2023 (2) TMI 1051

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....ng segments for bench marking. 3. That the CIT (A) erred on facts and in law in rejecting the appellant's claim for making adjustment for extraordinary items such as Loss of sale due to reduction in prices, cash discounts and additional discounts on account of FALCON Project cost affecting the operating profit of the appellant. 4. The appellant craves leave to add to, alter, amend or vary from the aforesaid grounds of appeal at or before the time of hearing." 3. Ground No. 2 of the assessee has been modified as under: "That the ld. CIT(A) erred on facts and in law in confirming the TPO action in combining the manufacturing and trading segment for bench marking and instead erred in not undertaking bench marking of international transactions of manufacturing export segment, domestic manufacturing segment and trading segment separately, applying TNMM considering operating profit margin of the respective segments." 4. The grievances of the Revenue read as under: "1. On the facts and in the circumstances of the case, the ld. CIT(A) erred on facts and in reducing the addition of Rs. 97,34,49,822/- made by the TPO/Assessing Officer on account ....

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.... Cost and other discount offered under The FALCON project - Rs 30.06 crores (iv) Adjustment on account of change in accounting standard - Rs. 7.75 crores 9. In so far as trading segment is concerned, operating margin of the assessee at 3.86% was higher than those of the comparable companies at 3.80%, the international transactions in the trading segment were considered to be at arm's length. 10. The afore-stated margin comparisons were not accepted by the TPO who relied upon the order for the preceding year and rejected the segmental analysis undertaken by the assessee and instead, considered the entity level operating margin of the assessee holding that the assessee has international transactions in both the segments and the marketing chain of the assessee is common for both the segments. 11. The TPO further rejected the claim of the assessee towards adjustment on account of reduction in sales of Rs 83.89 crores and discount of Rs 30.06 crores stating that such adjustments relate to general market conditions and there is nothing extra-ordinary in the expenses incurred towards discount and it is a common practice in the market to provide discount on old models. ....

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....p; 3 Years Avg. ALP Margin - A   3.69%   Total Income - B 111,883.25   Total Expenses (after adj. for VRS and Extra Warranty Charges & Fin. Charges) - C 117,487.99   ALP Profit - D - (=A*B)   4,129.75 Loss incurred by the assessee - E - - (=B-C) -5,604.73   Adjustment to the income of the assessee D+E   9,734.498 15. The assessee challenged the assessment before the ld. CIT(A) where it was able to convince the ld. CIT(A) that transfer pricing adjustment shall be made only with reference to the international transactions undertaken by the assessee and not with reference to the overall turnover. The CIT(A) accepted the contention and reduced the addition of Rs. 97,34,49,822/- to Rs. 4,06,71,820/-, against which the Revenue is in appeal. 16. However, the ld. CIT(A) rejected the contention with regard to use of segmental profitability on the basis that the trading turnover constitutes less than 10% of total sales of the assessee. 17. Before us, the ld. counsel for the assessee vehemently stated that the lower authorities have grossly erred in dismissing the segmental profitability st....

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.... one of the entities is not plain vanilla distributor ', it should be applied when necessary and applicable comparables on functional analysis, with or without adjustments are available. Otherwise, the TNM Method should not be adopted or applied on account of being an inappropriate method. 9.2 It would not be appropriate and proper to apply the TNM Method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw material for manufacture would possibly be an independent international transaction viz marketing and distribution activities or functions" 22. Keeping in mind the aforesaid decision of the Hon'ble Jurisdictional High Court of Delhi, all that we have to consider is as to whether the segmental results are to be taken into consideration or profit margin at entity level is to be considered. 23. In our considered opinion and in light of the provisions of section 92 to 94 of the Act, international transactions are to be taken into consideration. Therefore, in our considered opinion, segmental results are to be considered and not the prof....