Income Tax Appellate Tribunal - Pune
Lear Automotive India Private Ltd.,, ... vs Deputy Commissioner Of Income-Tax, ... on 4 August, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH, 'C' PUNE - VIRTUAL COURT
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER
आयकर अपील सं. / ITA No.213/PUN/2021
िनधा रण वष / Assessment Year : 2016-17
Lear Automotive India Private Vs. DCIT, Circle-8,
Limited, Pune
E-25,26, 27, Bhosari, MIDC,
Pune 411 026
Maharashtra
PAN : AAACL1978K
Appellant Respondent
Assessee by Shri Dhanesh Bafna
Revenue by Shri Shivraj Morey
Date of hearing 22-07-2021
Date of pronouncement 04-08-2021
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the assessee is directed against the final assessment order dated 08.05.2021 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2016-17.
2. Succinctly, the facts of the case are that the assessee is engaged in manufacturing/assembling of automotive seating and electrical systems. In respect of automotive seating systems, the assessee also provides design and Engineering Support services to the group 2 ITA No.213/PUN/2021 Lear Automotive India Private Limited companies and other automotive industry customers. The assessee has three factories in Chakan, Pune, two factories in Nashik, two in Chennai and one factory in Halol in addition to two Engineering centres in Bhosari, Pune and a facility under tool-manufacturing contract in Haridwar. The assessee filed its return declaring total income of Rs.27,72,90,010/-. Fifteen international transactions totaling Rs.484,29,35,354/- were reported in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions, who computed transfer pricing adjustments of - Rs. 22,37,81,961 under the international transaction of allocation of RHQ costs; Rs.82,34,00,000 under the Manufacturing activity segment; and Rs.5,27,44,000 under the international transaction of payment of global software charges. We will espouse these transfer pricing additions ad seriatim for consideration and decision. A. PAYMENT OF R.H.Q. FEE
3. The assessee paid Rs.22,37,81,961/- towards its share as the Regional Head Quarter (RHQ) fee. The TPO observed that Lear Shanghai provided certain support services to the worldwide Lear group entities including those situated in Asia Pacific Region covering the assessee, for which it was charged this fees. The 3 ITA No.213/PUN/2021 Lear Automotive India Private Limited assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method and considered the AE, i.e., Lear Shanghai, as a Tested party for establishing the arm's length price (ALP) of the international transaction. The assessee submitted that the costs associated with the provision of services were increased by 5% mark-up. Operating Profit/Total Cost of Lear Shanghai at 5% was compared with Operating Profit/Total cost of certain comparables giving average of 4.48%. That is how, the assessee claimed such a transaction to be at ALP. The TPO discussed the facts of this issue in a combined manner along with that of payment of Global Software charges, which has been discussed herein infra. Giving the reason that the assessee did not get any benefit or no material was brought on record to demonstrate that any services were availed, the TPO determined Nil ALP of the international transaction. The DRP did not accept the assessee's claim and affirmed the view taken by the TPO. This led to the transfer pricing addition of Rs.22,37,81,961/-.
4. We have heard both the sides through virtual court and gone through the relevant material on record. At the outset, the ld. AR submitted that the ALP determination of RHQ fee is a virgin issue inasmuch as it has not come up before the Tribunal so far for 4 ITA No.213/PUN/2021 Lear Automotive India Private Limited consideration in any earlier year. It is noted that the TPO has determined Nil ALP primarily by holding that the assessee did not prove availing of any RHQ services for which payment of Rs.22.37 crore was made. He further did not approve the assessee's selection of Foreign/AE as a tested party.
5. We first proceed to examine if any services were actually availed by the assessee? The ld. AR invited our attention towards the Agreement dated 01-03-2014 between Lear Shanghai and the assessee under which such services were rendered, a copy of such Agreement has been provided at page 278 onwards of the paper book. Schedule `A' to the Agreement enlists the services provided by Lear Shanghai.
"Lear Shanghai has provided and will provide the relevant consulting services of following items :
1) Operational and manufacturing consulting services;
2) Quality and quality control consulting services;
3) Program management and program launch consulting services;
4) Purchasing consulting services;
5) Access to Lear Cost and Technology Optimization ("CTO") services;
6) Supplier management consulting services;
7) General accounting consulting services, including US GAAP reconciliation services;
8) Treasury consulting services and financial analysis services;
9) Implementation of capital expenditure process;
10) Tax consulting services;5 ITA No.213/PUN/2021
Lear Automotive India Private Limited
11) Legal consulting services, including contract review and administration;
12) Board administration services;
13) Dealing with administrative authorities relating to joint venture contract administration;
14) Human resource consulting services;
15) Environmental analysis and consulting services;
16) Access to Lear IT systems and services."
6. To buttress the contention of having availed the services from Lear Shanghai, the ld. AR referred to page 378 onwards of the paper book, being, correspondence between the assessee and Lear Shanghai in respect of various services. There is a detailed elaboration of various services provided by Lear Shanghai through e-mails to the assessee and other group entities. A summary of such services has been given at page 537 of the paper book. There is a reference to numerous audit services, account services, budgeting services, sale services, engineering services, purchase policy services, technical training services and HR services etc. From the narration of such services, as backed by the relevant e-mail communications, it is amply clear that the assessee availed services from Lear Shanghai for which it made payment. The so-called Benefit test applied by the TPO has no relevance in determining if the assessee could have availed services or not. Once the factum of receipt of services is established, the only thing which remains is to determine the ALP of the services. Having noticed that the assessee did avail the services, 6 ITA No.213/PUN/2021 Lear Automotive India Private Limited we now proceed to determine the ALP of the receipt of RHQ services.
7. The assessee applied the TNM method to demonstrate that the payment of RHQ fee was at ALP. In such a determination, the assessee treated Lear Shanghai, the Foreign/AE, as a tested party. Certain comparables were chosen to show that the international transaction was at ALP. The TPO did not accept the selection of Foreign/AE as tested party. The ld. AR invited our attention towards a recent judgment delivered by the Hon'ble Madras High Court in Virtusa Consulting Services Private Ltd. Vs. DCIT (124 taxmann.com 309). In this judgment, the Hon'ble High Court has accepted the assessee's contention, in principle, that a tested party is normally the one which is least complex party to the controlled transaction. In the ultimate analysis, the Hon'ble High Court sent the matter back to the TPO by observing that: `The issue regarding the assessee's plea to consider foreign AE as tested party to determine the Arm's Length nature of the underlying international transactions stands remanded to the Transfer Pricing officer for a fresh decision on merits and in accordance with law ...'. As it is a solitary judgment of any Hon'ble High Court on the question as to whether a foreign/AE can be taken a tested party for benchmarking, the outright 7 ITA No.213/PUN/2021 Lear Automotive India Private Limited rejection of the Lear Shanghai as a tested party on the ground that a foreign/AE can never be a tested party, does not stand any more. As the Hon'ble High Court has itself held that the least complex entity to a transaction should be adopted as a tested party, for which analysis it sent the matter back to the lower authority, we need to examine that which out of the two entities to the transaction - the assessee or Lear Shanghai - is least complex in the extant case.
