Tribunal partially allows transfer pricing appeal on export segment's operating margin comparability.

The tribunal partially allowed the appeal in a transfer pricing case, finding merit in the appellant's arguments regarding the comparability of the export segment's operating margin with selected comparables. The tribunal directed the Transfer Pricing Officer to review the appellant's submissions and delete the adjustment if found favorable, impacting the total income determination.

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Issues Involved:
1. Transfer pricing adjustments.
2. Rejection of functional and economic analysis.
3. Rejection of comparable companies.
4. Acceptance of non-comparable companies.
5. Rejection of segmental accounts.
6. Consideration of prior period items as operating expenses.
7. Economic adjustment.
8. Flexibility of +/- 5% as per section 92C(2).
9. Penalty proceedings under section 271(1)(c).
10. Levy of interest under section 234A.
11. Excess levy of interest under section 234B.
12. Excess levy of interest under section 234C.

Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessing officer made an adjustment of INR 33,66,72,501 to the total income of the appellant under Section 92CA(3) of the Act due to discrepancies in the arm's length price of international transactions involving the sale of raw materials and goods. The total income was determined at INR 52,02,32,300 against the returned income of INR 18,35,59,790.

2. Rejection of Functional and Economic Analysis:
The functional and economic analysis undertaken by the assessee was rejected by the assessing officer. The assessee had used the Transactional Net Margin Method (TNMM) for comparable analysis, with an operating margin of 10.39%. The Transfer Pricing Officer (TPO) amended the list of comparables, resulting in a mean operating margin of 20.59%.

3. Rejection of Comparable Companies:
The assessing officer arbitrarily rejected the companies Jocil Ltd. and Treet Corporation Ltd., which were adopted as comparable by the appellant.

4. Acceptance of Non-Comparable Companies:
The assessing officer accepted companies such as Laser Shaving India Pvt Ltd., Hindustan Unilever Limited (personal care segment), Proctor and Gamble Hygiene and Health Care Ltd., Gillette India Ltd (grooming segment), and Colgate-Palmolive (India) Ltd., which the appellant argued were not comparable in terms of functions performed, assets employed, and risks undertaken.

5. Rejection of Segmental Accounts:
The segmental profit and loss account related to export sales submitted by the appellant was not considered. The TPO rejected the segmental data as it was not audited and lacked detailed allocation keys for common expenses.

6. Consideration of Prior Period Items as Operating Expenses:
The assessing officer included prior period expenses of INR 1269 lacs as operating expenses for the current year, which the appellant contested.

7. Economic Adjustment:
The appellant argued for an appropriate economic adjustment for differences such as working capital employed compared to comparable companies. This was not granted by the assessing officer.

8. Flexibility of +/- 5% as per Section 92C(2):
The assessing officer did not consider the +/- 5% variation from the arm's length price permitted under Section 92C(2) of the Act.

9. Penalty Proceedings under Section 271(1)(c):
Penalty proceedings were initiated under Section 271(1)(c) without acknowledging that the appellant had not furnished inaccurate particulars of income.

10. Levy of Interest under Section 234A:
Interest of Rs. 13,21,630 was levied under Section 234A, despite the return of income being filed within the specified due date.

11. Excess Levy of Interest under Section 234B:
Interest under Section 234B was computed at Rs. 6,80,35,642 instead of Rs. 6,59,93,320, resulting in an excess levy of Rs. 20,42,322.

12. Excess Levy of Interest under Section 234C:
Interest under Section 234C was levied on the assessed income without considering that it should be levied on the returned income.

Judgment:
The tribunal found merit in the appellant's submissions regarding the comparability of the export segment's operating margin with the comparables selected by the TPO. The tribunal directed the TPO to examine the veracity of the appellant's submission and delete the adjustment if the results compare favorably. The appeal was partly allowed.

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