACTUR ING (II) SALE OF PROTOTYPES AND TRIAL PARTS MANUFACT URING (III) SALE OF MANUFACTURED CBU MANUFACTURING (IV) RECEIPT OF COMMISSION TRADING (V) RETURN OF RACKS - MANUFACTURING (VI) PURCHASE OF PARTS AND COMPONENTS MANUFACTUR ING AND TRADING (VII) PURCHASE OF AUTOMOBILES AND ACCESSORIES TRA DING (VIII) PAYMENT OF ROYALTY AND TECHNICAL FEES MANU FACTURING (IX) PAYMENT FOR INTRA GROUP SERVICES MANUFACTU RING AND TRADING (X) REIMBURSEMENT OF EXPENSES RECEIVED MANUFACTU RING AND TRADING THE TPO THEN PROCEEDED TO CATEGORIZE THE AFORESAID TRANSACTIONS INTO TWO DISTINCT SEGMENTS:- I. MANUFACTURE AND SALE OF PASSENGER CARS II. TRADING IN AUTO COMPONENTS 8. THEREAFTER, THE TPO ARRIVED AT THE RESULTS OF TH E TRADING SEGMENT AS WELL AS MANUFACTURING SEGMENT OF THE ASSESSEE. THE PLI ADOPTED WAS OPERATING PROFIT ON SALES. AS FAR AS TRADING SEGME NT IS CONCERNED, THE AO ARRIVED AT THE FOLLOWING SEGMENTAL RESULTS:- MP NO.7/BANG/2015 PAGE 6 OF 16 PARTICULARS TRADING (RS. IN CRORES) OPERATING REVENUES 818.02 COST OF GOODS SOLD 715.82 GROSS PROFIT 102.02 GROSS PROFIT ON SALES 12.49% OPERATING COST 780.24 OPERATING PROFIT 37.78 OPERATING PROFIT MARGIN ON SALES 4.62% THE TPO WAS SATISFIED THAT THE INTERNATIONAL TRANSA CTIONS IN THE TRADING SEGMENTS WERE AT ARMS LENGTH AS THE ASSESSEES PRO FIT MARGIN WAS BETTER COMPARED TO THE PROFIT MARGIN OF THE COMPARABLE COM PANIES (IN ITS TRADING SEGMENT) SELECTED BY THE ASSESSEE IN ITS TP STUDY . NO ADJUSTMENT WHATSOEVER WAS THEREFORE SUGGESTED BY THE TPO IN SO FAR AS IT RELATES TO THE TRADING SEGMENT IS CONCERNED. 9. AS FAR AS MANUFACTURING SEGMENT IS CONCERNED, TH E TPO AS WE HAVE ALREADY SEEN HAD ARRIVED AT THE OPERATING PROFIT MA RGIN ON SALES AT 1.94% IN THE CHART GIVEN AT PARA-9 OF THIS ORDER. THE TAXPA YER HAD IDENTIFIED 7 COMPARABLES AT THE ENTERPRISE LEVEL BY TAKING MANUF ACTURING SEGMENT AS WELL AS TRADING SEGMENT RESULTS. THE 7 COMPARABLES CHOSEN BY THE ASSESSEE WERE AS FOLLOWS:- SL NO. NAME OF THE COMPANY 1 ASHOK LEYLAND LIMITED 2 EICHER MOTORS LTD. 3 FORCE MOTORS LTD. 4 HINDUSTAN MOTORS LTD. 5 MAHINDRA & MAHINDRA LTD. 6 SWARAJ MAZDA LTD. 7 TATA MOTORS LTD. MP NO.7/BANG/2015 PAGE 7 OF 16 10. THE TPO ACCEPTED 5 COMPANIES AS COMPARABLES. ON E OF THE FILTERS APPLIED BY THE TPO WAS THAT THE COMPARABLE COMPANY SHOULD HAVE AT LEAST 75% OF ITS REVENUE FROM MANUFACTURING OF THESE GOOD S. FOR APPLYING THE ABOVE FILTER FOR CHOOSING COMPARABLE COMPANIES, THE TPO RELIED ON PARA 1.20 (UNDER THE HEAD FUNCTIONAL ANALYSIS) OF THE OECD GUIDELINES, 1995 WHICH SAYS THAT FUNCTIONAL ANALYSIS IS TO IDENTIFY AND TO COMPARE ECONOMICALLY SIGNIFICANT ACTIVITIES UNDERTAKEN BY T HE INDEPENDENT ENTERPRISES. THE RELEVANT PORTION OF THE OECD GUIDE LINES IS REPRODUCED BELOW. 