8. No definition of a `tested party' has been given in the Indian Transfer pricing provisions. The OECD guidelines in this regard emphatically provide that: `As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis.'. Two illustrations have been given to identify a tested party, as under:
"Two illustrations-
Choice of the tested party: illustration Assume that company A manufactures two types of products, P1 and P2, that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical specifications set by B. Assume that in this P1 transaction, A only performs simple functions and does not make any valuable unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. 8 ITA No.213/PUN/2021 Lear Automotive India Private Limited Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable unique contribution in relation to the transaction. The tested party for the P2 transaction would most often be B."
9. As per the UN Manual, a tested party should have the following attributes, namely, availability of reliable and accurate data for comparison; least Complex (amongst the parties to the transaction); and the data available can be used with minimal adjustments. It further provides that the choice of a tested party should be consistent with the functional analysis of the transaction, and the characterization of the entities. The tested party generally would be the less complex party to the controlled transaction and should be the party in respect of which most reliable data for comparability is available.
10. Before undertaking the exercise of choosing a tested party in the instant case, we first need to understand the connotation of the term `least complex entity'. Least complex entity in an international transaction is the one in whose hands the ALP can be determined with relative ease and in a less complex manner. There cannot be any doubt that the computation of the value of the international transaction or Profit level indicator (PLI) is ordinarily workable in 9 ITA No.213/PUN/2021 Lear Automotive India Private Limited the hands of both the entities depending upon the extent of adjustments to be carried out. However, only such an entity can be selected as a tested party, inter alia, whose functions are relatively simple vis-a-vis the other entity and as a consequence thereof, in whose hands the value of the international transaction and/or the PLI can be computed with relative ease requiring least adjustments. Relative easiness of the computation pre-supposes its accuracy and, the latter is, in fact, embedded in the former. If accuracy is compromised in the process, then easiness of the computation is of no avail.
11. In the first illustration given by the OECD guidelines, where the company A manufactures P1 products and sells them to B by using the intangibles belonging to B and hence makes no valuable contribution of self, the tested party is A. It is so for the reason that the functions of A are relatively simple and it is easy to compute the PLI in its hands. It is B whose intangibles are being used. Whereas B will have to account for the cost of usage of its intangibles in addition to other costs of procuring product P1 for determining its profit level indicator, A will need to account for only the cost incurred by it in manufacturing product P1. In the second illustration given by the OECD guidelines, where the company A manufactures 10 ITA No.213/PUN/2021 Lear Automotive India Private Limited P2 products by using its own patents and trademarks and sells them to B, the tested party is B. It is so for the reason that now the functions of B are relatively simple as that only of distributor. It is A whose intangibles are being used. Whereas A will have to account for the usage of its intangibles in addition to other costs incurred by it in manufacturing product P2 for determining its profit level indicator of the transaction, B will have to account for directly the cost of goods purchased and the computation of PLI for the international of purchase of product P2 will be relatively simple in its hands.
12. It, ergo, clearly transpires that selection of a tested party primarily depends upon two factors, viz., the least complex entity and availability of suitable comparables. This coincides with the normal ALP determination process envisaged under the Act, as per which we find out the value or PLI etc. of/from the international transaction in the hands of the assessee as a first step and then the value or the PLI etc. of comparables as a second step. The first step under the Act is similar to the first factor of finding out the least complex entity as per the OECD guidelines and the UN Manual and the second step of finding out comparables under the Act matches with the second factor of the availability of suitable comparables. The first aspect is more important. If an entity chosen as tested party 11 ITA No.213/PUN/2021 Lear Automotive India Private Limited turns out to be more complex than the other entity, the later exercise of availability of comparables becomes meaningless.
13. Thus, the least complex party is the one wherein it is easy to determine the value or the PLI of the international transaction. In the context of availing/rendition of services to various entities, the least complex entity will be the one in whose hands identification of costs incurred/paid in rendering the services and then its allocation to various group entities can be done easily. The aspect of identifying the value and the PLI computation of transaction of receipt of services by an Indian entity involves simply finding out the price paid for receipt of such services and then working out the PLI, depending upon the method chosen for the ALP determination. On the other hand, such an aspect in the hands of the Foreign/AE involves finding out the costs incurred by such AE in rendering services to all the recipients of the services and then allocating such total costs to the Indian entity on some rational basis. This entails not only examining the total cost base of the Foreign/AE in rendering the services but also the manner in which the allocation is done to the Indian entity. It is only after this that the process of the PLI determination starts.
12ITA No.213/PUN/2021
Lear Automotive India Private Limited
14. We now advert to the details of the international transaction of receipt of RHQ services to find out if the assessee or Lear Shanghai is least complex party to the transaction? We have set out supra the nature of services rendered by Lear Shanghai to the assessee as per Annexure `A' of the Agreement. The Auditor's certificate has been filed in support of the allocation of costs to the assessee in respect of RHQ services rendered by Lear Shanghai. A copy of such certificate has been placed at pages 607 onwards of the Paper book. In this certificate, the service recipients or the Beneficiaries have been grouped under five categories,
1. WOFE manufacturer located in China (China WOFE);
2. Joint Venture manufacturers located in China (China JV);
3. Non-China entities located in Asia-Pacific region (Asia Non- China) [The assessee has been included in Asia Non-China]
4. Lear Corporation (US) related; and
5. LCM and Lear RHQ
15. There are 90 cost centres involved in the provision of the services, which have been gathered in 7 Cost pools, vis., China-SSD; China-EPMS; APO-CS; APO-CSD; APO-EPMS; LCM & Lear HQ; and Direct Cost. As per Table of Abbreviations given on page 609 of the Paper book, SSD stands for Seating System; EPMS for Electrical Power Management System; APO for Asia Pacific office; LCM for Lear Corporation (Mauritius) Limited; and Lear RHQ for Lear 13 ITA No.213/PUN/2021 Lear Automotive India Private Limited (China) Holding Limited, which at the material time was Lear Shanghai, the service provider. These cost pools are incurring costs in providing the RHQ services. On a pertinent query, the ld. AR submitted that all the seven cost pools are divisions of Lear Shanghai and no other Lear group company has contributed in any manner to the provision of RHQ services. Charging mechanism as per the auditor's certificate starts with Step 1-Classification of cost codes, reading as under:
"Lear management has defined the 90 cost centers in relation to the provision of all services in FY 2015-16. The 90 cost codes are further classified into 7 cost pools as listed below, accordingly to the major functions performed.
