ASSTT.CIT,CIR.1, AURANGABAD vs. M/S. ENDRESS+HAUSER FLOWTEC (I) PVT.LTD.,, AURANGABAD

The cross appeals filed by assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee in ITA No.255/PUN/2011 has raised the following grounds of appeal:- 1. a) On the facts and under the circumstances of the case and in law, the Learned CIT(A) erred in confirming the addition of Rs.28,63,412/-. b) On the facts and under the circumstances of the case and in law, the Learned CIT(A) erred in accepting the arm's length price made by Transfer Pricing Officer rather than accepting the working made by appellant. 2. On the facts and under the circumstances of the case and in law, the Learned CIT(A) erred in confirming addition of Rs.47,63,694/- being interest not eligible for deduction u/s 10B and concluding that interest income is not arising from business undertaking and needs to be treated as Income from other sources.

The assessee has filed additional grounds of appeal on 18.04.2013. The assessee also filed additional grounds of appeal during the course of hearing, which read as under:- a) The learned Transfer Pricing Officer erred in not considering the trading segment results of the Company as per TP study report while assessing arm's length price in respect of the transaction import of goods for high seas sale and the Ld. CIT(Appeals) erred in confirming the same.

Briefly, in the facts of the case, the assessee was engaged in the business of manufacturing and trading in Flow Measuring Instruments, Component parts and accessories with 99.99% of the paid up capital being held by parent company i.e. Endress+Hauser Flowtec A.G. of Switzerland. The assessee had originally filed return of income declaring total income of ₹ 6.54 crores. The assessee on the same day filed revised return of income also. The case of assessee was selected for scrutiny. The Assessing Officer noted that the assessee had entered into international transactions with its associated enterprises and hence, reference was made under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO), for computing arm's length price of international transactions.

The TPO noted that the assessee was engaged in the business of manufacturing industrial flow control instruments and flow meters, which were made as per specifications of foreign associated enterprises. A small portion was also sold in domestic market through its sister concern Endress + Hauser (India) Pvt. Ltd. The international transactions undertaken by the assessee were as under:-

The assessee in the TP study report had benchmarked the international transactions by adopting TNMM method as most appropriate method. The assessee had aggregated international transactions at serial Nos.1, 4, 5, 6, 7 and 9 under the Manufacturing Segment and had benchmarked the same against external comparables. The transactions reflected at serial Nos.2 and 3 were aggregated under the Trading Segment and were benchmarked taking external segments. The transaction at serial No.8 was not considered in the analysis conducted though in the Trading Segment transaction was considered, while computing profitability from the Trading Segment as a whole. The TPO issued show cause notice to the assessee pointing out that activities pertaining to purchase for re-sale and sale of traded goods have been categorized as trading activity and have been accordingly benchmarked under the segment carved out as Trading Segment and remaining all other activities have been aggregated under the Manufacturing Segment and have been accordingly benchmarked under the manufacturing activity. The TPO also noted that the assessee had adopted TNMM method and operating profit over sales was taken as Profit Level Indicator (PLI). The assessee was asked to produce the reconciliation of the trading and manufacturing results with reference to international transactions in the shape of segmental results for manufacturing activity as well as the Trading Segment. In reply, the assessee submitted segmental financial information from Profit and Loss Account for the year ended 31.03.2006, with reference to TP study report. The TPO from the details submitted, noted that in the Trading Segment, the assessee had also included

The learned Authorized Representative for the assessee pointed out that ground of appeal No.1 raised by the assessee is against the said addition of ₹ 28,63,412/-. He also pointed out that additional grounds of appeal have been raised which were never raised before the Assessing Officer and CIT(A). The learned Authorized Representative for the assessee pointed out that no segmental details were filed before the authorities below. He further stressed that in the Trading segment, it had imported goods from its associated enterprises, which were sold to others and the margins earned was 7.39%; whereas when it were sold at high seas to sister concern, there was loss but the profit had to be seen on overall basis. The segmental transaction was under the umbrella of Trading segment and the reason for loss was commercial decision; but, he admitted that there was no difference in goods imported from trading or for high seas sales. He thus, pointed out that there is no merit in the adjustment made in this regard by the TPO. The learned Authorized Representative for the assessee also pointed out that similar transaction of finished goods purchased for high seas sales were made in the succeeding years and the aggregation approach adopted by the assessee for Trading segment i.e. including high seas sales has been accepted. He referred to the

The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.

We have heard the rival contentions and perused the record. First of all, we find that the Revenue is in appeal against directions of CIT(A) for allowing deduction under section 10B of the Act. The said appeal of Revenue is not maintainable because of low tax effect and hence, the same is dismissed.

Then, coming to appeal of assessee the additional grounds of appeal filed on 12.04.2013 are dismissed as not pressed. Similarly, additional ground of appeal No.(b) filed on 21.11.2018 is also not pressed and hence the same is also dismissed as not pressed. The assessee has also not pressed ground of appeal No.2 raised in original ground of appeal and the same is also dismissed as not pressed.

The only issue which remains to be adjudicated by way of ground of appeal No.1 and additional ground of appeal No.(a) is against transfer pricing adjustment of ₹ 28,63,412/-. The said adjustment was made in the hands of assessee in Trading Segment. The assessee was engaged in the manufacturing and trading in Flow Measuring Instruments, Component parts and accessories. The assessee had aggregated certain transactions under the head Manufacturing Segment and had applied TNMM method as most appropriate method and benchmarked the same against list of comparables. No addition has been made in the said Manufacturing Segment undertaken by the assessee. In the Trading Segment, the assessee had pointed out that it was importing goods from its associated enterprises which were sold in the domestic market and one transaction on high seas was with the sister concern. The assessee had aggregated both transactions under the Trading Segment and had applied TNMM method and compared its margins with the set of comparables. The TPO was of the view that under the Trading Segment, when the assessee was selling goods to others, the margins earned were 7.39% but when it sold on high seas the imported goods to its sister concern, it had incurred loss of (-) 2.61%. The TPO thus, was of the view that when compared with the profitability of comparables at 3.98%, difference would work out to 6.59% and the corresponding adjustment made in the hands of assessee was ₹ 28,63,412/-. The case of assessee on the other hand, is that the complete Trading Segment has to be aggregated and there is no merit in segregating the sales on high seas from the sale to others and making aforesaid adjustment in the hands of assessee. Under Rule 10A(d) of the Income Tax Rules, 1962, transaction is provided to include number of closely linked transactions. In the

In the result, appeal of assessee is partly allowed and appeal of Revenue is dismissed.