1.20 IN DEALINGS BETWEEN TWO INDEPENDENT ENTERPRISES, COMPENSATION USUALLY WILL REFLECT THE FUNCTIONS THAT EACH ENTERPRISE PERFORMS (TAKING INT O ACCOUNT ASSETS USED AND RISKS ASSUMED). THEREFORE, IN DETERMINING WHETHER CONTROLLED AND UNCONTROLLED TRANSACTIONS OR ENTITIES ARE COMPARABLE, COMPARISON OF THE FUNCTIONS TAKEN ON BY THE PARTIES IS NECESSARY. THIS COMPARISON IS BASED ON A FUNCTIONAL ANALYSIS, WHICH SEEKS TO IDENTIFY AND TO COMPARE THE ECONOMICALLY SIGNIFICANT ACTIVITIES AND RESPONSIBILITIES UNDERTAKEN OR TO LIE UNDERTAKEN BY THE INDEPENDENT AND ASSOCIATED ENTERPRISES . FOR THIS PURPOSE, PARTICULAR ATTENTION SHOULD BE PAID T O THE STRUCTURE AND ORGANISATION OF THE GROUP. IT WILL AL SO BE RELEVANT TO DETERMINE IN WHAT JURIDICAL CAPACITY TH E TAXPAYER PERFORMS ITS FUNCTIONS. 11. THE ASSESSEE SUBMITTED BEFORE THE TPO THAT IF T HE ABOVE FILTER IS APPLIED TO COMPARABLE THEN THE SAME SHOULD BE APPLI ED TO THE TAXPAYER SO AS TO COMBINE MANUFACTURING AND TRADING AS TRADING REVENUES IN THE CASE OF TAXPAYER ARE ALSO LESS THAN 25% OF THE REVENUES. THE TPO HOWEVER WAS OF THE VIEW THAT TRADING AND MANUFACTURING ARE DIFF ERENT ACTIVITIES ASSOCIATED WITH DIFFERENT ASSET AND RISK PROFILE THEREFORE THE TWO ACTIVITIES CANNOT BE COMBINED. THE ASSESSEE POINTED OUT THAT THE COMPARA BLE COMPANIES ARE MP NO.7/BANG/2015 PAGE 8 OF 16 ALSO INTO TRADING AND THAT THE TRADING REVENUES IN THE CASE OF COMPARABLE COMPANIES CONTRIBUTE LESS THAN 25% OF REVENUES. TH E TPO HOWEVER HELD THAT THE IMPACT ON THE OVERALL PROFITS OF THE COMPA RABLE COMPANIES ON ACCOUNT OF TRADING REVENUES BEING LESS THAN 25% OF THE OVERALL REVENUES WAS NEGLIGIBLE. 12. THEREAFTER, THE TPO ARRIVED AT THE FOLLOWING A RITHMETIC MEAN OF THE 5 COMPARABLE COMPANIES CHOSEN IN THE MANUFACTURING SEGMENT:- (RS. IN CRORE) SL NO COMPANY NAME FINANCE YEAR ADJ. NET SALES ADJ. OP. COST ADJ. OP. PROFIT ADJ. OP /SALES 1 ASHOK LEYLAND 2007- 08 7237.19 6789.24 447.95 6.19% 2 EICHER MOTORS LTD 2007- 08 1932.90 1878.77 54.13 2.80% 3 MAHINDRA & MAHINDRA LTD. 2007- 08 9552.32 8923.55 628.77 6.58% 4 SWARAJ MAZDA LTD 2007- 08 576.38 565.08 11.30 1.96% 5 TATA MOTORS LTD. 2007- 08 27004.49 24859.14 2145.35 7.94% ARITHMETICAL MEAN MARGIN 5.10% 13. THEREAFTER, THE TPO MADE THE DOWNWARD REVISION OF THE PROFIT MARGINS OF THE COMPARABLE ON ACCOUNT OF OPERATING E FFICIENCY. IN THIS REGARD THE TPO WAS OF THE VIEW THAT THE OPERATIONAL EFFICIENCY IS INDICATED BY HOW AN ENTERPRISE CONTROLS ITS OPERATING EXPENSE S OTHER THAN COST OF RAW MATERIAL. THUS IF AN ORGANIZATION