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2021 (2) TMI 327 - AT - Income TaxTP Adjustment - comparable selection - selection of MAM - AO rejecting Resale Price Method (RPM) applied by the assessee as most appropriate method (MAM) for benchmarking the transaction of purchase of traded good - HELD THAT - The contentions of the assessee failed to justify RPM as most appropriate method. Though the TPO in subsequent AY 2013-14 has accepted the Retail Price Method (RPM) adopted by the assessee for purchase of traded goods that cannot be treated as the threshold for allowing the correct appropriate method of benchmarking. In the present assessment year, there is no proper comparable available for allowing the RPM as the most appropriate method. In fact, the TNMM is proper in the present assessee s case because the said method is tolerant of functional differences as well as it is adaptive in nature while benchmarking the other comparables. So the Transfer Pricing will be more appropriate by adopting TNMM. Therefore, the TPO as well as the DRP rightly rejected RPM as most appropriate method (MAM). Objection for considering TNMM as most appropriate method over RPM - Since we have already answered the question as to which is the Most Appropriate Method (MAM) while dealing Ground No. 2 of the appeal and held that Resale Price Method taken by the assessee is not the Most Appropriate Method (MAM), the TNMM adopted by the TPO is correct. The contention of the assessee that there cannot be the consideration for diluting the standards of comparable transactions/entity, does not have practical approach as in the present case RPM fails the threshold of benchmarking while taking up the comparables which are not at all proper. Thus, the most appropriate method is TNMM as held by the TPO and the DRP. Hence, Ground No. 4 is dismissed. Rejection of search process of the assessee - HELD THAT - It is pertinent to note that out of 6 quantitative filters used by the TPO for the new search process, 5 filters are same as that of the assessee which has been used for obtaining the comparables in its TP study report. But while not taking into account one filter and rejecting the same, the TPO has not given any proper reasons as to why the said filter is not applicable. The TPO was not right in rejecting the said filter as the same is very much relevant for the search process of the assessee for arriving at the correct margin. Hence, Ground No. 3.1.1 is allowed. Rejection of assessee s comparables - HELD THAT Having rejected the assessee s comparables on the basis of functionally dissimilar, the TPO subsequently stated in its order that the basis of rejecting the three comparables selected by the assessee namely Batliboi Ltd., Kirloskar Oil Engines Ltd. Greaves Cotton is that these failed in the filter of total income from trading activity more than 75% revenue . Thus the reason of functional dissimilarity of these comparables have been rightly justified by the TPO in the order. Thus, these comparables are not functionally similar in respect of the trading in tools and equipments for large industrial diesel engines to that of assessee company. Objection for not providing fresh search process to the assessee - HELD THAT - It is pertinent to note that since the search process given by the assessee is held as not correct by us in the abovesaid paras, hence, Ground No. 3.1.3 is dismissed. Objections to TPO s comparables and cherry picking - AR submitted that all the comparables taken by the TPO for benchmarking the transaction of purchase of traded goods is related to auto sector that is provision of breaking part services which is not at all related to the business of the assessee as assessee is admittedly engaged in the trading of spare parts used in engine based power plant which cannot be equated with the engine used in auto sector - HELD THAT - From the perusal of records it can be seen that the Ld. AR has contended that none of the comparables chosen by the TPO satisfy the comparability criteria of Rule 10(B)(2) and accordingly the contention of the Ld. AR that these comparables should be rejected appears to be genuine. But further, the Ld. AR contended that even if comparables obtained by the TPO are retained but the RPM method is applied for benchmarking, then also the international transaction of purchase of traded goods shall be at ALP, as GP margin of comparable i.e. 36.93% is less than the GP margin of the assessee i.e. 43.21%. Since we have already held that RPM is not the most appropriate method, we are not interfering with the comparables selected by the TPO. Treating goodwill written off as operating in nature for computing operating PLI as per TNMM - HELD THAT - TPO has rightly pointed out that in assessee s FAR analysis, assessee has not depicted goodwill in assets employed. The reason given by the Ld. AR that because goodwill may result in increase in sales over the years but it certainly does not affect the operations which are required to be examined for the purposes of determining PLI of tested party for comparisons for TP analysis does not have any bearing to support the case of the assessee. Therefore, this contention of the assessee fails. As regards to without prejudice argument of the Ld. AR has submitted the calculation of PLI of the assessee after treating the amortization of goodwill as non-operating as well as operating in nature. As against the average PLI of the comparables of 10.09%, assessee PLI of the assessee is 9.08% which is within /-5% range as per the proviso to Sec 92C of the Act. Thus these submissions of the Ld. AR are more practical in nature and are accepted and it appears that the goodwill written off of ₹ 1,99,27,211/- is an