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Income Tax Appellate Tribunal, “C” BENCH, PUNE
Before: SHRI ANIL CHATURVEDI & SHRI S.S. VISWANETHRA RAVI
This appeal preferred by the assessee emanates from the order of the Ld. DCIT, Circle-1, Aurangabad, dated 30.10.2017, for the assessment year 2013-14.
The relevant facts as culled out from the material on record are as under :-
MAN Diesel & Turbo India Pvt. Ltd.
The assessee is a company stated to be engaged in manufacturing / assembly of diesel engines. It is also stated to be engaged in trading of diesel engines, spares, design and engineering for diesel services for diesel engines in domestic and export markets. The assessee filed its original return of income for A.Y. 2013-14 on 30.11.2013 declaring total income of Rs.12,49,51,470/-. Thereafter, assessee revised its return of income on 31.03.2015 declaring total income at Rs.17,73,70,400/-. The case was selected under scrutiny and notices u/s 143(2) and 142(1) of the Income- tax Act, 1961 (hereinafter referred to as „the Act‟) and served on the assessee. It was noticed that assessee had entered into international transactions with Associated Enterprises (hereinafter referred to as „AEs‟) as envisaged in section 92A of the Act valued at Rs.72.24 crores. The Assessing Officer (AO) accordingly, made reference to Transfer Pricing Officer (TPO) for determining Arm‟s Length Price (ALP) of purchase and sale services availed by the company. The TPO vide order dated 21.10.2016 passed u/s 92CA(3) of the Act held the adjustment of Rs.2,64,18,333/- was required to be made to international transactions relating to sales commission. After receipt of TPO‟s order, AO framed draft assessment order u/s 144C r.w.s. 92CA of the Act vide order dated 21.12.2016 determining the total income at Rs.20,37,88,733/-. Aggrieved by the draft assessment order, assessee carried the matter before Dispute Resolution Panel (DRP). The DRP vide directions dated 11.09.2017 directed the AO to pass orders as per directions therein. Thereafter, assessment order was passed u/s 143(3) r.w.s. 144C & 92CA of the Act vide order dated 30.10.2017 and the total income was determined at Rs.19,17,10,393/-. Aggrieved by the order of AO, assessee is now in appeal before us and has raised the following grounds:-
MAN Diesel & Turbo India Pvt. Ltd.
The grounds stated hereunder are independent of, and without prejudice to one another: On the facts and circumstance of the case and in law, 1. The Ld Assessing Officer ('Ld AO'), erred in making a transfer pricing ('TP') adjustment of Rs.1,43,39,991 to the income of the Appellant company with respect to the international transactions pertaining to manufacturing activity of the assessee by rejecting the TP analysis conducted by the Appellant. The Appellant prays that the TP analysis conducted by the Appellant be accepted and consequently the TP adjustment of Rs.1,43,39,991 be deleted.
2. The Ld AO /Ld DRP has erred in disregarding the appellant's approach of aggregating the international transactions pertaining to manufacturing activity with international transactions pertaining to distribution and after sales activity without appreciating that the said activities are intrinsically linked to each other.
3. The ld.A.O / DRP erred in holding that the transactions relating to the manufacturing segment were not interlinked to the transactions of distribution and after sales activity and therefore, the claim of the appellant to aggregate both the activities for benchmarking the international transactions was not justified at all.
4. Without prejudice to the above grounds, assuming without admitting that the manufacturing segment was to be benchmarked independently, in that event, the Ld AO /Ld DRP erred in not granting economic adjustments on account of capacity underutilization with respect to manufacturing activity for benchmarking the international transaction pertaining to said activity.
5. The learned A.O. / DRP failed to appreciating the various reasons due to which the appellant had incurred loss in the manufacturing segment and since the loss incurred was not on account of the international transactions entered into with the AEs, no addition was warranted in respect of the said segment.
6. The learned A.O. erred in disregarding the direction of Ld DRP by computing the operating margin of the Engine business segment of UMS Technologies Ltd. at 5% as against the correct operating margin of - 21.48% and thereby erred in making an addition of Rs.1,43,39,991/-.
7. The Id A.O. erred in computing the operating margin of Engine business segment of UMS Technologies Ltd. at -5% without appreciating that he ought to have followed the directions given by the Ld DRP and should have computed the operating margin as per the segmental financial data of the said company and therefore, making an addition by disregarding the directions of the DPR was not justified at all and the same may kindly be deleted.
8. The appellant submits that the correct operating margin of the engine business segment of UMS Technologies Ltd. was -21.48% and since the same is within the benefit of plus or minus 3% of the operating margin of the manufacturing segment of the appellant company, no addition on transfer pricing was warranted at all.
