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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SMT DIVA SINGH & SH.PRASHANT MAHARISHI
PER DIVA SINGH, JUDICIAL MEMBER By the present appeal the assessee assails the correctness of the order dated 19.12.2014 pertaining to 2010-11 assessment year passed by Assessing Officer u/s 143(3) read with section 144C of the Income Tax Act 1961 under section 144C(5) dated 27.10.2014 has been assailed on the following grounds:-
1. “That on facts and circumstances of the case and in law, the learned AO/ Transfer Pricing Officer ("TPO"), and the learned Dispute Resolution Panel ("DRP") erred in making an adjustment of Rs. 2,74,88,776/- in respect of the international transaction, alleging
I.T.A .No.-1065/Del/2015 that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules").
2. That on the facts and circumstances of the case and in law, learned AO/DRP/TPO have erred in rejecting the transfer pricing approach and arm's length analysis carried out by the Appellant without assigning any cogent or valid reasons and further without prejudice erred in not making suitable adjustments to financial information determined by Ld. TPO.
3. That on the facts and circumstances of the case and in law, learned AO/DRP/TPO have erred in making an upward adjustment on account of transfer pricing which is against the principle of consistency since similar transactions undertaken by the Appellant in the earlier years have been accepted to be at arm's length by the learned TPO.
That on the facts and circumstances of the case and in law learned TPO has erred in considering data relating to the business operations of the Appellant out of context for the purpose of benchmarking the trading transactions and ignoring to consider Complete and relevant facts resulting in incorrect and unlawful conclusions.
5. That on the facts and circumstances of the case and in law, learned AO/TPO/DRP have erred in benchmarking the trading and manufacturing as separate transactions of Appellant's business without fully and properly understanding the business of the appellant and have erred in ignoring the fact that the manufacturing and trading segment of the Appellant are inextricably-linked and cannot be benchmarked separately.
6. That on the facts and circumstances of the case and in law, learned AO/TPO/DRP have erred in incorrectly understanding and appreciating the business model and commercial realities of the Appellant and proceeding to separately benchmark the trading transactions of the Appellant. Without prejudice, all necessary facts have not been considered and / or necessary adjustments to financial information not carried out.
7. Without prejudice, that on the facts and circumstances of the case and in , learned AO/DRP/TPO have erred in not using the correct financial information to compute the margins of the appellant.
8. That on the facts and circumstances of the case and in law, learned AO/DRP/TPO have erred in not carrying out a detailed analysis of functions performed, assets utilised and risks assumed while rejecting the arm's length analysis carried out by the Appellant and proceeding to separately benchmark the international transactions.
I.T.A .No.-1065/Del/2015
That on facts and circumstances of the case and in law, learned AO/TPO/DRP have erred in proceeding to make an upward adjustment on account of transfer pricing without appreciating reasonably high margins earned by the Appellant vis-a-vis the comparable(s).
That on the facts and circumstances of the case and in law, learned AO/TPO/DRP have erred in making an upward transfer pricing adjustment on the international transactions of the Appellant by taking isolated and unjustified view on some transactions . 11. Without prejudice to the above, and on the facts and circumstances of the case and in law, learned TPO has erred in incorrectly computing the adjustment to arm's length price of trading transactions of Appellant. Further, no adjustments have been made to factor in difference in business models with the comparable. 12. That on the facts and circumstances of the case and in law, learned AO/DRP/TPO have erred, by not providing the Appellant the benefit of ±5 percent range as provided under the proviso of Section 92C(2) of the Act. 13. That on the facts and circumstances of the case and in law, the learned AO has erred, in charging interest under Sections 234B, 234C and 234D of the Act. 14. That on the facts and circumstances of the case and in law, the learned AO has erred, in incorrectly allowing the credit of taxes deducted at source. 15. That on the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under Section 271(l)(c) read with Section 274 of the Act. The above grounds are independent and without prejudice to each other. The Appellant craves to leave to add, withdraw, amend or vary the above grounds of appeal before or at the time of hearing.”
