ITO, NEW DELHI vs. M/S. FEDERAL MOGUL AUTOMOTIVE PRODUCT (INDIA) PVT. LTD.,, NEW DELHI

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER

2.0 The assessee company is a 100% subsidiary of Federal Mogul Pty. Ltd, Australia. Federal Mogul Corporation, USA is the parent company of the group. The assessee company is engaged in manufacturing spark plugs and also undertakes marketing and distribution of a range of other products.

2.01 Return of income for A.Y 2005-06 was filed by the assessee company on 30.10.2006 declaring income of Rs NIL. The case was processed u/s 143(1) of the Income Tax Act, 1961 (‘the Act’).

Subsequently, the case was selected for scrutiny and notice u/s 143(2) of the Act was issued.

2.02 The assessee company was deriving income from its associate concerns abroad and during the year under consideration, it had reported international transactions amounting to Rs 13,85,70,706/-. The assessee had entered into the following international transactions with its Associated Enterprise (AE), in the assessment year under consideration:

Value of transaction S. Nature of transaction Method used by Assessec N. Method PLI Receipt Paid 1. Import of Raw Material, TNMM OP/SALES - 81,481,084/- components and tools 2. GP/COGS Sale Export semifinished CPM 39,558,533/- - & finished goods value 3. Provision of TNMM OP/SALES 16,501,326 /- marketing support services 4. Provision for 1,029,763/- professional services TNMM OP/SALES Total Value Of International Transactions: Rs. 13,85,70,706/- 2.03 In respect of the international transactions undertaken by the assessee with its associated enterprise during the F.Y 2004-05, the assessee had selected TNMM with operating revenue computed in relation to total cost as a PLI for import of raw material, components and tools, provision of marketing 2 Assessment year 2005-06 support services and provision for professional services. All the above transactions have been considered to be closely linked to the import of raw material and components and finished goods and hence a combined approach was followed by the assessee.

TNMM has been applied to these transactions. The PLI of the assessee was 6.17 percent whereas the average PLI of broad comparables was 5.99 percent.

2.04 Further, the assessee selected CPM as the most appropriate method for the international transaction pertaining to export of semi-finished & finished goods with Gross Profit mark-up (GP) as the appropriate PLI, to demonstrate its adherence to the Arm's length provisions contained in the Income Tax Act, 1961. As per the TP Study Documentation, the value of exports of finished goods by the assessee was Rs. 39,558,533/- whereas the same of broad comparables was Rs. 41,079,506/-. The assessee exercised the option of availing (+/- 5) percent on the above and as a result, the range of international transaction fell between Rs. 39,025,531/- and Rs. 43,133,481/-. Thus, according to the assessee, its transactions with the AEs were at arm's length.

Assessment year 2005-06 2.05 Further, as per the version of the assessee, cost recharges were stated to be on cost to cost basis and thereby no benchmarking was required for this particular international transaction.

2.06 The case was referred to the Addl. Commissioner of Income Tax, Transfer Pricing Officer-I(5) by the DCIT, Circle 11(1), New Delhi for examining whether or not the reported international transactions were at arm’s length prices as contemplated in section 92C of the Act. The Ld. TPO reported, vide his order u/s 92C A(3) of the Act, dated 27.10.2008, that the assessee had not transacted with its associated concerns at an arm’s length price and required the AO to enhance the income of the assessee by Rs 2,29,40,792/-. Subsequently, the assessee company was asked to show cause as to why such an enhancement in its income may not be made in the light of the order of the Ld. TPO u/s 92CA(3) of the Act.