MAN Diesel & Turbo India Pvt. Ltd.
9. Without prejudice to the above grounds, the appellant company submits that if at all, any addition is warranted, the same should be restricted only to the international transactions entered into with the AEs.
10. On the facts and circumstances of the case, and in law, the Ld AO erred in initiating the penalty proceedings under Section 271(1)(c) of the Income- tax Act, 1961 wherein the addition sustained is merely difference of opinion and does not reflect any omission or misrepresentation of facts. 11. The Appellant prays that the Ld AO be directed to drop the penalty proceedings initiated under Section 271(1)(c) of the Income-tax Act, 1961. 12. The Appellant craves leave to add, alter, amend, substitute or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing so as to enable the Hon'ble Tribunal Members to decide these according to the law.
Before us at the outset, the ld. AR submitted that the main issue which requires adjudication is ground No.6 and ground Nos.6 to 9 are interconnected. The ground Nos.10 and 11 are against initiation of penalty proceedings, which are premature.
We first take up ground Nos.1 to 3:-
Before us at the outset, ld. AR submitted that ground Nos.1 to 3 are against the orders of lower authorities, whereby it was held that manufacturing segment cannot be aggregated with distribution segment and both need to be benchmarked separately of each other. Before us, ld. AR fairly conceded that in A.Y. 2012-13 an identical issue arose before the Tribunal in assessee‟s own case and the Co-ordinate Bench of Tribunal vide order dated 09.12.2019 had upheld the orders of lower authorities and thus, against the assessee. He pointed to the relevant findings of Tribunal and submitted that in view of the earlier years order of ITAT, the issue be decided accordingly.
The ld. DR on the other hand did not controvert the submissions made by ld. AR.
MAN Diesel & Turbo India Pvt. Ltd.
We have heard the rival submissions and perused the material on record. During the course of TP proceedings, on a query regarding benchmarking of manufacturing activity segment it was the submission of assessee that international transactions forming part of manufacturing activity segment were closely linked with international transactions forming part of distribution and after sales activity and therefore, the transactions of these two segments be aggregated for comparability purposes. The TPO did not accept the contention of assessee regarding aggregation of transactions of manufacturing activity segment and distribution and after sales activity segment. He thereafter, proceeded to benchmark the international transactions of both segments separately. Aggrieved by the order of TPO, assessee carried the matter before DRP, who upheld the order of TPO. Aggrieved by the order of DRP, assessee is now in appeal before us.
We find that an identical issue in assessee‟s own case arose before the Co-ordinate Bench of Tribunal in A.Y. 2012-13. The Co-ordinate Bench of Tribunal held that manufacturing segment cannot be aggregated with distribution segment and both need to be benchmarked independent of each other by observing as under:- “7. The moot question is whether the transactions of the assessee in Production and Distribution segments can be construed as „closely linked transactions‟? At the cost of repetition, it is mentioned that whereas the Production segment covers the full diesel engines manufactured by the assessee in India and exported to its AEs, the traded goods segment covers spare parts purchased by the assessee from its AE for the purpose of sale in India to non-related parties. There is another significant aspect of the matter. The assessee exported diesel engines to its AEs and there is no sale of spare parts to the AEs as the entire sale of spare parts is in India to the third parties. It is only the import of such spare parts, which has been occasioned from the AEs. It is ergo evident that the sale of traded spare parts does not extend to its customers to whom the goods manufactured by it were sold. In our considered opinion, the two sets of the transactions, can by no stretch of imagination, be considered as „closely linked transactions‟.
MAN Diesel & Turbo India Pvt. Ltd.
The mere fact that spare parts sold by the assessee in Indian market would be of some help in subsequent years when the manufactured diesel engines would require servicing, cannot now make the transactions as „closely linked transactions‟, so as to come up for consideration in an aggregate manner.
In one sense, closely linked transactions means similar or alike transactions of purchase or sale etc. of goods or services. To put it simply, if there are several international transactions of, say, purchase of similar goods or with some variations, then instead of finding the ALP of such international transactions separately, if these are combined and benchmarked in an aggregate manner, it satisfies the prescription of closely linked transactions. The Hon‟ble Punjab & Haryana High Court in Knorr Bremse India (P) Ltd. Vs. ACIT (2016) 380 ITR 307 (P&H) considered the question of aggregation of international transactions in another sense. Their Lordships held that several transactions between two or more AEs can form a single composite transaction if they are closely linked transactions and the onus remains always on the assessee to establish that such transactions were part of an international transaction pursuant to an understanding between various members of a group. The Hon‟ble High Court observed that in case of a package deal where each item is not separately valued but all are given a composite price, these are to be taken as one international transaction. Further, where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave all), then also it is one international transaction. In that case, it will be on the assessee to prove that although each is priced separately, but they were provided under one composite agreement. It still further held that aggregation can be done when albeit each transaction is priced differently, but they are so inextricably linked that one cannot survive without other.
