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2022 (5) TMI 1001 - AT - Income TaxTP Adjustment - MAM - Internal Resale Price Method (RPM) as the most appropriate method for benchmarking the 'Trading segment - HELD THAT - Assessee purchased and sold the same goods without increasing or reducing their inherent value, clearly the most appropriate method for determining the ALP in such a situation is the RPM. In case Pr.CIT vs. Matrix Cellular International Services Pvt. Ltd. 2017 (11) TMI 1655 - DELHI HIGH COURT has held that where the goods are re-sold without making any value addition, the RPM is the most appropriate method. The contention of the ld. DR that more employee cost was booked in the Trading segment or that there was something amiss in the computation of the ALP under the RPM are irrelevant considerations. The ground before the Bench is against the selection of the most appropriate method and not the manner of its application. As the assessee sold the goods as such without tinkering with its inherent value, we countenance the view taken by the ld. CIT(A) in approving the application of the Internal RPM as most appropriate method against the TNMM applied by the TPO. This ground fails. Comparable selection for Manufacturing Segment - HELD THAT - It is evident that the only reason for the exclusion of this company by the TPO is the losses incurred by it in the year under consideration. In CIT vs. Welspun Zucchi Textiles Ltd. 2017 (1) TMI 1037 - BOMBAY HIGH COURT has held that loss made in one year would not ipso facto result in exclusion of a company from comparability analysis. In an earlier decision in CIT Vs. Goldman Sachs (India) Securities (P) Ltd 2016 (4) TMI 1136 - BOMBAY HIGH COURT has held that only persistent loss making companies can be excluded from the list of comparability. Since Electronica Machine Tools Ltd. admittedly incurred loss only in the year under consideration and was into profits in the earlier years, it ceased to be persistent loss making company. We are thus satisfied that the ld. CIT(A) was justified in including this company in the list of comparables. This ground fails. Direction of the ld. CIT(A) to allow adjustment on account of higher Customs duty paid by the assessee - assessee submitted before the TPO that it had made 100% import of raw materials and components in comparison with comparables importing at 25.20% - HELD THAT - It is not a case of payment of Customs duty by the assessee at a higher rate vis-a-vis comparables. It is just fundamental that if a person uses better quality raw materials, obviously, the corresponding sale price also goes up and vice-versa. Given the fact that the assessee imported more raw materials for manufacturing, it is but natural that the corresponding sale price would also have been on higher side, thereby nullifying the effect of higher payment of Customs duty, forming a part of the Operating cost base on the overall basis. The situation would have been different if the assessee had paid Customs duty at a rate higher than that paid by its comparables, which would have called for adjustment to have a level playing. Instantly, we are confronted with a case in which the assessee is claiming exclusion of extra custom duty on the strength of its higher quantum and not the higher rate of Customs duty. In that view of the matter, we are satisfied that the ld. CIT(A) was not justified in reducing the operating cost base of the assessee in the Manufacturing segment by higher Customs duty paid by the assessee. This ground is allowed. Treatment of Project expenses as operating, which were claimed as deductible in the computation of total income - assessee claimed that unallocated project expenses (consisting of travelling expenses, legal professional charges and other expenses) were non-operating and hence required exclusion from the operating cost base - TPO rejected the contention and considered the same as operating cost - HELD THAT - It is seen from the nature of expenses that they are otherwise of the revenue nature as they cater to travelling, legal professional and other small heads. The assessee admittedly claimed deduction for such amount in the computation of total income, which has not been denied. A case has been set up that such expenditure related to the setting up phase of the manufacturing unit and hence, should be considered as non-operating. We are unable to countenance this contention for the reason that the Manufacturing unit was already in existence, which fact is borne out from the assessee s Profit loss account for this year, which shows the figure of Revenue from operations in the preceding year at Rs.7.75 crore as against Rs.7.99 crore for the year. This manifests that the unit was already set up in an earlier year and was in operation even in the preceding year much less the year under consideration. This appears to be the reason for the assessee claiming deduction for such expenses in its Profit loss account and not capitalizing the same. But for that, there is no dispute that the expenses are otherwise of the operating nature. We, therefore, uphold the view taken by the ld. CIT(A) in treating Rs.1.12 crore as operating cost and including it in operating cost base. This is not allowed. Non-adjudication by the ld. CIT(A) of the exclusion of consultancy charges from the total AE cost while computing the proportionate adjustment - HELD THAT - We have given directions hereinabove concerning the ALP of the Manufacturing segment, which would require a re-do of the exercise, the AO / TPO will examine this claim of assessee also in such fresh proceedings. Needless to say, the assessee will be given reasonable opportunity of hearing.
Issues:
I. Trading Segment II. Manufacturing Segment I. Trading Segment: The Revenue contested the adoption of Internal Resale Price Method (RPM) by the assessee for benchmarking the 'Trading segment.' The TPO recommended a transfer pricing adjustment, but the ld. CIT(A) approved the application of Internal RPM. The Tribunal upheld the ld. CIT(A)'s decision, citing the Delhi High Court's ruling that RPM is appropriate when goods are resold without value addition. The Tribunal emphasized that the method's selection, not its application, was the issue. II. Manufacturing Segment: The Revenue challenged the inclusion of Electronica Machine Tools Ltd. as a comparable by the ld. CIT(A). The TPO excluded it due to losses in the relevant year, but the Tribunal supported its inclusion based on previous and subsequent profitable years. Citing Bombay High Court precedents, the Tribunal ruled that a single year loss does not disqualify a company from comparability analysis. The ld. CIT(A)'s decision to include the company was upheld. The Revenue also contested the adjustment for higher Customs duty paid by the assessee. The Tribunal rejected the claim, stating that the higher cost due to increased imports did not necessitate an adjustment since the rate of Customs duty was not higher than comparables. The ld. CIT(A)'s decision to reduce the operating cost base was overturned. The assessee's Cross Objection related to Project expenses treated as operating costs in the Manufacturing segment. The Tribunal upheld the ld. CIT(A)'s decision, stating that the expenses were revenue in nature and related to an already operational unit. The contention that the expenses were non-operating was rejected. Additionally, the assessee raised a ground regarding the exclusion of consultancy charges from the total AE cost. The Tribunal directed the AO/TPO to examine this claim in fresh proceedings related to the Manufacturing segment's ALP determination. In conclusion, the Tribunal partly allowed the appeal of the Revenue and the Cross Objection of the assessee. The judgment was pronounced on 28th April, 2022.
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