2018 (3) TMI 1214 - HC - Income Tax

Determine the Arms Length Price (ALP) of the trading goods exported to Associated Enterprises (AE) - Tribunal was correct in law in holding that the two segments viz manufacturing and trading are comparable - Held that - Both the CIT(A) and the Tribunal, on facts, had found that the margins derived on export of parts to AE, are not comparable with the margins derived from sales made in the domestic market. This is primarily because the margin derived in the domestic market is on account of sales of finished goods to the extent of 97%. Besides, on facts, it was found that not only the parts and finished goods are not comparable, but the class of customers to whom they sold are also different. This resulted in difference as found on FAR analysis. The above concurrent finding of fact is not shown to be perverse in any manner. No substantial question of law.

Summary

Issues:
1. Whether the Tribunal was correct in holding that the manufacturing and trading segments are comparable for determining the Arms Length Price (ALP) of trading goods exported to Associated Enterprises (AE)?

Analysis:
The case involved an appeal challenging an order passed by the Income Tax Appellate Tribunal related to Assessment Years 2005-06, 2006-07, and 2007-08. The main issue revolved around determining the Arms Length Price (ALP) of trading goods exported to Associated Enterprises (AE) by comparing the manufacturing and trading segments. The Respondent-Assessee was engaged in both manufacturing finished goods and trading parts used in its manufacture. The Transfer Pricing Officer (TPO) benchmarked the net margins from export of parts with the net margins from domestic sales, resulting in an addition to the Assessment Order. The Commissioner of Income Tax (Appeals) (CIT(A)) later found this benchmarking incorrect and deleted the addition. The Tribunal further examined the nature of customers in the domestic and export markets and concluded that the export of parts was not comparable with the finished goods, leading to the dismissal of the Revenue's appeal.

The High Court analyzed the facts and found that the margins derived from exporting parts to AE were not comparable to margins from domestic sales due to the significant difference in sales composition. The margins in the domestic market primarily consisted of sales of finished goods, while only 3% of sales were parts. Additionally, the class of customers for parts and finished goods differed. This discrepancy was supported by the Functions, Assets & Risks (FAR) analysis, leading to the conclusion that the margins were not comparable. The Court upheld the concurrent findings of the CIT(A) and the Tribunal, stating that the question raised did not give rise to a substantial question of law. Consequently, the appeal was dismissed, and no costs were awarded.