When we test the facts of the instant case on the touchstone of the principles enunciated by the Hon‟ble High Court, it becomes overt that the transactions of Production and Distribution segments cannot be clubbed because it is neither a case of package deal nor the two sets of transactions are structured in such a manner that the assessee has no option to accept one and reject the other nor they are so inextricably linked that one cannot survive without other. In fact, in all the earlier years, the assessee was exclusively in the trading of components and the manufacturing activity started at the fag end of the preceding year only.
The assessee in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT (2016) 389 ITR 469 (Delhi) entered into agreement with its A.E. for acquiring technology required for the purpose of manufacturing. It applied the TNMM to benchmark its international transactions of import of raw materials, sub- assemblies and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets. All these were categorized under one broad head, that is, “Manufacturing of automotive components” and shown to be at ALP. The TPO rejected the assessee‟s entity level approach applied to benchmark the international transactions including Technical assistance fees and proceeded to determine the ALP of the Technical assistance fees separately. The Tribunal approved the TPO‟s stand on segregation of payment of Technical assistance fee. The Hon‟ble Delhi High Court admitted the question in this regard - `Whether the Income Tax Appellate Tribunal was right in holding that royalty and technical assistance fee did not form part of a composite transaction and have to be treated as two separate transactions for the purpose of benchmarking and computing arms length price?‟ Answering this question against the assessee, the Hon‟ble High Court countenanced the view of the Tribunal that aggregation
MAN Diesel & Turbo India Pvt. Ltd. of the transaction of payment of Technical fees with other international transactions under the common TNMM, was not correct. Restoring the matter to the TPO/AO, it held that the TNMM should be separately applied for determining the ALP of the international transaction of payment of Technical fee.
11. We note that the facts of the extant case are on a rather weak footing. In that case, the Hon‟ble High Court did not approve the clubbing of `Technical fees‟ with other transactions under the Manufacturing segment as without technical know-how even the production could not have been possible. Instantly, we are dealing with a situation in which the assessee is trying to club the transaction of Production of finished goods with Trading of spare parts, which is a step further away from technical know-how in the process of manufacturing. In view of the foregoing discussion, it is held that the authorities below were fully justified in holding that the Manufacturing segment cannot be aggregated with the Distribution segment and both need to be benchmarked independent of each other. We, therefore, accord our imprimatur to the view canvassed by the TPO in rejecting the aggregation approach adopted by the assessee.”
Before us, since both the parties have accepted that the facts of the year under consideration are identical to that of earlier year, we following the order of Tribunal in assessee‟s own case for A.Y. 2012-13, find no reason to interfere with the order of DRP. Thus, the ground Nos.1 to 3 raised by the assessee are dismissed.
Ground No.6 8. The AO noticed for the year under consideration the operations of assessee could be categorized into (i) Manufacturing / assembly of diesel engines (Production activity), (ii) Distribution of spares and after sales services (Distribution and after sales activity) and (iii) Provision of design engineering services (Design Engineering activity). During the course of assessment proceedings the assessee was asked to submit separate profitability of manufacturing segment and also show caused as to why unadjusted operating margins of manufacturing activity cannot be compared with average operating margins as comparable in TPO‟s order for A.Y. 2012-13. The TPO after considering the submissions of assessee re-
MAN Diesel & Turbo India Pvt. Ltd. computed unadjusted operating margins of assessee from manufacturing segment at (-) 22.69% (the working of which is tabulated at pages 11 to 14 of assessment order). He thereafter noted that the average operating margin of comparable set as considered by the TPO in TP order for A.Y. 2012-13 was 9.90%. He thereafter, noted the difference between PLI of assessee and comparable companies at 32.59% and accordingly, made TP adjustment of Rs.2,64,18,333/-. Aggrieved by the order of TPO, assessee carried the matter before DRP. Before the DRP, it was contended by assessee that TPO had considered comparable companies as per TP order for A.Y. 2012-13 and since in A.Y. 2012-13 comparable companies were rejected, he has rejected the same in A.Y. 2013-14 as well. Before the DRP it was submitted that UMS Technologies Ltd. was functionally comparable to the assessee and should be considered as comparable. The DRP after considering the submissions of assessee directed the TPO to include UMS Technologies Ltd. (Engines segment) in the set of comparables for the manufacturing segment activity of assessee. With respect to inclusion of Kirloskar Oil Engines Ltd. and Greaves Cotton Ltd. as comparable companies by the TPO, it was the contention of assessee that the aforesaid two companies turnover was significantly higher vis-à-vis turnover of assessee and therefore, assessee sought exclusion of the aforesaid two companies from being comparables. The DRP noted the fact that turnover of Kirloskar Oil Engines Ltd. and Greaves Cotton Ltd. was very high as compared to the turnover of assessee and therefore, did not qualify as comparables. He accordingly, directed the TPO to exclude Kirloskar Oil Engines Ltd. and Greaves Cotton Ltd. from the set of comparables. Consequent to the directions of DRP, TPO vide order dated 17.10.2017 worked out the TP adjustment after DRP directions at Rs.1,43,39,991/-.