2.07 The Ld. Transfer Pricing Officer-I(5), New Delhi examined the international transactions of the assessee company and in his order u/s 92CA(3) of Income Tax Act, 1961,dated 27.10.2008 and concluded that in respect of import of raw material & components and finished goods, the assessee had Assessment year 2005-06 declared operating profit margin of 1.17% as against the Arm’s length margin of comparable worked out by the TPO at 5.99% thereby resulting in an adjustment to its income to the tune of Rs 1,70,45,591/-. Similarly, in respect of export of semi finished goods, the profit to be earned as worked out by the TPO was 37.48% as against 19.65% G P Margin on cost worked out by the assessee, thereby resulting in an adjustment to the income by Rs 58,95,201/-. Thus, in the said order, the Ld. Transfer Pricing Officer (TPO) directed the A.O to enhance the total income of the assessee for A.Y 2005-06 by Rs. 2,29,40,792/-. In arriving at this value of the Arm’s length price of the international transactions, the Ld. TPO studied the valuation adopted by the assessee and after an analysis of the transfer pricing approach of the assessee, he found that the assessee had earned commission income of Rs 1.65 crores while none of the comparables had earned commission income. The Ld. TPO also observed that the goods sold to the Associated Enterprise and non AE were not similar and hence the comparison made by the assessee company was not acceptable. While the assessee was valuing the international transactions pertaining to the sale of finished and semi finished goods at cost plus method, the gross profit mark Assessment year 2005-06 up of the comparables with respect to cost of goods sold worked out to 37.48% as against the figure of 19.65% adopted by the assessee company. In response to the show cause notice of the Ld. TPO for enhancement of its Arm’s Length price, the assessee cited the ground of lower utilization of installed capacity which was projected to increase to 55% as against the value of 41% for the year under consideration which was rejected by the Ld. TPO observing that the assessee was not in the initial year of its operations and its projected capacity utilisation from 2001 to 2008 was also far-fetched. The Ld. TPO made the enhancement as mentioned above.

2.08 Subsequently, the AO, following the reasoning of the Ld. TPO in his order dated 28.11 2008, enhanced the income of the assessee by Rs 2,29,40,792/-.

2.09 Aggrieved, the assessee preferred an appeal before the Ld. CIT (A) who was pleased to allow assessee’s grounds pertaining to the transfer pricing adjustments as detailed above.

2.10 Now the Department has approached the ITAT and has raised the following grounds of appeal- Assessment year 2005-06 “1. On the facts and in the circumstances of the case, the Learned CIT (A) has erred in deleting the addition of Rs. 34,72,826/- on account of notional foreign exchange fluctuation loss.

3. The CIT(A) has erred in ignoring the fact that the TPO has calculated the PLI for the purposes of calculating the ALP by reducing the commission income and professional service incomes of Rs. 1,65,01,326/- and Rs. 10,29,763/- respectively.

4. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.”

4.1 It was further submitted that the application of TNMM was based on an analysis of the profitability of the assessee and was compared with profitability achieved by independent comparable companies operating in a similar, but uncontrolled business environment in India. In order to compare the profit margin realised by the assessee, with the profit margin realised by comparable uncontrolled companies, the ratio of net operating margin (computed by taking Operating Profit as a percentage of Operating Revenue, i.e. OP/OR) was considered as the profit level indicator (“PLI”). It was submitted that based on the analysis carried out, in case of TNMM the arithmetic mean of the comparable companies worked out to be 5.99 percent. The assessee’s operating margin on operating revenue worked out to 6.17 percent, which is higher than the average / arithmetic mean of the net margins of the comparable companies and, therefore, Assessment year 2005-06 all the international transactions with associated enterprises on which TNMM was applied were considered to be at arm’s length.

4.2 The Ld. AR further submitted that in case of export of semi- finished goods, the assessee has selected Cost Plus Method (“CPM”) as the most appropriate method to benchmark the transaction. The application of CPM was based on an analysis of the gross margin earned by assessee from sale to the associated enterprises and sale to unrelated parties wherein the gross margins earned by the assessee from sales to associated enterprises worked out to 19.32 percent and sales made to unrelated party worked out to be 24.25 percent. Translating the percentage margins earned by the comparables into amount, value of arm’s length price works out to be 41,079,506/-. It was submitted that the assessee can, at its option, adopt a price that differs from the arithmetic mean of the arm’s length prices by an amount not exceeding 5 per cent of such mean, as the arm’s length price. Accordingly, allowing for a +/- 5 per cent variance from the mean transfer price, the range of transfer price of the comparable uncontrolled transaction would fall between Rs.39,025,531/- and Rs. 43,133,481/-. It was submitted that the sales value of the assesee’s export of semi finished goods is Rs. Assessment year 2005-06 39,558,533/- and since the sales value is within the arm’s length price range, the price charged for export of semi-finished & finished goods to associated enterprises was considered to be at arm’s length.

4.3 The Ld. AR submitted that the Ld. TPO, in case of international transactions where TNMM was considered as the most appropriate method, has treated the commission income as non operating and excluded the same from the margin computation of the assessee and recomputed the margin for comparison purposes at 1.17 percent. It was also submitted that further, in case of Export of semi-finished and finished goods, the Ld. TPO disregarded internal CPM contending that the goods sold to the associated parties and unrelated parties are not similar.

The Ld. TPO considered external CPM as the most appropriate method wherein the reliance was made on the search made by the assessee for import of raw material, components and goods.

