RIETER INDIA PRIVATE LIMITED,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 5, PUNE

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the final

assessment order dated 24-08-2017 passed by the Assessing Officer

(AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961

(hereinafter called ‘the Act’) in relation to the assessment year

2013-14. 2. The assessee has taken ten grounds in the Memorandum of appeal, out of which nine were not pressed. Such grounds, ergo,

stand dismissed as not pressed. Only ground no.9 survives which concerns with restricting the transfer pricing adjustment only to the international transactions.

machines and related parts and components. It provides sales and after-sales support services for the textile machinery and equipments manufactured and sold by the Rieter Group companies

in India. It also carries out installation and commissioning of the machines/equipments sold by the Rieter Group companies and also provides warranty support services. A return was filed declaring

loss of Rs.48.00 crore. Certain international transactions were reported in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length

Price (ALP) of the international transactions. Instantly, we are concerned with the only international transaction of ‘Purchase of goods (textile components/parts)’ with transacted value of Rs.2,15,00,14,692/-. The assessee applied internal Transactional

Net Marginal Method (TNMM) as the most appropriate method

with three comparables for demonstrating the international

transaction at ALP. The TPO rejected the application of internal TNMM and resorted to the external TNMM. Out of the three

companies chosen by the assessee as comparable, the TPO rejected

one and included one new company, again having three companies

in total, namely, Bajaj Steels Industries Ltd., Veejay Lakshmi

Engineering Works Ltd. and Chandni Textiles Engineering

Industries Ltd. The TPO determined the assessee’s adjusted PLI of Operating Profit (OP)/Operating Revenue (OR) at (-) 6.56%. Mean

margin of three comparables was worked out at 0.86%. With the difference in margins at 7.42%, the TPO proposed transfer pricing

adjustment of Rs.32.12 crore by considering total Operating

Revenue of the assessee at Rs.432.98 crore. The case of the assessee is that the transfer pricing adjustment, if any, should have been restricted only to the international transactions and not the entity level transactions.

and gone through the relevant material on record. Primarily, we

want to record that the assessee has disputed neither the selection of external TNMM, nor any of the three comparables chosen. The extant dispute is for restricting the transfer pricing adjustment to the international transactions alone and not extending it to the entity

level transactions.

provisions relating to avoidance of tax. Sub-section (1) of section 92

provides that: `Any income arising from an international transaction

shall be computed having regard to the arm’s length price’. Thus it is graphically clear that the ALP and the consequential transfer

pricing adjustment are contemplated only in respect of the international transactions (with AEs) and not the entity level

transactions (which also include transactions with non-AEs). The TPO, in the instant case has computed transfer pricing adjustment in respect of entity level transactions, which cannot be countenanced.

We, therefore, direct to restrict the transfer pricing adjustment only

to the international transactions rather than the entity level

transactions, of course, after giving due opportunity of hearing to the assessee.

reading as under :

“Without prejudice to other grounds of appeal filed by the Appellant, in case VRS expenses are to be considered as operating in nature while computing the net operating profit margins of the Appellant, the same should be considered as operating in nature while computing the net operating profit margin of the comparable company, i.e. Veejay Lakshmi Engineering Works Limited.

which does not require any fresh investigation of facts. The same is admitted in view of the judgment of Hon’ble Supreme Court in AR submitted that in self computing the own PLI of OP/OR, the assessee initially did not consider Voluntary Retirement Scheme

(VRS) expenses incurred by it in the operating cost base. However,

the TPO included the same in the operating costs of the assessee and recomputed the adjusted PLI of the assessee at (-) 6.56%. The ld.

AR submitted that the assessee has no objection to the inclusion of VRS expenses in its operating cost base for the purpose of determining its PLI. It was, however, submitted that the same

methodology should be applied in respect of comparable Veejay

Lakshmi Engineering Works Ltd. and the VRS expenses incurred

by it should also be included in the operating cost base, which the TPO did not do.

material on record. The ld. AR has demonstrated with reference to the relevant material on record that the VRS expenses incurred by it 10. In principle, there can be no dispute with VRS expenses

incurred by any company forming part of the operating cost base, a proposition that has not been disputed by the assessee as well. Once

such expenses incurred by the assessee have been finally included in its total operating costs, similar natured costs incurred by the comparables, if any, should also be given a parallel treatment.

base of Veejay Laskshmi Engineering Works Ltd. did not include

VRS expenses. Page 657 of the paper book is a copy of Profit and loss account of this company indicating `Exceptional item’ of Rs.475.37 lakh, which gives description of its nature as VRS

expenses at Note no. 26 to the accounts. Now, it needs to be established that this cost was not included by the TPO while

calculating the PLI. With a view of bolster his point of view, the ld.

AR invited our attention towards page 458 of the paper book,

showing some working of the PLI of this company. This document

does not bear signature of the TPO. On a further enquiry, the ld. AR fairly admitted that this is the working done by the TPO at the time

of giving effect to the order of the DRP. In our opinion, what is essential to consider is the PLI computation of the comparable at the time of the passing of the original order by the TPO for ensuring

that VRS expenses did not form part of the cost base as contended.

The ld. AR did not readily have such a copy of the working of the PLI of the company by the TPO. In view of the foregoing

discussion, we set-aside the impugned order and restore the matter

to the file of AO/TPO with a direction to include VRS costs

incurred by Veejay Laskshmi Engineering Works Ltd. in its operating cost base, if not already included, in the same manner as has been done in the case of the assessee and thereafter to compute

the operating costs and the consequential operating profit. Needless

to say, the assessee will be allowed a reasonable opportunity of hearing.

Date