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2020 (3) TMI 1200 - AT - Income TaxTP Adjustment - addition made under royalty segment and advertisement segment - MAM selection - Adopting the CUP method for comparing ALP of advertisement expenses - HELD THAT - Admittedly TPO has not made any adjustment upon segregating trading and manufacturing segment. However, Ld. AR vehemently submitted that, the two segments cannot be segregated, as they are interlinked and intertwined with each other and that assessee has determined the ALP by using TNMM at entity level. It is observed that, this issue has been considered by this Tribunal in assessee s own case for AY 2003-04, 2007-08, 2008-09 and 2010-11.TPO for AY 2012-13 accepted manufacturing and trading segment as integrated and combined transaction for purpose of determining ALP under TNMM. Revenue has not been able to establish any factual differences between the year under consideration as well as preceding Assessment and successive assessment year. More over Revenue has accepted combined transaction approach of Trading and Manufacturing segment in immediate subsequent assessment year. We therefore do not find any reason to deviate from the same. Further Ld. TPO has held Trading and Manufacturing segments independently to be at arm s length. On the basis of above discussions, respectfully following earlier orders of this Tribunal, we direct Ld.AO/TPO to compute ALP by considering trading and manufacturing segments as interlinked with each other and as a combined transaction. Addition made to royalty - Assessee in transfer pricing study considered royalty as a part of operating expenses in TNMM as most appropriate method. AR submitted that comparison of percentage of average royalty in respect of comparables was submitted which comes to 3% and 2.27%. Whereas assessee has paid royalty to its AE at 5%. He submitted that, since average percentage of royalty expenditure on net sales of assessee is much lower than percentage of royalty and R D expenditure on net sales of proposed comparables, the transaction of royalty payments to AE has to be treated at arm s length. It is also been submitted that, most of the auto parts companies are paying royalty of 3% to 5% and assessee is being royalty at 3% on part sales. He thus submitted that, even if royalty is to be considered independently, the transaction is at arm s length as compared to the comparables considered by Ld.TPO. We agree with the submissions made by Ld. AR insofar as considering the margin of transaction computed by assessee vis-a-vis average margin of comparables. However, in our view this needs to be verified by Ld. AO/TPO. Direct Ld.AO/TPO to consider the above submissions of assessee and to recompute ALP of the transaction, in accordance with law. It is also directed that, comparables considered by Ld.TPO in the order passed under section 92CA of the Act, should be considered for computing ALP of the tr ansaction.Accordingly, we set aside this issue back to Ld. AO/TPO with the aforestated directions. A djustment made towards the claim of expenditure - HELD THAT - We are of the opinion that Ld. AO/TPO shall verify the details filed by assessee and to compute ALP of transaction by using most appropriate method, that would be applicable in accordance with law. Needless to say, that assessee shall be granted proper opportunity of being represented.
Issues Involved
1. Transfer Pricing Adjustment 2. Segregation of Trading and Manufacturing Segments 3. Royalty Payment Adjustment 4. Advertisement Expenses Adjustment 5. Corporate Tax Adjustment 6. Interest under Section 234B Detailed Analysis 1. Transfer Pricing Adjustment The assessee challenged the orders of the AO, TPO, and DRP on the grounds that the transfer pricing adjustment of ?110,31,43,825/- was made without demonstrating a motive for tax evasion and without considering the definition of "income" under the Act. The lower authorities were criticized for not considering the intertwined nature of the trading and manufacturing segments and for adopting flawed methodologies in arriving at the Arm's Length Price (ALP). The Tribunal directed the AO/TPO to recompute the ALP by considering the trading and manufacturing segments as interlinked and as a combined transaction, following the precedent set in the assessee's own case for previous assessment years. 2. Segregation of Trading and Manufacturing Segments The Tribunal noted that the TPO had segregated the trading and manufacturing segments for TP analysis, which the assessee contended was incorrect as both segments are interlinked. The Tribunal observed that the issue had been previously decided in favor of the assessee in earlier assessment years, and there was no factual difference in the current year. Therefore, the Tribunal directed the AO/TPO to compute the ALP by considering the segments as combined. 3. Royalty Payment Adjustment The TPO had proposed an adjustment to the royalty payment by considering a rate of 2% as appropriate, which was contested by the assessee. The Tribunal noted that the royalty payment was considered interlinked with the trading and manufacturing segments but allowed for it to be considered separately. The Tribunal directed the AO/TPO to verify the comparables and recompute the ALP of the royalty transaction in accordance with the law, considering the average margin of comparables. 4. Advertisement Expenses Adjustment The DRP upheld the TPO's view that the assessee had not provided sufficient evidence to support the advertisement expenses, leading to an ALP computation of 'nil'. The Tribunal directed the AO/TPO to verify the details filed by the assessee and compute the ALP of the transaction using the most appropriate method, ensuring the assessee is given a proper opportunity to present its case. 5. Corporate Tax Adjustment The lower authorities had disallowed a provision of ?2,63,30,833/- towards employee long-term service benefit liability, considering it contingent and not accrued. The Tribunal did not specifically adjudicate on this issue as it was not argued by the assessee's representative. 6. Interest under Section 234B The assessee contested the interest levied under section 234B as excessive. The Tribunal noted that this ground was consequential in nature and did not require separate adjudication. Conclusion The appeal filed by the assessee was partly allowed for statistical purposes, with directions to the AO/TPO to recompute the ALP of the transactions considering the combined nature of the trading and manufacturing segments and to verify the details related to royalty and advertisement expenses. The Tribunal emphasized the need for proper verification and adherence to legal provisions in determining the ALP.
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