, " "
IN THE INCOME TAX APPELLATE TRIBUNAL " K" BENCH, MUMBAI
BEFORE HON'BLE S/SHRI VIJAY PAL RAO (JM), AND B.R.BASKARAN (AM)
, .. ,
./I.T.A. No.7295/Mum/2010
( / Assessment Year : 2003-04)
Sulzer Pumps India Limited, / The Jt.Commissioner of Income Tax
9, MIDC, -Range (OSD)-10(3),
Vs.
Thane Belapur Road, Aayakar Bhavan,
Digha, M K Road,
Navi Mumbai-400708 Mumbai-400020
( /Appellant) .. ( / Respondent)
. / . /PAN/GIR No. :AAACK2238F
/: Assessee by Ms.Heena Doshi
/ Revenue by : Shri N Padmanabhan
/ Date of Hearing : 28.05.2015
/Date of Pronouncement : 29. 5.2015
/ O R D E R
PER B.R.BASKARAN (AM)
The assessee has filed this appeal challenging the order dated
25.08.2010 passed by Ld CIT(A)-15 for assessment year 2003-04
confirming the addition relating to Transfer pricing adjustment of
Rs.99,01,330/-.
2. We heard the parties and perused the record. The assessee is one
of the leading players in Pump Industry in India offering wide range of
customized and configured pumps. During the year under consideration,
the assessee had entered different types of international transactions with
its AE viz., Purchase of raw materials, sale of finished goods, purchase of
software licence, payment of Royalty & technical know fee and also
ITA No.7295/Mum/2010
2
payment of Commission. The TPO considered all the transactions, except
the payment of Royalty & Technical knowhow fee, to be at arm's length.
3. Before TPO, the assessee followed TNMM and accordingly furnished
segmental financial information, i.e., one segment having international
transactions was classified as AE segment and the other segment which
did not have international transaction was classified as "Non-AE" segment.
The AE segment had operating profit margin of 6.19% and the Non-AE
segment had operating profit margin of 1.06%. Accordingly it was
contended that the international transactions are at arm's length. The
assessee had paid royalty @ 8% on export sales and @ 5% on domestic
sales. The royalty was allocated between AE segment and Non-AE
segment on the basis of actual sales. The Technical knowow fee was
allocated in the ratio of royalty payment.
4. The TPO took the view that the payment of royalty and technical
knowhow fees in the AE segment can be regarded to have complied with
the arm's length requirement. However, with regard to the payment of
royalty and technical knowhow fees in the Non-AE segment, the TPO took
the view that the assessee has to independently prove that the same is
also at arm's length. In response thereto, the assessee furnished five
comparable cases and the average mean of the "operating profit margin"
of the five companies worked out to 3.84%. The TPO adopted the same
as bench mark rate and accordingly computed the Profit of Non-AE
segment by applying 3.84% on the Non-AE sales of Rs.35.58 crores, which
worked out Rs.1.36 crores (there are certain typographical errors in TPO's
order). The assessee had reported operating profit of Rs.37.63 crores in
the Non-AE segment. Hence the TPO recommended for adjustment of
profit by Rs.99,01,330/- (Rs.1,36,64,527 less Rs.37,63,198/-). The Ld
CIT(A) also confirmed the same.
ITA No.7295/Mum/2010
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5. It can be noticed that the TPO has presumed that the fall in
Operating Profit in Non-AE segment is only on account of payment of
"Royalty and technical know fees" and accordingly recommended for
addition of Rs.99.01 lakhs. This approach would work out correctly only if
it is established that there is no difference between AE segment and Non-
AE segment with regard to sales, purchases, expenses etc. In this regard,
following points are pertinent here:-
(a) In the instant case, we have noticed earlier that the assessee
is selling different types of pumps both in the domestic market and
international market. The assessee itself has submitted that the
goods that were considered in the AE segment may not be identical
to that one included in Non-AE segment.
(b) The assessee has explained the basis of segmentation as
under:-
"All products sold in which raw material purchased from the
AE is used or sale of finished goods made to AE have been
treated as part of AE segment. The turnover relating to
products on which no imported raw material from AE is
involved or which is not sold to AE have been taken as non-
AE segment."
In this type of classification, there is a possibility that the cost of
indigenous material used for production of pumps that were
exported might have been included in the Non-AE segment, in
which case the operative margin of Non-AE segment would bound
to fall.
(c) The assessee has pointed out that the technical knowhow fee
has been allocated between AE and Non-AE segments, in the ratio
of royalty amounts allocated between the two segments. We
notice that the assessee itself is not sure about the correctness of
the same.
(d) The operative margin is the cumulative effect of different
factors, some of which, as per cost accounting principles, are (i)
Product mix variation, (ii) Sales price variation, (iii) Cost variation,
(iv) Expenses variation with sub classification. However the TPO
ITA No.7295/Mum/2010
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has presumed that the operative margin has gone down only due
to payment of "Royalty and technical knowhow fees", which does
not appear to be correct.
(e) The assessee has paid the Royalty and technical knowhow
fees at the rate of 8% on export sales and at 5% on domestic
sales. We notice that the TPO did not examine the reasons for the
variation in the rate of royalty. However, the royalty payments
made in respect of export sales were considered to be at arm's
length. We notice that the TPO has not given any valid reason for
accepting the payment made in respect of export sales, when the
rate of royalty for export sales is higher than the rate paid on
domestic sales.
6. The discussions made in the foregoing paragraph would show that
there is no clarity in the approach of both the assessee as well as the TPO.
Further examination of the segmental financials without considering the
points discussed above, in our view, may not also give any rational result.
Further, it appears that the assessee has also not furnished required
details in this regard. Under these circumstances, we are of the view that
this issue requires fresh examination. Accordingly, we set aside the order
of Ld CIT(A) on this issue and restore the same to the file of AO/TPO with
the direction to examine the same afresh by duly considering the points
discussed above.
7. In the result, the appeal filed by the assessee is treated as allowed
for statistical purposes.
The above order was pronounced in the open court on 29th May, 2015.
29th May, 2015
Sd sd
( /VIJAY PAL RAO) (.. ,/ B.R. BASKARAN)
/ Judicial Member /Accountant Member
Mumbai: 29th May,2015.
ITA No.7295/Mum/2010
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. ../ SRL , Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6
/ Guard file.
/ BY ORDER,
True copy (Asstt. Registrar)
, /ITAT, Mumbai
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