VEGA INDIA LEVEL AND PRESSURE MEASUREMENT P LTD,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -12, PUNE, PUNE

PER R.S.SYAL, VP :

This appeal by the assessee takes an exception to the final

assessment order dated 24-02-2022 passed by the Assessing

Officer (AO) u/s.143(3) r.w.s.144C(13) read with section 144B of

the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in

relation to the assessment year 2017-18.

wholly owned Indian subsidiary of Grieshaber

Verwaltungsgeselleshaft GmBH, Germany. It is engaged in

Assembly, Trading, Field commissioning, Repairing and Provision

2 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

of Engineering services relating to Pressure and Level

Measurement Instruments, Sensors and Signal Instruments. Return

was filed declaring total income at Rs.62,73,120/. 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. The assessee had international transactions under the

three segments, viz., Assembly/Manufacturing; Trading; and

Commission. It prepared a consolidated set of books of account

for all the segments. However, for the purpose of the ALP

determination, the assessee bifurcated its financials into the above

referred three segments. The figures of revenue, separately

available, were adopted as such and the combined expenses were

allocated to the three segments by using different allocation keys,

such as, rent base; employee cost base; and GP ratio base.

pricing adjustment of Rs.1,02,24,209/- made by the AO in the

`Trading segment’. This segment consisted of the international

transaction of ‘Purchase of traded goods’ at transacted value of

Rs.19,37,32,319. The assessee benchmarked it by using the Resale

Price Method (RPM) as the most appropriate method. The TPO

3 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

observed that the assessee did not provide any rational basis for

applying the allocation keys for bifurcating combined expenses

under different segments. Rejecting such allocation, he distributed

all the costs in the ratio of revenues from the three segments. He

further found that the assessee’s ratio of Depreciation and

Employee benefit expenses to total Revenue was much higher than

that of the comparables. Rejecting the RPM, he proceeded to

determine the ALP of the Trading segment under the Transactional

Net Margin Method (TNMM), by computing the transfer pricing

adjustment at Rs.2,74,45,190/-. The AO notified the draft order

with this amount of adjustment. The assessee raised objections

before the Dispute Resolution Panel (DRP), inter alia, assailing the

change of the allocation keys by the TPO; applying the TNMM as

the most appropriate method; and alternations made in the set of

comparables. The DRP changed certain allocation keys from the

segmental revenue as adopted by the TPO; approved the

application of the TNMM; and made some alterations to the final

set of comparables. Pursuant to the directions, the AO passed the

final assessment order by making the transfer pricing addition of

Rs.1,02,24,209/- in the Trading segment, against which the

assessee has come up in appeal before the Tribunal.

4 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

relevant material on record. It is undisputed that the assessee

maintained accounts on consolidated basis but furnished separate

profit determination under the three segments by allocating

expenses in certain ratios, which underwent change at the hands of

the TPO and then the DRP. The moot question involved herein is

against the application by the TPO of the TNMM as the most

appropriate method as against the assessee choosing the RPM.

purchased finished goods, namely, Sensors and Instruments etc.

from its Associated Enterprise and sold them as such without

making any value addition. Section 92C of the Act provides for

computation of arm's length price. Sub-section (1) gives five

specific methods including the RPM and the TNMM and one

general method for the ALP determination. The Act does not

stipulate application of any specific method in any specific

situation. Mechanism for determining the ALP under the five

specific methods has been set out in Rule 10B of the Income-tax

Rules, 1962. The modus operandi for determining the ALP under

the RPM is enshrined in Rule 10B(1)(b). This method talks of

considering the price at which the property purchased by an

5 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

enterprise from an AE is resold. Name of this method – `Resale’-

and its text specifically deal with a situation in which a property

purchased or service obtained by an Indian enterprise from an

Associated Enterprise is resold or provided to an unrelated

enterprise as such without doing any alternation to its features or

characteristics. In contrast, the TNMM under Rule 10B(1)(e)

contains a mechanism for computing operating margin realised by

an enterprise from an international transaction and then comparing

it with similar operating profit margin realised in Comparable

Uncontrolled transaction. Unlike the RPM dealing specifically

with the international transaction of purchase of goods or services,

the TNMM is not a transaction-specific and provides for the ALP

determination in a generalised manner. It goes without saying that

if a particular method deals with a specific nature of transaction,

then, such particular method should be preferred over a general

method for that specific transaction. On a comparative study of

both the methods, it gets vivid that where a certain property is

purchased by an Indian enterprise from its AE and is resold as such

without any value addition, it is the RPM, being the specific

method, which would hold the field in preference to the TNMM,

being its general contemporary.

