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TMI Blog2023 (1) TMI 1069X X X X Extracts X X X X X X X X Extracts X X X X ..... in goods domestically is exclusively with unrelated parties. While, rejecting assessee s benchmarking of international transactions with AEs, undisputedly, the TPO had aggregated transactions in both the segments at entity level and determined the ALP of the transactions with the AEs. This approach of the TPO is fundamentally wrong and against the statutory provisions. While benchmarking international transactions with AEs, the transactions relating to unrelated parties cannot be clubbed. Therefore, the benchmarking done by the TPO is flawed, hence, unacceptable. The tinkering of PLI by substituting the denominator with total cost is unacceptable considering that the TPO has included the cost of traded goods with unrelated parties in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case the Hon ble Learned DRP was right in law in rejecting the primacy of functions carried out by the assessee and basing its decision on the ground that risks were minimal in the case of the assessee? 2. Whether the DRP was correct in directing the TPO to recompute segmental margin of the assessee for indenting and trading activities based on allocation of total indirect costs which has no base either in the TP guidelines or in any of the judicial pronouncement in assessee s own case either in this year or earlier years? 3. Whether the DRP was correct in directing the TPO to include Besant Raj International Ltd. in the comparable set upon verification of positive operating margins for F.Y. 03-04, without appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: Type of transaction Value (in Rs.) Method Used MIPL s margin Comparable margin 1 Provision of agency support services 204,005,606 TNMM (see note 1 below) 23.53 percent (see note 2 below) 10.71 2. Cost allocation of software usage and usage services provided by AEs 5,282,817 3. Reimbursement of expenses by MIPL to AEs 605,672 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd quality of product resulting in enhancing the profitability of the AEs while doing business in India. He further observed, the assessee had assumed significant risks such as sourcing risk, quality risk and capacity utilization risk while performing its function, hence, required to be compensated. He further observed that the segmental accounting done by the assessee is only in relation to income, whereas, the allocation of expenses are unreliable. Therefore, entity-wise operating income/operating cost have to be considered to benchmark the international transaction. In this context, the TPO held that the profit level indictor (PLI) of operating profit to operating cost used by the assessee is inappropriate. Accordingly, he included cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsuring the allocation of cost between the AE and non-AE segments in the ratio of income earned from AE segment and non-AE segment. In this regard, learned DRP set out the following guidelines for the TPO: Identify the Revenue from financial statements of the A pertaining to indenting and trading activities separately. From the financial statements of the A determine the cost of goods sold (purchase in India of traded goods + decrease in inventory) and the processing expense and assign them entirely to the trading segment. Allocate other income in the ratio of gross commission income (indenting segment) to gross margin (trading segment). Allocate personnel expenses, operating and other expenses, depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO is fundamentally wrong and against the statutory provisions. While benchmarking international transactions with AEs, the transactions relating to unrelated parties cannot be clubbed. Therefore, the benchmarking done by the TPO is flawed, hence, unacceptable. Further, the tinkering of PLI by substituting the denominator with total cost is unacceptable considering that the TPO has included the cost of traded goods with unrelated parties in the total cost. Therefore, we do not find any infirmity in the decision of learned DRP in directing the TPO to recompute the ALP by strictly restricting himself to the international transaction with the AEs. In so far as, inclusion of Besant Raj International as a comparable, it is observed that only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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