ASB INTERNATIONAL PVT. LTD.,THANE vs. ACIT CIR-1, KALYAN, KALYAN

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER Rajendra A.M.- अनुसार Challenging the directions of the Dispute Resolution Panel(DRP),--I,Mumbai the assessee and the Assessing Officer(AO)have filed cross appeals for the year under consideration. Assessee-company,engaged in the business of manufacture of Injection Blow Moulding Machines to its Associated Enterprise(AE),filed its return of income, declaring income of Rs.37.05Crores.Subsequently,a revised return was filed by the assessee on 28.3.2013 declaring total income at Rs.36.85 crores. During the assessment proceedings,the Assessing Officer(AO)made a reference to the Transfer Pricing Officer(TPO)to determine Arm’s Length Price(ALP)of the International Transactions (IT.s).After receiving the order of the TPO the AO proposed addition of Rs.27,31,73,211/-in his draft order.The assessee filed objections before the DRP.The DRP partly upheld the orders of the AO/TPO.In pursuance of the directions of the DRP,the AO completed the assessment u/s.143 (3)r.w.s.144C of the Act,on 29.01.2016,determining the income of the assessee at Rs.50.99 Crores.

2.Assessee,a 100% subsidiary of the Nissei ASB Machine Co.Ltd.Japan(ASBJ),is engaged in manufacturing of injection stretch blow-moulding machines, moulds and parts, components and sub assemblies of machines and moulds.During the assessment proceedings, the AO

2137 & 1978/M/16 ASB International Pvt.Ltd. found that the assessee had entered into International Transactions (IT.s) with its Associated Enterprises (AE.s).He made a reference to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price(ALP)of the transactions. After receiving the order of the TPO,the AO issued a draft order including the adjustment suggested by the TPO.The assessee filed its objections before the DRP.As per the directions of the DRP,the AO completed the assess - ment on 29/01/2016, u/s.143 (3) r.w.s.144C (13) of the Act.He determined the income of the assessee at Rs.50.99 crores.

3.First effective ground of appeal

(GOA1-10)is about making an upward adjustment of Rs. 14.13 crores to the total income of the assessee.During the Transfer Pricing (TP) proceedings, the TPO found that the assessee had entered into following IT.s.with its AE.s : SN. Description Method Amount (in Rs.)

1. Purchase of raw material TNMM 11,36,22,102/- 2. Sale of finished goods TNMM 171,65,55,009/- 3. Payment of royalty TNMM 9,63,35,542/- 4. Availing of technical services TNMM 75,89,293/- 5. Payment of interest on loan TNMM 60,49,555/-

6. Redemtion of preference shares Section 92 100,000,000/- PLI was taken by considering OP/OC.He found that the assessee had aggregated all the IT.s and had conducted an entity level analysis.A summary of the margin earned by the assessee and its comparable companies was as under: Method used Overall TNMM Profit Level Indicator Net cost plus Margin- OP/OC’ Net cost + Margin of ASB India 14.01% Net cost + margin Comparables 3 year weighted average 12.64% The assessee claimed that the net cost plus margin (14.01%)shown by it was higher than the margin of the comparable companies(12.64%),that the IT.sentered into it were at arm’s length.The assessee also submitted the single year updated margin of the comparables and it was 9.26%. The TPO directed the assessee to submit segmental profit and loss account between the AE and the non-AE segments.The segmental result was as under: Particulars AE Segment Non-AE-Segment Net cost plus margin (OP/OC) 6.42% 26% Considering the segmental details,the TPO made an adjustment of Rs.27.31 crores taking in to consideration the OP/OC for AE segment at 23% [26%(-)3%,an allowance for delay in receivables and after sales services and other efforts made under the non-AE business].

2137 & 1978/M/16 ASB International Pvt.Ltd.