6 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

price at which the property purchased from an Associated

Enterprise is resold which is reduced by the amount of normal

gross profit margin accruing in a comparable uncontrolled

transaction. The price thus arrived at is reduced by the expenses

incurred by the enterprise in connection with the purchase of

property, which, after further adjustments on account of

functional and other differences, constitutes the ALP in respect of

purchase of property. The normal gross profit margin absorbs the

effect of all individual items of expenses. Composition and extent

of individual items of expenses may vary from one company to

another. For example, a particular company may have its own

building for running business. In that case, its depreciation cost

will be higher vis-a-vis another company, operating from a rented

premises, incurring more rental cost. Higher depreciation cost of

the first company is set off with the higher rent of the second.

When we consider the gross profit margins, the effect of all the

individual higher or lower level of expenses, gets creased out.

After taking gross profit margin, one cannot go back to the

individual items of expenses for contending that a particular

expense of comparable is more or less vis-a-vis the assessee or

7 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

another comparable. The raison d’etre is that gross profit

neutralises the effect of all over and under values of individual

items of expenses.

assessee is admittedly engaged in purchase of products from its

AE, which have been sold to the unrelated parties as such without

carrying out any value addition. Doubtlessly, it is only the RPM

which would govern the situation and will have to be applied as the

most appropriate method. Simply because the ratio of employee

cost and depreciation of the assessee to the revenue under the

segment is more in comparison with some of its comparables, that

would not thwart the application of the RPM. Such effect of

individual higher or lower values of expenses gets ironed out when

the gross profit margin is taken. In view of the foregoing

discussion, we hold that the AO was not justified in applying the

TNMM as the most appropriate method as against the RPM. The

impugned order is set aside on this score and the matter is sent

back to the file of the AO/TPO for re-determining the ALP of the

`Trading segment’ under the RPM with the comparables and

allocation of expenses as finally approved by the DRP. Needless

8 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

to say, the assessee will be allowed reasonable opportunity of

hearing in such fresh determination.

pricing adjustment of Rs.1,11,94,115/- made by the AO in the

`Manufacturing segment’.

TNMM with eight comparables for demonstrating that the ALP of

the international transactions under the `Assembly/Manufacturing’

segment was at ALP. The TPO did not disturb the application of

the TNMM as the most appropriate method. However, taking into

consideration the allocation of expenses done by him on the basis

of revenue, the TPO proceeded to determine the ALP of this

segment. He retained only one comparable from the assessee’s

list, namely, Kusum Electrical Industries Limited and rejected all

others. Thereafter, he selected other nine companies as

comparable. Considering the assessee’s PLI at (-) 13.28% as

computed by him on the basis of the revised allocation key of

expenses and finding out median at 13.41% of the comparables

finally chosen, he worked out transfer pricing adjustment under

this segment at Rs.2,90,21,248/-. The DRP made certain alterations

to the comparables selected by the TPO and also the allocation

9 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

keys for some expenses. Giving effect to the directions, the AO

recomputed the assessee’s PLI at (-) 7.23% and made the final

transfer pricing addition under the segment at Rs.1,11,94,115/-,

against which the assessee has approached the Tribunal.

determining the comparability of the companies selected.

However, this issue depends upon the primary issue of proper

characterization of the assessee’s business activity under this

segment. Whereas the assessee claimed itself to be engaged in low

level basic assembly activity and chose comparables operating in

the field of Trading, the AO held the assessee to be engaged in

full-fledged manufacturing activity and chose comparables

accordingly. Thus the initial question is to determine the assessee’s

proper characterization.

