2020 (4) TMI 128 - AT - Income Tax

TP Adjustment - transactions of two segments be aggregated for comparability purposes - Whether transactions of the assessee in Production and Distribution segments can be construed as closely linked transactions ? - HELD THAT - We find that an identical issue in assessee s own case arose before the Co-ordinate Bench of Tribunal in A.Y. 2012-13 2019 (12) TMI 456 - ITAT PUNE - The Co-ordinate Bench of Tribunal held that manufacturing segment cannot be aggregated with distribution segment and both need to be benchmarked independent of each other We are dealing with a situation in which the assessee is trying to club the transaction of Production of finished goods with Trading of spare parts which is a step further away from technical know-how in the process of manufacturing. In view of the foregoing discussion it is held that the authorities below were fully justified in holding that the Manufacturing segment cannot be aggregated with the Distribution segment and both need to be benchmarked independent of each other. We therefore accord our imprimatur to the view canvassed by the TPO in rejecting the aggregation approach adopted by the assessee. - Decided against assessee. Include UMS Technologies Ltd. as comparable company - HELD THAT - TPO has worked out the loss of UMS Technologies Ltd. at (-) 5% by allocating the expenses in the ratio of turnover of Engine segment to total revenue i.e. at 41.85%. He has completely disregarded the segment loss reported in the audited Balance Sheet. We further find that no reasons have been given by TPO for disregarding the segmental revenue as disclosed in the audited results. In such situation we are of the view that TPO was not justified in working out the margins of UMS Technologies Ltd. at (-) 5% when the audited Balance Sheet itself shows the loss of Engine segment at (-) 22.89%. We find that if the margin of UMS Technologies Ltd. is considered on the basis of audited results then it is comparable with the loss of assessee and therefore no adjustment is called for. We therefore set aside the adjustment made by TPO and thus this ground is allowed. Since this ground is allowed as submitted by assessee ground Nos.4 and 5 becomes academic and therefore requires no adjudication.

Summary

Issues Involved:
1. Transfer Pricing (TP) Adjustment for Manufacturing Activity.
2. Aggregation of International Transactions.
3. Economic Adjustments for Capacity Underutilization.
4. Reasons for Loss in Manufacturing Segment.
5. Correct Operating Margin Calculation.
6. Penalty Proceedings under Section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment for Manufacturing Activity:
The Assessee challenged the TP adjustment of ?1,43,39,991 made by the AO concerning international transactions related to the manufacturing activity. The AO rejected the TP analysis conducted by the Assessee and made adjustments based on the TPO's findings. The Tribunal noted that the TPO had not justified disregarding the audited segmental results of UMS Technologies Ltd., which showed a loss of (-) 21.48% compared to the Assessee's loss of (-) 22.69%. The Tribunal held that if the audited results of UMS Technologies Ltd. were considered, no adjustment to the ALP was necessary, and thus, the TP adjustment was set aside.

2. Aggregation of International Transactions:
The Assessee argued that the international transactions related to manufacturing activities should be aggregated with those related to distribution and after-sales services for benchmarking purposes. The Tribunal, following its earlier decision for A.Y. 2012-13, upheld the lower authorities' decision that the manufacturing segment cannot be aggregated with the distribution segment. The Tribunal reasoned that the transactions were not "closely linked" as per the criteria established by the Hon’ble Punjab & Haryana High Court in Knorr Bremse India (P) Ltd. Vs. ACIT. Therefore, the Tribunal dismissed the Assessee's grounds on this issue.

3. Economic Adjustments for Capacity Underutilization:
The Assessee contended that economic adjustments should be granted due to capacity underutilization in the manufacturing segment. However, since the Tribunal allowed the Assessee's primary ground concerning the correct operating margin calculation, this issue became academic and was not adjudicated.

4. Reasons for Loss in Manufacturing Segment:
The Assessee argued that the loss in the manufacturing segment was not due to international transactions with AEs. The Tribunal noted that the TPO had not provided valid reasons for rejecting the audited segmental results of UMS Technologies Ltd. and thus, no adjustment was warranted. Consequently, this issue also became academic.

5. Correct Operating Margin Calculation:
The Assessee disputed the TPO's calculation of the operating margin for the Engine business segment of UMS Technologies Ltd. The Tribunal found that the TPO had incorrectly calculated the operating margin by disregarding the audited segmental results. The Tribunal held that the audited results should be considered, which showed a margin of (-) 21.48%. Since this margin was within the acceptable range compared to the Assessee's margin, no adjustment was required.

6. Penalty Proceedings under Section 271(1)(c):
The Assessee challenged the initiation of penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961, arguing that the addition was merely a difference of opinion and did not reflect any omission or misrepresentation of facts. The Tribunal noted that the penalty proceedings were premature and did not adjudicate on this matter.

Conclusion:
The Tribunal partly allowed the appeal, setting aside the TP adjustment made by the TPO and dismissing the grounds related to the aggregation of transactions. The issues concerning economic adjustments and reasons for loss became academic, and the penalty proceedings were deemed premature. The order was pronounced on 14th February 2020.