IS ABLE TO CONTRO L THE INDIRECT EXPENSES LIKE EMPLOYEE COST ETC, ITS PROFITABILITY IMPROVES. THUS , BEFORE COMPARING THE TAXPAYER WITH THE COMPARABLE COMPANIES, THEIR EFFIC IENCIES ALSO HAVE TO BE EQUALIZED. OTHERWISE, THE COMPARABILITY EXERCISE WO ULD BE DISTORTED. ADJUSTMENTS HAVE TO BE MADE FOR THE DIFFERENCES IN OPERATIONAL EFFICIENCY MP NO.7/BANG/2015 PAGE 9 OF 16 LEVELS BETWEEN THE TAXPAYER AND THE COMPARABLE COMP ANY. THEREAFTER THE TPO DREW THE FOLLOWING CONCLUSION WITH REGARD TO TH E OPERATIONAL EFFICIENCY OF THE ASSESSEE AND THAT OF THE COMPARABLE COMPANIE S. DESCRIPTION OTHER OPERATIVE EXPENSES AS % OF SALES ARITHMETIC MEAN OF COMPARABLES (AS PER ANNEXURE C TO THE ORDER OF TPO) 19.64% TOYATA-KIRLOSKAR 16.07% 14. THE TPO CONCLUDED THAT THE OPERATIVE EFFICIENCY OF THE ASSESSEE VIS--VIS THE COMPARABLE COMPANIES IS HIGHER BY 3.5 7%. THIS DIFFERENCE ACCORDING TO THE TPO WAS MATERIAL AS THE MARGINS OF THE COMPARABLE COMPANIES IN THIS SECTOR VARIED ONLY FROM 3.52% ON SALES TO 9.35% ON SALES FOR THE FY 2006-07. THE TPO THEREFORE PROPOS ED TO INCREASE THE MARGINS OF THE COMPARABLE CHOSEN I.E., HE REVISED T HE PROFIT MARGINS OF THE COMPARABLES SO THAT THEY WOULD BE ON PAR WITH THE A SSESSEE. 15. THE TPO THEREAFTER COMPARED THE NET MARGIN EARN ED BY THE ASSESSEE AS COMPUTED BY HIM IN PARA-9 OF THIS ORDER ON SEGMENTAL BASIS FOR MANUFACTURING SEGMENT TO THE ADJUSTED NET MARGI N EARNED BY THE COMPARABLE COMPANIES AS FOLLOWS: PLI (OP TO SALES) ARITHMETIC MEAN OF ADJUSTED NET MARGIN OF COMPARABLES 7.10% TOYATA-KIRLOSKAR MOTOR (THE ASSESSEE AS COMPUTED IN PARA-9 OF THIS ORDER BY THE TPO ON MANUFACTURING SEGMENT) 1.94% THE TPO HELD THAT THE MARGIN EARNED BY THE ASSESSEE WAS MUCH LESS THAN THE ARITHMETICAL MEAN MARGIN EARNED BY COMPARABLE E NTERPRISES AND WAS MP NO.7/BANG/2015 PAGE 10 OF 16 BEYOND +/- 5% RANGE FROM THE PRICE CHARGED BY THE A SSESSEE IN ITS INTERNATIONAL TRANSACTIONS DURING THE FY 2006-07. T HE TPO THUS CONCLUDED THAT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN THE MANUFACTURING SEGMENT WAS NOT AT ARMS LENGTH. THE ARMS LENGTH PRICE WAS COMPUTED BY HIM AS UNDER. COMPUTATION OF ARMS LENGTH PRICE THE ARMS LENGTH PRICE IS COMPUTED AS UNDER FOR THE MANUFACTURING SEGMENT: COSTS INCURRED IN THE INTERNATIONAL TRANSACTIONS (AS PER SUBMISSIONS OF THE TAXPAYER DATED 25-02-201 1) A. PURCHASE OF PARTS & COMPONENTS RS.1089,86,95,1 68 B. PAYMENT OF TECHNICAL SUPPORT FEE RS. 76 ,63,572 C. OTHER EXPENSES RS. 3,21,80,558 D. ROYALTY RS. 78,13,84,839 TOTAL COST INCURRED WITH AES IN THE MFG SEGMENT RS.1171,99,324,13 7 THE ABOVE AMOUNT OF RS. 152,88,21,900 IS CONSIDERED AS AN