Thyssen Krupp Industries India P. Ltd. v. Addl. CIT

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The Tax Publishers2013 TaxPub(DT) 1705 (Mum-Trib) : (2013) 154 TTJ 0689 : (2013) 087 DTR 0065 : (2013) 025 ITR (Trib) 0243 Income Tax Act, 1961 --Transfer pricing --Computation of ALP Adjustment for internal TNMM--Assessee contended that assessing officer/TPO was not justified in rejecting assessee's OP/OC at 6.54% in respect of international transaction with AEs which was better than 4.20% in respect of non-AEs transactions. Further, he failed to appreciate that all purchases from AEs, even if used for Non-AEs projects, were considered as purchases of AEs and all sales to AEs even if material used for those projects were purchased from Non-AEs were consolidated by assessee in figures of AEs in segmental accounts. It was argued that there was no other way out for determining profit margin in respect of transactions with AEs and Non-AEs. *Held :* By considering some transactions with Non-AEs also as a part of the AE segment, computation of operating profit margin in respect of AE transactions at 6.54% had completely lost its significance. Once figure of OP/OC margin at 6.54% is itself incorrect, there can be no question of comparing it with that of Non-AE segment at 4.20%, which again stands distorted because of exclusion of certain purchases and sales from/to Non-AEs from this segment eventually finding their way into AE segment. Therefore, view taken by the authorities below on this count was uphelearned First thing which one need to determine is the extent of the reliability of the so-called segment-wise figures of AE transactions and Non-AE transactions furnished by the assessee during the course of proceedings before the TPO for contending that the internal TNMM should be applied. Admittedly, no such segment-wise accounts were maintained by the assessee. Such figures of AE and Non-AE transactions were segregated by the assessee from the common pool of figures. While making such classification and to demonstrate that its so-called profit rate under the TNMM from internal comparables was favourable to such profit rate from Non-AE transactions, the assessee also included in the sales of AEs, the amount of sales to Non-AEs for which the material was purchased from AEs and also included in the purchases of the AEs, the amount of purchases from Non-AEs for which the material was sold to the AEs. [Para 11.2] On one hand, one need to have profit margin which is to be compared from transactions with the AEs and on the other hand, one need to find out the profit margin from similar transactions with non-AEs with which comparison is to be made. Both these figures should come from separate watertight compartments. No overlapping is permissible in the composition of such compartments. In other words, neither the first compartment of profit margin from AE transactions should include profit margin from the transactions with non-AEs, nor the second compartment should have profit margin from the transactions with the AEs. If such an overlapping takes place, then the entire working is vitiated, thereby obliterating the finer line of distinction of the profit margin to be compared and the profit margin to be compared with. [Para 11.4] Adverting to the facts of the instant case it is observed that the assessee is claiming sales to AEs at 322.58 crore and similar is the position regarding other components of operating costs including purchases. In such figures of purchases and sales from/to the AEs, not only the transactions with AEs but also certain transactions with Non-AEs stand included. Figure of purchases from AEs also includes purchases from Non-AEs where such purchases were used for sales to AEs. Similarly figure of sales to AEs also includes the figure of sales to Non-AEs where purchases from AEs were used for sales to Non-AEs. This shows that the figures of AE purchases and AE sales considered by the assessee for working out operating profit margin at 6.54% in respect of AEs also include Non-AE transactions. Such a course of action followed by the assessee to determine the profit margin from transactions with the AEs has absolutely no sanction of law. It rather defies and runs contrary to the very definition of 'international transactions' and the mandate of rule 10B(1)(e). Approving the course of action adopted by the assessee for calculating profit margin in respect of AE and Non-AE segments would require rewriting of the relevant provisions as discussed supra. By considering some transactions with Non-7 p bjbjUU -47'7'WlB B B B B B B V 84aring it with that of Non-AE segment at 4.20%, which again stands distorted because of the exclusion of certain purchases and sales from/to Non-AEs from this segment eventually finding their way into the AE segment. Therefore, the view taken by the authorities below on this count is uphelearned [Para 11.5] Authorities below were justified in rejecting the so-called segmental accounts showing internally comparable margin of 4.20% computed by the assessee for the purposes of comparison with the margin of 6.54% from the international transactions with the associated enterprises. [Para 11.7] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1705 (Mum-Trib) : (2013) 154 TTJ 0689 : (2013) 087 DTR 0065 : (2013) 025 ITR (Trib) 0243