Cost Pools Codes Services Beneficial Lear Number
Begins entities of Bene-
with ficial
Lear
Entities
China-SSD 81 -Sales & Business -Major: China SSD 12
development services; manufacturers;
-Finance services; -Others: US, LCM
-Commercial services; & RHQ, and Asia
-Human resource services; Non-China;
-Operations services; and
-Purchasing services
China-EPMS 42 -Sales & Business -Major: China ESD 5
development services; manufacturers;
-Commercial services; -Others: US, LCM
Engineering services; & RHQ, and Asia
-Finance services; Non-China;
-Human resource services;
-IT services;
-Operations services;
-Purchasing services;
-Program management
services; and
-Quality control services
APO-CS 31 and -APO Corporate services -Major:Asia- 3
61 Pacific
manufacturers;
14
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Lear Automotive India Private Limited
-Others: US, LCM
& RHQ;
APO-SSD 91 -Sales & Business -Major: Asia- 16
development services; Pacific SSD
-Program management manufacturers;
services; -Others: US, LCM
-Engineering services; & RHQ, and Asia
-Finance services; Non-China;
-Human resource services;
-IT services;
-Operation services; and
-Purchasing services;
APO-EPMS 54 -Sales services; -Major: Asia- 8
-Engineering services; Pacific ESD
-Finance services; manufacturers;
-Commercial services; -Others: US, LCM
-Purchasing services; & RHQ, and Asia
-Human resource services; Non-China;
-IT services;
-Quality control services; and
-Operations services;
LCM & Lear 11F,11 -Expense incurred for LCM & -LCM & RHQ 3
RHQ A,11H RHQ
and
11R
Direct Cost 42M -Cost directly related to China -China JV /
and JV manufacturers manufacturers
81M
16. It can be seen from the Auditor's Certificate that firstly there are Cost Pools followed by the Cost codes that have contributed to the generation of services, whose description is given in the next column and then there is a list of Lear group beneficiary entities availing the services. The ld. AR explained the auditor's certificate by submitting that in the first row under the first column of `Cost pool', China -SSD (China Seating system) incurred costs in rendering the services mentioned in next column and the beneficiaries of such services are China SSD manufacturers, US, 15 ITA No.213/PUN/2021 Lear Automotive India Private Limited LCM & RHQ and Asia Non-China. Similarly, in the third row, the `Cost pool' of APO-CS (Asia Pacific Officer - Corporate Services) incurred the costs; the services generated by such costs are Corporate services; and the Beneficiaries of such services are Asia Pacific manufacturers, US, LCM and RHQ. Similarly, in the fourth row, the Cost Pool of APO-SSD (Asia Pacific Seating System) incurred the costs; the services generated are Sales and Business development, Program management, Engineering, Finance and Human Resources etc.; and the beneficiaries of such services are Asia Pacific SSD manufacturers, US, LCM & RHQ and Asia Non-China. The `Cost pool' in the second last row is LCM & Lear RHQ; and the beneficiaries are also LCM & Lear RHQ. The last row has `Cost pool' designated as `Direct Cost' with the beneficiaries, being, China JV manufacturers. The above Table clearly depicts that various cost pools rendered spectrum of services and the beneficiaries are also not similar in all of them. Some cost pools resulted in rendering services to some of the Lear group entities while some others rendered services to another set of beneficiaries.
17. Now we turn to the allocation of costs mechanism given in the auditor's certificate on pages 614 and 615 of the paper book. The ld. AR explained that Total costs incurred by Lear Shanghai amounted 16 ITA No.213/PUN/2021 Lear Automotive India Private Limited to 32.71 crore RMB, out of which Direct costs charged to US were 5.38 crore RMB, thereby leaving 27.33 crore RMB that have been allocated to various Lear group entities. The auditor's report on page 614 of the paper book records that: `Certain costs centres will continue to follow the current approach and allocate their costs accordingly be either the Revenue or Entity number.' The case of the assessee is that the RHQ services rendered by Lear Shanghai involved the use of its work force of 364 employees, consisting of Staff of 270 and Dep. Headers of 94. The cost allocation has been done to the five major zones, that is, China WOFE, China JV, U.S., LCM & Lear RHQ and Asia Non-China on the basis of Work time/Effort spent by these two categories of employees in rendering RHQ services in a ratio given in the second table given on the same page, which is as under:-
Work time/ China China JV U.S LCM & Asia Non- Effort spent (%) WFOE Lear RHQ China Staff split their 50% NA NA 50% time as Dep. Headers split 50% 25% 5% 20% their time as
18. The key figures in all the cost allocations are founded on the premise that 50% of Staff and 20% of Dep. Headers spent time exclusively for Asia Non-China. This deciphers that the balance four zones were served by the remaining 50% and 80% of Staff and Dep. 17 ITA No.213/PUN/2021
Lear Automotive India Private Limited Headers. On a specific query, as to how the percentages of 50% and 20% of the Staff and Dep. Headers were allocated to the Asia Non- China zone, the ld. AR submitted that it was on the basis of the time spent by them. However, no record of any sort was produced to justify the allocation of such high percentages of time to Asia Non- China zone. What to talk of furnishing such details of time spent for different zones before the authorities below, this information was not even shared with the auditor, who has reported immediately above the Table of time allocation of 50% and 20% on page 614 of the paper book that: `Accordingly to the information provided by the Lear RHQ management, the percentage of the cost allocated to the five categories, accordingly to the work time and effort spent on the relevant regions are listed as below.' Thus, it is graphically clear that the entire exercise of cost allocation to the respective zones is based on the time spent by Staff and Dep. Headers and there exists no basis except `the information provided by the Lear RHQ Management'. Since the foundational figures of allocation of costs to Asia-Non China, that have been sub-allocated to the assessee in India, is itself open to question and is not based on any authentic document/evidence, we are unable to appreciate as to how such cost allocation can be considered as proper.18
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Lear Automotive India Private Limited
19. It is in the above manner that costs with code 31 have been allocated at 37% to Asia Non-China region by taking Staff costs at 29% (50% of 58%) and Dep. header costs at 8% (20% of 42%). Costs under code 61 have been allocated accordingly at 47% to Asia- Non China region. Costs under codes 81, 91, 42 and 54 have been allocated at 42%, 41%, 42% and 38% to Asia-Non China region. Average of such allocation of costs under all the above codes comes to more than 41%, which means that around 41% of total costs have been allocated only to Asia Non-China zone, while all other four zones shared 59% of costs in a combined manner, with average of less than 15% each. The travesty of cost allocation can be gauged from the fact that Asia Non-China zone has been saddled with costs at a little less than the costs shared by three zones taken together. Such a cost allocation mechanism raises a serious question mark on its veracity.
20. At this juncture, it is pertinent to accentuate that the benchmarking requires not only a mark-up in the international transaction which is comparable with uncontrolled transactions but also an accurate cost allocation. Simply a comparable mark-up, as is 5% in the instant case, does not make the international transaction at ALP. Cost allocation also plays a pivotal role. If the cost allocation is 19 ITA No.213/PUN/2021 Lear Automotive India Private Limited not correct, the comparable mark-up hardly pushes the envelope. It can be understood with the help of an example. Suppose, a Foreign/AE which is rendering services to five entities worldwide, including the one in India, has incurred costs of 1000 US$ on which it adds 5% mark-up. Further suppose that all the five entities are equally served. In such a situation, the Indian entity should be charged 200US$ plus 5% mark-up of 10 US$. Suppose the Foreign/AE actually allocates 500 US$ plus 5% mark up. Under the TNMM, as has been applied by the assessee, though the 5% PLI will show the international transaction at ALP, but the reality of the fact is that the Indian entity has been charged 300 US$ extra, resulting into siphoning away of profit from the Indian tax net to this extent. Unless the cost allocation is done correctly, the mere comparison of profit rate from the international transaction with that of comparables will be an exercise in futility. That is the reason for which accuracy has primacy over the relative easiness in an exercise of finding out a least complex entity.