4.The assessee filed objections before the DRP.It also filed additional evidences.It was argued before the DRP that the TPO did not consider the fact that there was difference in functional and risk profile of AE-business vis-a-viz the non AE-business,that he had given an ad hoc relief of 3%,that he did not consider the difference in the profiles of the AE and non- AE businesses.It filed detailed note about the risk profile of both the businesses and submitted that in the case of AE-business it was not the seller of the products,that it was rather a provider of manufacturing services conducted as per the AE’s order, specifications and schedules with limited risk,that in most of the cases the AE.s would undertake the painting additional customisation of the semi-finished goods as per the requirements of the end customers of the AE.s,that in case of non-AE business it operated as an entrepreneur to sell its products to the end users,that price of the products for non-AE business solely depended on the market acceptability and various risk undertaken by it,that in case of AE business the assessee was akin to a contractor manufacturer or a limited risk manufacturer ,that the business model in both the cases were quite different, that internal TNMM should not have been applied for determining the ALP considering the peculiar facts of the case .The assessee relied upon the case of Wrigley India Pvt. Ltd. (ITA/5648.5649 and 5650/Del/12 , Piagio Vehicle Pvt.Ltd.(ITA/1480/PN/2010);Drilbits International Pvt.Ltd.(ITA/1361/PN/ 2010).It was further argued that the AE-business should be compared with the companies who had similar function profile as that of the assessee vis-a-viz its AE business,that it had conducted a search for comparables engaged in contract manufacturing activities of machi - nery/equipments,that it had identified four comparables in that regard, that the average mean OP/OC margin of the identified comparables for the AY.2011-12 was 8.41% as against the margin earned by the assessee from its AE business of 6.42%, that the variation was well within the plus/minus 5% range, that the pricing of the IT was at Arm’s length. It was further argued that the adjustments made by TPO by rejecting the entity level at TNMM and adopting internal TNMM was incorrect.Vide letter 29.6.15 the assessee submitted additional evidences and contended that it was granted the EOU status since 29/01/2007, that it was renewed regularly and existed till the date of assessment order,that it was established as an EOU to manufacture and sell goods to its AE.s,that an agreement was signed on 1.10.2010 with the AE for supplying goods,that it had followed the same terms in the first half of the year too,that the documents submitted by it were relevant for the entire period, that the TPO did not consider clause 3.1 of the sales and purchase agreement of the 100% guarantee purchase agreement,that it was not exposed to the market risk, that irrespective of market conditions,that it was guaranteed the remuneration fixed as per the agreement,that the TPO 3

2137 & 1978/M/16 ASB International Pvt.Ltd. had not considered submission dtd. 24.9.15 with regard to sale of machines to the AE.s and non-AE.s,that the nature of the machines sold to the AE.s and non-AE.s was vastly different, that it would sell mostly semi-finished goods to the AE.s and non AE.s ,that for each sale it had a customised specification list,that for the sale of semi finished goods to AE.s the specification list was standard,that for sale of machines to non-AE.s the specification list would be pretty detailed and would be based on the requirements of a particular buyer,that the mere description of the products in the invoice could not be considered a deciding factor with regard to nature of product supplied by it,that the non-AE business included AE transactions-like royalty and purchase of raw material from AE,that non-AE business could not be considered to consist only of non-AE transactions, that the contention of the TPO considering internal TNMM was not correct. The assessee referred to the case of Thyssen Krupp Industries India Pvt.Ltd.(TS-721-ITAT-2012 )and submitted that AE-segment should not have been compared with the non AE segment, that it would be appropriate to bench mark the AE segment with external contract manufacturing entities.

4.1.After considering the available material,the DRP held that the TPO had rightly rejected the transfer pricing study conducted by the assessee, that the AE and non-AE transactions of the assessee were not similar and should not have been bundled together,that application of TNMM at entity level did not properly benchmark the AE transactions,that the assessee had failed to prove that it was engaged in contract manufacturing for its AE.s, that no such claim had been made by it in the study report,that it was not entitled to any fixed remuneration on cost plus basis, that examination of the agreement with the AE showed that sale price of goods were fixed on mutual negotiations and same were valid for a period of 1 year,that the assessee would bear risks involved in fluctuation of raw material prices,that it would also bear foreign exchange fluctuation risk and other normal risk associated it other manufacturing activities,that at best the AE could be considered a bulk customer, that the sales made to non- AE.s were retail sales, that in retail sales it was involved in marketing as well as designing of the moulds, that in respect of AE-sales no marketing was required mould designs were based on requirement of AE.s depending upon the requirement of end users,that in case of non-AE sales it was required to look after the after sales services, that the non-AE sales were sale of finished goods,that it was required to pay royalty for use of brand names,that the AE-sales were not of fully finished goods, that they were substantially finished,that internal TNMM could not be applied straight away, that suitable adjustments had to be made in respect of functional and risk differences,that TPO had already given allowance of 3% for delay in 4

2137 & 1978/M/16 ASB International Pvt.Ltd. receivables and other factors while computing the margin, further adjustments for bulk manufacturing orders received from AE.s and geographical factors only were required to be given,that AE.s segment accounted for approx 63% of total operating cost, that it was the mainstay of the operations of the assessee , that the assessee enjoyed a dominant position in the domestic market.The DRP granted adjustment of 8%.It was further mentioned that revised margin would also become comparable with the mean margin of the contract manufa -cturer given by the assessee that worked out to 11.94%. The DRP further observed that the assessee had submitted a list of four comparables contract manufacturers, that out of the four one was a loss making company,that contract manufacturers would have assured return on cost, that it could never incur a loss, that if the loss making comparable was rejected the mean margin of remaining three comparables would work out to 11.94%.Finally,it direted the AO /TPO to work out the amt of adjustments accordingly.After receiving the order of the DRP, the AO made an adjustment of Rs.14.13 crores to the operating income of the assessee .