Income Tax Act, 1961

--Transfer pricing --Computation of ALP Adjustment for internal TNMM--Assessee contended that assessing officer/TPO was not justified in rejecting assessee's OP/OC at 6.54% in respect of international transaction with AEs which was better than 4.20% in respect of non-AEs transactions. Further, he failed to appreciate that all purchases from AEs, even if used for Non-AEs projects, were considered as purchases of AEs and all sales to AEs even if material used for those projects were purchased from Non-AEs were consolidated by assessee in figures of AEs in segmental accounts. It was argued that there was no other way out for determining profit margin in respect of transactions with AEs and Non-AEs. Held : By considering some transactions with Non-AEs also as a part of the AE segment, computation of operating profit margin in respect of AE transactions at 6.54% had completely lost its significance. Once figure of OP/OC margin at 6.54% is itself incorrect, there can be no question of comparing it with that of Non-AE segment at 4.20%, which again stands distorted because of exclusion of certain purchases and sales from/to Non-AEs from this segment eventually finding their way into AE segment. Therefore, view taken by the authorities below on this count was uphelearned

First thing which one need to determine is the extent of the reliability of the so-called segment-wise figures of AE transactions and Non-AE transactions furnished by the assessee during the course of proceedings before the TPO for contending that the internal TNMM should be applied. Admittedly, no such segment-wise accounts were maintained by the assessee. Such figures of AE and Non-AE transactions were segregated by the assessee from the common pool of figures. While making such classification and to demonstrate that its so-called profit rate under the TNMM from internal comparables was favourable to such profit rate from Non-AE transactions, the assessee also included in the sales of AEs, the amount of sales to Non-AEs for which the material was purchased from AEs and also included in the purchases of the AEs, the amount of purchases from Non-AEs for which the material was sold to the AEs. [Para 11.2] On one hand, one need to have profit margin which is to be compared from transactions with the AEs and on the other hand, one need to find out the profit margin from similar transactions with non-AEs with which comparison is to be made. Both these figures should come from separate watertight compartments. No overlapping is permissible in the composition of such compartments. In other words, neither the first compartment of profit margin from AE transactions should include profit margin from the transactions with non-AEs, nor the second compartment should have profit margin from the transactions with the AEs. If such an overlapping takes place, then the entire working is vitiated, thereby obliterating the finer line of distinction of the profit margin to be compared and the profit margin to be compared with. [Para 11.4] Adverting to the facts of the instant case it is observed that the assessee is claiming sales to AEs at 322.58 crore and similar is the position regarding other components of operating costs including purchases. In such figures of purchases and sales from/to the AEs, not only the transactions with AEs but also certain transactions with Non-AEs stand included. Figure of purchases from AEs also includes purchases from Non-AEs where such purchases were used for sales to AEs. Similarly figure of sales to AEs also includes the figure of sales to Non-AEs where purchases from AEs were used for sales to Non-AEs. This shows that the figures of AE purchases and AE sales considered by the assessee for working out operating profit margin at 6.54% in respect of AEs also include Non-AE transactions. Such a course of action followed by the assessee to determine the profit margin from transactions with the AEs has absolutely no sanction of law. It rather defies and runs contrary to the very definition of 'international transactions' and the mandate of rule 10B(1)(e). Approving the course of action adopted by the assessee for calculating profit margin in respect of AE and Non-AE segments would require rewriting of the relevant provisions as discussed supra. By considering some transactions with Non-7

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84aring it with that of Non-AE segment at 4.20%, which again stands distorted because of the exclusion of certain purchases and sales from/to Non-AEs from this segment eventually finding their way into the AE segment. Therefore, the view taken by the authorities below on this count is uphelearned [Para 11.5] Authorities below were justified in rejecting the so-called segmental accounts showing internally comparable margin of 4.20% computed by the assessee for the purposes of comparison with the margin of 6.54% from the international transactions with the associated enterprises. [Para 11.7]