ADJUSTMENT U/S 92CA IN THE MANUFACTURING SEGMENT. OPERATING REVENUES (A) RS. 2949,89,00,000 ARMS LENGTH MEAN ADJUSTED OPERATIVE PROFIT MARGIN 7.10% ON SALES TOTAL ARMS LENGTH OPERATIVE COST (92.90% OF (A)) (B) RS. 2740,44,78,100 OPERATIVE COST SHOWN IN THE BOOKS (C) RS. 2893,33,0 0,000 COST SHOWN IN THE INTERNATIONAL TRANSACTIONS (AS ARRIVED ABOVE) (D) RS. 1171,99,24,137 COSTS INCURRED WITH UN-ASSOCIATED ENTERPRISES / PERSONS (E = C D) RS. 172 1,33,75,863 ARMS LENGTH COST OF INTERNATIONAL TRANSACTIONS (F= B - E) RS. 1019,11,02,237 SHORTFALL BEING ADJUSTMENT U/S 92CA (G=D F) RS. 1 52,88,21,900 MP NO.7/BANG/2015 PAGE 11 OF 16 16. THE ORDER OF THE AO WAS CONFIRMED BY DRP. 17. IN GROUND NOS.12, 22, 23 & 24, THE ASSESSEE RAI SED THE FOLLOWING GROUNDS:- THE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PR ICING OFFICER AND HONOURABLE DISPUTE RESOLUTION PANEL HAVE ERRED IN GR.NO.12: NOT APPRECIATING THAT THE TRADING AND MA NUFACTURING SEGMENTS ARE INTERTWINED AND INTER-RELATED WARRANTI NG A COMBINED TRANSACTION APPROACH IN ARRIVING AT THE ARMS LENG TH PRICE. GR.NO.22: DOING SEPARATE EVALUATION OF ROYALTY PAY MENT, TECHNICAL FEES AND OTHER PAYMENTS BY ADOPTING CUP METHOD WITH OUT JUSTIFYING HOW THE SAME WAS MOST APPROPRIATE METHOD. GR.NO.23: CONCLUDING THAT ARMS LENGTH PRICE OF RO YALTY PAYMENT, TECHNICAL FEES AND OTHER PAYMENTS AS NIL WITHOUT BR INING ON RECORD ANY COMPARABLE; GR.NO.24: CONCLUDING THAT THE TAXPAYER HAS NOT BEE N ABLE TO SHOW THAT IT DERIVED ANY ECONOMIC BENEFIT FROM THE ALLEG ED KNOW-HOW RECEIVED FROM THE ASSOCIATED ENTERPRISES IGNORING T HE EVIDENCE SUPPORTING THE SAME, WHICH WERE ON RECORD; 18. ON THE ABOVE GROUNDS, THE TRIBUNAL HELD AS UNDE R:- 41. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. ON THE ISSUE AS TO WHETHER THE INTERN ATIONAL TRANSACTIONS HAVE TO BE CONSIDERED SEPARATELY OR IN DEPENDENTLY WITHOUT AGGREGATING THEM AS PART OF THE SEGMENT TO WHICH THEY RELATE, WE FIND THAT THE TERM INTERNATIONAL TRANSA CTION HAS BEEN DEFINED IN SECTION 92B OF THE ACT TO MEAN AND INCLU DE TRANSACTIONS BETWEEN TWO OR MORE AES, EITHER OR BOT H OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SAL E OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SE RVICES, OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISE. SECTION 92 OF THE ACT PROVIDES THAT INCOME FROM INT ERNATIONAL TRANSACTIONS BETWEEN AES SHALL BE COMPUTED HAVING R EGARD TO ALP. SECTION 92-C OF THE ACT PRESCRIBES THE METHOD S OF DETERMINING ALP, HAVING REGARD TO THE MOST APPROPRI ATE METHOD WHICH WILL BE DECIDED IN ACCORDANCE WITH THE RULES PRESCRIBED. RULE 10A(D) OF THE INCOME-TAX RULES 1962 [THE RULE S] PROVIDES THAT TRANSACTION WOULD INCLUDE A NUMBER OF CLOSEL Y LINKED MP NO.7/BANG/2015 PAGE 12 OF 16 TRANSACTIONS. RULE 10B(1)(D) OF THE RULES ADVOCATE PROFIT SPLIT METHOD OF DETERMINING ALP WHERE INTERNATIONAL TRANS ACTIONS INVOLVE TRANSFER OF UNIQUE INTANGIBLE OR IN MULTIPL E INTERNATIONAL TRANSACTIONS WHICH ARE SO INTER-RELATED THAT THEY C ANNOT BE EVALUATED SEPARATELY FOR THE PURPOSE OF DETERMINING ALP OF ANY ONE TRANSACTION. IT THUS APPEARS THAT THE ACT AND THE RULES CONTEMPLATE DETERMINING ALP BY AGGREGATING INTERNAT IONAL TRANSACTIONS WHICH ARE MULTIPLE, INTERLINKED OR INT ER-RELATED TO EACH OTHER AND CANNOT BE EVALUATED SEPARATELY. TO THIS EXTENT THE CONCLUSIONS OF THE TPO REGARDING DETERMINATION OF A LP BY TAKING SEGMENTAL RESULTS WITHOUT LOOKING INTO AS TO WHETHER THE TWO SEGMENTS ARE INTERLINKED OR INTER-RELATED CANNO T BE SUSTAINED. AS TO WHAT WOULD BE THE MOST APPROPRIATE METHOD IN SUCH CASES IS AGAIN DEPENDENT ON RULES 10B(2) AND (3) OF THE RULE S. 42. THE OECD GUIDELINES AS WELL AS THE AUSTRALIAN T AX OFFICER (ATO) TAXATION RULE 97/20 ON INTERNATIONAL TRANSFER PRICING PARA.2.74(1) REFERRED TO BY THE ASSESSEE BE FORE THE REVENUE AUTHORITIES WHICH HAVE BEEN SET OUT IN THE EARLIER PART OF THIS ORDER SEEMS TO SUPPORT COMBINED TRANSACTION A PPROACH WHERE THE TRANSACTIONS ARE CLOSELY LINKED OR CONTIN UOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON AN INDIVIDUAL BAS IS. IN SUCH A SITUATION, RATHER THAN ASSESSING THE ALP OF THE TRA NSACTIONS INDIVIDUALLY, THE TRANSACTIONS COULD BE EVALUATED T OGETHER USING THE MOST APPROPRIATE METHOD. 43. THE ABOVE BEING THE LEGAL POSITION, IT BECOME S NECESSARY TO EXAMINE THE INTERNATIONAL TRANSACTIONS CARRIED O UT BY THE ASSESSEE WITH ITS AE DURING THE PREVIOUS YEAR WHICH HAVE BEEN CATEGORIZED INTO 2 SEGMENTS BY THE TPO IN HIS ORDER AND FIND OUT IF THEY ARE INTERLINKED OR INTERCONNECTED SO THAT T HE TRANSACTIONS NEED TO BE EVALUATED TOGETHER RATHER THAN INDIVIDUA LLY. IN THIS REGARD, WE FIND THAT THE SUBMISSIONS MADE BY THE AS SESSEE BEFORE TPO AS WELL AS BEFORE DRP HAVE NOT BEEN CONSIDERED AT ALL. THE TPO PROCEEDED ON THE BASIS THAT ALP OF EACH TRANSAC TION HAS TO BE EXAMINED INDEPENDENTLY/INDIVIDUALLY BY PLACING R ELIANCE ON THE DECISIONS OF TRIBUNAL IN THE CASE OF STAR INDIA LTD. (SUPRA) AND UKB(I) (P) LTD. (SUPRA). WE AGREE WITH THE SUBMISS IONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THESE DECISIO NS HAVE IN FACT ACCEPTED IN PRINCIPLE THAT AGGREGATION OF TRANSACTI ONS HAVE TO BE DONE WHERE THEY ARE INTERLINKED BUT HAVE ON FACTS F OUND THAT TRANSACTIONS WERE NOT INTERLINKED AND THEREFORE HEL D THAT