2023 (9) TMI 688 - AT - Income Tax

TP Adjustment - allocate various costs between the Trading and Manufacturing segments in the Gross Profit ratio as against the Sales ratio applied by the Transfer Pricing Officer (TPO) - HELD THAT - When the TPO confronted the assessee with omission of several expenses in the allocation the assessee came out with a revised figure of allocation at Rs. 28.37 crore thereby and increasing the allocation of expenses to the trading segment by Rs. 34, 88, 446/-. Despite an opportunity granted by the TPO the assessee still did not come clean by not properly allocating Employee cost Depreciation and Other expenses as discussed supra . This demonstrates that the assessee failed to properly apportion the expenses between the manufacturing and trading segments as has been correctly adjudicated by the ld. CIT(A). The assessee s solitary grievance in this regard is therefore not jettisoned. Proper allocation of expenses to the segment - First item is Employees cost - TPO has rightly excluded the salaries of site Directors/Managers etc. from the ambit of common employee cost for allocation. Depreciation - Assessee allocated depreciation only in respect of building amounting to Rs. 58, 837/- to the trading segment. It was fairly conceded by the assessee before the TPO that Land Building Warehouse and other facilities were also used for the trading activity - depreciation on these items also needed to be allocated to the trading segment. However depreciation on plant and machinery which is peculiar to the manufacturing segment alone is required to be excluded from the ambit of common base of depreciation which has rightly been done by the TPO. Other expenses - The assessee did not allocate expenses on account of Local travel Lodging Communication expenses Stationary Courier charges to the trading segment having turnover of Rs. 28.00 crore. Obviously some sort of travelling would be required for the trading segment including visiting clients. Similarly stationary etc. would also be needed for this segment as part of any office expense. In our considered opinion the TPO was justified in clubbing such expenses in the purview of the common expenses for the allocation. We therefore hold that the TPO rightly constituted the base of common expenses for allocation to the trading segment. Adjustment to own operating profits was made on the ground that it paid higher amount of custom duty vis-a-vis the comparables - HELD THAT - Under the TNMM the ALP is determined by considering the operating margin to a common base and while computing the operating margin all the operating expenses and the corresponding revenue are taken into consideration. Having done so it is usually not open to again go back to the individual items of the operating costs for claiming that such expenditure was higher in the case of the assessee in quantitative terms vis-a-vis the comparables and adjustment should be given. It is but natural that if a costly purchase of high quality product is made it will yield higher sale price as well. This shows that if the operating cost is higher the operating revenue will also be higher and vice versa . Once operating margin is considered for benchmarking it implies that the higher operating costs have equalised the corresponding higher operating revenue as well. In such cases there can be no question of granting any separate adjustment in respect of costly purchases. However the adjustment will be warranted only if there is a difference between the rate of custom duty paid by the assessee and comparables. We are confronted with a situation in which the difference is only in respect of amount of custom duty and not the rate of custom duty. In such circumstances there is no point in allowing any adjustment on account of custom duty. We therefore overturn the impugned order on this score. Working capital adjustment - HELD THAT - We observe that the CIT(A) too has not gone into such details taken note of by the TPO and simply accepted the assessee s contention without any discussion on these relevant points having bearing. In view of the fact that the assessee could not furnish relevant details before the TPO qua the working capital adjustment and further the ld. CIT(A) was swayed by the submissions of the assessee and did not consider the objections of the TPO we are satisfied that it would be just and fair if the impugned order on this score is set-aside and the matter is remitted to the file of the AO/TPO. TP Adjustment - selection of MAM - CUP or TNMM - TPO observed that the assessee applied the TNM method in respect of international transaction of Sale of finished goods at the transacted value but CUP method should have been applied instead of the TNMM - HELD THAT - As against the item COMITE 31R the assessee sold 15000 units for the month of February 2014 to its AE as against third party export of 25 units. Similarly for August 2013 the item sold is COMITE 86. Sale to AEs is of 3000 units and to third parties of 40, 000 units. Such difference in the quantity sold to the AEs and non-AEs appears for other months as well. In view of such huge quantitative differences one cannot say that the price charged for a product sold in huge quantity can be taken as comparable price for the sale of lower units of the same product. Thus the CUP is not the most appropriate method in the facts of the case. If the CUP method is excluded what remains is the TNMM as was applied by the assessee. We therefore hold that the ld. CIT(A) was justified in accepting the assessee s contention that the TNMM should be applied in respect of international transaction of Sale of finished goods . The grounds relating to this issue in the appeal of the Revenue are thus not allowed.

Summary

Issues Involved:
1. Allocation of costs between 'Trading' and 'Manufacturing' segments.
2. Adjustment towards higher custom duty paid.
3. Computation of working capital adjustment.
4. Application of Comparable Uncontrolled Price (CUP) method in the manufacturing segment.

Summary:

1. Allocation of Costs:
The Revenue contested the CIT(A)'s decision to allocate various costs between the 'Trading' and 'Manufacturing' segments based on the Gross Profit ratio instead of the Sales ratio applied by the Transfer Pricing Officer (TPO). The assessee objected to the CIT(A)'s rejection of its expense allocation method. The Tribunal upheld the CIT(A)'s rejection of the assessee's allocation but overturned the CIT(A)'s acceptance of the Gross Profit ratio for allocation, favoring the TPO's Sales ratio method. The Tribunal reasoned that the Gross Profit ratio is not a logical yardstick for expense allocation as it does not account for the volume of sales.

2. Adjustment Towards Higher Custom Duty Paid:
The assessee sought an adjustment for higher custom duty paid compared to its comparables, which the TPO rejected but the CIT(A) accepted. The Tribunal found no merit in the assessee's contention, stating that under the TNMM, the operating margin considers all operating expenses and revenues. The Tribunal emphasized that separate adjustments for higher costs are unwarranted unless there is a difference in the rate of custom duty, which was not the case here. Thus, the Tribunal overturned the CIT(A)'s decision.

3. Computation of Working Capital Adjustment:
The Revenue challenged the CIT(A)'s directions for computing the working capital adjustment. The Tribunal noted that the TPO identified defects in the assessee's calculation and the CIT(A) did not address these adequately. The Tribunal remitted the matter back to the AO/TPO for fresh computation, directing them to allow the assessee a reasonable opportunity to present correct figures.

4. Application of CUP Method:
The TPO replaced the Transactional Net Margin Method (TNMM) with the CUP method for the international transaction of 'Sale of finished goods,' resulting in a transfer pricing adjustment. The CIT(A) reversed this, favoring the TNMM. The Tribunal upheld the CIT(A)'s decision, noting significant quantitative differences in products sold to AEs and non-AEs, making the CUP method inappropriate. The Tribunal confirmed that the TNMM was the most appropriate method for this transaction.

Conclusion:
The Tribunal partially allowed the Revenue's appeal and dismissed the assessee's Cross Objection, remitting the matter to the AO/TPO for fresh determination of the ALP of the international transactions, ensuring the assessee is given a reasonable opportunity of hearing.