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2018 (4) TMI 436 - AT - Income TaxTPA - AO/TPO clubbed the domestic transaction of IMFL with international transaction while applying TNMM - economic analysis undertaken by the appellant in respect of international transaction pertaining to purchase of CAP following a segmental approach by segregating manufacturing operations into BIIS and IMFL business verticals - Whether the international transaction of the appellant comply with the arm s length standard even if the TPO s approach of clubbing the BIIS and IMFL segment is to be followed for the year under consideration ? - Held that - The economic analysis undertaken by the assessee in respect of international transaction pertaining to the purchase of CAP following segmental approach by segregating manufacturing operations into BIIS and IMFL business verticals is in accordance with the relevant Transfer Pricing Regulations. The assessee s international transaction pertaining to purchase of CAP, thus, complies with the Arm s Length Standard for the year under consideration. D.R. merely relied upon the Auditor s Note in the Accounts, which, according to assessee, is not relevant because from the accounting perspective, it is one line of business and accordingly, assessee was not required to disclose segmental reporting in its Note to the Accounts. The assessee filed the segmental accounting on both the segments before the authorities below, which have not been disputed by them. Therefore, there is nothing wrong in the analysis submitted by the assessee for the purpose of benchmarking of ALP. Both the segments cannot be clubbed together to determine the ALP. CIT(A), even on the alternative point considered that even if the TPO s approach of clubbing of both the segments is to be followed for the year under consideration and certain comparables which are not relevant to the issue are excluded, the assessee s would be entitled for full relief on account of T.P. adjustment. The reason given by the CIT(A) have not been disputed by the Ld. D.R. through any evidence or material on record. CIT(A) also considered that manufacturing activity in the IMFL segment largely comprises of contract manufacturing and bottling of liquor for other companies, for which, fixed return are received and in case of bottling, profit is excluded, then also, the ALP declared by the assessee was correct. In the absence of any serious challenge to the findings of the CIT(A) on this issue also, no interference is called for in the matter. No interference is called for in the matter. - Decided against revenue.
Issues Involved:
1. Deletion of addition on account of difference in Arm's Length Price (ALP). 2. Entitlement to the benefit of proviso to sub-section (2) to section 92C of the I.T. Act. 3. Segregation of revenue and expenses related to the manufacturing segment. Detailed Analysis: Issue 1: Deletion of Addition on Account of Difference in Arm's Length Price (ALP) The Revenue challenged the deletion of an addition of ?2,31,23,800/- made on account of the difference in ALP. The Assessing Officer (A.O.) determined the total assessed income of ?9,63,50,800/- by making disallowances/additions to the returned income of ?5,46,81,880/-. An adjustment of ?2,31,23,800/- was made by the Transfer Pricing Officer (TPO) in relation to the international transactions pertaining to the purchase of Compound Alcoholic Preparation (CAP) from the Associated Enterprise (A.E.). The TPO clubbed the Bottled in India Scotch (BIIS) and India Made Foreign Liquor (IMFL) segments and compared the net profit margin (NPM) of the combined manufacturing operations with those of broadly comparable independent companies. The TPO also rejected five companies out of the set of twelve comparable companies selected by the assessee for benchmarking the transaction and used the final year (FY 2004-05) financial data for arriving at an ALP. The assessee argued that the TPO's approach was incorrect as BIIS and IMFL are distinct segments with different market positioning, manufacturing processes, raw materials, and returns. The Ld. CIT(A) agreed with the assessee, noting that the economic analysis undertaken by the appellant in respect of the international transaction pertaining to the purchase of CAP following a segmental approach by segregating manufacturing operations into BIIS and IMFL business verticals is in accordance with the relevant transfer pricing regulations. The Ld. CIT(A) held that the appellant's international transaction pertaining to the purchase of CAP complies with the arm's length standard for the year under consideration. Issue 2: Entitlement to the Benefit of Proviso to Sub-Section (2) to Section 92C of the I.T. Act The Revenue contended that the value of international transactions is outside the (+ 5%) tolerance band, and therefore, the assessee is not entitled to the benefit of the proviso to sub-section (2) to section 92C of the I.T. Act. The Ld. CIT(A) considered the updated NPM computations of the comparable companies based on their annual reports and found that the arithmetic mean now works out at 6.80% as against 7.78% computed by the TPO. As a result, the transfer pricing adjustment gets reduced to ?1,01,83,795/- from ?2,31,23,800/-. The Ld. CIT(A) also considered the appellant's argument that certain comparable companies should be excluded from the final set as they were outliers and represented extreme positions. The inclusion of comparables with extreme results tends to skew the arithmetic mean of the comparable set and distort the arm's length results. The Ld. CIT(A) found merit in the appellant's alternate contentions and provided relief accordingly. Issue 3: Segregation of Revenue and Expenses Related to the Manufacturing Segment The TPO clubbed the BIIS and IMFL segments and compared the net margin of the combined manufacturing operations. The assessee argued that the BIIS and IMFL segments are distinct with different market positioning, manufacturing processes, raw materials, and returns. The Ld. CIT(A) agreed with the assessee, noting that the allocation keys used for segregation of BIIS and IMFL segments are robust and applied consistently on a year-on-year basis. The Ld. CIT(A) held that the TPO's rationale for clubbing the two segments just because the appellant has not drawn any segmental accounts as prescribed under the Accounting Standard (AS) 17 (Segment Reporting) is not appropriate. AS 17 cannot be said to be a governing law for the economic analysis to be undertaken for transfer pricing purposes. The Ld. CIT(A) concluded that the economic analysis undertaken by the appellant in respect of the international transaction pertaining to the purchase of CAP following a segmental approach by segregating manufacturing operations into BIIS and IMFL business verticals is in accordance with the relevant transfer pricing regulations. Conclusion: The Ld. CIT(A) set aside the orders of the authorities below and decided the issue in favor of the assessee, allowing the appeal related to the transfer pricing adjustment. The Departmental Appeal was dismissed, and the order was pronounced in the open Court.
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