ALP OF TRANSACTIONS HAVE TO BE DETERMINED INDIVIDUALLY. T HE FOLLOWING DECISIONS RELIED UPON THE LEARNED COUNSEL FOR THE A SSESSEE ALSO SUPPORTS THE PLEA OF THE LEARNED COUNSEL FOR THE AS SESSEE. : I. M/S.THYSSEN KRUPP INDUSTRIES VS. ACIT (ITA NO.7032/MUM/2011), MP NO.7/BANG/2015 PAGE 13 OF 16 II. HINDUSTAN UNILEVER LTD. VS. ACIT (ITA NO.7868/MUM/2010), AND III. DCIT VS. CMA CGM GLOBAL INDIA (P) LTD. (ITA NO.5979/MUM/2010) 44. THE DRP WITHOUT EXAMINING THE SUBMISSIONS ON B EHALF OF THE ASSESSEE HAS SIMPLY ENDORSED THE FINDINGS OF TH E TPO. WITH REGARD TO THE CONCLUSIONS OF THE DRP, UPHOLDING THE ORDER OF THE TPO THAT THE TRADING AND MANUFACTURING SEGMENT OF T HE ASSESSEE ARE DISTINCT AND NOT INTER-RELATED WARRANTING COMBI NED TRANSACTION APPROACH, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FO R A.Y. 2003-04 IN ITA NO.828/B/2010, WHEREIN IDENTICAL ISSUE WAS C ONSIDERED AND DECIDED BY THIS TRIBUNAL AS FOLLOWS:- '14.5.2 TAKING INTO CONSIDERATION THE SUBMISSIONS M ADE AND THE FACTS AND CIRCUMSTANCES OF THE CASE, WE AGR EE WITH THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE. WHILE IT IS TRUE THAT FUNCTION, ASSETS AN D RISKS OF THE TRADING AND MANUFACTURING SEGMENTS GENERALLY DIFFER, HOWEVER CIRCUMSTANCES MAY WARRANT COMBINING BOTH OF THEM. IT IS ONLY IN THE SPECIFIC FACTS OF THE CASE THAT THE COMBINING OF BOTH SEGMENTS IS ADVISABLE. I N THE INSTANT CASE OF THE ASSESSEE, THE SALE OF SPARE PAR TS IS TRIGGERED AS A RESULT OF THE MANUFACTURING ACTIVITI ES, INCLUDING WARRANTY COMMITMENTS. THEREFORE, WE ARE O F THE VIEW THAT IT WOULD NOT BE IN THE FITNESS OF THI NGS FOR THE SALE OF SPARE PARTS AND COMPONENTS TO BE CONSID ERED IN ISOLATION FROM THE SALE OF MANUFACTURED VEHICLES . THIS VIEW IS SUPPORTED BY THE OECD T.P. GUIDELINES, 2010 , RELIED ON BY THE ASSESSEE. THIS VIEW IS ALSO BUTTRE SSED BY THE FACT THAT THE COMPARABLE COMPANIES ARE ALSO TRA DING IN SPARE PARTS AND COMPONENTS. ON A OVERALL CONSIDERATION, IT CAN BE CONCLUDED THAT TRADING IN SPARE PARTS IS CLOSELY INTER-LINKED WITH THE MANUFACTURIN G SEGMENT OF THE ASSESSEE. WE ARE OF THE VIEW THAT NO MEANINGFUL PURPOSE WOULD BE SERVED IN SEGREGATING T HE TRADING AND MANUFACTURING SEGMENTS, PARTICULARLY WH EN THE ASSESSEE AND THE COMPARABLE COMPANIES ARE AT PA R WITH REGARD TO THE NATURE AND SCALE OF COMBINED ACTIVITIES. NEEDLESS TO ADD THAT THIS FINDING / DEC ISION BY ITS VERY NATURE HAS TO BE CASE-SPECIFIC AND YEAR-SP ECIFIC AS THE DECISION IS BASED ON THE FACTS AND CIRCUMSTA NCES OF THIS PARTICULAR CASE AND OF THIS PARTICULAR YEAR AND IS NOT TO BE CONSTRUED AS LAYING DOWN THE PRINCIPLE IN THIS REGARD. WE, THEREFORE, DIRECT THE ASSESSING OFFICER / MP NO.7/BANG/2015 PAGE 14 OF 16 TPO TO COMPUTE THE ALP AT THE ENTITY / ENTERPRISE L EVEL BY COMBINING THE TRADING AND MANUFACTURING SEGMENTS .' 