MAN Diesel & Turbo India Pvt. Ltd.
9. Before us ld. AR submitted that working of TPO, consequent to the order of DRP is incorrect wherein he works out the arithmetic mean of UMS Technologies Ltd. at (-) 5%. He pointing to the calculations at para 3 of the order submits that TPO proceeds on the basis of revenue for Engine segment to the total revenue, which according to him works out at 41.83% and based on this ratio he works out the operating loss of UMS Technologies Ltd. (Engine segment). He thereafter, pointed to page 36 of Profit & Loss Account of UMS Technologies Ltd. and from there, he pointed that purchase of stock-in-trade of Rs.47.95 lacs has been ignored by TPO while working out Profit & Loss Account. He submitted that TPO has erred in working out the operating loss on the aforesaid basis disregarding the fact that in the audited Balance Sheet of UMS Technologies Ltd. on turnover of Rs.256.36 lacs, loss has been worked out at Rs.54.89 which works out to (-)21.48%. He submits that if the results of UMS Technologies Ltd. are considered on the basis of audited results where the margins are (-) 21.48% as against assessee‟s margins of (-) 22%, the difference is within +/- 3% and therefore, no adjustment to ALP is called for. He further submitted that once the profitability results of a segment are available in the audited Balance Sheet, TPO has no discretion to alter it in the absence of valid reasons and further the TPO has not spelt out the reasons for rejecting the audited margins of UMS Technologies Ltd. He therefore, once again reiterated that if the profitability of UMS Technologies Ltd. is worked out on the basis of audited statements, then the margin of assessee is comparable with UMS Technologies Ltd. and no adjustment is called for. He thereafter, submitted that if ground No.6 is decided in assessee‟s favour, ground Nos.4 and 5 become academic.
MAN Diesel & Turbo India Pvt. Ltd.
10. The ld. DR on the other hand supported the order of TPO.
We have heard the rival submissions and perused the material on record. We find that before the TPO assessee had asked to include UMS Technologies Ltd. as comparable company. The TPO did not agree with the contention of assessee and proceeded to benchmark the transactions after considering Kirloskar Oil Engines Ltd. and Greaves Cotton Ltd. as comparables. When the matter was carried by the assessee before DRP, DRP directed the TPO to exclude Kirloskar Oil Engines Ltd. and Greaves Cotton Ltd. from comparables but directed to include UMS Technologies Ltd. (Engine segment) in the set of comparables. Consequent to the directions of DRP, TPO worked out the adjustment on the basis of margins of UMS Technologies Ltd. as worked out by him on the basis of revenue of Engine segment to total revenue.
We find that in the audited Balance Sheet of UMS Technologies Ltd. for A.Y. 2013-14 segment reporting is available for various segments. With respect to Engine segment of UMS Technologies Ltd., we find that on turnover of Rs.256.36 lacs, loss has been determined at Rs.54.89 lacs, which work out at (-)21.48% as against loss of assessee which is at (-)22.69%. We find that TPO has worked out the loss of UMS Technologies Ltd. at (-) 5% by allocating the expenses in the ratio of turnover of Engine segment to total revenue i.e. at 41.85%. He has completely disregarded the segment loss reported in the audited Balance Sheet. We further find that no reasons have been given by TPO for disregarding the segmental revenue as disclosed in the audited results. In such situation, we are of the view that TPO was not justified in working out the margins of UMS Technologies
MAN Diesel & Turbo India Pvt. Ltd.
Ltd. at (-) 5% when the audited Balance Sheet itself shows the loss of Engine segment at (-) 22.89%. We find that if the margin of UMS Technologies Ltd. is considered on the basis of audited results, then it is comparable with the loss of assessee and therefore, no adjustment is called for. We therefore, set aside the adjustment made by TPO and thus, this ground is allowed. Since this ground is allowed, as submitted by assessee, ground Nos.4 and 5 becomes academic and therefore, requires no adjudication.
In the combined result, the appeal of assessee is partly allowed.
Order pronounced on 14th day of February, 2020.