The Ld. AR submitted that the Ld. TPO compared gross margin earned by the assessee from export of semi finished goods and finished goods with gross margin earned by the comparable companies selected by the assessee for TNMM, thereby totally Assessment year 2005-06 disregarding the applicability of both the methods as prescribed under transfer pricing rules.

4.4 On the issue of disallowance of loss on account of fluctuation of foreign exchange amounting to Rs 34,72,826/-, the Ld. AR submitted that during the year under consideration, the assessee had debited to its profit and loss account an amount of Rs 34,72,826/- as foreign exchange fluctuation (net). During the course of assessment proceedings, the assessee was asked to submit the details of the same and also to justify the allowably of the same. It was submitted that the assessee filed the details vide letter dated 3 December 2008 and also explained the reason for claiming the said loss as allowable in the computation of total income. The assessee had mentioned in the letter that the loss has been incurred on account of settlement of trade debtors/ creditors and restatement of balances due from trade debtors/ creditors as on 31 March 2005. Thus, it was explained by the assessee that the loss incurred is on account of both payment and reinstatement. It was further submitted that in the assessment order, the amount of Rs. 34,72,826/- was disallowed by the Assessing Officer on the ground that the foreign exchange loss incurred by the assessee on mere restatement of the Assessment year 2005-06 liabilities is not allowable being contingent and notional in nature. The Ld. AR submitted that the AO completely disregarded the submission made by the assessee that the loss also included the loss on account of settlement of trade debtors and creditors.

It was further submitted that while disallowing the same, the AO also disregarded the judgment of Honorable Delhi High Court in the case of CIT vs Woodward Governor India P Ltd (294 ITR 451).

4.5 The Ld. AR also filed written submissions which are being reproduced below-

“A. The assessee transactions are at arm’s length as per the combined transactions approach

The approach of the assessee is in line with the approach 1. prescribed in the Income Tax Rules, 1962

The assessee submits that Rule 10A (d) of the Income Tax Rules’ 1962 (“the Rules”) provide that, “a “transaction” includes a number of closely linked transactions.” This implies that a number of transactions can be aggregated together and construed as a single transaction for determining the ALP for the combined transactions.

The approach of the assessee is also in line with the 2. approach prescribed in OECD guidelines Assessment year 2005-06 The assessee submits that Para 3.9 of OECD Guidelines state the following - “there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. some long term contracts for the supply of commodities or services, 2. rights to use intangible property, and 3. pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method or methods.”

The assessee submits that the above extract specifically mentioned that in case the transactions of the assessee are so closely linked that a segregated analysis is not possible, an aggregated approach will be considered more appropriate.

The approach of the assessee is well supported by 3. international jurisprudence Assessment year 2005-06 In the case Canadian Case Law of MNR v. Granite Bay Timber Co. Ltd., 58 DTC 1066 (Ex Ct), briefly affd 59 DTC 1262 (SCC), Justice Thurlow stated -

“In my opinion, the expression “one or more transactions” in s. 8(3) is wide enough to embrace all types of voluntary processes or acts by which property of one person may become vested in another without regard for the reason or occasion for such processes or acts and regardless also of whether the process is undertaken or the act is done for consideration in whole or in part or for no consideration at all. It may not be wide enough to embrace a transmission or devolution upon death but as used in s. 8(3), I think it is wide enough to include any voluntary transfer of property between existing persons falling within the class referred to as “persons not dealing at arm’s length.”

In light of the above interpretation approach taken by the Court, it is clear that the word "transaction" has a very broad meaning. In this regard, Rule 10A (d) provides that, “a “transaction” includes a number of closely linked transactions”. Hence, it is clear that the approach of the assessee represents a transaction by transaction approach as it has treated closely linked transactions as a unitary transaction

The assessee’s contention finds support in the Guidance 4. Note issued by the Institute of Chartered Accountants of Assessment year 2005-06 India (“ICAI”)

The assessee’s approach is in line with the Guidance Note issued by the ICAI. In relation to benchmarking of closely linked transactions, the guidance note states - “5.7 The factors referred to above are to be applied cumulatively in selecting the most appropriate method. The reference therein to the terms ‘best suited’ and ‘most reliable measure’ indicates that the most appropriate method will have to be selected after a meticulous appraisal of the facts and circumstances of the international transaction. Further, the selection of the most appropriate method shall be for each particular international transaction. The term ‘transaction’ itself is defined in rule 10A(d) to include a number of closely linked transactions. Therefore, though the reference is to apply the most appropriate method to each particular transaction, keeping in view, the definition of the term ‘transaction’, the most appropriate method may be chosen for a group of closely linked transactions. Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or an arrangement and the nature, characteristics and terms of these transactions are substantially flowing from the said common source. For example, a master purchase order is issued stating the various terms and conditions and subsequently, individuals orders are released for 16 Assessment year 2005-06 specific quantities. The various purchase transactions are closely linked transactions.