2. The Ld. AR inviting attention to the grounds raised submitted that in the facts of the present case by Ground No. 1, the entire adjustment made by the AO is assailed. It was submitted that Ground No. 2, 3 & 4 address specific grievances of the assessee. Inviting attention to Ground Nos. 4 to 6 it was submitted that by way of these grounds, the continuing grievance of the assessee is being kept alive. Referring to the said grounds it was submitted that I.T.A .No.-1065/Del/2015 the assessee’s business model has not been correctly understood and since there is an error in the foundational fact the entire exercise of comparables and adjustments becomes fault ridden. The said issue historically though has not been accepted by the Revenue and as opposed to the assessee’s plea that the printers are under priced and the assessee consciously suffers a loss so as to recoup the gains by selling ink. The profit made from the sale of Ink far outweighs the loss from printers. However, the Revenue has not accepted this position and insisted upon treating the two activities as separate and distinct.
Not willing to give up the issue and requesting that it may be kept alive for adjudication at some future date as in the year under consideration it was submitted the issue would become academic. In the facts of the present case, arguments were advanced qua Ground No.7 so as to submit that fresh evidences may be admitted as there are computational errors. The fact that there is an error in the approach it was submitted is evident from the directions given by the DRP in 2011–12 assessment year on same facts and circumstances. Ground No. 7 it was submitted is a ground raised without prejudice to the main grounds.
By considering the same, the other issues contested by the assessee would become academic in the present proceedings and may be left open for adjudication permitting the assessee to raise them as and when they become relevant.
I.T.A .No.-1065/Del/2015
In the said background referring to the material on record, it was submitted that the assessee is engaged in the business of manufacturing and trading of inkjet printers, contact coders, consumables such as inks, additives and other accessories and spare parts etc. and consistently the assessee has taken the position that the trading and manufacturing activities are so interlinked that they cannot be considered to be separate and different activities on account of the peculiar business model and the business strategy of the assessee. It was submitted that however the said approach has not been accepted either by the Transfer Pricing Officer (hereinafter referred to as “TPO”) or by the DRP as a result of which specific grounds have been raised by the assessee in the present appeal. In view of the fact that the TP study of the assessee was so made where trading and manufacturing activity was shown as one international transaction, accordingly the financial information to compute the margins was also so presented. Inviting attention to the order passed by the DRP under section 144C(5) dated 23/11/2015 for 2011-12 AY wherein the precedent qua the issue raised in Ground No.7 has been relied upon and the consistent claim of the assessee has been addressed, attention was invited to internal page 3 and 4 of the DRP’s order wherein the following Ground No.2 was raised by the assessee which has been considered:-
I.T.A .No.-1065/Del/2015
GROUND 2: WITHOUT PREJUDICE, THE MARGINS COMPUTED BY THE LD.TPO FOR THE TRADING SEGMENT ARE INCORRECT LEADING TO ERRONEOUS AND AN ADJUSTMENT IN THE CASE OF THE ASSESSEE
DRP’s Findings:The TPO relied upon the disclosure in the financial statements of the assessee while carving out the gross margins from the trading transaction of the assessee, and separately benchmarking the same.”
“The assessee submitted that there was an apparent mistake in the sales "figures of traded consumables as per the Notes to Accounts". The sale of traded consumables forming a part of the revenue of the assessee from manufacturing operations, consist of sale of certain traded consumables which have been sold to third party customers. Such trading consumables pertain mainly to the "Continuous InkJet & L.C Valve" models, which were traded as well as manufactured by the company during the year. However, the sales of this consumable model, were inadvertently clubbed with the manufacturing sales in the "Notes to Accounts" The assessee submitted that the costs of such traded consumables have been rightly clubbed under trading transactions in the "Notes to Accounts disclosure". Hence, in effect, the cost of these consumables has been taken into consideration while the revenue has not been taken into consideration by the TPO while computing the gross margins. This contention was raised by the assessee In Form 35A and certain additional supporting evidence to substantiate this claim were submitted vide submission dated 26-10-2015. The assessee submitted a certificate by Chartered Accountant: documenting certain procedures which were performed in accordance with the Standard on Related Services (SRS) 4400, "Engagements to Perform Agreed-upon Procedures regarding Financial Information", issued by the Institute of Chartered Accountants of India ("AUP") on the value of Sale of Traded Consumables. The matter was remanded to the TPO to examine the additional evidence submitted by the assessee.” (Emphasis provided)
3.1. Relying upon the Directions, it was submitted that the matter may be remanded to the TPO. In the facts of the present case the assessee alongwith a copy of the DRP’s order in 2011-12 AY has also filed margins of both segments
I.T.A .No.-1065/Del/2015 which it was stated have been verified and recomputed by Chartered Accountant following the Agreed-upon Procedure. Thus the issue following the precedent it was submitted may be remanded as there are computational errors in the computation of the tax authorities. The detailed observations running into 1 to 5 it was submitted have been considered by the DRP and relying on the Agreed upon Procedure (as “AUP”) the matter was remanded. Accordingly it was his limited prayer that as far as the present appeal is concerned it may be decided on the basis of Ground No. 7 which is without prejudice. The issues raised by the assessee in the present proceedings may be kept alive though academic in the present proceedings in view of the prayer on the without prejudice ground being argued.
