MAN DIESEL & TURBO INDIA PRIVATE LTD.,AURANGABAD vs. ASSISTANT COMMISSIONER OF INCOME TAX, AURANGABAD

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.

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.

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

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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.

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.

‘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.

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.

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.

transactions of purchase or sale etc. of goods or services. To put it

simply, if there are several international transactions of, say,

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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.

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.

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

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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.,

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.

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.

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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