TPO erred in re-classifying its assembly activity as that of full-

fledged manufacturing activity. It made an elaborate functional

analysis about the nature of activity done by it under this segment,

which has been reproduced at page 68 onwards of the DRP’s

directions, by stating, inter alia, that every product of VEGA

comprises of two components, viz. Electronic part and Mechanical

10 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

part. Full manufacturing of both these parts was done by the AE

outside India. All intangibles, such as, patent, know-how etc.

required for the production of these products were owned by the

AE outside India and Research and Development activities relating

to these products were also carried by the AE. The assessee

purchased fully manufactured Electronic and Mechanical parts at

its rented premises in Pune and assembled them to finished

product. Only two benches were used for this purpose, viz., one

for assembly and other for testing. Only basic Tools and

Equipments, such as, screw drivers and cables etc. were needed for

assembly and it needed only 10 to 15 minutes to assemble one

product. Only three persons were doing the job of assembling,

who were not highly skilled or professionally qualified. The

assessee submitted a list of its employees engaged in

manufacturing segment with their respective designations and the

nature of work done by them by clearly mentioning that only three

Technicians were involved into assembly function and all others

were into sales activity of the assembled products. The assessee

made extensive submissions before the DRP to accentuate that it

was only into ‘Assembly’ and not ‘Manufacturing’. The DRP,

after religiously recording the submissions of the asssessee, simply

11 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

went ahead with countenancing the TPO’s view without properly

controverting the contentions advanced. As against the specific

points raised by the assessee, the DRP canvassed a general view

that the claims made by the assessee were not backed by any

substantive material and further the evidence, if any, furnished

were only self-serving in nature. It did not deny that the assessee

did not have adequate machinery for full-fledged manufacturing

activity. It focussed on the payment of Excise duty by the assessee

as a corollary for `manufacturing’. Per contra, the ld. AR

submitted that Excise duty is required to be paid even for assembly

function, which has not been countered on behalf of the Revenue.

The DRP did not deny the assessee’s contention of having only

three employees doing the basic and low-end assembly of the fully

manufactured products purchased from its AE. Thus, it is apparent

that the submissions advanced by the assessee before the DRP

have not been rebutted with any plausible reasoning.

which has been placed at page 263 of the paper book. Schedule of

Fixed Assets shows only Land, Tools and Equipment, Computers

and IT assets, Vehicles, Office Equipments, Leasehold

Improvements under the head ‘Tangible Asset’ apart from

12 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

Intangible assets comprising of certain computer software at

Rs.95,813/-. This divulges that apart from certain Tools and

Equipments, the assessee did not have any Plant and Machinery

needed for manufacturing the finished goods. We have also

examined the Profit and loss account of the assessee. Nature of

expenses covered in the Profit and loss account does not justify the

carrying on of full-fledged Manufacturing activity. The Directors’

report of the assessee has also been gone into, which does not refer

to any manufacturing activity.

as different from manufacturing as it is from trading. Functions,

assets and risks involved in all the three activities are poles apart

from each other. `Assembly’ lies somewhere between `trading’ and

`manufacturing’. Depending upon the extent of assembly function,

it may in certain cases be close to manufacturing whilst in other

cases it may be close to trading. Where a finished product is

received in a knocked-down position and then assembled, it is

usually a basic assembly. However, where more intensive activities

are required to be done before coming out with a qualitatively

different product having varying features and characteristics, it

may be an extensive assembly or sometimes even breaching to a

13 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

full-fledged manufacturing activity. The assessee’s stand ab-initio

was that it was into assembly function of a very low level. The

authorities below have not faulted with such submissions despite

the fact that the Department has no dearth of resources at its

command to uncover the truth, if it is not properly brought out.

The fortiori is that the unassailed submissions made by the

assessee, which are further backed by the relevant Annual

accounts, have to be accepted as correct. Ex consequenti, re-

characterising the `assembly’ function of the assessee into `full-

fledged manufacturing’ function is uncalled for. We, therefore,

overturn the impugned order on this score and hold that the

assessee has been engaged in basic assembly function only.

under this segment, we now move on to the challenged

comparables. In this regard, it is noted that the DRP finalised

seven comparables including the one selected by the assessee and

not removed by the TPO, namely, Kusum Electrical Industries.The

assessee is aggrieved by the inclusion of all the six comparables

chose by the TPO, which we will deal in seriatim.