4. The Ld. Sr.DR on considering the order of the DRP in 2011-12 AY and the limited prayer of the assessee had no objection, if the said prayer of the assessee is allowed and the matter is remanded back to the file of the TPO for a consideration on merit on the limited issue.
We have heard the rival submissions and perused the material available on record. It is seen that the assessee, Markem-Imaje India Private Limited (‘MIPL’) is a wholly owned subsidiary of Markem-Imaje SAS France. It is engaged in the business of manufacturing and trading of ink-jet printers, contact coders, consumables such as inks, additives and other accessories and spare parts. As
per record the assessee in the year under consideration undertook the following Page 7 of 22
I.T.A .No.-1065/Del/2015 international transactions with its Associated Enterprises (hereinafter referred to as “AE”):-
S.No. Particulars Amount (Rs.) 1. Purchase of tools 258,192 2. Purchase of marketing material 273,416 3. Purchase of spare parts and accessories 21,794,000 4. Purhcase of coding machines 157,081,000 5. Purchase of ink 80,355,000 5.1. For the purpose of benchmarking its international transactions, the assessee used Resale Price Method (hereinafter referred to as “RPM”) as the most appropriate method. Gross Profit/Sales (‘GP/Sales’) was selected as the Profit Level Indicator (hereinafter referred to as “PLI”). The benchmarking analysis conducted by the assessee is as below:-
Particulars Furnished in TP Documentation No. of comparables 1 GP/Sales margin of comparable 17.17% Assessee’s GP/Sales margin 46.05% 5.2. A perusal of the TPO’s order shows that IMAJE acknowledged the growing Indian potential and that was responsible for the first industrial inkjet printers to come to India way back in 1988 and it became a 100 wholly-owned subsidiary of IMAJE SA, France in January 1998. The TPO notes that the assessee in the TP study describes the beginning of IMAGE as modest, the journey focused on providing complete solution to its customers and also giving excellent post sales service support through their network of 12 service locations spread all over India. The TPO notes that MARKEM and IMAJE merged together and MARKEM-
I.T.A .No.-1065/Del/2015 IMAGE was formed in 2008. The Indian operation is headquartered at Noida near Delhi. The manufacturing unit is also situated at Noida. The TPO described that the wide sales and service network has excellent infrastructure and facilities to cater to the discerning customers. The Indian operation it has been held was fully backed up by the IMAJE R&D team working for its specific requirements. In addition the MARKEM-IMAJE Product Support Team as well as the MARKEM-IMAJE Post Sales Service Teams endeavours to provide with installation evaluations and solutions package as per the requirements. The service Engineers were held to be provided training in Image training & Center and few were trained at Regional headquarter in Singapore to ensure International level support with continuous upgradation of technical status.
Training Centres were held to be established in Noida and Banglore on all ranges of products. The Markem-Image Production Mis has been described as:-
MARKEM-IMAGE PRODUCT MIX
“Small Character printers :- These machines utilizes the principle of continuous deviated ink jet to put a mark (eg. Batch no, shift code, date of manufacture, counters etc) on the product itself or tie primary packaging. These machines, are non-contact types and prints from a distance (usually 10 - 30 mm). The inks used are fast drying inks and mark made, has a long life. It can print on any-type of substrate like plastic, paper, metal, wood, glass etc. There is a variety of colours available like black, white, blue, yellow and green. It can print up to 8 / 16 lines (character height from 2-20 mm) of variable information with logo, barcode and any other customized symbols. There are a variety of fonts and languages available.
I.T.A .No.-1065/Del/2015
Large Character printers - These machines utilizes the principle of drop on demand (000) to put a mark (e.g. Batch no, shift code, date of manufacture, counters etc) on the secondary packaging. These machines also are non-contact types and prints from a distance (usually 10 - 20 mm). The inks used are fast drying inks and mark made has a long life. It can print on generally porous substrate like corrugated boxes, paper etc. There is a verity of colours available like black, blue, yellow and green. It can print up to 5 lines and a maximum character height of 64 mm.