extraordinary expense which affects the normal profitability for the period in which it is amortized and should be adjusted for computing the PLI of the assessee company after taking into account whether the assessee claimed for depreciation or not on the goodwill. Therefore, we remand back this issue to the file of the TPO/AO for proper verification in light of the above findings. Aggregating the trading and service segments for benchmarking the transaction of purchase of traded goods - HELD THAT - From the perusal of the record, it can be seen that the TPO has benchmarked the transaction of purchase of traded goods and correspondingly proposed an adjustment by aggregating the trading and service segment without appreciating the fact that purchase of traded goods is part of the trading segment, therefore the adjustment should be proposed by considering only the trading segment. AR has given the working of TP adjustment by considering only the trading segment. The said working represent that if the TPO would have proposed the adjustment on the transaction of purchase of traded goods by considering only trading segment then the adjustment should be restricted to ₹ 64,14,301/- only instead of ₹ 70,61,839/- as originally proposed by TPO. Thus, the contentions of the Ld. AR appears to be genuine but the same needs verification. Therefore, we direct the TPO to verify the same. Quashing of order passed by the AO/TPO/DRPTPO - HELD THAT - While deciding the filters has given his own reasons and the same does not make an order bad in law or non-est void-ab-initio in totality.The case laws cited before us are not applicable in the present case as the assessee s factual aspect has been rightly pointed out by the TPO in the order which are not denied in toto by the Ld. AR and also not brought on record any contrary facts to that effect. Thus, the contention of the Ld. AR appears to be not correct.
Issues Involved:
1. Addition on account of arm’s length price under section 92CA(3). 2. Rejection of Resale Price Method (RPM) as the Most Appropriate Method (MAM). 3. Fresh search process and comparables selection by TPO. 4. Treatment of goodwill amortization. 5. Aggregation of trading and service segments for benchmarking. 6. Allegations of non-application of mind by the TPO. Detailed Analysis: 1. Addition on Account of Arm’s Length Price: The assessee contested the addition of ?70,61,839/- made by the TPO under section 92CA(3). The TPO had rejected the RPM applied by the assessee and adopted TNMM, selecting 7 comparables with an average OP/OI of 10.09%, leading to the adjustment. The Tribunal found that the TPO did not dispute the nature of the assessee as a trader and that the goods were sold without value addition. However, it upheld the TPO’s decision to use TNMM due to insufficient functional comparability in the assessee’s selected comparables. Thus, the addition was justified. 2. Rejection of Resale Price Method (RPM): The Tribunal examined the rejection of RPM by the TPO, who argued that RPM requires stricter comparability and the assessee’s comparables were not functionally similar. The Tribunal agreed with the TPO, noting that the selected comparables engaged in diverse activities, making RPM unsuitable. It emphasized that TNMM is more tolerant of functional differences and thus more appropriate. Hence, the rejection of RPM was upheld. 3. Fresh Search Process and Comparables Selection: The assessee argued that the TPO’s fresh search process was conducted without sharing details, violating natural justice principles. The Tribunal acknowledged that the TPO used similar filters as the assessee but failed to justify the rejection of one filter. Consequently, the Tribunal allowed the assessee’s ground regarding the rejection of the search process. However, it dismissed the objection to the TPO’s comparables, agreeing with the TPO’s reasoning for their selection. 4. Treatment of Goodwill Amortization: The assessee contended that goodwill amortization should be treated as a non-operating expense. The Tribunal noted that the TPO treated it as an operating expense, but the assessee presented a practical argument showing that even with goodwill amortization, the PLI was within the acceptable range. The Tribunal remanded the issue to the TPO for verification, directing that the amortization of goodwill should be adjusted for computing the PLI if the assessee claimed depreciation on it. 5. Aggregation of Trading and Service Segments: The assessee objected to the aggregation of trading and service segments for benchmarking. The Tribunal found that the TPO aggregated these segments without appreciating that the purchase of traded goods was part of the trading segment. It directed the TPO to verify and restrict the TP adjustment to ?64,14,301/- if proper, instead of ?70,61,839/-. 6. Allegations of Non-Application of Mind by the TPO: The assessee claimed that the TPO’s order was based on conjectures and surmises, pointing out several inconsistencies and repetitions. The Tribunal acknowledged these issues but found that they did not render the order void ab initio. It dismissed the ground, stating that the TPO’s reasons for the filters and adjustments were valid. General and Consequential Grounds: The Tribunal did not adjudicate on general grounds (Grounds 1, 9, 12, and 13) and noted that Grounds 10 and 11 were consequential in nature. Conclusion: The appeal was partly allowed for statistical purposes, with specific issues remanded for verification and proper adjudication by the TPO. The Tribunal upheld the use of TNMM over RPM and directed adjustments based on detailed verification of goodwill amortization and segment aggregation.
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