21. The assessee has tried to show the international transaction at ALP with the Foreign/AE as a tested party by showing that the PLI of 5% in the hands of Lear Shanghai is better than around 4.5% of comparables. This methodology overlooks proper allocation of the 20 ITA No.213/PUN/2021 Lear Automotive India Private Limited cost base. We have noted above that there is no reliable rationale of the cost allocation to the Asia Non-china zone at 37% under the concerned code. The percentages of 50% of Staff and 20% of Dep. Headers, which form the basis for the cost allocation, are just the words of mouth of the management de hors a proper substantiation by any evidence capable of examination. The improper cost allocation has jeopardized the benchmarking of the transaction resulting into profit shifting from India by booking higher expenses and thus taking away the rightful tax due to the Indian exchequer.
22. The Auditor's certificate, which is the self claimed evidence of proper cost allocation, is itself riddled with several disclaimers. Para 1.1 with the `Limitation' heading starts by stating that: `This study relies upon substantial input and information provided by Lear RHQ. EY China assumes no responsibility for the accuracy and completeness of such information'. EY China is the auditor firm which has issued Cost allocation certificate. It is further pertinent to note that the auditor has made the following disclaimers reading as under:
"Lear RHQ has represented, on behalf of itself and its affiliated companies, that such facts, assumptions and representatives are true, correct and complete. However, EY China has not independently audited or otherwise verified any of these facts, assumptions or representation. A misstatement or omission of any fact or a change or amendment in any of the facts, 21 ITA No.213/PUN/2021 Lear Automotive India Private Limited assumptions or representations we have relied upon may require a modification of all or part of this advice. In addition, our advice is based on such facts, assumptions and representations as represented to us as of the date of this planning report. Any changes in the facts, assumptions or representations upon which we have relied may require a modification of all or part of this advice. Our advice assumes that the documents are legally valid and enforceable according to their terms. We have no responsibility to update our advice for events, circumstances or changes in any of the facts, assumptions, representations or changes in applicable law or authorities occurring after this date.
While EY China believes that the conclusions in this report are supportable, there can be no guarantee that tax authorities will agree. ....
Moreover, the report contains information obtained from third party sources such as information databases, filed annual accounts, and industry relevant publications. Although EY China uses its experience to assess the reliability and suitability of such third party data as far as is reasonably possible, we cannot guarantee its accuracy. Since the work performed herein does not constitute an attest engagement in accordance with generally accepted audited standards, the analyses and any resulting reports have been prepared solely for the purpose stated herein."
23. The above remarks of the auditor are good enough to prove the point that the auditor has done cost allocation only on the strength of representations made by Lear RHQ and its affiliated companies. The auditor has not independently audited or otherwise verified any of these facts, assumptions or representation. And further, even the auditor cannot guarantee its accuracy.
24. We have reproduced above 16 services, classified as RHQ services, rendered by Lear Shanghai as per the Agreement. When we 22 ITA No.213/PUN/2021 Lear Automotive India Private Limited examine the nature of the services rendered by Lear Shanghai, tabulated above from the Agreement, it can be seen that the services at Sl.No.1 to 3, 4, 6, 7, 8, 10, 11, 14 and 15 are in the nature of consulting services thereby leaving five non-consulting services. Two out of such five services given at Sl. Nos. 5 and 16 are relating to "Access to Lear Cost and Technology Optimization services" and `Access to Lear IT systems and services'. Lear Shanghai is not owning any global IT System, which implies that the same is owned by some other major Lear Group entity. Giving the assessee an `Access to Lear IT systems' would thus mean that Lear Shanghai first got access to the same by paying some consideration. The same holds good for allowing the assessee an access to Lear Cost and Technology optimization. In order to verify as to what were the costs incurred by the assessee for availing access to the Lear IT systems and Lear cost and technology optimization, the ld. AR was asked to place on record the annual accounts of Lear Shanghai. On perusal of the "Income and profit appropriation statement" of Lear Shanghai, it can be seen that there is a composite figure of cost of sales at Rs.15,87,01,208/-. There is no Note appended to the cost of sales which could show the cost at which Lear Shanghai obtained access to the Lear IT systems etc., for providing, in turn, access to 23 ITA No.213/PUN/2021 Lear Automotive India Private Limited Lear entities including the assessee. Another way to extract this information was to ascertain the 'Related Party Transactions' of Lear Shanghai with the other group entities. The ld. AR expressed his inability to provide any such details. On a pointed query, the ld. AR categorically submitted that Lear Shanghai did not pay any amount to any Lear group entity and all the costs were incurred by itself alone. If that is the case, then there can be two things. First, that such an access was not provided at all and it was wrongly mentioned in the Agreement for which a composite charge was made or in alternate that the access was obtained and provided but the consideration paid for getting such an access was clubbed with other costs and not properly allocated.
25. On an overview of the matter, it is palpable that ascertaining the value of international transaction of RHQ services with the help of cost allocation, which is a first step in the process of determining the PLI, by treating Lear Shanghai as a tested party, is so complex and tedious involving gathering information from so many Cost Pools and then its allocation between several group entities has been done in an arbitrary and unsubstantiated manner, which is rather inaccurate. This makes Lear Shanghai as a complex entity vis-a-vis the assessee. On the other hand, the computation of the value of the 24 ITA No.213/PUN/2021 Lear Automotive India Private Limited international transaction by treating the assessee itself as a tested party is more accurate and also relatively easy since a precise and straight figure of the RHQ fee charged by Lear Shanghai is available, which can be adopted for the ALP determination under a suitable method. Ex consequenti, it is the Indian entity, i.e. the assessee which is least complex in the transaction of RHQ services. We, therefore, accord our imprimatur to the view point of the lower authorities that the assessee wrongly selected Lear Shanghai as the tested party.
26. We have noted above that a tested party is the one which is least complex in the transaction and for whom suitable comparables are available. Having seen that Foreign/AE is not a least complex entity to the transaction, now we proceed to the second aspect of examining if the correct comparables were chosen.
27. The assessee, after choosing Lear Shanghai, China as the Tested party, went on to select three comparables, namely, Business Brain SHOWA-OTA-INC; S.Pool Inc; and Temp Holdings Company Ltd. All the three companies chosen as comparable are located in Japan as against Lear Shanghai located in China. We have tabulated above the nature of international transaction of rendering RHQ services. The first company taken as comparable is Business Brain SHOWA OTA INC., whose consolidated report has been placed at 25 ITA No.213/PUN/2021 Lear Automotive India Private Limited page 2247 onwards of the paper book. This company situated in Tokyo, Japan has shown its nature of business under the nomenclature of "Business Services". However, the details of its activities have been set out at page 2249 of the paper book giving certain codes under which it rendered services - Code 737 represents `Computer programming, data processing and other computer related services'; Code 7379 represents `Computer related services, not elsewhere classified'; Code 6209 covers `Other information technology and computer service activities'; Code 5415 covers `Computer Systems design and Related services'; Code 541519 represents `Other Computed Related services'. On going through the nature of services provided by this company, it is clear that these are in the nature of IT and ITeS. As against that, the international transaction under consideration is of RHQ services and there is a separate international transaction of `IT services' of the assessee with value of Rs.2,96,16,174/- that has been accepted by the TPO at ALP. Thus, this company chosen from Japan is functionally dissimilar.