Laser marking systems -Imaje lasers are RF excited sealed C02 laser based marking system (dot matrix rotating polygon mechanism) used for indelible marking on various kind of surfaces. The system is highly reliable and it comes with 3 years warranty on laser source. This makes it extremely reliable, flexible and maintenance free machine. It can print up to 5 lines at high industrial speeds. It utilizes a peak power of 250 W.
Thermal transfer on line (TTOL) & Print and apply labeling systems - For printing complex information (e.g. Logos, text, bar codes etc.) with high resolution two types of technology is used namely thermal transfer and direct thermal labels. TTOL is utilized to put thermal mark on ILcxible and continuous substrates. Print and apply systems print labels and apply them on secondary packaging (Shipping boxes) of pallets. Lt can be integrated to the ERP system for greater control.
Contact coders - These coders are contact type and uses the hot roll and hot foil mechanism to leave a fixed mark on the surface of the laminate etc. These can be integrated with packaging lines like FFS or continuous wrapping machines.
The international transactions of the assessee during the year are given as below:-
S.No. Head Value Method Used for Determining the price 1. Purchase of Tools 2,58,192 NA 2. Purchase of Marketing Material 2,73,416 NA 3. Purchase of Spare Parts and 2,17,94,000 NA Accessories 4. Purchase of Coding Machines 15,70,81,000 Resale Price Method (RPM)
I.T.A .No.-1065/Del/2015
5. Purchase of Ink 8,03,55,000 Resale Price Method Total 25,97,61,608 5.3. The TPO found that the assessee applied RPM for benchmarking its international transactions of purchase of coding machines and purchase of ink and did not apply any method for benchmarking transactions shown at Sl. No.1 and 2 in the table. He also found that the assessee also aggregated all the transactions under one segment and benchmarked the same using GP/sales as the profit level indicator and RPM as the most appropriate method taking one company as comparable, i.e. M/s Control prints. The assessee in response to show cause submitted that the GP/Sales of the assessee is 46.05% and GP/Sales of the comparable is 17.17% and accordingly no adjustment should be made.
The TPO did not agree with assessee’s claim. It was further submitted by the assessee that it intended to make higher margin on the sale of inks that is why it did not mind purchasing the printers at a loss. The said argument of the assessee was not found acceptable. The TPO was of the view that the assessee in the first place is selling the products of its AE. Thus, he held that if at all any loss was to be suffered in the transaction then it should be suffered by the AE who should sell it to the India entity at a lower margin. The logic of why the assessee should bear the loss for the sale of its AE’s product was questioned and not agreed with. It was also observed that the assessee has aggregated
I.T.A .No.-1065/Del/2015 manufacturing and trading segments and then tried to determine the arm’s length of its international transaction. These issues were confronted to the assessee in detail.
5.4. However, the said explanation of the assessee was not accepted by the TPO who was of the view that admittedly the assessee is in the business of manufacturing as well as trading of printers, cartridge, ink jets and despite this while determining the arm’s length price of the international transactions the two have been clubbed together. The clubbing of trading as well as manufacturing and segment it was held was not permitted as these were two different activities and they could not be aggregated. Reliance was placed upon the decision of the Special Bench in the case of LG Electronics. Accordingly the inconsistency that TP study on account of combining both the trading and the manufacturing activity was not upheld. The draft assessment order passed pursuant to the TPO’s order was summed up by the DRP in the following manner:-
“During the assessment proceedings, the Assessee’s case was referred by the AO to the TPO for establishing the arm’s length nature of Assessee’s international transactions with its AEs. The Ld.TPO passed the TP order dated 08.01.2014 holdings as follows:- (i) Trading and manufacturing are two different activities and cannot be aggregated for determining the arm’s length price. Hence MIIPL’s trading and manufacturing activities should be benchmarked separately. (ii) The Gross loss of the Assessee’s trading activities (-2.04%) was compared with the gross profit earned by the comparable’s trading activities (20.01%).”
I.T.A .No.-1065/Del/2015 5.5. It is seen that before the DRP also the assessee was not successful in its objections to the TPO’s conclusion:-
7.0 Objection 3: 7.1 Assessee's Case: 7.1.1. “The assessee has submitted that during the FY 2009-10, MIIPL was primarily engaged in the low-value added assembly/ distribution of ink-jet printers, contact coders, consumables such as inks, additives and other accessories and spare parts. MIIPL set up an assembling plant in Noida Phase II which commenced assembly of machines (such as printers) in the year 2000 and that of consumables (such as inks) in the year 2003.
