Decided on September 02,2014

Nsk India Sales Co. (P.) Ltd. Appellant


O.K.Narayanan, Vice -President - (1.) THIS appeal is filed by the assessee. The relevant assessment year is 2009 -10. The appeal is directed against the order of the Assessing Officer passed on 24.2.2014 under sec. 143(3) read with sections 144C(13) and 92CA(3) of the Income -tax Act, 1961. Thus, it is a Transfer Pricing case. The assessee company incorporated in July 2007, is engaged in the distribution and marketing of Bearings and other products. The brand name of the assessee is "NSK". The assessee is 98% subsidiary of NSK Ltd. The balance 2% shares are held by NSK International (Singapore) Pte. Ltd. The assessee purchases bearings and other products from its AEs by way of imports and sells them in Indian market. The customers are unrelated to the assessee company. In certain cases, the AEs also make direct sales to the customers procured by the assessee, in India.
(2.) FOR the impugned assessment year, the assessee company filed its return of income declaring a loss of Rs. 1,09,38,208/ -. The return was filed on September 30, 2009. The assessment proceedings were initiated by issuing notice under sec. 143(2). In view of the related party transactions, the Assessing Officer made a reference under sec. 92CA(1) to the Transfer Pricing Officer(TPO) to determine the Arm's Length Price(ALP). On the basis of the Transfer Pricing documentation filed by the assessee company and other details furnished thereon, the TPO proceeded to make certain adjustments. The assessee company characterized its business as that of Normal Risk. But the TPO held that the functional characterization adopted by the assessee company is without basis. The TPO characterized the business of the assessee as that of a Limited -Risk Distributor (LRD). In the matter of deciding the Profit Level Indicator (PLI), the TPO followed Berry Ratio. The assessee has accounted for a loss of Rs. 2,45,12,653/ - in the nature of foreign exchange rate fluctuation loss between INR and Japanese Yen. The assessee company has claimed this foreign exchange loss as an item of adjustment inducing the financial result into an operating loss. But the TPO did not accept the said adjustment as claimed by the assessee company.
(3.) AS already mentioned earlier, the TPO has followed the Berry Ratio to work out the PLI. The Berry Ratio is "Operating Profit/Value Added Expenditure(VAE)". Accordingly, he worked out the Berry Ratio of the assessee company at 0.84. He has also considered the Berry Ratio of comparables. The comparables are four companies, namely, M/s. George Oaks, India Motor Parts, Jullundur Motor and Sri Aruna Auto. The arithmetic mean of VAE was worked out by the TPO at 1.54. The VAE of the assessee company has been adopted by the TPO at Rs. 9.67 crores. The difference in Berry Ratio worked out at 0.7. Therefore, the product of VAE and the difference in Berry Ratio came to Rs. 6.76 crores. The actual purchases of the assessee from the AEs amounted to Rs. 20.26 crores. Accordingly, the TPO has deducted an amount of Rs. 6.76 crores from the actual AE purchases of Rs. 20.26 crores. The TPO thus, worked out the ALP of the AE purchases at Rs. 13.50 crores.;

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