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2020 (2) TMI 1040 - AT - Income TaxTP Adjustment - Splitting of ESAS segment into three segments, namely, Sales, Trading and Service - whether the instant transactions of Indenting, Trading and Service can be construed as closely linked transactions ? - HELD THAT - For providing marketing support services, MTU India is remunerated with commission which ranges from 2 to 10% on the value of sales. These rates have been prescribed under the Sales Representative agreement . Thus it is vivid that not only risks and rewards under the Indenting activity have absolutely no relation with the activities of Trading and Service, even the kind of effort required and the nature of expenses incurred for such an activity are also miles apart. By no stretch of imagination, the Indenting activity can be considered as a closely linked transaction with the Trading and Service activities. In the FAR (Functions, assets and risks) analysis, the assessee itself analysed Import of Spares and Engines, Sale of spares and provision of warranty services together on page 10 and Commission separately on page 12 of its T.P. Study report. In view of the foregoing raison d etre , we are satisfied that the segment of Indenting (pre-sale activity) is not closed linked with Trading and Service (post-sale activities) activities and hence cannot be aggregated. Each international transaction of an assessee is to be benchmarked separately unless two or more international transactions are closely linked to each other. If the argument of the ld. AR is taken to a logical conclusion, then all the international transactions of an assessee would require aggregation in as much as they cumulatively lead to one aim of carrying on the business and earning profit. But for transaction of purchase of raw material, there can be no sale; but for acquisition of technical know-how, there can be no manufacturing; but for availing administrative, financial and marketing services, there can be no production or sale; so on and so forth. The scenario as presented by the ld. AR before us, if accepted, would lead to complete bypassing of the transfer pricing provisions because of cross-subsidizations etc., which is impermissible. As the law requires benchmarking of each transaction separately, unless closely linked, we are unable to accord our imprimatur to the contention of the ld. AR. We hold that the authorities below were justified in segregating Indenting, Trading and Service under the main ESAS segment. Most appropriate method - Whether TNMM or RPM? - resale of spare parts without any value addition carried out by the assessee - HELD THAT - View canvassed by the TPO of accepting dissimilar companies as comparable under the TNMM and not under the RPM, does not sound logical. Selection of companies as comparables cannot differ with the method adopted. Comparables have to be selected on the basis of similarity irrespective of the method - be it the RPM or the TNMM TPO was not justified in applying the TNMM by considering functionally dissimilar companies as comparables and not accepting the RPM as the most appropriate method with correct comparables. AR stated that the assessee can provide correct comparables engaged in trading of diesel engine spare parts. In these circumstances, we direct to determine the ALP of the segment of Trading of spare parts afresh under the RPM with correct comparables. Calculation of PLI and T.P. adjustment - HELD THAT - We find from the allocation of expenses made by the TPO that he allocated to the Trading segment 50% of Employees cost; 70% of Job work charges and Travelling expenses; 60% of Advertising; and in the turnover ratio for other expenses. Such allocation of expenses is an arbitrary exercise, which cannot be approved. It is accordingly directed that the allocation of expenses to the three segments should be done on some logical and rational basis. Expenses which can be directly linked to one or more segments, should be allocated accordingly without resorting to any ad hoc allocation key. Whether TPO carried out transfer pricing adjustment not only in respect of transactions with AE but also non-AEs in the Trading segment? - This issue is no more res integra in view of the judgment of Hon ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. ( 2017 (6) TMI 1240 - BOMBAY HIGH COURT wherein it has been held that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. It is pertinent to mention that the Department s SLP against this judgment has since been dismissed by the Hon ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. 2018 (7) TMI 798 - SC ORDER We, therefore, direct to restrict the transfer pricing addition in the Trading segment only in respect of transactions with AEs. To sum up, we set-aside the transfer pricing addition of ₹ 8.29 crore made in the international transaction of Trading of spare parts under the ESAS business segment and remit the matter to the file of AO/TPO for a fresh determination of the ALP in terms of the discussion made supra in this order. Transfer pricing addition made in the EARC business segment - Grant of risk adjustment - HELD THAT - Through the relevant material on record, it is observed that there is no dispute in the computation of ALP under EARC business segment except for grant of risk adjustment. Such an argument was taken up before the DRP for the first time and the TPO had no occasion to examine the assessee s claim in this regard. Under the given circumstances, we set-aside the impugned order on this issue and send the matter back to the AO/TPO for examining, if any, risk adjustment can be granted in the facts and circumstances of the instant case.
Issues Involved:
1. Splitting of ESAS segment into three segments: Sales, Trading, and Service. 2. Most appropriate method for determining ALP: TNMM or RPM. 3. Calculation of PLI and Transfer Pricing (T.P.) adjustment. 4. Transfer pricing addition in the Engineering & Research Centre (EARC) business segment. Issue-wise Detailed Analysis: I. Splitting of ESAS Segment into Three Segments: Sales, Trading, and Service The assessee aggregated eight international transactions under the ESAS segment and applied the TNMM for benchmarking. The TPO segregated these transactions into Indenting, Trading, and Service segments, which the assessee contested. The Tribunal examined whether these transactions were "closely linked" as required under Rule 10A(d). It was determined that the Indenting segment (pre-sale activity) was not closely linked with Trading and Service segments (post-sale activities). The Tribunal upheld the TPO's segregation of the ESAS segment into three separate segments. II. Most Appropriate Method: TNMM or RPM The assessee initially applied TNMM but later requested the TPO to use RPM for the Trading segment. The TPO rejected this request, citing the use of dissimilar comparables. The Tribunal noted that RPM is appropriate for cases where goods purchased from an AE are resold without further processing, as supported by the Hon’ble jurisdictional High court in CIT Vs. L’oreal India (P) Ltd. The Tribunal directed the TPO to determine the ALP of the Trading segment afresh under RPM with correct comparables. III. Calculation of PLI and T.P. Adjustment The TPO calculated the operating revenue and costs for the Trading segment and proposed a transfer pricing adjustment based on an arbitrary allocation of expenses. The Tribunal found this allocation arbitrary and directed a logical and rational basis for expense allocation. Additionally, the Tribunal restricted the transfer pricing adjustment to transactions with AEs only, following precedents set by the Hon’ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. IV. Transfer Pricing Addition in the EARC Business Segment The TPO proposed a transfer pricing adjustment in the EARC segment, which the assessee contested, seeking a risk adjustment. The DRP rejected this claim, noting that the assessee was not a risk-free entity. The Tribunal set aside the impugned order and remitted the matter to the AO/TPO for examining the possibility of granting a risk adjustment, allowing the assessee a reasonable opportunity of hearing. Conclusion: The Tribunal set aside the transfer pricing addition in the Trading segment under the ESAS business segment and remitted the matter for fresh determination of the ALP using RPM with correct comparables. It also directed a logical allocation of expenses and restricted the adjustment to transactions with AEs. For the EARC segment, the Tribunal remitted the matter for examining the claim for risk adjustment. The appeal was allowed for statistical purposes.
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