7.1.2. As a part of the assembly operations in India, unassembled kits are imported along with the printer software. The imported parts are then assembled and the software is loaded onto the assembled parts. Further, testing is done on the assembled printers. Further, in case of consumables, ink is imported in huge containers (Drums) and is then debulked in small cartridges/ bottles. Further, it was submitted that the Assessee has been able to earn overall healthy gross margins (46.05%) and net margins (37.71%) during the relevant year.
7.1.3. The assessee has further submitted that one of the reasons given by the Ld. TPO for segregating the business functions of the Assessee Into manufacturing and trading segments is that the Assessee itself has stated in various statutory filings (such as tax audit report, annual accounts etc.) that it is undertaking manufacturing and distribution functions. The assessee contended that it has used the term 'manufacturing' only for the sake of complying the statutory provisions laid down under section 2 of the Central Excise Act, 1944.
7.1.4 The Assessee further submitted that the purchases from the AEs are not overpriced. Markem-Imaje India Private Limited, after a group merger, began trading in certain models of printers in FY 2009-10, which were previously in the portfolio of the separate entity, Markem. Consequently, the Assessee was required to implement a market penetration Strategy for these newly introduced products. In OECD guidelines, it has been held that business strategies such as market penetration is a factor to be considered for comparability.
7.1.5. The general strategy of the Assessee’s industry is to sell the machines [Printers) with lesser margin or on loss to counter sale the consumables (Ink) which has a good margin. The Assessee treats the I.T.A .No.-1065/Del/2015 printer and ink as a complete package sale as specific printers require specific kind of ink sold by the company only. To substantiate the same, the Assessee would like to highlight that it has earned a gross margin of 72.72% on sale of ink. Based on the above, the Assessee has incurred a marginal loss on account of a calculated business strategy, which is a fact that has erroneously been ignored by the Ld. TPO.
7.1.6. Further, the Assessee has relied on the judicial precedence which reinforces that a tax officer cannot question the commercial wisdom or business efficacy in undertaking the above transactions and that the business strategies needs to be factored in during a transfer pricing analysing as below: • Ericsson India Pvt. Ltd. [TS-319-ITAT-2012(Del)] • Dresser - Rand India Pvt. Ltd. [(2011) 141 TTJ (Mumbai) 385] • Abhishek Auto Industries Ltd. [(2011) 136 TTJ (Del) 530) • Maruti Suzuki India Pvt. Ltd. [ITA 5237/Del/2011] • Hon'ble Delhi High Court's decision in the case of CIT vs Ekla Appliances Ltd, (I.T.A. No. 1070/2011) • Hive Communication Private Ltd. [ITA 306/2011] • SC Enviro Agro India Ltd. vs. DCIT in (I.T.A. No. 2057 & 2058/Mum/2009).
"7.2 DRP has duly considered various arguments of the assessee and other material placed on record. The case of the assessee is that since it is engaged in low level of value addition, all the trading and manufacturing transactions should be clubbed together for purposes of benchmarking. However, DRP is of the considered view that the assessee is doing significant identifiable processes on imported parts so as to make them saleable. Therefore trading and manufacturing components are separate transactions and should be separately benchmarked. 7.2.1 There is no force in argument of the assessee that loss in trading segment is because the assessee wants to earn more profit from sale of ink with reference to those printers. It can not be assessee's case that it does not want more profit from sale of ink in respect of manufactured printers. Then why there is loss in trading segment could not be explained. The TPO has not challenged business wisdom of the assessee but has only determined arm's length price of its international transactions as mandated by TP provisions. In view of above, DRP is not inclined to interfere with AO/TPO's action. The objection is accordingly rejected.”
Aggrieved by which the assessee is in appeal before the ITAT.
