2018 (12) TMI 1868 - AT - Income Tax

TP Adjustment - assessee company was engaged in manufacturing and trading activity - TNMM method - HELD THAT - The first aspect of the issue is that admittedly, the assessee is carrying on two separate divisions i.e. two separate activities; one is the manufacturing and second is trading. AO had considered the operations of assessee in entirety and held it to be one activity. In the preceding year, the assessee was held to be in carrying on two activities. There is no dispute to the same. Accordingly, we hold that the assessee is engaged in two separate activities; one is manufacturing and the second is trading. Coming to the second step, wherein it is the duty of Assessing Officer / TPO to benchmark two activities separately. Accordingly, we direct the Assessing Officer / TPO to apply TNMM method and go through the comparables selected by assessee and determine the arm's length price of international transactions entered into by assessee with its associated enterprises under the umbrella of manufacturing activity and also as part of trading activities. The two activities have to be benchmarked separately and independently, for which reasonable opportunity of hearing shall be provided to the assessee. Accordingly, we remit the issue back to the file of Assessing Officer / TPO in this regard. The grounds of appeal raised by Revenue are thus, allowed for statistical purposes.

Summary

Issues:
- Transfer pricing adjustment based on bifurcation of trading activity into domestic and export sales
- Determination of manufacturing activity by the assessee

Transfer Pricing Adjustment Issue:
The Revenue filed an appeal against the order of the CIT(A) relating to assessment year 2010-11, challenging the deletion of a Transfer Pricing adjustment. The Revenue contended that the assessee had bifurcated its trading activity into domestic and export sales but used the same set of comparable companies for both, leading to discrepancies in the economic analysis. The Assessing Officer proposed aggregating and benchmarking all transactions using the same set of comparables. The CIT(A) deleted the adjustment, following the approach applied in earlier years. The Tribunal noted that the issue was previously decided in favor of the assessee for assessment years 2008-09 and 2009-10. The Tribunal directed the Assessing Officer/TPO to benchmark the manufacturing and trading activities separately using the TNMM method and determine the arm's length price of international transactions independently.

Manufacturing Activity Determination Issue:
The Tribunal found that the assessee was engaged in both manufacturing and trading activities. The TPO had initially considered the operations as a single activity, but the CIT(A) recognized the two separate activities. The Tribunal upheld the CIT(A)'s decision that manufacturing activity was indeed being carried out by the assessee. The Tribunal directed the Assessing Officer/TPO to separately benchmark the manufacturing and trading activities, providing a reasonable opportunity of hearing to the assessee. The Tribunal remitted the issue back to the Assessing Officer/TPO for further assessment. The appeal of the Revenue was allowed for statistical purposes.

In conclusion, the judgment addressed the Transfer Pricing adjustment issue concerning the bifurcation of trading activities and the determination of manufacturing activity by the assessee. The Tribunal directed separate benchmarking of manufacturing and trading activities using the TNMM method and provided an opportunity for the assessee to present its case. The decision highlighted the importance of accurately assessing international transactions to ensure compliance with Transfer Pricing regulations.