28. The next company chosen is S-POOL INC. A copy of the annual report of this company has been placed at page 2330 onwards. The broad nature of its services has been given as "Business 26 ITA No.213/PUN/2021 Lear Automotive India Private Limited Services". However the codes show that the precise nature of services as given on page 2332 is quite different from the RHQ services availed by the assessee. Code No.736 is `Personnel Supply services'; Code 7361 is `Employment Agencies'; Code 7810 is `Activities of Employment placement agencies'; Code 5613 is `Employment services'; and Code 561311 is `Employment Placement Agencies'. It has further been mentioned that company is mainly engaged in the personnel outsourcing business as well as the Mobile marketing business. There is hardly any need to emphasize that the services rendered by this company are miles apart from the RHQ services in question.
29. The last company chosen as comparable is Temp Holdings Co., whose report has been placed at page 2418 of the paper book. Here again under the broad heading of "Business Service", Code No.736 shows `Personnel supply services'; Code 7363 indicates `Help Supply services'; Code 7820 is of `Temporary employment agency activities'; Code 5613 is of `Employment services'; and Code 561320 is of `Temporary Help services'. It clearly delineates that this company situated in Tokyo, Japan is of no match to the Lear Shanghai rendering RHQ services.
27ITA No.213/PUN/2021
Lear Automotive India Private Limited
30. On a pertinent question as to why no comparable from China was selected and all the three companies chosen were from Japan as against Lear Shanghai situated in China, the ld. AR submitted that no suitable comparable was found from China and further such a course of action chosen by the assessee is proper and permissible. It goes without saying that location of comparables plays a significant role in making comparison. Payment for availing services in India cannot be compared with that paid by a company availing similar services situated in Japan or USA or UK. Moreover, the Indian transfer pricing regulations do not admit of such a position and attach due importance to geographical location of comparables as is manifest from Rule 10B(2). It provides that the comparable of an international transaction with an uncontrolled transaction shall be judged with reference to four sub-clauses and clause (d) states : "conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail". On going through Rule 10B(2), which deals with the determination of ALP under section 92C, it gets absolutely evident that the condition 28 ITA No.213/PUN/2021 Lear Automotive India Private Limited prevailing in the markets in which the respective parties to the transaction operate, including the geographical location, is an important factor to judge an uncontrolled transaction. Thus, it is overt that the Indian transfer pricing regulations attach necessary importance to geographical location of the comparable entities vis-a- vis the transaction under consideration.
31. It is clear that not only all the three comparables chosen by the assessee for benchmarking the international transaction of RHQ services are located at different geographical locations but even their functional profiles also do not match with the RHQ services.
32. To sum up, Lear Shanghai is neither a least complex entity to the transaction nor is the one for whom the suitable comparables are available from China as per the assessee's own admission. We, therefore, approve the view of the authorities below in rejecting Lear Shanghai as the Tested party for the international transaction of receipt of RHQ services.
33. Reverting to this international transaction in totality, we have found above that the RHQ services were actually availed and hence Nil ALP determination by the TPO is incorrect. Insofar as the benchmarking of this transaction is concerned, the assessee benchmarked it by taking Foreign/AE as Tested party, which has 29 ITA No.213/PUN/2021 Lear Automotive India Private Limited been found above to be incorrect. Thus, the international transaction of receipt of RHQ services is required to be benchmarked by taking the assessee as a Tested party. We, therefore, set-aside the impugned order and remit the matter to the file of the AO/TPO for re- determining the ALP of the international transaction of receipt of RHQ services under the most appropriate method by taking the assessee as a tested party. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in this regard. B. PAYMENT OF GLOBAL SOFTWARE CHARGES
34. The next international transaction in which transfer pricing addition has been made is `Payment of Global Software charges' amounting to Rs.5,27,44,000/-. The TPO required the assessee to furnish the evidence of receipt of services under this transaction and also the benefit derived therefrom. Applying the Benefit Test, the TPO held that no independent party would have paid for such services. Determining Nil ALP, the TPO proposed transfer pricing adjustment of Rs.5.27 crore. The assessee assailed such addition before the DRP but without any success.
35. It is observed that the TPO proposed such adjustment by relying on the view taken by him on this very issue in earlier years. The ld. AR submitted that it is a recurring issue which came up 30 ITA No.213/PUN/2021 Lear Automotive India Private Limited before the Tribunal for the first time for the assessment years 2005- 06, 2006-07 & 2008-09, for which a combined order was passed. Then, it again came up for the assessment year 2007-08. The ld. AR took us through the order passed by the Tribunal for the assessment year 2007-08, a copy of which has been placed at page 101 onwards of the paper book. Relevant discussion has been made at para 2.2 onwards of the order and eventually the matter has been sent back in line with the view taken by the Tribunal in its order for earlier years, namely, 2005-06, 2006-07 & 2008-09. Both the sides are in agreement that the facts and circumstances of this ground are similar to those of earlier years. Respectfully following the precedents, we set-aside the impugned order on this score and remit the matter to the file of the AO/TPO for re-deciding it in accordance with the directions given by the Tribunal in its aforenoted earlier orders. C. MANUFACTRURING ACTIVITY SEGMENT
36. The AO made transfer pricing addition of Rs.82,34,00,000/- under the Manufacturing activity segment. The assessee, inter alia, had three international transactions viz., `Export of seating components' amounting to Rs.47,63,29,917/-; `Import of CKD components' amounting to Rs.66,09,76,639/-; and `Import of raw materials and components' amounting to Rs.27,62,33,311/-, all of 31 ITA No.213/PUN/2021 Lear Automotive India Private Limited which were benchmarked by the assessee independently. The assessee's total revenue from operations, including provision of services, stood at Rs.1942.19 crore. Though the accounts were maintained in a composite manner but for the purposes of benchmarking this set of transactions, the assessee divided its total business into four segments viz., Export of seating components; Import of CKD units; Other manufacturing; and Provision of services. There is no dispute on the international transaction of `Provision of services' which has been accepted by the TPO at ALP. To be more specific, the assessee aggregated the international transaction of `Export of seating components' with a part of the international transaction of `Import of raw material and components' and determined its ALP as one unit. The remaining part of the international transaction of `Import of raw material and components' was taken to `Other manufacturing' segment, which does not have any Associated enterprise (AE) transactions and hence no benchmarking of this segment was necessitated. The third international transaction of `Import of CKD components' was also separately benchmarked. The ALP determination was done by the assessee applying the TNMM as the most appropriate method. In the segmental approach so adopted for showing these international 32 ITA No.213/PUN/2021 Lear Automotive India Private Limited transactions at the ALP, the assessee worked out the revenues, the operating profit and OP/TC of the three segments as under:
Description Revenue Operating profit OP/TC
(In crore) (In crore)
