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TMI Blog2023 (9) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. The assessee's only issue in the Cross objection is an assail to the finding of the ld. CIT(A) rejecting the allocation of expenses done by it to the Trading and Manufacturing segments. 3. Succinctly, the facts of the case are that the assessee is a domestic company engaged in the manufacturing of colour concentrates and additive masterbatches. In addition, it is also engaged in Trading activities. The return was filed declaring total income at Rs. 4.99 crore along with audit report in Form No. 3CEB, detailing certain international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) of the international transactions. The first issue is against the transfer pricing adjustment of Rs. 1,42,95,079/- in the Trading segment. The assessee declared an international transaction of "Purchase of manufactured finished goods from AE for the purpose of trading" with transacted value at Rs. 33,48,84,268/-. The Transactional Net Margin Method (TNMM) was applied as the most appropriate method for its ALP determination. The assessee computed its operating margin from the trading segment at (-) 0.36%. Certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had not allocated anything to trading segment. A meagre sum of Rs. 6.88 lakh out of total Rs. 1.12 crore under Legal and Professional fees was apportioned. Rejecting the assessee's contention, the TPO made allocation of Other expenses to the trading segment in the ratio of revenue. Aggrieved thereby, the assessee objected before the ld. first appellate authority, firstly, to the rejection of its allocation of certain expenses and then, to the making of allocation of the expenses by the TPO in the Sales ratio between the two segments as against its claim of allocation on the basis of Gross Profit ratio. The ld. CIT(A) accepted the fact that the assessee did not properly apportion the expenses between the manufacturing and trading segments. He, however, went with the assessee's arguments in respect of allocation of expenses in the ratio of gross profit ratio. Both the sides have come up in appeal before the Tribunal on their respective stands. 4. Having heard the rival submissions and gone through the relevant material on record, it is seen that the assessee's revenue from the trading segment stands at Rs. 28.13 crore as against the revenue from the manufacturing segment at Rs. 164 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly been done by the TPO. 7. The last item is `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. 8. It is further observed that the assessee did not allocate some of the expenses as discussed supra and whatever allocation it did was in the gross profit ratio of trading and manufacturing segments. The TPO rejected such basis and proceeded to apportion the common expenses in the ratio of revenue from the two segments. The ld. CIT(A) accorded his imprimatur to the view point of the assessee for applying the gross profit ratio as a key for bifurcation of common expenses. 9. Gross p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer pricing adjustment amounting to Rs. 40,77,800/- on this count. The ld. CIT(A) allowed the relief. 15. Having heard the rival submissions and gone through the relevant material on record, it is noticed that the assessee applied the TNM method for benchmarking the international transaction of `Sale of finished goods', which was substituted with the CUP method by the TPO. The latter method can be applied more appropriately if all other facts and circumstances of the international transaction and of the comparable transaction are similar. If there is difference in product, geography, timing or quantity sold etc., then the CUP method cannot be applied as the most appropriate method. Turning to the facts of the extant case, it is observed that there is a huge difference in quantities of products sold by the assessee to its AE and non-AEs. The detail has been provided at page 287, which shows 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 differe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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