14 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

Mettler Toledo India Pvt. Ltd.

assessee objected to its comparability before the DRP contending

that it was having Related Party Transactions (RPTs) at more than

25%, which was the filter applied by the TPO. The DRP directed

that for computing the percentage of related party transactions,

only RPTs of income nature should be compared with the total

income and not the RPTs of expenses and income with the total

income. It sent the matter back to the AO. Giving effect to the

direction given by the DRP, the AO/TPO noticed that the ratio of

RPTs of revenue nature to the revenue of this company was only

0.13%. He, therefore, continued with its inclusion.

ITAT-1297 onwards of the paper book. Related party transactions

have been listed at page ITAT-1310 to 1312. Such related party

transactions are a bouquet of items of expenses as well as revenue.

The ld. AR has placed on record a chart showing the related party

transactions of expense nature of this company which total up to

Rs.177.27 crore. Such total has been determined by scrutinising

all the RPTs and then segregating the RPTs of expense nature,

which are in the realm of Software development expenses; Market

15 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

support charges; Global business shared support service charges;

Purchase of raw materials, components and traded goods; Group

cost allocation charges. As against total of such related party costs

at Rs.177.27 crore, the total costs incurred by this company stands

at Rs.310.32 crore, giving 57% as RPTs of expenses. Correctness

of the copious details with relevant figures shown by the ld. AR

has not been disputed by the ld. DR. Thus, it is palpable that the

RPTs of expense nature at 57% breach the filter of 25% for

exclusion. Though the DRP directed to consider the RPTs of

income nature only, but the essence of the RPTs is the

consideration either of expenses or revenue and not a combination

of both. If a company’s RPTs are only in the nature of expenses,

then percentage of such RPTs should be viewed qua its total

expenses. If the RPTs comprise only of revenue nature, then

percentage of such RPTs should be viewed qua the total revenue.

In case the RPTs comprise both of revenue and expense items, then

both should be viewed separately as a percentage of the respective

revenue or expenses. In case either the RPTs of revenue or

expenses cross the threshold of 25%, the company should be

considered as failing the RPT filter notwithstanding the fact that

the other RPT is well within 25%.

16 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

the percentage of the related party transactions of expenses of this

company is more than 57% of the total expenses incurred by it,

which fails the RPT filter notwithstanding the fact that the

percentage of the RPTs of the revenue items is way below 25%.

We, ergo, direct to exclude this company from the list of

comparables.

Avery India Ltd.

comparables. The assessee contended before the DRP that it was

into full-fledged manufacturing of Weighing machines having high

intensity of functions such as Research & Development and hence,

ceased to be comparable. Rejecting the assessee’s contention, the

DRP approved its inclusion.

the assessee, we have held that it is only into low-end assembly

functions. In that view of the matter, the assessee cannot be

compared with the companies involved into full-fledged

manufacturing activity.

manufacturing weighing machines and has also undertaken

17 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

contracts. 77% of its revenue is from manufacturing and 23%

from contracts. The very fact that this company is engaged into

manufacturing of weighing machines and not into any basic level

assembly, we hold that it cannot be considered as comparable to

the assessee.

Essae Teraoka Private Ltd.

comparables. The assessee objected to its inclusion before the

DRP by contending that it was engaged in the design, manufacture

and trading on wide range of products. Certain other objections

were also espoused before the DRP, which were rejected on the

ground that the assessee was also into manufacturing.

copy of which has been placed in the paper book. It can be seen

that the nature of business of this company is multi-dimensional

ranging from design, manufacture of electronic weighing and POS

system, self-service KIOSK and GPS synchronized clock. It is

also into field of constructing and long term leasing of high quality

built to suit industrial and commercial space to its clients. This

company is also engaged in R&D activity, which is apparent from

its Annual report. In view of the clear difference in the nature of

18 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

business carried by this company vis-à-vis the assessee doing only

the low end assembly activity, we hold that there is no comparison

between the two. As such, this company is also directed to be

excluded.