Export of Seating components 47.6 7.25 17.80%
Import of CKD Units 113.23 4.74 4.37%
Other Manufacturing 1701.69 0.78 0.05%
37. With the above calculated PLIs at 17.80% and 4.37% from the transactions requiring the ALP determination, the assessee chose certain comparables and declared the international transactions under consideration at ALP. The TPO did not accept the splitting up of accounts for the purpose of benchmarking by observing that several questions going into the veracity of the segmental approach were unanswered. He rejected the segregation done by the assessee. By taking the overall Manufacturing activity as one unit, he computed assessee's Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC) at 0.69%. Certain comparables were selected whose adjusted margin was computed at 5.71%. As a result of that, the transfer pricing adjustment of Rs.82,34,00,000/- was recommended. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP), which led to the making of transfer 33 ITA No.213/PUN/2021 Lear Automotive India Private Limited pricing addition of Rs.82.34 crore in the impugned order on this score. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
38. The assessee is engaged in manufacturing and assembling of automotive seating and electrical systems. The assessee maintained a composite set of books of account with one Profit and loss account. Its total revenue for the year stood at Rs. 1942.19 crore, out of which the major portion (more than 95%) was contributed by the manufacturing activity at Rs.1862.52 crore. Out of such manufacturing revenue, the assessee made sales to non-Associated Enterprises under the head "Other Manufacturing" at Rs.1701.69 crore, which is more than 91% of the total sales, meaning thereby that the sales to Associated Enterprises are less than 4%. It is only for the purpose of benchmarking that the assessee divided its financials into separate segments, inter alia, Export of seating components (hereinafter called SC-AE), Import of CDK units (hereinafter called CDK-AE) and Other manufacturing of domestic sales only to Non-Associated enterprises (hereinafter called DS- NonAE) as reproduced on pages 2 to 4 of the TPO's order under: 34 ITA No.213/PUN/2021
Lear Automotive India Private Limited Particulars Export Import of Other Provision Total Seating CKD Manufactu of services components units ring Non AEs OPERATING INCOME Revenue from operations 47.6 113.23 1701.69 79.67 1942.19 (gross) Other income 0.38 0.42 0.80 Total operating income 47.98 113.23. 1701.69 80.09 1942.99 (A) OPERATING EXPENSES Excise duty 0.00 13.14 186.23 - 199.37 Cost of raw material and 28.87 86.20 1182.00 - 1297.07 components consumed Increase/decrease in 0.09 0.13 1.16 - 1.12 inventories of finished goods and work-in-
progress Employee benefits 4.43 1.85 135.05 38.36 179.69 expense Other expenses 2.65 1.82 80.98 16.16 101.61 Depreciation and 1.98 0.65 30.62 3.61 36.86 amortisation expenses Bank charges 0.05 0.01 0.39 0.05 0.50 Total 38.07 103.54 1616.43 58.18 1816.22 ALLOCATION OF COMMON EXPENSES Allocation of common 0.15 0.32 4.92 0.26 5.66 expenses (salary) Allocation of common 0.77 1.61 24.44 1.28 28.11 expenses (other than salaries) Allocation of royalty 1.89 3.98 60.34 - 66.22 Sub total 40.89 109.46 1706.13 59.73 1916.21 Less :Non-operating expenses CSR expenses 0.01 0.03 0.43 0.02 0.49 Fixed assets written off 0.32 0.00 0.02 -0.01 0.33 Exchange difference, net -0.18 0.94 4.77 -0.30 5.23 Total operating expenses 40.73 108.49 1700.91 60.02 1910.16 (B) Operating Profit 7.25 4.74 0.78 20.07 32.83 (€=A-B) Operating 15.11 4.19 0.05 25.06 1.69 Profit/Operating Income (OP/Sales) (D=C/A) Operating Profit/Total 17.80 4.37 0.05 33.44 1.72 Cost (OP/TC) (E-C/B) 35 ITA No.213/PUN/2021 Lear Automotive India Private Limited
39. That is how, the assessee worked out the amount of operating profit (PLI) of Rs.7.25 crore (17.80%) in SC-AE segment; Rs.4.74 crore (4.37%) in CKD-AE segment; and Rs.0.78 crore (0.05%) in DS-NonAE segment. We need to ascertain if the assessee drew segmental profits correctly or the authorities below were justified in jettisoning the assessee's point of view and determining the ALP of the three international transactions under the overall Manufacturing activity segment as one unit.
40. Operating revenues in the above Table have been given under the above three segments pertaining to the manufacturing activity at gross as well as net of excise duty levels. On a specific query, the ld. AR submitted that the allocation of costs to the three segments was done by booking direct costs to the related segments and common costs by way of allocation in the ratio of their Revenues on net basis. Net revenue from the SC-AE segment stands at Rs.47.60 crore; CKD-AE segment at Rs.100.09 crore; and DS-NonAE segment at Rs.1515.46 crore. The first major item in the above Table under the head 'Operating expense' is `Cost of raw material and components consumed' that has been shown at Rs.28.87 crore; Rs.86.20 crore; and Rs.1182.00 crore respectively. The ld. AR submitted that the figure under the CKD-AE segment at Rs.86.20 crore was on actual 36 ITA No.213/PUN/2021 Lear Automotive India Private Limited basis pertaining solely to the CKD components and the balance cost of raw materials at Rs.1210.87 crore (Rs.1297.07 total cost of raw material minus Rs.86.20 crore CKD raw material cost) was bifurcated on actual basis between the other two segments. On a question as to how the actual cost of raw material of the other two segments was ascertained, the ld. AR submitted that the factories manufacture specific products pertaining to a particular segment only and cost of raw material relating to each factory has been clubbed under the respective segment manufacturing the requisite products. On a further query, it was fairly conceded that three factories of the assessee were exclusively in manufacturing the products under DS- NonAE segment and the one factory with Code No.175 at Chakan, Pune was serving both the DS-NonAE and SC-AE segments. Our attention has not been drawn towards any document to indicate that the raw materials meant for these two segments were separately purchased or separately recorded. In that view of the matter, there remains no basis to support the contention that actual cost of raw material and components was properly accounted for under SC-AE and DS-NonAE segments. The ld. AR submitted that wherever the segment-wise figures were not available on actual basis, the assessee bifurcated such costs on the basis of net revenue of the respective 37 ITA No.213/PUN/2021 Lear Automotive India Private Limited segments. If we go with the bifurcation of raw material cost in the ratio of revenue from these two segments, the cost of raw material and components consumed under SC-AE segment comes to Rs.36.87 crore, being Rs.1210.87 crore bifurcated between SC-AE and DS- NonAE segments in the ratio of their net revenue at Rs.47.60 crore:
Rs.1515.46 crore. As against the allocated figure of Rs.36.87 crore, the assessee has recorded only a figure of Rs.28.87 crore under the SC-AE segment. Thus, it is palpable that the assessee booked lower cost of raw material and components under the SC-AE segment by Rs.8.00 crore and correspondingly allowed such excess cost to be absorbed by the DS-NonAE segment, with the result that the profit in the SC-AE segment got artificially boosted at the expense of the DS- NonAE segment so as to present a rosy picture in the export segment with the intention of projecting that the assessee earned handsome operating profit under this segment of international transaction since the other segment of DS-NonAE is not required to be benchmarked. The next item is the Employees Benefit expenses. Here again, the assessee contended that these expenses were bifurcated on actual basis. No record whatsoever has been placed before the authorities below or the Tribunal to demonstrate that the expenses recorded under these three segments were on actual basis. Be that as it may, 38 ITA No.213/PUN/2021 Lear Automotive India Private Limited we have noticed above that one factory at Chakan, Pune was producing goods meant for SC-AE as well as DS-NonAE segments. The raison d'etre given above qua the raw material cost applies to this cost as well. Similar is the position regarding the other expenses claimed by the assessee in determining the operating profit from the three segments under consideration.
