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TMI Blog2023 (1) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... his score and the matter is sent back to the file of the AO/TPO for re-determining the ALP of the `Trading segment under the RPM with the comparables and allocation of expenses as finally approved by the DRP. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh determination. TP adjustment in the `Manufacturing segment - Assembly/Manufacturing segment is determining the comparability of the companies selected - HELD THAT:- Mettler Toledo India Pvt. Ltd. - As percentage of the related party transactions of expenses of this company is more than 57% of the total expenses incurred by it, which fails the RPT filter notwithstanding the fact that the percentage of the RPTs of the revenue items is way below 25%. We, ergo, direct to exclude this company from the list of comparables. Avery India Ltd - Turning to the facts of this company, we find that it is into manufacturing weighing machines and has also undertaken contracts. 77% of its revenue is from manufacturing and 23% from contracts. The very fact that this company is engaged into manufacturing of weighing machines and not into any basic level assembly, we hold that it cannot be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be compared with the assessee engaged in low-end assembly function. We, therefore, order to exclude it from the list of comparables. TPO retained only one comparable, viz., Kusum Electrical Industries Ltd. from the assessee s list and included 9 more. The DRP squeezed the TPO s list of comparables from 10 to 7 by retaining the one which was chosen by the assessee and allowed by the TPO in his list We have seen supra that the six new comparables of the TPO, sustained by the DRP, are not comparable for the reasons assigned above, thereby leaving one company in the tally of comparables, being, Kusum Electrical Industries Ltd. having negative weighted working capital adjusted margin of (-) 10.26% as determined by the AO in his final order giving effect to the directions of the DRP. As against the ALP of (-) 10.26%, the PLI of the assessee from this segment has been computed by the AO in his final assessment order at (-) 7.23%, which discerns that the transaction is at ALP. The addition under this segment is directed to be deleted. - ITA No.260/PUN/2022 - - - Dated:- 17-10-2022 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P of the Trading segment under the Transactional Net Margin Method (TNMM), by computing the transfer pricing adjustment at Rs.2,74,45,190/-. The AO notified the draft order with this amount of adjustment. The assessee raised objections before the Dispute Resolution Panel (DRP), inter alia, assailing the change of the allocation keys by the TPO; applying the TNMM as the most appropriate method; and alternations made in the set of comparables. The DRP changed certain allocation keys from the segmental revenue as adopted by the TPO; approved the application of the TNMM; and made some alterations to the final set of comparables. Pursuant to the directions, the AO passed the final assessment order by making the transfer pricing addition of Rs.1,02,24,209/- in the Trading segment, against which the assessee has come up in appeal before the Tribunal. 4. We have heard the rival submissions and gone through the relevant material on record. It is undisputed that the assessee maintained accounts on consolidated basis but furnished separate profit determination under the three segments by allocating expenses in certain ratios, which underwent change at the hands of the TPO and then the DRP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Associated Enterprise is resold which is reduced by the amount of normal gross profit margin accruing in a comparable uncontrolled transaction. The price thus arrived at is reduced by the expenses incurred by the enterprise in connection with the purchase of property, which, after further adjustments on account of functional and other differences, constitutes the ALP in respect of purchase of property. The normal gross profit margin absorbs the effect of all individual items of expenses. Composition and extent of individual items of expenses may vary from one company to another. For example, a particular company may have its own building for running business. In that case, its depreciation cost will be higher vis-a-vis another company, operating from a rented premises, incurring more rental cost. Higher depreciation cost of the first company is set off with the higher rent of the second. When we consider the gross profit margins, the effect of all the individual higher or lower level of expenses, gets creased out. After taking gross profit margin, one cannot go back to the individual items of expenses for contending that a particular expense of comparable is more or less vis-a-vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,90,21,248/-. The DRP made certain alterations to the comparables selected by the TPO and also the allocation keys for some expenses. Giving effect to the directions, the AO recomputed the assessee s PLI at (-) 7.23% and made the final transfer pricing addition under the segment at Rs.1,11,94,115/-, against which the assessee has approached the Tribunal. 