5.8 It may be noted that in order to be closely linked transactions, it is not necessary that these transactions need be identical or even similar. For example, a collaboration agreement may provide for import of raw materials, sale of finished goods, provision of technical services and payment of royalty. Different methods may be chosen as the most appropriate methods for each of the above transactions when considered on a stand alone basis. However, under particular circumstances, one single method may be chosen as the most appropriate method covering all the above transactions as the same are closely linked.”

Based on the above, the assessee submits that the assessee was justified in applying the approach of aggregation of transactions. Given the fact and circumstances of the case, it was 5. practically not possible to perform the analysis the assessee undertook several types of international transactions with various AEs. Availability of comparable data in all the transactions in itself would be a challenge, in case separate analysis was to be adopted.

Jurisprudence 6.

Assessment year 2005-06 In the case of "Dresser Valve India Pvt. Ltd. vs. The Deputy Commissioner of income Tax, Circle-8 (1), Mumbai (I.T.A. No.1945/Md6/2010)”, Hon'ble Mumbai ITAT held

“13. We are of the considered view that in respect of the commission income and recovery of sourcing expenses, such an universal comparison is not justified. This is because in respect of the assessee- company these two items are unique receipts with its limited scope of operation...

The approach followed by assessee has also been upheld in the case of ACIT vs. Lumax Industries Limited [TS-152-ITAT- 2013(DEL)-TP] wherein the Hon’ble Delhi ITAT held -

“33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines ‘transaction’ as a number of closely linked Assessment year 2005-06 transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty." The assessee also places reliance on the case of Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (ITA No. 1683/PN/2011), wherein the Hon’ble Pune ITAT principally upheld the aggregation of closely linked transactions placing its reliance on the provisions of the Income Tax Act read with Income Tax Rules, OECD Guidelines and Guidance Note issued by the ICAI.

Thus, the loss incurred was on account of both, payment and reinstatement. However, the amount of Rs 34,72,826/- was disallowed by the AO on the ground that foreign exchange loss incurred by the assessee on mere restatement of the liabilities was not allowable being contingent and notional in nature. The Assessing Officer disregarded the assessee’s explanation that the loss also included the loss on account of settlement of trade debtors and creditors. However, the Ld. CIT (A) allowed the asseessee’s ground by holding that the underlying liability was on account of revenue transaction and hence the Forex loss also took colour of revenue loss. The Ld. CIT (A) also relied on the judgment of the Hon’ble Apex Court in the case of CIT vs. Woodward Governor reported in 312 ITR 254 (SC) while allowing the assessee’s ground.

5.01 The Ld. AR has placed reliance on AS 11 in support of the contention that Forex loss was revenue in nature. It has been submitted by the Ld. AR that whenever export sales are Assessment year 2005-06 made by the assessee, the export invoice is converted into INR by applying the exchange rate prevailing as on the date of export. If the export proceeds are realized from the customer before the end of the financial year in which sale was made then the difference between sale price (in INR) and amount actually received from the customer is debited/credited to profit and loss account as foreign exchange loss or gain, as the case may be. It has been further submitted by the Ld. AR that, if, however, the proceeds are not realized from the customer before the end of relevant financial year, the amount recoverable from parties in foreign currency is converted into INR by applying the exchange rates prevailing at the year end. The difference between amount receivable (in INR) and amount so reinstated is debited/ credited to profit and loss account as foreign exchange loss/gain, as the case may be. It has also been submitted that the said accounting treatment is mutatis mutandis applied whenever the goods or services are imported from outside India. The Ld. AR has also submitted that provisions of Section 145(1) of the Act also require an assessee to compute its taxable profits in accordance with the method of accounting (mercantile or cash) which is consistently followed by the assessee. It has been Assessment year 2005-06 submitted that the assessee is consistently following mercantile system of accounting and accordingly any loss on exchange variation is recognized in the books of accounts as when the same is accrued. The accounting treatment as explained by the Ld. AR has not been controverted by the Department at any stage of the proceedings.

