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2023 (4) TMI 979 - AT - Income TaxTP adjustment - TPO rejecting the audited segmental accounts, the functional analysis conducted by the assessee and by identifying the new comparables in transfer pricing study - HELD THAT - We find from the impugned order of the Coordinate Bench in assessee s own case 2019 (8) TMI 1864 - ITAT KOLKATA that the issue has been decided in favour of the assessee as held appellant has two separate distinct activities viz., manufacturing of printing inks, blankets and trading in press chemicals. It is well understood that the functions involved in manufacturing activities, risks assumed, assets employed are significantly different and higher than the trading activity. Cross subsidization of the international transactions in a combined approach is impermissible since it results in distorted presentation of facts. Hence if both the manufacturing trading segments of the appellant are aggregated, the combined profit margin would throw up an inappropriate result in as much as it cannot be compared either with companies engaged in manufacture of printing ink or companies engaged in trading activities. Further more in order to benchmark each set of transactions distinctly, it is imperative to use the segmented information of the manufacturing activity and trading activity of the appellant. On these facts we are therefore of the view that the segmented results of the appellant are required to be used for benchmarking the international transactions. We find that the Income-tax Act, 1961 has several provisions, particularly profit-linked deductions etc. wherein assessees are required to carve out and identify separate segmental information and prepare standalone accounts for the eligible unit. It is noted that preparation identification of such segmented results are not linked with AS-17 in any manner and in that view of the matter, we are of the considered view that the lower authorities were unjustified in rejecting the audited segmented results on the frivolous premise that it did not form part of financial statements. Segment results cannot be said to be unreliable. However on perusal of the transfer pricing order, we agree with the ld. DR that these segmented results were never verified by the TPO since he had out-rightly rejected the same. Accordingly we uphold the Ld. DR's alternative claim and set aside the audited segmented results to the file of the AO for the limited purpose of verification and cross- check with the overall audited financial statements of the appellant. Needless to say, the appellant shall be afforded sufficient opportunity of being heard, in this regard. Also on detailed examination of segmented information, this Tribunal had found the transactions involving purchase of traded goods to be at ALP under internal RPM. Nature of expenses - Disallowance of royalty treating the same to be capital in nature - HELD THAT - Issue decided in favour of assessee as relying on own case 2017 (4) TMI 1437 - ITAT KOLKATA CIT merely made a bald statement by stating that the assessee by using the licensed information had entered into new dimensions of business from time to time and hence the payment of royalty could. not be equated with the nature of royalty paid in earlier years, which statement is absolutely without any basis and without any material on record. The assessee had submitted before the ld. CIT that the royalty was paid in respect of licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan for manufacture of resins and printing inks and the licensed information pertains to these specific items i.e resins and printing inks alone and cannot be used to venture into new business. The nature of royalty, mode and manner of payment thereon had remained the same since financial year 2007-08 / 2008-09 as the case may be, in which these agreements were entered into by the assessee.this royalty payment was a revenue expenditure as no capital assets came into being in the hands of the assessee. - Decided in favour of assessee.
Issues Involved:
1. Transfer pricing adjustment. 2. Rejection of audited segmental accounts. 3. Functional analysis and comparables. 4. Broad comparable strategy. 5. Filters and search strategy for comparables. 6. Subjective rejection of comparables. 7. Deletion of transfer pricing adjustment. 8. Disallowance of royalty payment as capital expenditure. 9. Nature of royalty payment. Detailed Analysis: Transfer Pricing Adjustment: The assessee contested the transfer pricing adjustment of Rs. 5,75,32,306/- made by the AO/TPO, arguing it was unjustified. The Tribunal found that the issue was covered by a previous decision in the assessee's favor for A.Y. 2013-14, where the segmented results of the appellant were deemed permissible for benchmarking international transactions. The Tribunal upheld the use of segmented information for benchmarking manufacturing and trading activities, rejecting the DRP's reasoning that segmented information should form part of the published financial statements. Rejection of Audited Segmental Accounts: The TPO and DRP rejected the audited segmental accounts provided by the appellant. The Tribunal noted that the segmental accounts were audited as per Accounting Standard-17 and that allocation keys were provided. The Tribunal found no merit in the DRP's rejection based on the segmental information not being part of the published financial statements, emphasizing that the Income Tax Act operates in a different sphere from accounting standards. Functional Analysis and Comparables: The appellant argued that the TPO and DRP erred in rejecting the functional analysis and comparables identified by the appellant. The Tribunal agreed, noting that the appellant's segmented results should be used for benchmarking. The Tribunal also found that the comparables identified by the TPO, which were engaged in manufacturing pigments, were not functionally similar to the appellant, who was engaged in manufacturing printing inks. Broad Comparable Strategy: The Tribunal found that the TPO and DRP erred in applying a broad comparable strategy by including companies engaged in manufacturing pigments, detergents, and other chemicals, which were not comparable to the appellant's business of manufacturing printing inks. Filters and Search Strategy for Comparables: The Tribunal noted that the TPO and DRP did not objectively set out the filters, functional analysis, and search strategy for identifying new comparables. The Tribunal directed the AO/TPO to exclude the comparables identified by the TPO and accepted by the DRP from the TNMM analysis. Subjective Rejection of Comparables: The Tribunal found that the TPO and DRP followed a subjective and biased approach in rejecting the comparables identified by the appellant without providing a cogent analysis. The Tribunal directed the inclusion of the comparables identified by the appellant in the TNMM analysis. Deletion of Transfer Pricing Adjustment: The Tribunal directed the AO/TPO to delete the impugned transfer pricing adjustment of Rs. 5,75,32,306/- in full, following the decision in the assessee's own case for A.Y. 2013-14. Disallowance of Royalty Payment as Capital Expenditure: The assessee contested the disallowance of royalty payment of Rs. 9,83,66,198/- by the AO and DRP, who treated it as capital in nature. The Tribunal noted that the issue was covered in favor of the assessee by decisions in previous years (A.Y. 2010-11, 2011-12, and 2012-13). The Tribunal found that the royalty payment was for non-exclusive limited rights to use technical/licensed information, which did not result in enduring advantage or creation of a capital asset. Nature of Royalty Payment: The Tribunal found that the royalty payment was revenue in nature, as the rights over the technical/licensed information ended upon termination of the agreement. The Tribunal directed the AO/TPO to delete the disallowance of the royalty payment, following the decisions in the assessee's own case for previous years. Conclusion: The Tribunal allowed the appeal of the assessee, directing the deletion of both the transfer pricing adjustment and the disallowance of the royalty payment.
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