2019 (9) TMI 308 - AT - Income Tax

TP adjustment - Adjustment made on account of domestic transactions - comparable selection - HELD THAT - AO has picked up the figures of segmental revenue but has failed to take cognizance the reporting made under the head segment reporting , wherein the assessee following the requirement of AS-17 has segregated two segments i.e. the transaction of gold and silver division and transaction of diamond and others. Another analogy which has to be considered in the approach of AO that while picking up the margins of comparables, it had considered the revenue earned by said comparables from gold and silver and diamond jewellery transactions. Similarly, the said approach should have been applied in the hands of assessee. Our attention was drawn to the financial statements of PC Jeweller Ltd. wherein it is reported that revenue arises from the sale of gold, diamond and silver jewellery. Similarly, in the case of Tribhovandas Bhimji Zaveri Ltd., the entity-wise margins were applied wherein no breakup or no segmental of items dealt in had been given. In the case of KP Sanghvi International Limited, the sale of products on account of cut and polished diamonds at ₹ 75.93 crores, jewellery at ₹ 135 crores and other raw materials at ₹ 79 lakhs has been reported. The margins of third concern have been given but no segmentals in that concern has been given and the total revenue has been applied to compute the margins of said comparable. In such scenario, the TPO has erred in applying two different approaches i.e. first in computing margins of assessee by only taking segmentals of gold and silver division and excluding the second division of diamonds and semi precious stones. On the other hand, in the case of three comparables, revenue from all the divisions has been applied as no segmentals have been supplied or made available to the TPO in this regard. Accordingly, we hold that the assessee s entity-wise margins i.e. its dealings in gold, silver and diamond jewellery in entirety is to be applied and in this regard, the margins of assessee would work out to 8.47%. The TPO has after the directions of DRP worked out the mean margins of comparables at 8.73%. In such scenario, the margins shown by assessee were at arm's length price of its domestic transactions and no adjustment is warranted in the hands of assessee. Payment of Directors remuneration - HELD THAT - We find that Mumbai Bench of Tribunal in the case of Hindustan Unilever Limited Vs. Addl.CIT 2012 (12) TMI 458 - ITAT MUMBAI had deliberated on the issue and held that if benchmarking was being done at the entity level either for the AE transactions or for the entire transactions, then there was no requirement for further adjustment as all the adjustments made by Assessing Officer / TPO would get automatically subsumed including those adjustments also relating to royalty, etc. as done by the TPO. Applying the said principle, we hold that no separate adjustment is to be made on account of Directors remuneration in the hands of assessee.

Summary

Issues Involved:
1. Inappropriate consideration of segmental operating profit margins.
2. Inappropriate computation of transfer pricing adjustment.
3. Non-aggregation of specified domestic transactions pertaining to director's remuneration.

Detailed Analysis:

Issue 1: Inappropriate Consideration of Segmental Operating Profit Margins
The assessee objected to the Transfer Pricing Officer (TPO) considering segmental operating profit margins related to the gold and silver segment instead of entity-wide margins while applying the Transactional Net Margin Method (TNMM). The TPO had initially computed the Profit Level Indicator (PLI) of the assessee at 7.02% and later at 5.29% using segmental details. The assessee argued that its entity-wide margins were 8.47%, which should be considered for benchmarking.

The Tribunal noted that the assessee had reported two segments: gold and silver, and diamond and other precious stones. The TPO had only considered the gold and silver segment, which was inconsistent with the approach taken for comparables, where entity-wide margins were used. The Tribunal accepted the assessee's plea, holding that the entity-wide margins should be applied, resulting in an 8.47% margin for the assessee. Since the mean margins of comparables after the Dispute Resolution Panel (DRP) directions were 8.73%, the assessee's margins were within the tolerance level, and no adjustment was warranted.

Issue 2: Inappropriate Computation of Transfer Pricing Adjustment
The assessee contended that the TPO erred in computing the transfer pricing adjustment on the entire segmental revenue instead of only on the value of international/specified domestic transactions. The Tribunal, after considering the entity-wide margins, found that the assessee's margins were within the arm's length price. Consequently, no adjustment was necessary.

Issue 3: Non-Aggregation of Specified Domestic Transactions Pertaining to Director's Remuneration
The TPO had made a separate adjustment for director's remuneration, arguing that the remuneration should be proportionate to the period the company was operational. The assessee argued that if entity-level results were considered, the remuneration would be subsumed within the overall margins. The Tribunal agreed, citing the Mumbai Bench of the Tribunal's decision in Hindustan Unilever Limited Vs. Addl.CIT, which held that if benchmarking is done at the entity level, further adjustments for specific transactions are not required. Thus, no separate adjustment for director's remuneration was necessary.

Other Grounds
- General Ground (No.1): Dismissed as it did not need adjudication.
- Non-Pressed Grounds (Nos. 2-6, 10, and additional ground 13): Dismissed as not pressed.
- Levy of Interest (No.11): Treated as consequential.
- Premature Ground (No.12): Dismissed as premature.

Conclusion
The Tribunal partly allowed the appeal, holding that the assessee's entity-wide margins were within the arm's length price, negating the need for any transfer pricing adjustment. Consequently, no separate adjustment for director's remuneration was required. The appeal was partly allowed, with specific grounds dismissed as either not pressed or premature.