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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI PARTHA SARATHI CHAUDHURY
PER R.S.SYAL, VP :
This appeal by the assessee is directed against the final assessment order dated 28-02-2017 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.92C & 144C of the Income-tax Act, 1961 (hereinafter called ‘the Act’) in relation to the assessment year 2012-13.
Briefly stated, the facts of the case are that the assessee was incorporated in the year 1989 and is a part of MAN Diesel & Turbo group, which is a world market leader for large diesel engines for
2 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
use in ships and power stations. The assessee, an Indian company, is
engaged in the trading of spare parts, installation/erection and
commissioning of DG sets and is also acting as a commission agent
by facilitating the sales of DG sets on behalf of its Associated
Enterprises (AEs). Earlier, the assessee was engaged only in trading
operations but in the preceding year, a manufacturing unit came to
be set up by it, which became operational for some time of the
preceding year. The instant year is the full first year of the
assessee’s manufacturing operations. The assessee filed its return
declaring total income of Rs.10,46,63,900/-. 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. For
benchmarking, the assessee clubbed all the international
transactions concerning the manufacturing and trading segments
except Design Engineering services. The TPO observed from the
Transfer Pricing study report that the assessee claimed to have
incurred losses in the Production activity for which import of raw
material was made from its AEs and sale of diesel engines was also
made to the AEs. He did not accept the aggregation of Distribution
and Production segments for the purpose of benchmarking. It was
3 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
opined that both the Distribution and Production segments ought to
have been benchmarked separately. Thereafter, he proceeded to
benchmark the international transaction of Manufacturing
segment, in which the assessee had reported loss at the rate of
(-)7.79%. The TPO selected two companies as comparable giving
their average OP/OC at 9.38%. Considering such profit margin as a
benchmark, he proposed transfer pricing addition of
Rs.3,25,27,859/-. The AO passed the draft order with the above
addition. The assessee’s contention before the Dispute Resolution
Panel (DRP) for aggregation of the Distribution and Production
segments was repelled. However, the DRP got convinced with the
assessee’s submission on inclusion of one more company, namely,
UMS Technologies Ltd. (Engine Segment), which had the effect of
reducing the amount of transfer pricing addition to Rs.2,74,71,715/-,
which has been assailed in the instant appeal.
We have heard the rival submissions and gone through the
relevant material on record. Though the assessee has raised five
grounds, but the thrust of the arguments of the ld. AR was only to
the aggregation of Production and Distribution segments. We have
gone through the Statement of Profit and loss of the assessee for the
4 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
year under consideration, a copy of which has been placed at page
106 onwards of the paper book. Total `Revenue from operations’
stands at Rs.78.94 crore, whose bifurcation has been given in Note
no. 19. In addition to Commission income and Revenue from sale
of services, the assessee earned Revenue from sale of finished
goods at Rs.18.03 crore (i.e. Manufacturing segment) and Revenue
from traded goods at Rs.30.20 crore (i.e. Trading segment).
Whereas the assessee wants aggregation of its Manufacturing and
Trading segments, the TPO has segregated them and made transfer
pricing adjustment in the Manufacturing segment by considering
operating revenues therefrom at Rs.18.23 crore. The ld. AR
submitted that the difference in two figures, namely, Rs.18.03 crore
and Rs.18.23 crore is because of exclusion of taxes from the former.
It is an admitted position that sale of finished goods in the
Manufacturing segment at Rs.18.03 crore represents exports of
diesel engines made exclusively to the AEs, in which the assessee
has shown loss. In so far as the sale of traded goods in the Trading
segment is concerned, it consists only of sale of spare parts to third
parties in India, in which the assessee has shown profit. The view
point canvassed by ld. AR is that there is a close link between the
5 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
‘sale of diesel engines’ and ‘sale of spare parts’ because it is only
with the help of traded goods, namely, spare parts that the assessee
can survive in the years to come by providing parts of the diesel
engines sold by it as and when getting faulted. It was, therefore,
urged that because of the close nexus between the sale of diesel
engines manufactured by the assessee and sale of the related spare
parts traded by the assessee, both should be aggregated for the
purpose of benchmarking.
Section 92(1) of the Act provides that any income arising from
‘an international transaction’ shall be computed having regard to
the arm’s length price. Section 92C(1) provides for the computation
of the ALP and mandates to follow one of the prescribed methods as
the most appropriate method, which, inter alia, include the TNM
method, as has been applied by the assessee on aggregate basis and
the TPO on segregate basis. The term ‘transaction’ has been
defined in section 92F(v) to include an arrangement or
understanding or action in concert, whether or not such arrangement
etc. is reduced in writing or is intended to be enforceable by legal
proceeding. The mechanism for determination of the ALP under
the TNMM has been provided in Rule 10B(1)(e) of the Income-tax
6 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
Rules, 1962. The term ‘transaction’ has been defined in Rule
10A(d) as including ‘a number of closely linked transactions’.
Whereas the definition of the term `transaction’ in section 92F(v) is
meant for identifying a transaction, the term `transaction’ in rule
10A(d) is meant for determining the ALP of international
transaction under the relevant rules.
In the present context, we are concerned only with the
definition of `transaction’ as given in rule 10A(d). It, therefore,
boils down that in so far as the determination of the ALP under the
machinery of computation under the methods as given in Rule 10B
is concerned, the term ‘transaction’ also includes a plural of
transactions. However, the caveat is that in order to be aggregated
within the term ‘transaction’ under Rule 10A(d), it is sine qua non
that such number of transactions must be closely linked. If these are
not closely linked transactions, then they cannot be aggregated for
determination of the ALP under the IT Rules.
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
7 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
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’. 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,
8 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
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.
9 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
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
10 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
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 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 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
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.
Once it is held that the international transaction of the
Production segment is required to be benchmarked separately, then
the next question is the determination of the ALP. The ld. AR
candidly admitted that if the aggregation is not to be done, then
there is no flaw in the computation of the ALP and the
12 ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
consequential transfer pricing addition in the final assessment order.
We, therefore, uphold the transfer pricing addition of
Rs.2,74,71,715/- in the international transaction of Production
segment.
In the result, the appeal is dismissed.
Order pronounced in the Open Court on 09th December, 2019.
Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; �दनांक Dated : 09th December, 2019 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “C” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
ITA No.1049/PUN/2017 MAN Diesel & Turbo India Pvt. Ltd.,
Date 1. Draft dictated on 06-12-2019 Sr.PS 2. Draft placed before author 09-12-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/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.
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