2017 (5) TMI 1795

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....,219/- as difference in arm's length price determined by the Transfer Pricing Officer (TPO) and in pursuance of DRP's order in r/o sale of goods to Associated Enterprise. (ii) That on the facts and in the circumstances of the case and in law, the Learned A.O/TPO erred in rejecting the economic analysis undertaken by the assessee for determination of the arms length price of international transaction entered into by the Appellant with its Associated Enterprise.("AE's")" (iii) That on the facts and in the circumstances of the case and in law, the Learned A.O/TPO erred in rejecting the segmental profit and loss for AE and Non AE segment, relying on the Tax Audit Report to conclude that the Appellant is not maintaining separate audited financials for these segmental information as disclosed in the transfer pricing report had been created to artificially allocate costs and thereby reducing losses. (iv) That on the facts and in the circumstances of the case and in law, the Learned A.O./TPO, erred in not taking into consideration that the assessee has reported the segment information as per AS-17 and identified the geographical segment. (v) That on the ....

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....d to be at arms length. 4. The TPO on a perusal of the aforesaid facts therein concluded that the allocation of various costs done by the assessee to its AE and Non-AE transactions was not proper, as well as the base taken by it was incorrect. The TPO thus being of the view that the profit figure arrived by the assessee was not reliable, thus in light of his aforesaid conviction rejected the self-serving allocation exercise done by the assessee. The TPO further on the basis of search done in capital line database and using various filters identified 25 comparable companies, which as per him were doing the same business as that of the assessee. That during the course of the proceedings before the TPO, the list of companies alongwith the working of Operating Margin (OP/OC) was given to the assessee, and the latter was called upon to show cause as to why the internal TNMM should not be rejected and the External TNMM may not be adopted as the Most Appropriate Method (MAM) for determining the ALP of the transactions of the assessee with its AE's. The TPO further observing that the sale transactions were more than the purchase transactions, therefore took the PLI as OP/OC, as against ....

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....ansactions as the base. The TPO thus in the backdrop of his aforesaid observations being of the view that since the PLI of the assessee was lower than the PLI of comparables, therefore did not accept the ALP computed by the assessee as regards the sales and purchases to and from the AE's, and thus proposed an upward adjustment of Rs. 1,30,18,232/- to the total income of the assessee. 6. The AO on receiving the order of the TPO therein passed the draft assessment order u/s. 143(3) r.w.s. 144C(1) on 03/03/2015. Theassessee aggrieved with the adjustments proposed by the AO in the assessment order, therein filed objections before the DRP in respect of the upward adjustment of Rs. 1,30,18,232/- proposed by the TPO in respect of the international transactions of the assessee with its AE's. The DRP being of the view that the segmental accounts furnished by the assessee were not authentic due to the reason that the expenses have been artificially allocated to AE and Non-AE segment and were not shown on actual basis, as well as that the expenses pertaining to marketing efforts and various risks associated with the sale to Non-AE transactions have been bifurcated to AE segment and were no....

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....puted the PLI (OP/OC) of the assessee as under:- Particulars Adjustment as per DRP Directions Export sale to AE 11,55,92,714 OP/OC of Assessee -4.37% Operating Cost of the Assessee on AE export 12,08,74,949 OP/OC of Comparable 6.17 ALP of the Export Sale to AE 12,83,32,933 Difference ALP & Export Sale to AE 1,27,40,219 (+5%) of export sale to AE 57,79,609 The A.O thus observing that the difference in ALP of the Export sale to the AE's and the Export Sales made by the assessee to its AE's amounted to Rs. 1,27,40,219/-, which was more than 5% of the export salesmade to the AE's, therefore, going by the direction of the DRP carried out an upward adjustment of Rs. 1,27,40,219/- in respect of the international transactions undertaken by the assessee company with its AE's during the year under consideration. 9. The AO further observing that the assessee had defaulted to credit the payments relating to employees contribution to PF, ESIC and labour welfare fund on or before the prescribed due date, therein made an addition of Rs. 14,45,925/- u/s. 36(1)(v)(a) r.w.s. 2(24) (x) of the "Act" in the hands of the assessee company. The AO thus....

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.... assessee and erred in failing to appreciate that the said respective segments were not comparable. The Ld. A.R referring to Page 52 andPage 13 of its APB therein submitted that the same were the part of its "Annual report" wherein the segmental reporting containing the aforesaid factors stood mentioned. Per contra, the Ld. DR heavily relied on the orders of the lower authorities. 11. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material produced before us. We have given a thoughtful consideration to the facts of the case and are of the considered view that the adverse inferences drawn by the DRP in the hands of the assessee company are primarily backed by the following factors: i) That as per the DRP the segmental accounts furnished by the assessee are not authenticdue to the reason that the expenses have been artificially allocated to AE and Non-AE segment and are not actual. ii) That as per the DRP the expenses pertaining to marketing efforts and various risks associatedwith the sale to Non-AE transactions have been bifurcated to AE segment and not shown on actual basis. iii) T....

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....ocal sales in India is not comparable to its AE segment due to different FAR, can safely be concluded to be misplaced in context of the adverse inferences so drawn by the DRP in the hands of the assessee on the basis of misconceived facts, because the fact as it so remains is that no such comparison between the Non-AE segment pertaining to the local sales in India had ever been put across as against the AE segment of the assessee. We after a perusal of Page 52 of the "APB" to which our attention was drawn are persuaded to be in agreement with the contention of the Ld. A.R that the DRP had proceeded with on the basis of incorrect facts that the assessee had embarked on an infeasible comparison between Non-AE segment pertaining to local sales in India, as against its international transactions with its AE's, as the facts as they so emerge from the record therein reveals beyond any scope of doubt that the assessee had specifically categorized and earmarked such NonAE segment pertaining to local sales in India as "Uncomparable", as a fall out of which it can safely and inescapably be concluded that the aforesaid observation arrived at by the DRP are devoid of any force and thus do not ....