5.02 The relevant extract of AS-11 is reproduced below- Para 11 - “At each balance sheet date, Foreign currency monetary items should be reported using the closing rate”. Para 13 - “Exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise, with the exception of exchange differences dealt with in accordance with paragraph 15”.

5.03 We agree with the contentions of the Ld. AR that such accounting treatment of reinstating the monetary assets/liabilities is in accordance of Accounting Standard 11

(“AS- 11”) “Accounting for Effects of Changes in Foreign Assessment year 2005-06 Exchange Rates” issued by the Institute of Chartered

Accountants of India (“ICAI”) which mandates for every company to reinstate its foreign exchange monetary assets and liabilities at the rate prevailing on the last day of the financial year. It is also undisputed that such accounting policy has been consistently followed by the assessee. The assessee is following mercantile system of accounting consistently. The Forex loss is due to the reinstatement of accounts at the end of the financial year as per the Accounting Standard 11 issued by the Institute of Chartered Accountants of India. It is undisputed that the underlying liability was on account of revenue transaction- income on account of settlement of creditors/ debtors. Therefore, the Forex loss is also takes the colour of revenue loss. Further,

The issue has been settled by the judgment of the Hon'ble

Supreme Court in the case of Woodword Governor [2009] 312

ITR 254 SC. The case of the assessee squarely falls within the ambit of the decision of the Hon'ble Supreme Court. Therefore, we find no reason to interfere with the findings of the Ld. CIT (A) on this issue and we uphold the same. Accordingly, ground No.

1 of the Department’s appeal is dismissed.

Assessment year 2005-06 5.1 As far as ground nos. 2 and 3 of the department’s appeal are concerned, it is seen that the assessee had used TNMM for benchmarking the transaction of import of raw material, components and tools and provision of marketing support services and Provision of professional services using combined transactional analysis. While doing so Operating Profit / Operating Revenue (OP/ OR) was taken as Profit Level Indicator (PLI). For Export of Semi-finished and finished goods Cost Plus Method (CPM) was taken as the most appropriate method using GP/ Cost of Goods sold as the PLI. For this CPM, it was the internal benchmarking as the assessee had sold the similar goods to unrelated parties as well. The Ld. TPO accepted the comparables under TNMM analysis. However, he rejected the internal CPM. Using the same set of comparables, taking the financials at the gross profit level the benchmarking was made using external CPM for Export of semi-finished and finished goods. The Ld. TPO accepted the most appropriate method, comparables as selected by the assessee and the PLI as used by the assessee in its TP study. The Ld. TPO even accepted the multiple year data as provided in the TP study. He had taken the company-wide data as provided in the audited profit and loss Assessment year 2005-06 account of the assessee and the TP study. However, the Ld. TPO did not include the commission income and income from professional services earned by the assessee by stating “as none of the comparable has earned commission income”. As a result of this exercise, the OP/OR of the assessee was reduced to 1.17% from 6.17%.

5.1.1 It has been the contention of the assessee that the rendering of marketing support services and provision of professional services are intrinsic to the entire business model and that it was not feasible to consider the services as a separate business segment. It has also been contended that there is no separately identified team which carries out marketing support services and, therefore, it will be inappropriate to segregate cost incurred for manufacturing and cost incurred for marketing support services. It has been submitted that the consideration for marketing support services is not a cost-plus pricing model but a fixed percentage of sales and if it was a separate business segment, an appropriate cost plus markup approach would have been adopted by the assessee. On the issue of provision for legal services, it is the assessee’s contention that since it has been chargeable @ cost +10% basis, on matching principle, the Ld. Assessment year 2005-06 TPO should have excluded the cost pertaining to provision of such services in case the income is reduced for computation of operating profit. However, the main thrust of the assessee is that all the transactions with the associated enterprise were closely linked transactions and needed to be aggregated for the purpose of determining the ALP. The Ld. Authorised Representative has has placed reliance on the OECD guidelines as well as the order of the ITAT Pune Bench in the case of Demag Cranes & Components versus DCIT in ITA No. 1683/p.m./2011 and also on the Guidance Note on report under section 92E of the Income Tax Act, 1961 issued by the Institute of Chartered Accountants of India in support of his contention that a number of transactions can be aggregated and that they constitute a single transaction for the purpose of determining the ALP provided that such transactions are closely linked and where it would be inappropriate to analyse the transactions individually.

