2019 (8) TMI 1864 - AT - Income Tax

TP Adjustment - Appellant benchmarked the transactions by applying TNMM on entity level - lower authorities adopting aggregation approach and benchmarking all international transactions at entity level as opposed to transaction by transaction approach - HELD THAT - We are of the considered view that the arm s length price is essentially required to be determined on transaction-by-transaction approach for each international transaction separately. For that purpose a transaction in singular also includes plural for closely linked transactions. Where the transactions are not closely linked that their ALP should be determined separately for each international transaction and such determination of ALP for an international transaction as per section 92C(1) is done as per the most appropriate method. Each international transaction is to be viewed separately and independent of other international transactions for determining its ALP by using one of the given methods which is the most appropriate method having regard to the nature of transaction or class of transaction or functions performed etc. It is impermissible to combine all the international transactions for determining their ALP in a unified manner when such transactions are diverse in nature. Thus it is the higher of actual income or the arm s length income from an international transaction which is taken into consideration for computing the total income. We find that the international transactions inter alia including purchase of raw materials and export of printing inks manufactured out of it the appellant has sufficiently demonstrated that these transactions are closely linked and inter-related and therefore may be considered together for benchmarking purposes. Both these transactions relate to the appellant s manufacturing activity and have similar FAR analysis.TNMM is therefore held to be the most appropriate method as claimed by the appellant as well as the Revenue for benchmarking these set of transactions. In respect of the press chemicals purchased from AEs for trading we note that this set of transactions have no relation or connection with purchase of raw materials and export of printing inks and are hence separate distinct. We find that the press chemicals purchased relate to pure trading functions of the appellant wherein minimal assets are employed and risks assumed are also significantly less in comparison to the other set of transactions viz. purchase of raw materials and export of manufactured printing inks. We find merit in the submissions of the Ld. AR of the appellant the TPO s act of aggregating these three set of international transactions and benchmarking it on entity level was not the correct approach. Instead in light of the provisions of Section 92 and Rules framed there under and also the judicial precedents available on this issue we hold that the transaction-by-transaction approach was the most scientific and correct way to determine the ALP of each of set of similar / closely related international transactions. Whether therefore the use of segmented information qua the (a) manufacturing segment and (b) trading segment is permissible in the given facts of the present case? - We uphold the use of segmented information for benchmarking the trading activity involving purchase of finished goods and manufacturing activity involving purchase of raw materials and export of manufactured goods. We further note that the segmented information furnished by the appellant before the lower authorities were audited results and complete details of allocation keys were also set out therein. In these circumstances the segment results cannot be said to be unreliable - on perusal of the transfer pricing order we agree with the ld. DR that these segmented results were never verified by the TPO since he had out-rightly rejected the same. we uphold the Ld. DR s alternative claim and set aside the audited segmented results to the file of the AO for the limited purpose of verification and crosscheck with the overall audited financial statements of the appellant. Needless to say the appellant shall be afforded sufficient opportunity of being heard in this regard. Application of the internal RPM as employed by the appellant for benchmarking the purchase of press chemicals - We uphold the application of internal RPM for benchmarking the international transactions involving purchase of press chemicals from AEs. We accordingly direct the TPO/AO to consider the assessee s audited trading segment results and to compute arm s length price by applying internal RPM. Application of internal TNMM qua the manufacturing segment for benchmarking the international transactions involving purchase of raw materials and export of manufactured printing inks and the appellant s claim for resegmentation of the manufacturing segment into further sub-segments viz. (i) manufacture of printing inks and (ii) manufacture of blankets - We find merit in the ld. DR s argument that the alleged sub-segment viz. manufacture of blankets is very small does not have any material bearing on the overall manufacturing segment. Accordingly we reject both these claims of the appellant and hold that external TNMM was the most appropriate method. Comparability analysis undertaken by the lower authorities under the TNMM - We agree with the ld. AR s contention that a good comparable can be said to be a company which is engaged in the same line of business and not any down-stream or up-stream company which forms part of the supply chain. In the present case the appellant manufactures printing inks and not pigments. Instead it procures pigments from pigment manufacturers or suppliers thus one of the mentioned six comparables retained by the DRP are good comparables and hence stands rejected/ excluded.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Segmentation and Re-segmentation of Accounts
3. Application of TNMM and RPM Methods
4. Use of Audited Segmented Results
5. Comparability Analysis and Selection of Comparables

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue in the appeal was the transfer pricing adjustment of Rs. 2,23,79,449/- made by the TPO concerning international transactions involving the purchase of raw materials, finished goods, and the sale of finished goods with the AEs. The appellant company, engaged in manufacturing and selling printing inks, had its transactions benchmarked using internal TNMM and RPM methods. However, the TPO applied entity-level external TNMM, leading to the adjustment. The DRP upheld the TPO's approach but excluded four comparables, resulting in a revised adjustment.

2. Segmentation and Re-segmentation of Accounts:
The appellant prepared segmented accounts for its manufacturing and trading segments, which were further subdivided. The TPO rejected these segmented results, claiming they lacked data support and were not part of the audited financial statements. The appellant argued that the segmented accounts were reliable and had been accepted in previous years. The Tribunal found merit in the appellant's segmented approach, noting that different activities should be benchmarked separately due to distinct FAR analyses.

3. Application of TNMM and RPM Methods:
The appellant used internal TNMM for manufacturing transactions and internal RPM for trading transactions. The Tribunal upheld the use of internal RPM for benchmarking the purchase of press chemicals, citing consistency with previous years' methodology. However, for manufacturing transactions, the Tribunal rejected the appellant's claim for further sub-segmentation and upheld the external TNMM as the most appropriate method.

4. Use of Audited Segmented Results:
The Tribunal found the lower authorities' rejection of segmented results, based on their absence from published financial statements, to be unjustified. It noted that segment reporting under AS-17 is not mandatory for all companies and that segmented results for tax purposes can be reliable even if not disclosed in financial statements. The Tribunal directed the AO to verify the audited segmented results provided by the appellant.

5. Comparability Analysis and Selection of Comparables:
The Tribunal emphasized the need for selecting comparables engaged in similar business activities. It rejected the DRP's retention of companies manufacturing pigments, noting that these were not comparable to the appellant's business of manufacturing printing inks. The Tribunal directed the AO to re-compute the ALP margin using the four comparables identified by the appellant, which were engaged in the manufacture of printing inks.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to verify the segmented results and re-compute the ALP margin based on the identified comparables. The Tribunal upheld the use of internal RPM for trading transactions and external TNMM for manufacturing transactions, while rejecting the inclusion of pigment manufacturers as comparables.