Tribunal partially allows appeal, instructs re-determination of ALP in Trading segment using RPM.

The Tribunal partly allowed the appeal, directing the AO/TPO to re-determine the ALP in the Trading segment using RPM and to exclude certain comparables in the Manufacturing segment, thereby deleting the transfer pricing adjustment in that segment.

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Issues Involved:
1. Transfer pricing adjustment in the Trading segment.
2. Transfer pricing adjustment in the Manufacturing segment.
3. Comparability of selected companies in the Manufacturing segment.

Detailed Analysis:

1. Transfer Pricing Adjustment in the Trading Segment:
The first issue concerns the transfer pricing adjustment of Rs.1,02,24,209/- made by the AO in the Trading segment. The assessee used the Resale Price Method (RPM) for benchmarking the international transaction of 'Purchase of traded goods' valued at Rs.19,37,32,319. The TPO rejected the RPM, citing the lack of a rational basis for the allocation keys used by the assessee to bifurcate combined expenses. The TPO instead applied the Transactional Net Margin Method (TNMM), leading to a higher adjustment. The DRP partially accepted the TPO's approach but made some changes to the allocation keys and comparables. The Tribunal found that since the assessee purchased finished goods from its AE and sold them without adding value, the RPM should be preferred over the TNMM. The Tribunal directed the AO/TPO to re-determine the ALP using RPM with the comparables and allocation of expenses as approved by the DRP.

2. Transfer Pricing Adjustment in the Manufacturing Segment:
The second issue relates to the transfer pricing adjustment of Rs.1,11,94,115/- in the Manufacturing segment. The assessee applied the TNMM with eight comparables to demonstrate that the ALP of the international transactions was at arm's length. The TPO, however, retained only one comparable from the assessee's list and added nine new ones. The DRP made some changes to the comparables and allocation keys, leading to a final adjustment of Rs.1,11,94,115/-. The Tribunal emphasized the need to properly characterize the assessee's business activity. It concluded that the assessee was engaged in a low-level assembly function rather than full-fledged manufacturing. Consequently, the Tribunal overturned the recharacterization by the authorities and directed the exclusion of certain comparables that were involved in full-fledged manufacturing.

3. Comparability of Selected Companies in the Manufacturing Segment:
The Tribunal addressed the comparability of six companies included by the TPO in the Manufacturing segment:
- Mettler Toledo India Pvt. Ltd.: Excluded due to high related party transactions (57% of total expenses).
- Avery India Ltd.: Excluded as it was engaged in full-fledged manufacturing.
- Essae Teraoka Private Ltd.: Excluded due to its multi-dimensional business, including R&D and manufacturing.
- Nitiraj Engineers Ltd.: Excluded for being involved in full-fledged manufacturing and holding intangible assets.
- Rice Lake Weighing Systems India Ltd.: Excluded due to its different business model and full-fledged manufacturing.
- Precia Molen India Pvt. Ltd.: Excluded for being engaged in full-fledged manufacturing.

After excluding these comparables, only Kusum Electrical Industries Ltd. remained, which had a negative weighted working capital adjusted margin of (-) 10.26%. Since the PLI of the assessee from this segment was (-) 7.23%, the transaction was deemed to be at arm's length, and the addition was deleted.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO/TPO to re-determine the ALP in the Trading segment using RPM and to exclude certain comparables in the Manufacturing segment, thereby deleting the transfer pricing adjustment in that segment. The order was pronounced in the Open Court on 17th October 2022.

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