Tribunal allows assessee's appeal for separate benchmarking in TP adjustments

The Tribunal allowed the assessee's appeal, directing separate benchmarking of international transactions for each segment. The Revenue's appeal was dismissed, affirming TP adjustments limited to international transactions as per regulations.

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Issues Involved:
1. Deletion of addition under Section 92CA(3) of the Income Tax Act, 1961.
2. Combining manufacturing and trading segments for benchmarking.
3. Adjustment for extraordinary items affecting operating profit.
4. Transfer Pricing (TP) adjustment with reference to international transactions versus overall turnover.

Detailed Analysis:

1. Deletion of Addition under Section 92CA(3):
The assessee contested the addition of Rs. 97,34,49,822/- made under Section 92CA(3) of the Income Tax Act, 1961. The CIT(A) reduced this addition to Rs. 4,06,71,820/- by accepting the assessee's contention that TP adjustment should be made only with reference to international transactions and not the overall turnover. The Tribunal upheld this view, stating that TP regulations require adjustments to be made in respect of international transactions only.

2. Combining Manufacturing and Trading Segments for Benchmarking:
The CIT(A) confirmed the TPO's action of combining manufacturing and trading segments for benchmarking, which the assessee opposed, arguing for separate benchmarking of international transactions in manufacturing export segment, domestic manufacturing segment, and trading segment. The Tribunal referred to the Delhi High Court's decision in Sony Ericsson Mobile Communications India Pvt Ltd, which held that in cases involving manufacturing and trading activities, it is inappropriate to apply TNMM on an entity-wide basis. The Tribunal concluded that segmental results should be considered for benchmarking, not the entity-level profit margin.

3. Adjustment for Extraordinary Items Affecting Operating Profit:
The assessee sought adjustments for extraordinary items such as loss of revenue due to price reduction, cash discounts, and additional discounts related to the FALCON project, which were rejected by the TPO. The Tribunal found that these adjustments relate to general market conditions and are common practices, thus siding with the TPO's rejection of these claims.

4. TP Adjustment with Reference to International Transactions Versus Overall Turnover:
The Revenue's appeal contested the CIT(A)'s decision to restrict TP adjustments to international transactions rather than the overall turnover. The Tribunal upheld the CIT(A)'s view, emphasizing that TP regulations mandate adjustments to be made only for international transactions. The Tribunal found no reason to interfere with the CIT(A)'s findings, dismissing the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the Assessing Officer/TPO to benchmark international transactions separately for each segment with suitable comparables. The Revenue's appeal was dismissed, affirming that TP adjustments should be limited to international transactions as per TP regulations. The order was pronounced in the open court on 11.10.2022.

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