Tribunal Upholds TPO's ESAS Segregation Decision, Directs Correct ALP Determination

The Tribunal upheld the TPO's segregation of the ESAS segment into three separate segments, directed the determination of ALP for the Trading segment under RPM with correct comparables, and rational expense allocation. The Tribunal remitted the EARC segment for consideration of a risk adjustment, allowing the appeal for statistical purposes.

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Issues Involved:
1. Splitting of ESAS segment into three segments: Sales, Trading, and Service.
2. Most appropriate method for determining ALP: TNMM or RPM.
3. Calculation of PLI and Transfer Pricing (T.P.) adjustment.
4. Transfer pricing addition in the Engineering & Research Centre (EARC) business segment.

Issue-wise Detailed Analysis:

I. Splitting of ESAS Segment into Three Segments: Sales, Trading, and Service

The assessee aggregated eight international transactions under the ESAS segment and applied the TNMM for benchmarking. The TPO segregated these transactions into Indenting, Trading, and Service segments, which the assessee contested. The Tribunal examined whether these transactions were "closely linked" as required under Rule 10A(d). It was determined that the Indenting segment (pre-sale activity) was not closely linked with Trading and Service segments (post-sale activities). The Tribunal upheld the TPO's segregation of the ESAS segment into three separate segments.

II. Most Appropriate Method: TNMM or RPM

The assessee initially applied TNMM but later requested the TPO to use RPM for the Trading segment. The TPO rejected this request, citing the use of dissimilar comparables. The Tribunal noted that RPM is appropriate for cases where goods purchased from an AE are resold without further processing, as supported by the Hon’ble jurisdictional High court in CIT Vs. L’oreal India (P) Ltd. The Tribunal directed the TPO to determine the ALP of the Trading segment afresh under RPM with correct comparables.

III. Calculation of PLI and T.P. Adjustment

The TPO calculated the operating revenue and costs for the Trading segment and proposed a transfer pricing adjustment based on an arbitrary allocation of expenses. The Tribunal found this allocation arbitrary and directed a logical and rational basis for expense allocation. Additionally, the Tribunal restricted the transfer pricing adjustment to transactions with AEs only, following precedents set by the Hon’ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd.

IV. Transfer Pricing Addition in the EARC Business Segment

The TPO proposed a transfer pricing adjustment in the EARC segment, which the assessee contested, seeking a risk adjustment. The DRP rejected this claim, noting that the assessee was not a risk-free entity. The Tribunal set aside the impugned order and remitted the matter to the AO/TPO for examining the possibility of granting a risk adjustment, allowing the assessee a reasonable opportunity of hearing.

Conclusion:

The Tribunal set aside the transfer pricing addition in the Trading segment under the ESAS business segment and remitted the matter for fresh determination of the ALP using RPM with correct comparables. It also directed a logical allocation of expenses and restricted the adjustment to transactions with AEs. For the EARC segment, the Tribunal remitted the matter for examining the claim for risk adjustment. The appeal was allowed for statistical purposes.

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