I.T.A .No.-1065/Del/2015 6.1. Since the Ld.AR has taken the position that relying on precedent available in assessee’s own case, he would press for without prejudice ground seeking admission of fresh evidence so as to carry out the necessary computational corrections in the margins of the two segments and thus the remaining issues would become academic in the present appeal, we do not propose to discuss them any further. The Revenue also has no objection if the findings arrived at on the main issues are left undisturbed and recognizes the fact that the issues are decided in its favour in view of these peculiar facts and circumstances thereby leaving the assessee open to argue the issues at a future date if need be. In the said background, we find that the assessee has placed before us petition dated 17.05.2016 requesting for admission of additional evidence under rule 29 of ITAT Rules 1963. The additional evidence is restament of trading and manufacturing segment described as “Report of Factual Findings in connection with Agreed-upon Procedures Engagement with respect to the sale and consumption of Traded and Manufactured consumables for the year ended March 31, 2010” as Annexure I duly signed by a Chartered Accountant alongwith Attachment A consisting of “Statement of sale of Traded and Manufactured Goods’ and “Statement of Sale of Traded and Manufactured Consumables” both for the year ended March 31, 2010; and Attachment B which has been described as “Statement of consumption of Traded Consumables” and “Statement of Consumption of Traded and Manufactured Page 15 of 22
I.T.A .No.-1065/Del/2015 Consumables” for the year ended March 31, 2010. The filing of these fresh evidences it has been submitted is supported by a similar prayer having been accepted by the DRP in 2011-12 AY. On a consideration of the said request, we find that the re-conciliation relied upon has been placed on record in terms of the precedent wherein 2011-12 AY before the DRP the assessee submitted that there was an apparent mistaken in the sales figures of traded consumables as per the Notes to Accounts. The sale of traded consumables forming part of the revenue of the assessee from Manufacturing operations consist of sale of certain traded consumables which had been sold to third-party customers. Such trading consumables pertained mainly to “Continuous inkjet and LC valve” models which are traded as well as manufactured by the assessee company during the year.
However, the sales of this consumable model were clubbed with the manufacturing sales in the Notes to Accounts. The assessee had argued that the costs of such traded consumables have been rightly clubbed under trading transactions in the “Notes of Accounts disclosure”. Hence in effect the cost of these consumables has been taken into consideration while the Revenue has not been taken into consideration while computing the gross margins. Accordingly accepting the documents certified by the Chartered Accountants documenting certain procedures which were performed in accordance with the Standard on Related Services (SRS) 4400 Engagements to Perform Agreed-upon Procedures regarding Financial Information” issued by the Institute of Page 16 of 22
I.T.A .No.-1065/Del/2015 Chartered Accountants of India on the value sale of traded consumables.
Considering the evidences, the DRP remanded the matter to the TPO.
6.2. We find that considering the Remand Report of the TPO dated 10.11.2015 wherein the following observation was made as “In its submission dated 26 October 2015, the assessee has provided the following reconciliation of sales consumables between the above disclosure and the sales register:-
Particulars Amount (INR) Traded consumables as per Audited financials 31,500,112 Traded consumables as per Sales Register 90,407,309 Amount of adjustment to be made 58,907,197 6.3. The DRP’s order takes note of the following observation of the AO:”The above mentioned submission made by the assessee to the DRP talks about a difference in the “amount of traded consumables as per the audited financials and the traded consumables as per the sales register”. However, the (iv) finding of the report clearly states that the traded consumables as per the audited financials matches the traded consumables as per the sales register. In light of such a discrepancy the reason for the difference between the report and the submission of the assessee cannot be explained.”
6.4. After considering the reply of the assessee thereon the DRP was pleased to hold as under:-
“In view of the above excerpts, the Panel observes that to determine the discrepancy between traded consumables as per audited financials and sales register, point (iii) would have to be examined as point (iv) only provides the total amount of sale of I.T.A .No.-1065/Del/2015 consumables. Point (iii) clearly substantiates the claim of the assessee.”
6.5. A perusal of the DRP’s order further brings out the fact that the following observation 2 of the TPO was upheld by the DRP. The relevant extracts are reproduced hereunder:- Observation 2 The TPO has observed the following:- “If indeed, as per the assessee, there has been a difference of Rs.58,907,197 by way of adjustment of the sales of traded consumables then there should be a subsequent decrease in the sales of manufacturing consumables which will render the TP analysis of the manufacturing segment useless. Therefore, at this stage, we cannot hold the trading segment to be at arm’s length without carrying out a comparability analysis for the manufacturing segment. In view of the discussions in Ground 2, the decision of the TPO to follow a transaction by transaction approach in separately benchmarking the manufacturing and trading activities is justified.” 6.6. The DRP’s conclusion on Observation 2 of TPO:-
“It is necessary to note that the assessee should have not only received an arm's length margin on the trading segment but also on the manufacturing segment. Due to the change in the trading and manufacturing sales, the contention of the TPO is held to be correct and a fresh benchmarking of the manufacturing business is required to determine the arm's length price in relation to the same. Accordingly, view of the TPO is upheld. The TPO is at liberty to benchmark the margins of the manufacturing segment as provided above and also examine the comparability of the set of companies submitted by the assessee to benchmark the manufacturing segment as per the provisions of the Act.”