5.1.2 The Hon’ble Pune Bench in the case of Demag Cranes and Components (supra), on which the Ld. AR has relied, has examined the issue of aggregation as under – “30. We have carefully considered the rival submissions. Section 92B of the Act provides the meaning of expression international Assessment year 2005-06 transaction between two or more associated enterprises. Rule 10 A(d) of the Rules explains the meaning of the expression “transaction” for the purposes of computation of ALP as to include a number of closely linked transactions. 10B of the Rules prescribes the manner in which the ALP in relation to an international transaction is to be determined by following any of the methods prescribed. Shorn of other details, it would suffice to observe that on the combined reading of Rule 10 A (d) and 10 B of the Rules, a number of transactions can be aggregated and construed as a “single transaction” for the purposes of determining the ALP, provided of course that such transactions are “closely linked”. Ostensibly the rational of aggregating “closely linked” transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of transactions can be aggregated and construed as a composite transaction in order to compute ALP also finds echo in the OECD guidelines under chapter III wherein the following extract is relevant –

“Ideally, in order to arrive at the most precise approximation of arm’s length conditions, the arm’s length principle should be applied on a transaction-by- transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. some long term contracts for the supply of commodities or services, 2. rights to use intangible property, and 3. pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing Assessment year 2005-06 for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is apart in its entirety, rather than consider the individual transactions on a separate basis.”

“13.7 The factors referred to above are to be applied cumulatively in selecting the most appropriate method. The reference therein to the terms “best suited” and “most reliable measure” indicates that the most appropriate method will have to be selected after meticulous appraisal of the facts and circumstances of the international transaction. Further, the selection of the most appropriate method shall be for each particular international transaction. The term “transaction” itself is defined in Rule 10 A (d) to include a number of closely linked transactions. Therefore, though the reference is to apply the most appropriate method to each particular transaction, keeping in view, the definition of the term “transaction”, the most appropriate method may be chosen for a group of closely linked transactions. Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or an arrangement in the nature, characteristics and terms of these transactions are substantially flowing from the said common source. For example, a master purchase order is issued stating the various terms and conditions and subsequently individual orders are released for specific quantities. The various purchase transactions are closely linked transactions. 13.8 It may be noted that in order to be closely linked transactions, it is not necessary that the transactions need be identical or even similar.….”

Assessment year 2005-06 5.1.3 Reverting to the facts of the present case, we do accept the contentions of the Ld. AR that aggregation/combined transactions approach can be followed by the taxpayer and the same will be in accordance with the mandate of Rule 10A (d) read with Rule 10B. However, it is our considered opinion that the onus is essentially on the assessee to demonstrate with ample evidence that such an approach is justifiable in its case.

The Ld. Departmental Representative has vehemently argued to support the order of the Ld. TPO. However, the Ld. TPO has not specifically commented on the combined approach adopted by the assessee but has excluded the income from marketing support services and professional services from the operating income of the assessee for the purpose of computation of arm’s length price. The Ld. TPO has commented that none of the comparables selected by the assessee had earned commission income whereas the assessee had shown commission income of Rs. 1,65,01,326/-. The Ld. CIT (Appeals) has noted that by eliminating commission income and professional service income the Ld. TPO had failed to benchmark the international transaction itself which he was purporting to do. The Ld. CIT (Appeals) has also noted that the cost relating to the earning of Assessment year 2005-06 income from professional services has not been excluded by the Ld. TPO. On the other hand, the assessee has also not made out specific case by producing due evidences before us as to why the rendering of marketing support services and professional services can be classified as closely linked transactions for the purposes of Rule 10 A (d) of the Rules.

Therefore, in our considered opinion, on one hand, the approach of the Ld. TPO in out rightly rejecting the aggregation of the transactions was flawed as no justification has been given by the Ld. TPO for such rejection. On the other hand, as stated earlier, the assessee also has not been able to make out a strong case as to why the rendering of marketing services and professional services should be classified as closely linked transactions. Therefore, considering the entirety of facts and circumstances, we are of the opinion that the issue needs to be revisited by the AO/TPO for re-computing the ALP in respect of the impugned international transactions after duly taking into consideration the material sought to be relied upon by the assessee in respect to adopting a combined transaction approach after considering each of the transactions for the purpose of determining as to whether the same are to be Assessment year 2005-06 benchmarked after aggregation or not. The AO shall allow the assessee reasonable opportunity to submit material and submissions in support of its the stand and thereafter pass order afresh on the above aspects in accordance with law.

Accordingly, ground numbers 2 and 3 of the Department’s appeal stand allowed for statistical purposes.

Order is pronounced in the open court on 12th May, 2017.