45. IT IS NO DOUBT TRUE THAT THE TRIBUNAL HAS OBSER VED THAT THE RULING GIVEN IN THAT YEAR IS BASED ON THE FACTS THA T PREVAILED IN THAT YEAR. WE FIND THAT THE FACTS IN THE PRESENT ASSESS MENT YEAR ARE ALSO IDENTICAL AND THERE HAS BEEN NO CHANGE WHATSOE VER IN THE BUSINESS MODEL OF THE ASSESSEE. IN THESE CIRCUMSTA NCES, WE ARE OF THE VIEW THAT THE DECISION RENDERED BY THE TRIBUNAL WOULD BE APPLICABLE FOR THIS ASSESSMENT YEAR ALSO. RESPECTF ULLY FOLLOWING THE DECISION OF THE TRIBUNAL, WE HOLD THAT THE TRAD ING AND MANUFACTURING SEGMENT OF THE ASSESSEE ARE NOT DISTI NCT AND ARE INTER-RELATED WARRANTING COMBINED TRANSACTION APPRO ACH. 46. WE HAVE ALREADY SEEN IN PARA 9 OF THIS ORDER TH AT THE TPO HAS ARRIVED AT THE BIFURCATION OF THE MANUFACTURING AND TRADING SEGMENTAL OPERATING RESULTS. IN VIEW OF OUR CONCLU SIONS THAT THE TRADING AND MANUFACTURING SEGMENTS ARE INTERLINKED AND THEREFORE A COMBINED TRANSACTION APPROACH HAS TO BE ADOPTED, WE COMBINE THE RESULTS SO ARRIVED AT BY THE TPO, WHICH IS GIVE N IN PARA 9 OF THIS ORDER. IF THE SEGMENTAL RESULTS ARE COMBINED, THE OPERATING REVENUE OF THE ASSESSEE WOULD BE 3767.91 CRORES AND THE OPERATING PROFIT WOULD BE RS.94.34 CRORES. THUS, T HE OPERATING PROFIT MARGIN ON SALES WOULD BE 2.517. 47. EVEN ASSUMING THAT THE ADJUSTMENT ON ACCOUNT OF OPERATIONAL EFFICIENCY MADE BY THE TPO IS TO BE ACC EPTED, THEN THE COMBINED MARGIN AFTER ADJUSTMENT OF THE FIVE CO MPARABLES WHICH IS GIVEN IN PARA-20 OF THIS ORDER, WOULD BE 7 .10%. IF THE ARITHMETIC MEAN OF THE FIVE COMPARABLES AS ABOVE IS TESTED AS AGAINST THE OPERATING PROFIT MARGIN ON SALES OF THE ASSESSEE AT 2.517%, THEN THE SAME WOULD BE WITHIN THE (+)/(-) 5 % RANGE OF THE ARITHMETIC MEAN AND THEREFORE NO ADDITION BY WA Y OF ADJUSTMENT TO THE ALP CAN BE MADE. IN THIS VIEW OF THE MATTER, WE ARE OF THE VIEW THAT THE ADDITION SUSTAINED BY T HE DRP DESERVES TO BE DELETED AND IS HEREBY DELETED. GR.N O.12 IS ACCORDINGLY ALLOWED. 19. THUS, ADJUSTMENT OF ALP WAS DELETED BY THE TR IBUNAL. THE TRIBUNAL WENT AHEAD AND DECIDED THE ISSUE WHETHER T HE TPO CAN COME TO THE CONCLUSION THAT ALP OF INTERNATIONAL TRANSACTIO N IS NIL BECAUSE NO SERVICES WERE RENDERED OR THAT THE ASSESSEE DID NOT DERIVE ANY BENEFIT FROM THE AE FOR WHICH PAYMENTS WERE MADE. THE TRIBUNAL IN PARA 48 OF ITS ORDER MP NO.7/BANG/2015 PAGE 15 OF 16 CLEARLY OBSERVED THAT THIS ISSUE IS PURELY ACADEMIC BECAUSE THE TRIBUNAL HAS ALREADY HELD THAT INTERNATIONAL TRANSACTION