5.During the course of hearing before us,the Authorised Representative(AR)argued that business models of AE and non-AE segments were not comparable, that the TPO and the DRP had wrongly compared wholesale level to retail level, that there was qualitatively difference between the product sold to both the segments,that in the non-AE segment products were sold to the customers, that in the AE-segment the assessee would be selling services,that both the segments were different at the market level that regulated their respective prices and the structure which determined their remunerations, that the revenue authorities had compared both the segments stating that there was no difference between them , that TPO and the DRP had provided adjustments for various differences which they deemed were existent between those twe segment,that the TPO had adopted the internal TNMM approach considering the fact that profit margin of non-AE segment were higher than AE-segment,that TPO had not considered the fact that non-AE-segment too had controlled transactions like royalty and purchase payment,that there was glaring difference in the FAR of the AE and the non-AE segments,that the AE segment carried out only four functions whereas the non-AE segment had to undertake 13 functions, that a segment which would bear only limited risks could not be compared to a segment which would bear all risks,that a contract manufacturer could not be compared with an entrepreneur,that the revenue authorities had recognised that markets of the AE -segment(export) and the non-AE segment (domestic)were completely different,that even then they compared those segments,that it was an entrepreneur in India and sold its goods directly to its customer, that the pricing would be 5

2137 & 1978/M/16 ASB International Pvt.Ltd. based on completion scenario in the country, that in non-AE segment it was rendering contract manufacturing services, that any import of similar machines would attract duty upto 21.52% along with the freight/handling cost, that the assessee was able to translate these factors who earn higher margin,that the TPO and the DRP had granted adjustment for various factors to forcibly apply internal TNMM ,that if the adjustments could not be made in a reasonable and accurate manner comparables have to be dropped,that both the authorities had failed to appreciate that in the AE segment the assessee was acting as a contract manufac - turer,that the TPO/DRP had not appreciated the fact that it was a 100% subsidiary of ASBJ and it did not have the ability of manufacturing the machines on its own, that it was only because of the technology and instructions received from the AE that it could manufacture the machines,that a contract manufacturer would follow the instruction to whom he had to supply the goods, that it had to give assurance on quality and define and supply the goods of defined quality, that DRP had accepted the external comparables except for one loss making company,that it had rejected the comparable on the ground that contract manufacturer could not incur a loss, that contract manufacturer also could suffer loss, that merely because a comp -arable was incurring losses it cannot be taken out of list of valid comparables,that no TP adjustments were made from AY.2002-03 to 2009-10.It was also argued that if the assessee is not considered a contract manufacturer in the AE segment, the AE segment should be bench - marked with external comparables in the assessee’s TP study report after granting appropriate adjustments for differences in risk while applying TNMM . He relied upon the cases of Merck Limited(37taxmann.com433);Drillbits Internatonal Pvt. Ltd.(supra);Technimont ICB India (ITA/5085 /Mum/2010);Reebok India Co.(63 taxmann. Com367);Sony Ericsson Mobile Communications Ltd.(374ITR118);Chrys Capital Invest - ment Advisors(India)(P.)Ltd.(56taxmann.com 417) and Maersk Global Service Centre (India) (P.) Ltd. (133ITD 543). The Departmental Representative(DR)argued that the assessee had not characterised itself as contract manufacturer in the TP study ,that it had mentioned itself as akin to contract manufacturer, that non AE segment had risks like marketing,designing,bad debt expenses which increased the cost and reduced the profit margin of the assessee , that the said factors amounted to automatic grant of adjustment in non AE segment, that onus was on the assessee to provide data if he wanted certain adjustment , that the assessee ahd not brought on record anything to prove that it was semi finished goods to two of its AE.s, that non AE segment could be sued to bench mark the AE segment transactions, that the assessee had not 2137 & 1978/M/16 ASB International Pvt.Ltd. prepared separate segments for commissioning after sales marketing designing any other activities,that the AE was not having any other significant value added functions.

