Transfer pricing segmentation required; benchmarking must be done segment-wise and matter remitted for verification under Section 92C(2).

Taxpayer's distinct AMC and agency/marketing activities must be treated as separate business segments for transfer pricing when supported by functional, asset and risk analysis and a disclosed allocation basis; entity-level aggregation and a TNMM application without segmental benchmarking cannot be sustained. The PLI and comparables must be applied segment-wise and the transfer pricing adjustment is remitted to the TPO for limited verification of segmental accounts, comparables and whether the tested-party margin falls within the permissible tolerance under the proviso to Section 92C(2); if so, no adjustment is warranted.

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Issues: (i) Whether the assessee's business for the year under consideration can be treated as two distinct segments (AMC services and agency/marketing support) for transfer pricing analysis; (ii) Whether the transfer pricing adjustment made by the TPO/AO by aggregating the segments and applying TNMM at entity level should be sustained or the matter should be restored to the TPO for segment-wise verification and benchmarking.

Issue (i): Whether the business can be segmented into AMC services and agency/marketing support services for transfer pricing purposes.

Analysis: The issue was examined with reference to the functional, asset and risk (FAR) profile and the segmental accounts maintained by the taxpayer for the relevant year and the immediately preceding year. The Tribunal's earlier decision for the immediately preceding assessment year accepting separate segments and the presence of segmental allocation methods and apportionment basis were taken into account. The authorities' objections based solely on the absence of audited segmental accounts were weighed against the provided basis of allocation and the FAR indicators showing distinct functions and risks for the two segments.

Conclusion: The Tribunal concludes that the business is to be treated as two distinct segments for transfer pricing analysis in the year under consideration; this conclusion is in favour of the assessee.

Issue (ii): Whether the TPO/AO's aggregation of segments and application of TNMM at entity level leading to an adjustment of Rs. 1,79,85,243/- should be upheld or re-examined segment-wise.

Analysis: Having accepted segmentation, the PLI and comparables must be applied segment-wise. The Tribunal referenced the earlier coordinate-bench decision directing deletion of a similar adjustment when segments were respected. The Tribunal evaluated the reported tested party PLI (17.95%) and the mean comparable result (19.63%) for the agency/marketing segment and noted the proviso to Section 92C(2) regarding permissible tolerance. The Tribunal determined that factual verification by the TPO is required to confirm whether the segmental benchmarking results fall within the permissible tolerance and whether any adjustment remains warranted.

Conclusion: The Tribunal directs restoration of the transfer pricing issue to the TPO for limited purpose of verification of the segmental accounts, comparables and benchmarking; if the PLI as per segmental accounts is within the proviso to Section 92C(2), no adjustment is called for. This conclusion is partly in favour of the assessee.

Final Conclusion: The appeal is allowed for statistical purposes and the transfer pricing addition is remitted to the TPO for limited verification and appropriate fresh determination on a segment-wise basis, taking into account the Tribunal's acceptance of two distinct segments and the proviso to Section 92C(2).

Ratio Decidendi: Where a taxpayer demonstrates distinct business segments by functional, asset and risk analysis together with a disclosed basis of allocation, transfer pricing benchmarking must be conducted segment-wise and an aggregated entity-level adjustment cannot be sustained without cogent reasons; if segment-wise tested party margin falls within the permissible tolerance under Section 92C(2) of the Income-tax Act, 1961 no transfer pricing adjustment is warranted.

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