IS AT ARM'S LENGTH AND NO ADDITION NEEDS TO BE MADE TO THE TOTAL INCOME OF TH E ASSESSEE. THE TRIBUNAL FINALLY CONCLUDED IN PARA 48 OF THE ORDER THAT TPO CANNOT COME TO THE CONCLUSION THAT THE ASSESSEE HAS NOT DERIVED AN Y BENEFIT FOR WHICH IT MADE PAYMENTS AND THEREFORE THE CONSIDERATION PAID BY THE ASSESSEE HAS TO BE ARRIVED AT NIL. 20. IN PARAS 50 & 51 OF THE ORDER, THE TRIBUNAL ALS O REFERRED TO AN ORDER OF CIT(A) FOR A.Y. 2005-06 WHEREIN THE CIT(A) HELD THAT TPO CANNOT DETERMINE THE ALP OF ROYALTY PAYMENT AT NIL AND CON CURRED WITH THE VIEW. 21. IN THIS M.P., THE REVENUE AFTER REFERRING TO PA RAS 50, 51 AND 48 HAS SUBMITTED AS FOLLOWS:- 5. THE ABOVE PARA READS TO MEAN THAT THE TPO IS TO RECOMPUTED THE ALP IN ACCORDANCE WITH THE METHODS L AID DOWN IN THE ACT AND ALSO SATES THAT THE ASSESSEES STAND IS ACCEPTED OPENING IT TO A READING THAT THE APPEAL HAS BEEN AL LOWED IN FAVOUR OF THE ASSESSEE AS WELL AS THAT OF IT BEING SET ASI DE FOR THE TPO TO DO IT IN ACCORDANCE WITH THE METHODS RECOGNIZED UND ER THE ACT. 6. THE TRIBUNAL WAS ALSO PLEASED TO SET ASIDE THE M ATTER TO THE FILE OF THE TPO FOR AY 2008-09 WHEN READ WITH PARA 51 LEADS TO A BELIEF THAT THE TPO IS TO RECOMPUTED THE ALP. 7. THEREFORE, IT IS REQUESTED THAT THE HONBLE ITAT MAY CLARIFY AND ADJUDICATE THE ABOVE ISSUE. 22. THE LD DR REITERATED THE STAND OF REVENUE AS CO NTAINED IN THE PETITION. WE HAVE CONSIDERED THE CONTENTIONS IN TH E PETITION AND ARE OF THE VIEW THAT THE SAME ARE DEVOID OF ANY MERIT. THE AD DITION BY WAY OF ADJUSTMENTS TO THE ALP HAS BEEN DELETED BY THE TRIB UNAL IN PARA 47 OF ITS ORDER. THE OBSERVATIONS IN PARA 48 TO 51 HAS BEEN VERY CLEARLY MENTIONED MP NO.7/BANG/2015 PAGE 16 OF 16 TO BE PURELY ACADEMIC. THEREFORE, THE CONFUSION AS IS SOUGHT TO BE BROUGHT OUT IN THE PETITION IS WITHOUT ANY BASIS AND IS RAT HER MISCHIEVOUS. ALL THAT THE AO HAS TO DO WHILE GIVING EFFECT TO THE ORDER O F TRIBUNAL IS TO DELETE THE ADDITION ON ACCOUNT OF ADJUSTMENT TO ALP. WE MAY A LSO ADD THAT THE MISCELLANEOUS PETITION IS THOROUGHLY MISCONCEIVED A ND HAS BEEN FILED WITHOUT A PROPER READING OF THE ORDER OF THE TRIBUN AL. WE HOPE THAT SUCH MISCELLANEOUS PETITIONS WILL NOT BE FILED BY THE RE VENUE IN FUTURE, WHEN THE ORDERS IN QUESTION CLEARLY SET OUT ITS CONCLUSIONS. THE MISCELLANEOUS PETITION IS THEREFORE DISMISSED. 23. IN THE RESULT, THE MISCELLANEOUS PETITION IS DI SMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF FEBRUARY, 2015. SD/- SD/- ( JASON P. BOAZ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE, DATED, THE 20 TH FEBRUARY, 2015. /D S/ COPY TO: 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.