6.We have heard the rival submissions and perused the material before us.We find that the assessee was supplying goods to its AE.s and non-AE.s,that assessee had considered the entity level data for determining the ALP of the IT.s.,that the TPO applied internal TNMM and made an upward adjustment of Rs. 27.31Croes,that he gave an allowance of 3% on account of ‘delay in receivables and after sales services and other efforts made under the non- AE business’,that the assessee filed additional evidences before the DRP and argued that it was a contract manufacturer or akin to contract manufacturer, that the DRP held that internal TNMM could not be applied straight away,that the assessee had filed a list of four compara - bles,that the DRP rejected one of the comparables holding that it was suffering losses and that contract manufacturer could not suffer losses,that no adjustment was allowed on account of capital employed. 6.1.Section 92 and the Rules dealing with TP proceedings were brought on statute to ensure that the price paid by an assessee to its AE for the goods sold/purchased or services rendered/ availed is not less than the fair market value.In short,for an IT,the assessees should charge the same price from its AE as it would have charged from a unknown third party.For determining ALP one of the several methods can be used and several factors have to be considered. But, the base remains the same i.e.determination of fair market value of a transaction entered in to.Fairness demands that the assessee as well as the revenue authorities should avoid arbitrari -ness ,while determining ALP of an IT.Both should use some reasonable data to prove that IT is above board. Adhoc adjustments, in our opinion,goes against the basic concept of TP.In the case under consideration 3% and 8% allowance was given by the TPO and the DRP.But,how they arrived at those figures is not known.The reasons for adopting a certain percentage does not find place in their orders.They have not discussed as to what was the material that gave them the basis for allowing 3% and 8% adjustment on account of ‘delay in receivables and after sales services’ and considering the factors like‘bulk manufacturing orders received from AE.s and geographical locations’.But,both the authorities have not cited the instances where an independent assessee,in similar circumstances,had claimed that adjust -ment on account ‘delay in receivables’ ‘geographical factors’ etc. was approximately 3% or 8%.No judicial forum has adopted the said percentage on account of delay in receivables/ bulk manufactu- ring/geographical location.Even if they had some material supporting their stand,same has 2137 & 1978/M/16 ASB International Pvt.Ltd. not been brought on record.Thus,the order passed by them is a non-speaking order and it falls under the category of an order passed without assigning reasons.Such orders cannot be endorsed.As a representatives of the State,they are supposed to raise and collect only Due taxes from the subjects.As per the scheme and provisions of the Act,due taxes cannot be dete -rmined by making adhoc allowances/disallowances.Before the DRP,the assessee had filed a list of comparables and it was not considered in proper perspective. A comparable cannot and should not be rejected only on the basis of loss suffered by it for a particular year.A persistent loss making comparable can be excluded.But, in the case under consideration,the comparable had not suffered loss year after year.After admitting that internal TNMM could not have been applied straight away,the DRP should have deliberated upon the issue of deter -mination of ALP in a more rational manner.But,it just adopted the easiest route- an ad hoc allowance.It is a fact that more than 60% of the sales turnover of the assessee is with non- AE.s and the profit ratios of non-AE.s and AE.s cannot be same. Besides,the assessee had entered in to an agreement with its AE for supply of goods and working capital adjustment is required to be made.All these factors would affect the ALP of the transactions.Considering the peculiar facts and circumstances of the case,we are of the opinion that the matter needs further verification and investigation.So,in the interest of the justice,we are restoring the matter to the file of the TPO/AO to decide the issue afresh.While determining the ALP,he should consider the data of the companies who are engaged in such activities that are similar or closer to the activities of the assessee and the turnover with the AE.s and Non-AE.s should be of similar volumes.In short,some reasonable comparables should be selected after consider -ing the FAR analysis of such comparable and only then exercise of determining ALP should be completed.Effective ground of appeal is decided in favour of the assessee,in part.

ITA/1976/Mum/2016:

7.The only issue raised in the departmental appeal is about the direction given by the DRP to the AO.In the earlier part of our order,we have mentioned that the DRP had held that internal TNMM could not be applied straight away,that adjustments for bulk manufacturing orders received from AE.s and geographical factors were required to be given while determining the ALP of the IT.s.As per the directions of the DRP,the AO allowed allowance of 8%,while finalising the assessment.

8.Before us,the DR supported the order of the TPO and the AR relied upon the order of the DRP.While deciding the appeal,filed by the assessee,we have restored back the issue of 8

2137 & 1978/M/16 ASB International Pvt.Ltd.