2023 (2) TMI 1051 - AT - Income Tax

TP Adjustment - MAM - use of segmental profitability on the basis that the trading turnover constitutes less than 10% of total sales of the assessee - HELD THAT - We would like to refer to the decision of Sony Ericsson Mobile Communications India Pvt Ltd 2015 (3) TMI 580 - DELHI HIGH COURT wherein held that in cases where the assessee is engaged in the manufacturing/sales trading activities it would be inappropriate to apply TNMM on entity wide basis. Keeping in mind the aforesaid decision of the Hon'ble Jurisdictional High Court of Delhi, all that we have to consider is as to whether the segmental results are to be taken into consideration or profit margin at entity level is to be considered. In light of the provisions of section 92 to 94 of the Act, international transactions are to be taken into consideration. Therefore, in our considered opinion, segmental results are to be considered and not the profit at entity level. Considering the factual matrix of the case in hand, nature of transactions are functionally different and even the risks assumed are different. We are, therefore, inclined to accept the stand of the ld. counsel for the assessee to bench mark the manufacturing segment and the trading segment separately. Rejection by ld. CIT(A) is solely on the ground that turnover of the trading segment is around 10% of the total turnover. This appears to be logical if considered as it If the same is considered in light of total sales made by the assessee for the year ended 31.03.2005, the picture is totally different. The assessee has recorded turnover of Rs. 1062 crores and 10% of which would be around 106 crores, claim of the ld. DR that it would be difficult to find comparables does not hold any water as several comparables can be found in Rs. 100 crores club. Thus we direct the AO/TPO to bench mark the international transactions separately segment wise with suitable comparables and decide the issue afresh after affording reasonable and adequate opportunity of being heard to the assessee. TP adjustment shall be made only with reference to international transactions undertaken by the assessee and not with reference to the overall turnover - In TP Regulations, price of only international transaction is to be determined for which adjustment of ALP is to be done in respect of international transactions only. TPO/Assessing Officer grossly erred in considering the total turnover and did not restrict the ALP adjustment to the international transactions. Therefore, we do not find any reason to interfere with the findings of the ld. CIT(A).

Summary

Issues Involved:
1. Deletion of addition under Section 92CA(3) of the Income Tax Act, 1961.
2. Combining manufacturing and trading segments for benchmarking.
3. Adjustment for extraordinary items affecting operating profit.
4. Transfer Pricing (TP) adjustment with reference to international transactions versus overall turnover.

Detailed Analysis:

1. Deletion of Addition under Section 92CA(3):
The assessee contested the addition of Rs. 97,34,49,822/- made under Section 92CA(3) of the Income Tax Act, 1961. The CIT(A) reduced this addition to Rs. 4,06,71,820/- by accepting the assessee's contention that TP adjustment should be made only with reference to international transactions and not the overall turnover. The Tribunal upheld this view, stating that TP regulations require adjustments to be made in respect of international transactions only.

2. Combining Manufacturing and Trading Segments for Benchmarking:
The CIT(A) confirmed the TPO's action of combining manufacturing and trading segments for benchmarking, which the assessee opposed, arguing for separate benchmarking of international transactions in manufacturing export segment, domestic manufacturing segment, and trading segment. The Tribunal referred to the Delhi High Court's decision in Sony Ericsson Mobile Communications India Pvt Ltd, which held that in cases involving manufacturing and trading activities, it is inappropriate to apply TNMM on an entity-wide basis. The Tribunal concluded that segmental results should be considered for benchmarking, not the entity-level profit margin.

3. Adjustment for Extraordinary Items Affecting Operating Profit:
The assessee sought adjustments for extraordinary items such as loss of revenue due to price reduction, cash discounts, and additional discounts related to the FALCON project, which were rejected by the TPO. The Tribunal found that these adjustments relate to general market conditions and are common practices, thus siding with the TPO's rejection of these claims.

4. TP Adjustment with Reference to International Transactions Versus Overall Turnover:
The Revenue's appeal contested the CIT(A)'s decision to restrict TP adjustments to international transactions rather than the overall turnover. The Tribunal upheld the CIT(A)'s view, emphasizing that TP regulations mandate adjustments to be made only for international transactions. The Tribunal found no reason to interfere with the CIT(A)'s findings, dismissing the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the Assessing Officer/TPO to benchmark international transactions separately for each segment with suitable comparables. The Revenue's appeal was dismissed, affirming that TP adjustments should be limited to international transactions as per TP regulations. The order was pronounced in the open court on 11.10.2022.