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TMI Blog2017 (6) TMI 1298X X X X Extracts X X X X X X X X Extracts X X X X ..... with its Associated Enterprises in respect of international transactions relating to manufacturing and trading activities. 2. Benchmarking of transaction by transaction approach rejected - Manufacturing Activity 2.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not accepting the benchmarking of manufacturing activity done by the Appellant using "transaction by transaction" approach and has instead adopted the "aggregation" approach. 2.2 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not accepting the alternative benchmarking of international transactions in respect of export of goods to AEs and receipt of IT support services from AEs. 3. Rejection of Resale Price Method (RPM) and selecting of Transactional Net Margin Method (TNMM) as the most appropriate method - Trading Activity 3.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not accepting the benchmarking of trading activity done by the Appellant using "Resale Price Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis are tabulated as under : Name of the Activity Manufacturing Activity Trading Activity International Transactions Import of Raw materials Import of finished goods Export of finished goods Receipt of sales commission Receipt of IT Support Services Payment of testing charges 4.1 From the above extract, it is evident that the exports to related companies amounting to Rs. 1,06,31,811/- is the transaction benchmarked by the TPO adopting the PLI of the Manufacturing Segment of the assessee, i.e. 0.54%. Otherwise, PLI of this sub-segment is 17.97%. 5. So far as the manufacturing activity is concerned, the TPO in his order dated 21-10-2011 benchmarked the relevant transactions and the adjustments added by him works out to Rs. 13,45,500/- and the relevant Para No. 7.2 of the TPO's order in this regard reads as under : "7.2 The major transaction is of exports at Rs. 1,06,31,811/-. The other receipts are for IT services at Rs. 66,18,055/-. The margin in manufacturing activity is 0.54%. The PLI of comparables is 8.34% for F.Y. 2007-08 (Annexure 8 B of TP report). Hence adjustment of (8.34-0.54) X (1,06,31,811 + 66,18,055/100) = Rs. 13,45,500/- is mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards the segmental analysis in respect of in respect of import of raw materials and export of finished goods, the contention of the assessee that there is no statutory requirement necessitating the Assessee to provide audited segmental information and hence contention of the learned TPO that segments made for the transfer pricing study needs to be supported by audited segmental accounts is not justified, is not acceptable." 8. From the above, the DRP did not justify the legal requirement of audited segmental/sub-segmental information and the statutory requirements, if any, in this regard. Further, regarding allocation of expenses also, as per the DRP, the assessee could not counter-comment satisfactorily with the working demonstrating the actual allocation of expenditure. Thus, the AO was directed by the DRP to proceed to make adjustments as proposed in the draft assessment order. 9. Before us, Ld. Counsel for the assessee made various submissions. To start with, bringing our attention to the contents of Para 452 of the paper book, Ld. Counsel for the assessee submitted that the manufacturing activity has 4 distinct sub-segments and the allocation of expenditure was made sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mestic sales, Ld. Departmental Representative for the Revenue submitted that none of these events are duly audited by the statutory auditors in which case the arguments of the Ld. Authorised Representative is unsustainable. 12. On hearing both the parties on these issues raised by the TPO, on perusal of the order of the DRP dated 12-01-2012 in general and Para 3.4 in particular, which was already extracted above, we are of the opinion that the DRP order does not provide reasons how the requirement for the assessee to furnish audited segmental/sub-segmental accounts in the TP study is needed. We understand the requirement of auditing the accounts of the assessee and it has the strength of the provisions of Section 44AB of the Act. But when it comes to the TP study matters, there is responsibility cast on the assessee to conduct TP study and there is a role/participation of the assessee. As in the matter DRP should have given reasons as to how the TP study also demands the Auditing of the segmental accounts or sub-segmental accounts. As such, it is not clear as to why the contents of page 492 of the paper book is not audited before filing the same before the lower authorities or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Para 8.2 of the TPO's order and came to the conclusion that the Resale Price Method (RPM) adopted by the assessee as most appropriate method for TP studies of the segment, is not appropriate. There is an observation that distributor segment shown the operating loss before interest and depreciation. As per the TPO/AO, the distributor does not suffer losses normally. There was also discussion about the quality of the comparables considered for TP study before concluding that the most appropriate method for benchmarking the trading activity of the assessee is TNMM and rejected the Resale Price method chosen by the assessee. 14. In the DRP proceedings, assessee contested the findings of the TPO. As per the discussion given in Para No.5.4 and its sub-paragraphs, the DRP upheld the views of the TPO. 15. Aggrieved with the same, the assessee raised Ground No.3 before us. In this regard, Ld. Counsel for the assessee brought our attention to the said Para No.5.4 and demonstrated that the DRP merely extracted some paragraphs from the OECD Transfer Pricing Guidelines 2010 without applying the same to the facts of the assessee. Relevant operational para from the DRP's order (page 15) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarking the international transaction of a distribution segment of the assessee. We have also given special attention to the fact of incurring selling and marking expenses by the distributor qua the appropriate method for benchmarking. On perusal of the decisions cited by the Ld. Authorised Representative for the assessee, we find the Bangalore Bench of the Tribunal in the case of Textronix India Pvt. Ltd. (supra) is on identical issue and relevant observations (sub-paragraph of Para No.5) are extracted as under: "We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipments from its AE and re-sells them without any value addition to the Indian customers. In similar circumstances, Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal, in this regard, has referred to the OECD guidelines wherein a view has been expressed that RPM would be the best method when a resale takes place without any value addition to a product. In the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Delhi Bench of the Tribunal in the case of Bose Corporation India Pvt. Ltd.(supra) held that Resale Price Method is the best suited method for determining the ALP of an international transaction in nature of purchase of goods from Associated Enterprises which are sold as such to related parties. Operational Para No.7.6 reads as under : "7.6 We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marketing expenses by the assessee does not in any manner affect the determination of ALP under the RPM. It is but natural that only those expenses can have bearing on the gross profits that are debited to the Trading account. As the amount of advertisement and marketing expenses finds its place in the Profit and loss account, the higher or lower spend on it cannot affect the amount of gross profit and the resultant ALP under the RPM." 22. Our view is further fortified by the order of the Tribunal in the case of M/s. OSI Systems Pvt. Ltd. Vs. DCIT in ITA Noo.683/Hyd/2014 order dated 12-08-2015 where all the above referred decisions were considered before deciding the issue in faovur of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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