Nitiraj Engineers Ltd.

comparables. The assessee objected to its inclusion before the DRP

by contending that it was into full-fledged manufacturing having

different products. The DRP did not provide any succour.

the year under consideration, it can be seen that it is in the business

of wide range of production of electronic weighing scales,

currency counting machine and electronic fare meters etc. It has

its full-fledged R&D department. It is also engaged in designing

and developing electronic hardware and software. In addition, this

company also holds intangible assets and has its full-fledged

manufacturing facility. In this backdrop of facts, it is directed to

be excluded from the list of comparables.

Rice Lake Weighing Systems India Ltd.

comparables. The assessee raised objections before the DRP

19 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

against its inclusion by submitting that it was into a different

business model and was also into full-fledged manufacturing. The

contentions raised by the assessee were repelled.

which shows that it is engaged in the business of manufacturing,

marketing and servicing of road and rail weigh bridges, in-motion

electronic weighing systems and other weighing systems mainly

used in industrial activities, bulk material handling systems and

batching systems. This company also earns royalty income which

shows that it has developed its own technical know-how that has

been provided to others on payment basis. In addition, this

company is also engaged in Research & Development for which it

has spent substantial amount. The above distinguishing features

make this company incomparable to the assessee company. We,

therefore, order for its exclusion.

Precia Molen India Pvt. Ltd.

The assessee objected to its inclusion by submitting that it was into

full-fledged manufacturing, which did not convince the DRP.

After going through the Annual report of this company, it can be

seen that it is engaged in the manufacturing and marketing of

20 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

electronic weighing systems having huge intensity plant and

machinery. This company is also paying royalty for use of

technical know-how for the purpose of manufacturing. Since this

company is into full-fledged manufacturing, we hold that it cannot

be compared with the assessee engaged in low-end assembly

function. We, therefore, order to exclude it from the list of

comparables.

are left with one only comparable, namely, Kusum Electrical

Industries Ltd. having weighted WCA margin (OP/OR) at (-)

10.26%. Rule 10CA, dealing with the computation of ALP with

the help of dataset, has been inserted by the IT (Sixteenth Amdt.)

Rules, 2015 w.e.f. 19.10.2015. The rule applies to the A.Y. 2017-

18 under consideration. This rule contains a detailed mechanism

for determining the ALP in a broad manner. Sub-rule (1) of rule

10CA, which is relevant in the present context, states that: `Where

in respect of an international transaction …. the application of the

most appropriate method referred to in sub-section (1) of section

92C results in determination of more than one price, then the arm’s

length price in respect of such international transaction … shall be

computed in accordance with the provisions of this rule.’ Au

21 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

contraire, the mechanism under rule 10CA does not and cannot

apply if there is only one comparable uncontrolled price. In that

panorama, the sole comparable uncontrolled price constitutes the

ALP.

assessee selected certain comparables under the Assembly

segment. The TPO retained only one comparable, viz., Kusum

Electrical Industries Ltd. from the assessee’s list and included 9

more. The DRP squeezed the TPO’s list of comparables from 10 to

7 by retaining the one which was chosen by the assessee and

allowed by the TPO in his list. We have seen supra that the six

new comparables of the TPO, sustained by the DRP, are not

comparable for the reasons assigned above, thereby leaving one

company in the tally of comparables, being, Kusum Electrical

Industries Ltd. having negative weighted working capital adjusted

margin of (-) 10.26% as determined by the AO in his final order

giving effect to the directions of the DRP. As against the ALP of

(-) 10.26%, the PLI of the assessee from this segment has been

computed by the AO in his final assessment order at (-) 7.23%,

which discerns that the transaction is at ALP. The addition under

this segment is directed to be deleted.

22 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 17th October, 2022 Satish

आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “C” / DR 5. ‘C’, ITAT, Pune गाड� फाईल / Guard file 6. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

23 ITA No.260/PUN/2022 Vega India Level and Pressure Measurement Pvt. Ltd.,

Date 1. Draft dictated on 14-10-2022 Sr.PS 2. Draft placed before author 17-10-2022 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.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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