10. The larger issue in the `Assembly/Manufacturing segment is determining the comparability of the companies selected. However, this issue depends upon the primary issue of proper characterization of the assessee s business activity under this segment. Whereas the assessee claimed itself to be engaged in low level basic assembly activity and chose comparables operating in the field of Trading, the AO held the assessee to be engaged in full-fledged manufacturing activity and chose comparables accordingly. Thus the initial question is to determine the assessee s proper characterization. 11. The assessee specifically contended before the DRP that the TPO erred in re-classifying its assembly activity as that of fullfledged manufacturing activity. It made an elaborate functional analysis about the nature of activity done by it u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, it is apparent that the submissions advanced by the assessee before the DRP have not been rebutted with any plausible reasoning. 12. We have gone through the assessee s Balance sheet, a copy of which has been placed at page 263 of the paper book. Schedule of Fixed Assets shows only Land, Tools and Equipment, Computers and IT assets, Vehicles, Office Equipments, Leasehold Improvements under the head Tangible Asset apart from Intangible assets comprising of certain computer software at Rs.95,813/-. This divulges that apart from certain Tools and Equipments, the assessee did not have any Plant and Machinery needed for manufacturing the finished goods. We have also examined the Profit and loss account of the assessee. Nature of expenses covered in the Profit and loss account does not justify the carrying on of full-fledged Manufacturing activity. The Directors report of the assessee has also been gone into, which does not refer to any manufacturing activity. 13. At this juncture, it is pertinent to accentuate that `assembly is as different from manufacturing as it is from trading. Functions, assets and risks involved in all the three activities are poles apart from ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company was only 0.13%. He, therefore, continued with its inclusion. 16. The Annual report of this company is available at page ITAT-1297 onwards of the paper book. Related party transactions have been listed at page ITAT-1310 to 1312. Such related party transactions are a bouquet of items of expenses as well as revenue. The ld. AR has placed on record a chart showing the related party transactions of expense nature of this company which total up to Rs.177.27 crore. Such total has been determined by scrutinising all the RPTs and then segregating the RPTs of expense nature, which are in the realm of Software development expenses; Market support charges; Global business shared support service charges; Purchase of raw materials, components and traded goods; Group cost allocation charges. As against total of such related party costs at Rs.177.27 crore, the total costs incurred by this company stands at Rs.310.32 crore, giving 57% as RPTs of expenses. Correctness of the copious details with relevant figures shown by the ld. AR has not been disputed by the ld. DR. Thus, it is palpable that the RPTs of expense nature at 57% breach the filter of 25% for exclusion. Though the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture and trading on wide range of products. Certain other objections were also espoused before the DRP, which were rejected on the ground that the assessee was also into manufacturing. 22. We have examined the Annual report of this company, a copy of which has been placed in the paper book. It can be seen that the nature of business of this company is multi-dimensional ranging from design, manufacture of electronic weighing and POS system, self-service KIOSK and GPS synchronized clock. It is also into field of constructing and long term leasing of high quality built to suit industrial and commercial space to its clients. This company is also engaged in R D activity, which is apparent from its Annual report. In view of the clear difference in the nature of business carried by this company vis- -vis the assessee doing only the low end assembly activity, we hold that there is no comparison between the two. As such, this company is also directed to be excluded. Nitiraj Engineers Ltd. 23. This company was included by the TPO in the list of comparables. The assessee objected to its inclusion before the DRP by contending that it was into full-fledged manufacturing having di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it from the list of comparables. 28. After excluding the six comparables added by the TPO, we are left with one only comparable, namely, Kusum Electrical Industries Ltd. having weighted WCA margin (OP/OR) at (-) 10.26%. Rule 10CA, dealing with the computation of ALP with the help of dataset, has been inserted by the IT (Sixteenth Amdt.) Rules, 2015 w.e.f. 19.10.2015. The rule applies to the A.Y. 2017- 18 under consideration. This rule contains a detailed mechanism for determining the ALP in a broad manner. Sub-rule (1) of rule 10CA, which is relevant in the present context, states that: `Where in respect of an international transaction . the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm s length price in respect of such international transaction shall be computed in accordance with the provisions of this rule. Au contraire, the mechanism under rule 10CA does not and cannot apply if there is only one comparable uncontrolled price. In that panorama, the sole comparable uncontrolled price constitutes the ALP. 29. Adverting to the facts of the extant case, it is seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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