I.T.A .No.-1065/Del/2015 6.7. A perusal of the following observation 3 of the TPO and the conclusion of the DRP that AUP Certification needs to be given due regard is brought out from the following extracts:-
Observation 3 "3. The assessee has given a full submission of the sales register where the assessee has classified the sales made by it as manufacturing or trading sales. This register is the primary evidence through which the assessee tries to prove the total of the trading consumable sales. However, it is impractical to verify if actually the sales which are being mentioned in the sales register are correctly marked. This office has not been able to ascertain if these sales were actually safes of trading consumables instead of manufacturing consumables or if such classification has been 'done to improve the margins of the assessee." 6.8. The DRP’s conclusion extracted:- “The Panel after considering the above observation of the TPO and the facts and evidences on record and "the submission of the assessee; is of the view that AUP certificate, certified by a Chartered Accountant contains detailed procedures undertaken as part of the AUP and the findings thereof have to be given due regard.” 6.9. The DRP’s conclusion on the following observation 4 of the TPO is also evident from the following extracts:-
Observation 4 4. Further it is not clear as to how the manufacturing consumables have been valued and transferred to the traded consumables. Consumables can also be defined as the components of an end product that are used up or permanently altered in the manufacturing process. Such consumables are not sold in an individual capacity. Hence they don't have a sale value of their own. If the sales of such consumables were incorrectly
I.T.A .No.-1065/Del/2015 recorded, it is not possible to find out their individual values since in the manufacturing segment, it is the finished product that is being sold and not the consumable.” 6.10. The DRP’s conclusion on Observation 4 of TPO:- “We have considered the above observation of the TPO, evidence on record and assessee's submissions and find that actual sales value of these consumables to third party unrelated customers are taken as the sales value, as is also getting reflected in the sales register submitted by the assessee. The above view of the TPO is accordingly rejected.” 6.11. The DRP considering the Observation 5 of the TPO accepts the evidence after hearing the assessee. The relevant extracts are reproduced hereunder:-
Observation 5 "... The disclosure made in the end of the report clearly states that the report do not make any assurance for the traded and manufactured consumables of Markem Imaje India Private Limited for the year ending on March 31, 2011." 6.12. The DRP’s conclusion on the above observation of the TPO:- “The Panel agrees with the contention of the assessee. It is common for such limitations to appear in certificates when a full audit is not being undertaken. The procedures performed in the AUP do not primarily involve procedures of an audit/assurance nature as also disclosed by the CA in the certificate. The conclusions drawn by the CA based on the detailed procedure as documented in the certificate should be considered and are acceptable.”
6.13. Accordingly in view of the above, we find in the absence of any objections by the department and considering the factual matrix as considered by the DRP in 2011-12 AY that the additional evidences deserve to be admitted. While so I.T.A .No.-1065/Del/2015 holding it may be made clear that the correctness of the fresh evidences sought to be admitted are not commented upon and have not been taken into consideration by us and is left open for consideration before the TPO. It may further be made clear by way of abundant caution that the correctness of the opinion/direction of the DRP in 2011-12 AY which has been extracted has also not been addressed by us in the present proceedings as the correctness of the conclusion drawn by the DRP was not an issue for consideration before us. The directions were referred to in support of the admissibility of the additional evidence and the conclusions/opinions have been extracted only to bring out the issue that the evidences sought to be admitted are relevant and crucial for determining the issues and it is not a comment on the correctness of the Opinion/Direction of the DRP in 2011-12 AY. Accordingly, the fresh evidences addressed in the earlier part of this appeal are admitted and Ground No. 7 of the assessee is allowed and the issues are restored to the file the TPO with a direction to pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard.
In view of the above decision the remaining issue become academic and are not required to be addressed. The assessee reserves its right to contest these in future if need be as the issues have not been given up.
I.T.A .No.-1065/Del/2015
In the result, the appeal of the assessee is partly allowed for statistical purposes. The order is pronounced in the open court on 24th of August, 2016.