2017 (9) TMI 112

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....INR 6,54,78,631. 2. That on the facts and in the circumstances of the case and in law, the Ld. DRP grossly erred in allocating expenses under the head 'manufacturing and other expenses' in the profit and loss account of the audited financial statements to the 'trading segment' of the appellant and thus making an addition on account of difference in the impugned transfer price and the arm's length price. 2.1 Without prejudice, that on the facts and in the circumstances of the case and in law, the Ld. DRP grossly erred in (a) not allocating operating income items; and (b) allocating non-operating expenses to the trading segment in making the impugned addition to the income. 3. That on the facts and circumstances of the case and in law, the Ld. DRP erred in redrawing the segmental accounts without providing an opportunity of being heard to the appellant to refute the same, thus violating the principle of natural justice. 4. That on the facts and in the circumstances of the case and in law, the Ld, DRP grossly erred in disregarding multiple year / prior years' data used by the Appellant in the transfer pricing ('TP') d....

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....ns. It was further submitted that the assessee did not allocate any indirect expenses to the trading segment for the reasons that the functions performed in relation to the trading of goods were minimal and any allocation of indirect expenses would not have any significant impact on the net margin and that the same approach was not questioned in any of the previous years by the TPO. 7. The ld. DRP after considering the objections and the submissions of the assessee observed that the Rule 10B of the Income-tax Rules, 1962 provides that, under the TNMM, the net operating profit margin realized by the enterprise is compared to that earned by an unrelated enterprise from a comparable uncontrolled transaction to arrive at arm's length price, in relation to the international transaction and that the net margins were more tolerant to some of the functional differences between controlled and uncontrolled transactions than gross margins (i.e. used in the RPM and CPM). It was further observed that usually it is difficult to find comparables having similar functional profile. Therefore, keeping in mind the flexibility of TNMM towards functional differences, it is used most often and that t....

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.... 1,81,82,450 Cost of materials consumed 26,88,19,925     26,88,19,925 Cost of traded goods sold - 7,23,70,149 8,23,16,372 15,46,86,521 Personnel Expenses(al located in the ratio of sales) 1,51,08,885 28,74,043 32,43,379 2,12,26,307 Manufacturing and other Expenses (break up given below)       3,15,43,103 Rent 2,93,919 55,886 64,165 4,13,972 Rates and Taxes(allocated in the ratio of sales) 85,059 16,173 18,569 1,19,801 Travelling & conveyance (allocated in the ratio of sales) 31,59,2,96 6,00,711 6,89,705 44,49,713 Repair & maintenance (allocated in the ratio of sales) 28,56,650 5,43,166 6,23,634 40,23,450 Consumables (allocated in the ratio of sales) 18,30,220 3,47,999 3,99,555 25,77,774 Training and seminars (allocated in the ratio of sales) 888096 168863 193880 12,50,840 Communication Expense (allocated in the ratio of sales) 900647 171250 196620 12,68,517 Legal & Professional (allocated in the ratio of sales) 2383919 453280 520433 33,57,632 Insurance (allocated in the ratio o....

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....uring and was also having trading activity, the arm's length price in manufacturing activity was accepted by the TPO/AO. However, the indirect expenses were allocated in the trading activities to determine the arm's length price. It was stated that few of the expenses which were directly related to the manufacturing activity e.g. depreciation, wages, consumable, power and fuel etc., were required to be excluded while allocating the expenses. It was also stated that the goods were directly supplied by the associated enterprises to the third parties, therefore, adjustment made by the TPO/AO was not justified. 10. In his rival submissions the ld. DR supported the order of the AO and further submitted that the ratio of gross profit margin cannot be applied as directed in the order of the ITAT relied by the ld. Counsel for the assessee because in certain segment, there can be gross loss instead of gross profit margin. However, he could not rebut this contention of the ld. Counsel for the assessee that few of the expenses which were directly related to the manufacturing segment could not have been allocated to the trading segment. 11. We have considered the submissions of both the ....