Transfer pricing benchmarking must focus on associated enterprise transactions only, not entity-level comparisons

The ITAT Hyderabad ruled in favor of the assessee on transfer pricing adjustments, directing that benchmarking should be restricted to transactions with associated enterprises (AEs) only, not entity-level comparisons. The tribunal restored multiple issues to the Assessing Officer/TPO including: consideration of segmental information for AE transactions only when determining arm's length price, evaluation of appropriate most appropriate method (MAM) selection for manufacturing versus trading segments, verification of whether resale price method should apply to trading activities without value addition, and proper classification of business segments based on transaction volumes. The appeal was allowed for statistical purposes with directions for fresh consideration of segmental margins and transaction-specific analysis.

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Issues Involved:

1. Non-consideration of segmental information.
2. Non-consideration of TNMM as MAM for manufacturing segment.
3. Non-consideration of RPM as MAM for trading segment.
4. Classification of the assessee as manufacturing segment.
5. Restriction of TP adjustment to AE transactions only.

Summary:

1. Non-consideration of segmental information:

The assessee challenged the Revenue authorities' action of clubbing manufacturing and trading segments into one for benchmarking. The learned TPO aggregated activities and benchmarked transactions under TNMM at the entity level. The learned DRP rejected the remand report that considered segmental information, citing difficulties in verifying cost allocation and computing profits attributable to AE transactions. The Tribunal, following the decision in TPSC (India) Private Limited vs. DCIT, restored the issue to the learned Assessing Officer/learned TPO to consider transactions with AEs only.

2. Non-consideration of TNMM as MAM for manufacturing segment:

The assessee argued that it provided segmental analysis, but the learned TPO benchmarked operations at the entity level. The learned DRP concurred, noting no segregation of accounts for AEs and non-AEs. The Tribunal, referencing Rule 10B(1)(e)(2) and OECD guidelines, directed the learned Assessing Officer/learned TPO to consider only the operating profit/operating cost of AEs segment and internal TNMM where services to AEs and non-AEs are similar.

3. Non-consideration of RPM as MAM for trading segment:

The assessee contended that it adopted RPM as MAM for trading segment, submitting that it merely purchased and resold goods without value addition. The learned TPO and DRP disagreed, citing lack of comparable data. The Tribunal, referencing the decision in DCIT vs. Commvault Systems (India) Private Limited, restored the issue to the learned Assessing Officer/learned TPO to verify the absence of value addition and accept RPM as MAM if segmental financials support the claim.

4. Classification of the assessee as manufacturing segment:

The assessee argued that AE transactions in the manufacturing segment were only 5.2% compared to non-AE transactions, making entity-level comparison unreasonable. The Tribunal restored the issue to the learned Assessing Officer/learned TPO to verify transaction volumes and, if majority relate to trading, classify the assessee under trading segment for economic analysis.

5. Restriction of TP adjustment to AE transactions only:

The learned TPO's adjustment at the entity level was contested by the assessee, who requested restriction to AE transactions. The learned DRP maintained entity-level comparison. The Tribunal, following TPSC (India) Private Limited, directed the learned Assessing Officer/learned TPO to restrict margin analysis to AE segment alone.

Conclusion:

The appeal of the assessee is treated as allowed for statistical purposes.

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