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2023 (1) TMI 159 - AT - Income TaxTP adjustment made in the 'Trading segment - Selection of MAM - Application by the TPO of the TNMM as the most appropriate method as against the assessee choosing the RPM - This segment consisted of the international transaction of Purchase of traded goods at transacted value - HELD THAT - As the assessee is admittedly engaged in purchase of products from its AE, which have been sold to the unrelated parties as such without carrying out any value addition. Doubtlessly, it is only the RPM which would govern the situation and will have to be applied as the most appropriate method. Simply because the ratio of employee cost and depreciation of the assessee to the revenue under the segment is more in comparison with some of its comparables, that would not thwart the application of the RPM. Such effect of individual higher or lower values of expenses gets ironed out when the gross profit margin is taken. We hold that the AO was not justified in applying the TNMM as the most appropriate method as against the RPM. The impugned order is set aside on this score and the matter is sent back to the file of the AO/TPO for re-determining the ALP of the Trading segment under the RPM with the comparables and allocation of expenses as finally approved by the DRP. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh determination. TP adjustment in the Manufacturing segment - Assembly/Manufacturing segment is determining the comparability of the companies selected - HELD THAT - Mettler Toledo India Pvt. Ltd. - As percentage of the related party transactions of expenses of this company is more than 57% of the total expenses incurred by it, which fails the RPT filter notwithstanding the fact that the percentage of the RPTs of the revenue items is way below 25%. We, ergo, direct to exclude this company from the list of comparables. Avery India Ltd - Turning to the facts of this company, we find that it is into manufacturing weighing machines and has also undertaken contracts. 77% of its revenue is from manufacturing and 23% from contracts. The very fact that this company is engaged into manufacturing of weighing machines and not into any basic level assembly, we hold that it cannot be considered as comparable to the assessee. Essae Teraoka Private Ltd - As seen that the nature of business of this company is multi-dimensional ranging from design, manufacture of electronic weighing and POS system, self-service KIOSK and GPS synchronized clock. It is also into field of constructing and long term leasing of high quality built to suit industrial and commercial space to its clients. This company is also engaged in R D activity, which is apparent from its Annual report. In view of the clear difference in the nature of business carried by this company vis- -vis the assessee doing only the low end assembly activity, we hold that there is no comparison between the two. As such, this company is also directed to be excluded. Nitiraj Engineers Ltd. - As seen that it is in the business of wide range of production of electronic weighing scales, currency counting machine and electronic fare meters etc. It has its full-fledged R D department. It is also engaged in designing and developing electronic hardware and software. In addition, this company also holds intangible assets and has its full-fledged manufacturing facility. In this backdrop of facts, it is directed to be excluded from the list of comparables. Rice Lake Weighing Systems India Ltd. - As gone through the Annual report of this company, which shows that it is engaged in the business of manufacturing, marketing and servicing of road and rail weigh bridges, in-motion electronic weighing systems and other weighing systems mainly used in industrial activities, bulk material handling systems and batching systems. This company also earns royalty income which shows that it has developed its own technical know-how that has been provided to others on payment basis. In addition, this company is also engaged in Research Development for which it has spent substantial amount. The above distinguishing features make this company incomparable to the assessee company. We, therefore, order for its exclusion. Precia Molen India Pvt. Ltd. - After going through the Annual report of this company, it can be seen that it is engaged in the manufacturing and marketing of electronic weighing systems having huge intensity plant and machinery. This company is also paying royalty for use of technical know-how for the purpose of manufacturing. Since this company is into full-fledged manufacturing, we hold that it cannot be compared with the assessee engaged in low-end assembly function. We, therefore, order to exclude it from the list of comparables. TPO retained only one comparable, viz., Kusum Electrical Industries Ltd. from the assessee s list and included 9 more. The DRP squeezed the TPO s list of comparables from 10 to 7 by retaining the one which was chosen by the assessee and allowed by the TPO in his list We have seen supra that the six new comparables of the TPO, sustained by the DRP, are not comparable for the reasons assigned above, thereby leaving one company in the tally of comparables, being, Kusum Electrical Industries Ltd. having negative weighted working capital adjusted margin of (-) 10.26% as determined by the AO in his final order giving effect to the directions of the DRP. As against the ALP of (-) 10.26%, the PLI of the assessee from this segment has been computed by the AO in his final assessment order at (-) 7.23%, which discerns that the transaction is at ALP. The addition under this segment is directed to be deleted.
Issues Involved:
1. Transfer pricing adjustment in the Trading segment. 2. Transfer pricing adjustment in the Manufacturing segment. 3. Comparability of selected companies in the Manufacturing segment. Detailed Analysis: 1. Transfer Pricing Adjustment in the Trading Segment: The first issue concerns the transfer pricing adjustment of Rs.1,02,24,209/- made by the AO in the Trading segment. The assessee used the Resale Price Method (RPM) for benchmarking the international transaction of 'Purchase of traded goods' valued at Rs.19,37,32,319. The TPO rejected the RPM, citing the lack of a rational basis for the allocation keys used by the assessee to bifurcate combined expenses. The TPO instead applied the Transactional Net Margin Method (TNMM), leading to a higher adjustment. The DRP partially accepted the TPO's approach but made some changes to the allocation keys and comparables. The Tribunal found that since the assessee purchased finished goods from its AE and sold them without adding value, the RPM should be preferred over the TNMM. The Tribunal directed the AO/TPO to re-determine the ALP using RPM with the comparables and allocation of expenses as approved by the DRP. 2. Transfer Pricing Adjustment in the Manufacturing Segment: The second issue relates to the transfer pricing adjustment of Rs.1,11,94,115/- in the Manufacturing segment. The assessee applied the TNMM with eight comparables to demonstrate that the ALP of the international transactions was at arm's length. The TPO, however, retained only one comparable from the assessee's list and added nine new ones. The DRP made some changes to the comparables and allocation keys, leading to a final adjustment of Rs.1,11,94,115/-. The Tribunal emphasized the need to properly characterize the assessee's business activity. It concluded that the assessee was engaged in a low-level assembly function rather than full-fledged manufacturing. Consequently, the Tribunal overturned the recharacterization by the authorities and directed the exclusion of certain comparables that were involved in full-fledged manufacturing. 3. Comparability of Selected Companies in the Manufacturing Segment: The Tribunal addressed the comparability of six companies included by the TPO in the Manufacturing segment: - Mettler Toledo India Pvt. Ltd.: Excluded due to high related party transactions (57% of total expenses). - Avery India Ltd.: Excluded as it was engaged in full-fledged manufacturing. - Essae Teraoka Private Ltd.: Excluded due to its multi-dimensional business, including R&D and manufacturing. - Nitiraj Engineers Ltd.: Excluded for being involved in full-fledged manufacturing and holding intangible assets. - Rice Lake Weighing Systems India Ltd.: Excluded due to its different business model and full-fledged manufacturing. - Precia Molen India Pvt. Ltd.: Excluded for being engaged in full-fledged manufacturing. After excluding these comparables, only Kusum Electrical Industries Ltd. remained, which had a negative weighted working capital adjusted margin of (-) 10.26%. Since the PLI of the assessee from this segment was (-) 7.23%, the transaction was deemed to be at arm's length, and the addition was deleted. Conclusion: The Tribunal partly allowed the appeal, directing the AO/TPO to re-determine the ALP in the Trading segment using RPM and to exclude certain comparables in the Manufacturing segment, thereby deleting the transfer pricing adjustment in that segment. The order was pronounced in the Open Court on 17th October 2022.
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