Segmental transfer pricing and section 10B turnover parity applied; provision for discount disallowed as contingent liability.

Segmental results for the contract manufacturing activity were available and had been accepted in earlier years, so an entity-level comparison for transfer pricing was not appropriate; the arm's length adjustment was therefore deleted. The provision for discount was treated as a contingent and unascertained liability and was disallowed, though the reversed excess provision was left open for verification and possible allowance if already disallowed in an earlier year. Foreign currency travel expenses for training and marketing/business promotion were required to be excluded from both export turnover and total turnover for section 10B relief.

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Issues: (i) whether the transfer pricing adjustment could be sustained on an entity-level comparison when segmental results for the contract manufacturing activity were available; (ii) whether the provision for discount was deductible, and whether the excess provision reversed during the year could be allowed on verification; (iii) whether foreign currency travel expenses incurred for training and marketing/business promotion were to be excluded from export turnover and total turnover for computing relief under section 10B.

Issue (i): whether the transfer pricing adjustment could be sustained on an entity-level comparison when segmental results for the contract manufacturing activity were available.

Analysis: The segmental results for the assessee's contract manufacturing activity were available and had been accepted in earlier years. The margin of the assessee's contract manufacturing segment was higher than the margin of the comparables. The entity-level comparison adopted by the Transfer Pricing Officer and the Dispute Resolution Panel was therefore not appropriate for testing the arm's length nature of the associated enterprise transactions.

Conclusion: The transfer pricing adjustment was not sustainable and the addition was deleted in favour of the assessee.

Issue (ii): whether the provision for discount was deductible, and whether the excess provision reversed during the year could be allowed on verification.

Analysis: The provision for discount was held to be a contingent and unascertained liability and, on that basis, was not allowable as a deduction. At the same time, the assessee's alternative plea that the excess provision reversed during the year had already been disallowed in the earlier year was directed to be examined by the Assessing Officer and allowed if found correct.

Conclusion: The deduction for provision for discount was disallowed, but the claim for allowance of the reversed excess provision was left open for verification and possible grant in favour of the assessee.

Issue (iii): whether foreign currency travel expenses incurred for training and marketing/business promotion were to be excluded from export turnover and total turnover for computing relief under section 10B.

Analysis: The foreign currency travel expenses were treated as expenditure falling to be excluded from the computation of export turnover, and the same item was also required to be excluded from total turnover for parity in the section 10B computation.

Conclusion: The expenses were directed to be excluded from both export turnover and total turnover in favour of the assessee.

Final Conclusion: The appeal succeeded on the transfer pricing addition and the section 10B turnover computation, while the claim relating to provision for discount was rejected subject to verification of the reversed excess provision.

Ratio Decidendi: Where segmental accounts are available and comparable margins are higher than the assessee's segmental margin, an entity-level comparison cannot be used to make an upward transfer pricing adjustment; for section 10B computation, expenditure excluded from export turnover must also be excluded from total turnover.

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