41. The assessee has drawn SC-AE and CKS-AE segments to show that the three international transactions under the manufacturing activity were at ALP. We have noted above that there is a separate international transaction of `Import of raw material' with value of Rs.27,62,33,311/-. On a pertinent query, as to how the ALP of the international transaction of Import of raw material was done, the ld. AR submitted raw material cost of Rs.2.16 crore pertaining to the SC-AE segment was absorbed along with the other raw material costs of the same segment and the remaining amount of Rs.25.46 crore was taken to DS-NonAE segment. On what basis, the segregation of the international transaction of `Import of raw material and components' under the SC-AE segment was done was explained to be as per actual basis. However, no material has been brought on record to demonstrate that the raw material consumed in SC-AE and DS-NonAE segments were separately received and recorded - value 39 ITA No.213/PUN/2021 Lear Automotive India Private Limited wise and quantity wise. When there is no authenticity of Import of raw material components going to SC-AE and DS-Non-AE segments, the bifurcation of this cost to the two segments gets distorted.
42. We have noted above that the assessee is engaged in manufacturing automotive seating systems. Seating components, constituting SC-AE segment, are part of the whole of the seating systems. The DS-NonAE segment of the assessee has only non-AE transactions and as such there is no requirement to determine its ALP. The assessee has shown operating profit of Rs.7.25 crore (17.80%) with gross sales of Rs. 47.6 crore under the SC-AE segment for benchmarking. As against that, DS-NonAE segment has gross sales of Rs. 1701.69 crore with operating profit of just Rs.0.78 crore (0.05%). From these figures, it is manifest that the assessee made the calculations of the segment wise profits in such a manner so as to reflect higher margin of profits under the SC-AE and CKD-AE segments which required ALP determination. As against that, the DS-NonAE segment, which is the prime source of the assessee's revenue but does not require any benchmarking as it is de hors any AE transactions, has shown microscopic operating profit. 40 ITA No.213/PUN/2021
Lear Automotive India Private Limited It is a clear-cut case of artificial and highly manoeuvred segmental profitability.
43. At this stage, it would be significant to note that the TPO required the assessee to furnish per-unit cost and sale price of major products manufactured by it during the course of transfer pricing proceedings. The assessee, vide its reply dated 17-10-2009 whose copy has been given at page 443 onwards of the paper book, submitted such details through two different sets of calculations by computing `Operating income' in amount and percentage in respect of major 13 products in one chart given at page 445 with weighted average operating profit at 3.64% and from major 11 products in another chart with weighted average profit of 7.65%. The TPO aggregated such individual product-wise profit rates and found out the average profit of all the major products manufactured at 5%. It was thus observed that as against the major product-wise `Operating profit' calculated by the assessee itself at 5% in such calculation sheet, it had shown `operating profit' only at 0.05% in the Manufacturing segment in the segmental profit sheet meant for transfer pricing purpose. This further substantiates that the working done by the assessee in calculating the operating profit from the three segments for benchmarking is misplaced. Por una parte, the 41 ITA No.213/PUN/2021 Lear Automotive India Private Limited assessee itself presented figures before the TPO giving average operating profit at 5% and por otra parte it again itself computed operating profit at 0.05%. in the segmental calculation.
44. The ld. AR tried to clarify the position by submitting that the profit rate of 5%, as submitted before the TPO, was exclusive of common expenses, whereas it was not so in the working done for benchmarking. From the working so given at page 445 and 446 of the paper book, it is seen that the assessee has taken 24 major products dealt with by it with volume, per unit sale price, per unit material cost, per unit variable overheads and per unit fixed overheads. It is thereafter that the assessee first computed `Operating income' and then `OI%', giving average of 5%. When the assessee itself computed its `Operating income', it is but natural that the same was loaded with all the operating costs including common costs also. No fresh calculation has been brought on record to show that the per unit profit working given by the assessee to the TPO in respect of major products was exclusive of common expenses. Since in both the calculations, the assessee has itself computed `Operating income' firstly, on the product wise details and then in the bifurcation of business operations into four segments for benchmarking, we are unconvinced that the per unit operating 42 ITA No.213/PUN/2021 Lear Automotive India Private Limited income separately given to the TPO was exclusive of common expenses.
45. The ld. AR tried to justify the segregation approach adopted by the assessee by submitting that the three international transactions under consideration have no relation with each other and hence could not have been aggregated by the TPO. To fortify his point of view, he referred to definition of "Transaction" under Rule 10A(d) to mean "Transaction" including number of closely linked transactions.
46. We agree with the ld. AR on the definition of the term `transaction', which clearly states that closely linked transactions are to be taken as one and hence aggregated. However, the same is not applicable to the facts and circumstances as are instantly obtaining. It has been noticed supra that the international transaction of "Import of raw material and components" amounting to Rs.27.62 crore has been divided by the assessee into two parts, one part of Rs.2.16 crore taken to SC-AE segment and the other part of Rs.25.46 crore taken to DS-NonAE segment. When the substantial amount from the international transaction of import of raw materials has been absorbed in the DS-NonAE segment, a clear and direct relation between the domestic sales segment and the international transaction of `Import of raw materials' gets established.
43ITA No.213/PUN/2021
Lear Automotive India Private Limited
47. In order to substantiate its claim of proper segmentation and the resultant benchmarking , the ld. AR relied on an order passed by the Kolkata bench of the Tribunal in DCIT Vs. Landis+ Gyr Ltd. (2017) 86 taxmann.com 109 (Kolkata Tribunal). In that case, the assessee benchmarked the international transactions by segregating them into Manufacturing, Trading and Service. The ld. AR submitted that the TPO in that case also clubbed the transactions and when the matter finally came up before the Tribunal, the separate benchmarking of the three segments was countenanced.
48. The facts of that case are distinguishable from those of the assessee inasmuch as in that case there was no dispute about the allocation of expenses to different segments and further the transactions of that assessee were subject to benchmarking. In contrast, the allocation of expenses done by the assessee in this case is apparently not correct as has been discussed above and further its DS-NonAE segment, which has shown the least profit, is non AE segment requiring no benchmarking. As such, the ratio in the case of Kolkata Tribunal referred above is not applicable to the facts of the extant case.
49. In view of the foregoing discussion, we are satisfied that the authorities below were justified in rejecting the segregation approach 44 ITA No.213/PUN/2021 Lear Automotive India Private Limited adopted by the assessee and rightly combined the three international transactions under the overall `Manufacturing activity' for benchmarking.
50. Notwithstanding having found that the preparation of the segmental profitability statement by the assessee is flawed, we still proceed to examine if the assessee did benchmarking in a correct manner even of such a fallacious segmental profitability.
