2019 (12) TMI 456 - AT - Income Tax

TP Adjustment - determination of the ALP under the machinery of computation under the methods as given in Rule 10B - definition of transaction as given in rule 10A(d) - whether the transactions of the assessee in Production and Distribution segments can be construed as closely linked transactions ? - HELD THAT - Transactions of Production and Distribution segments cannot be clubbed because it is neither a case of package deal nor the two sets of transactions are structured in such a manner that the assessee has no option to accept one and reject the other nor they are so inextricably linked that one cannot survive without other. In fact, in all the earlier years, the assessee was exclusively in the trading of components and the manufacturing activity started at the fag end of the preceding year only. Instantly, 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. Once it is held that the international transaction of the Production segment is required to be benchmarked separately, then the next question is the determination of the ALP. The ld. AR candidly admitted that if the aggregation is not to be done, then there is no flaw in the computation of the ALP and the consequential transfer pricing addition in the final assessment order. We, therefore, uphold the transfer pricing addition in the international transaction of Production segment.

Summary

Issues:
Transfer pricing adjustment based on aggregation of production and distribution segments for benchmarking.

Analysis:
The appeal was against the final assessment order passed by the Assessing Officer regarding the assessment year 2012-13. The assessee, engaged in trading spare parts and commissioning of DG sets, had set up a manufacturing unit. The Transfer Pricing Officer (TPO) disagreed with the assessee's aggregation of production and distribution segments for benchmarking. The TPO proposed a transfer pricing addition, which was reduced by the Dispute Resolution Panel (DRP) after including another company. The main contention was the aggregation of manufacturing and trading segments for benchmarking.

The Income-tax Act mandates computation of arm's length price for international transactions. The TPO segregated the manufacturing and trading segments for transfer pricing adjustment. The assessee argued for aggregation based on the close link between the sale of diesel engines and spare parts. However, the TPO and authorities held that the transactions were not closely linked for aggregation.

The definition of 'transaction' under Rule 10A(d) includes a plural of closely linked transactions for determining the arm's length price. The High Court's precedent emphasized that aggregation is permissible for closely linked transactions. However, in this case, the Production and Distribution segments were not found to be closely linked for aggregation.

The High Court's decision in a similar case supported the separate benchmarking of transactions that were not part of a composite transaction. The court emphasized the need for technical know-how for aggregation, which was not applicable in the current scenario. Consequently, the authorities were justified in rejecting the aggregation approach and requiring separate benchmarking.

The conclusion upheld the transfer pricing addition in the production segment, as the aggregation was not warranted. The appeal was dismissed, affirming the transfer pricing adjustment in the production segment.