51. Under the CKD-AE segment, all the comparables chosen by the assessee are, by and large, distributors of automobiles, such as, Maruti and Hyundai cars. On a pertinent query, the ld. AR submitted that the CKD-AE segment is in the nature of Distribution activity. It is an admitted position that under the CKD segment, the assessee imported completely knocked down products and then assembled them as full-fledged products as these were before the knocking down condition. The process of remaking falls under the broader manufacturing activity. This further gets fortified on perusal of the assessee's segmental profitability statement drawn for benchmarking CKD-AE segment, which includes Excise duty of Rs.13.14 crore; Royalty of Rs.3.98 crore in addition to certain other manufacturing peculiar costs under the same. As such, none of the chosen comparables is a functional match to the CKD segment. 45 ITA No.213/PUN/2021
Lear Automotive India Private Limited
52. The international transaction of `Import of raw material and components' was bifurcated by the assessee into two parts. The first one of Rs.2.16 crore was taken to SC-AE segment and its benchmarking was done under the TNMM. For the remaining cost of Rs.25.64 crore, which was taken to the DS-NonAE segment, the ld. AR submitted that the ALP of the same was determined under the "any other method" as prescribed in the Rule 10AB of the Income- tax Rules, 1962. In order to properly appreciate the view point of the assessee, we consider it expedient to reproduce the relevant rule as under:
`Other method of determination of arm's length price.--For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arms' length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.' D R .1
53. On going through the above rule, it clearly emerges that this method contemplates taking into account the price which has been charged or would have been charged for the same or similar uncontrolled transactions as are between non-AEs under similar circumstances. In other words, this method requires firstly, identifying the international transaction of the assessee and then 46 ITA No.213/PUN/2021 Lear Automotive India Private Limited comparing it with some price charged or chargeable under similar uncontrolled situation.
54. The ld. AR took us through the Transfer pricing study report, which refers to four transactions within its ambit. The first transaction is import of raw materials and components from Lear Automotive, Malaysia amounting to Rs.1.56 crore. It is mentioned in the Transfer pricing study report that raw material and components (sheet foam worth Rs.1.56 crore) were imported from Lear Malaysia on specific directions from Volkswagon, India, its customer. It has further been mentioned that Volkswagon, India directed the assessee to procure the relevant raw material and components and the prices were mutually agreed between Volkswagon and Lear Malaysia and that the price at which it has been imported by the assessee and the price at which it sold the same to Volkswagon, India ensured that it earned a reasonable markup. It has still further been mentioned:
"Accordingly the company believes that since the price at which it imports is a direct price agreed between Volkswagon, India (third party) and the companies AE, the price itself is at arm's length". We are unable to find out as to how the assessee can be said to have benchmarked this transaction under "any other method". No basis whatsoever has been pointed out for making a comparison with any 47 ITA No.213/PUN/2021 Lear Automotive India Private Limited comparable price paid or payable. Except for stating that the assessee earned "reasonable markup", there is no mention whatsoever as to what is that reasonable markup and its yardstick and further how any arrangement was entered into between Volkswagon, India and Lear Malaysia. No documentation in support of the said assertion has been made available.
55. The next transaction is import of raw materials and components from Lear, Shanghai Automotive Metals Company Ltd. and Lear Corporation, Poland amounting to Rs.20.99 crore. The assessee has mentioned in its Transfer pricing study report that it imported certain raw material and components (electric trucks and ASM adjustors). In the name of benchmarking, it has been mentioned that "the pricing policy adopted by the AE in connection with the supply to the company yields a margin for the AE which is in line with the margin earned by the comparable companies". There is no reference to what was the margin earned by the AE and what was the margin earned by the comparable companies.
56. The next transaction is import of other materials and components. It has been mentioned in the Transfer pricing study report that the assessee has imported certain raw materials and components from its AEs for its manufacturing activities on a need 48 ITA No.213/PUN/2021 Lear Automotive India Private Limited basis. It has further been mentioned that "the price at which raw materials and components are supplied by the AE are "fair and reasonable" and that the company has represented that it is in the process of collating relevant documentation to substantiate the same". No such documents, which were being collated at the stage of preparing the transfer pricing study report, have seen the light of the day so far. Again, there is question as to how the price is fair and reasonable without any thing further to make comparison with the price charged or chargeable under comparable uncontrolled situations.
57. It is thus apparent that none of the transactions of `Import of raw material and components' to the extent of Rs.25.46 crore was benchmarked under the guise of adoption of "any other method".
58. Without prejudice to the above submissions for approving the segregation approach, the ld. AR submitted that the TPO went wrong in computing the transfer pricing adjustment by considering the entity level figures under the manufacturing activity whereas he ought to have restricted the addition only to the international transactions under consideration. It was stated that if the transfer pricing adjustment is restricted only to the international transactions under consideration as against the entity level transaction under the 49 ITA No.213/PUN/2021 Lear Automotive India Private Limited Manufacturing activity, the amount of the transfer pricing adjustment would get reduced to around rupees five crore.
59. It is overt that the TPO determined the ALP by considering the entity level PLI of the assessee under the Manufacturing activity and chose certain comparables for working out the amount of transfer pricing adjustment. It is essential to note that the ld. AR did not point out anything amiss in the selection of comparables or the computation of PLI of the assessee or comparables. The grievance is confined only to the making of transfer pricing adjustment on entity level.
60. The issue of restricting the transfer pricing adjustment to the transaction level rather than the entity level is no more res integra in view of several judgments rendered by various higher forums including the Hon'ble jurisdictional High Court holding that the transfer pricing adjustment should be restricted only to the international transactions and not the entity level transactions. The Hon'ble jurisdictional High Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2019) 414 ITR 704 (Bom.) has held that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. Here, it is pertinent to mention that the Department's SLP against the judgment in the case of Phoenix 50 ITA No.213/PUN/2021 Lear Automotive India Private Limited Mecano (India) Pvt. Ltd. has since been dismissed by the Hon'ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2018) 402 ITR 32 (St.). Similar view has been taken by the Hon'ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefore, set aside the impugned order on this score and direct to restrict the transfer pricing addition only in respect of transactions with Associated Enterprises under the Manufacturing activity after allowing opportunity of hearing to the assessee.
61. Before parting, we place on record our appreciation for the illuminating arguments and copious details put forth during the course of hearing by Sh. Dhanesh Bafna, the ld. AR and the ld. DR, which assisted the Tribunal in disposing off the issues in a well informed manner.
62. In the result, the appeal is partly allowed for statistical purposes.
Order pronounced in the Open Court on 04th August, 2021.
Sd/- Sd/-
(S.S. VISWANETHRA RAVI) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; िदनां क Dated : 04th August, 2021
सतीश
51
ITA No.213/PUN/2021
Lear Automotive India Private Limited
आदे श की ितिलिप अ ेिषत/Copy of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. थ / The Respondent;
3. The CIT (DRP-3), Mumbai-1/ CIT (DRP-3), Mumbai-2/ CIT (DRP-3), Mumbai-3
4. DR, ITAT, 'C' Bench, Pune
5. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date
1. Draft dictated on 22/23-07-21 Sr.PS
2. Draft placed before author 24-07-2021/ Sr.PS 02-08-2021
3. Draft proposed & placed before JM the second member
4. Draft discussed/approved by JM Second Member.
5. Approved Draft comes to the Sr.PS Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the Head Clerk
10. Date on which file goes to the A.R.
11. Date of dispatch of Order.
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