TaxTMI 
TaxTMI 
2025 (8) TMI 1800
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....78/- to the value of international transactions in the manufacturing segment of the Appellant. Incorrect rejection of TP documentation and performance of fresh search 2.2. The NFAC/DRP erred in law and facts in confirming the action of the TPO of rejecting the Appellant's TP documentation and performing a fresh search resulting in the addition of three new comparable companies without appreciating the fact that the TPO himself has accepted all of the Appellant's comparable companies in the TP order dated 12.04.2023 and hence there is no question of non-reliability of the Appellant's TP documentation/search. 2.3. The NFAC/ DRP erred in law and facts in confirming the action of the TPO of invoking the provisions of section 92C(3) of the Income Tax Act, 1961. 2.4. The NFAC/ DRP erred in law and facts in confirming the action of the TPO in not providing any cogent reasons for selection of additional comparable companies. 2.5. The TPO erred in not providing the search parameters basis which the comparable companies were selected by him. 2.6. The NFAC/DRP ought to have appreciated the fact that the search strategy provided by the TPO in the TP....
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....6. The NFAC/DRP erred in computation of notional interest on outstanding receivables by adopting credit period of 30 days without giving proper basis for the same. 2.17. Without prejudice the NFAC/TPO/DRP erred in not appreciating the fact that the overall intercompany outstanding payables (INR 1,475,721,371) with Group companies is more than that of the overall outstanding intercompany receivables (INR 324,465,169) from Group companies and hence imputing interest only on outstanding receivables from Group companies is unwarranted and unsustainable. 2.18. The NFAC/DRP failed to appreciate that no interest is charged on intercompany payables and on third party customers" 1. The Assessee further filed additional grounds as follows: "Incorrect treatment of miscellaneous expenses as non-operating expenses 3.1. The NFAC/ DRP/ TPO erred in law by considering the miscellaneous expense as non-operating while computing the margins of comparable companies and Appellant. 3.2. The NFAC/DRP ought to have appreciated that the miscellaneous expenses were incurred for the operations of the comparable companies and as such it has to be treated as oper....
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....; and iii. Flair Writing Inds. Ltd. arriving at arithmetic median of comparable at 9.64% against the segmental PLI arrived by the Assessee at 5.01% to arrive at an ALP of Rs. 3,43,68,897/- (para 6.4.3 of the TPO order) and Rs. 8,86,388/- towards interest on outstanding receivables. The total amount of adjustment amounting to Rs. 3,52,55,285/-. The TPO passed an order u/s. 92CA(3) of the Act dated 12.04.2023. The Assessee has filed rectification petition dated 04.05.2023. The AO issued a draft order u/s.144C(1) of the Act dated 14.09.2023 proposing to make variations as additions by providing 30 days time to accept or to file an objection to DRP. The Assessee filed an objection before the DRP. In the meanwhile, the TPO passed rectification order dated 27.03.2024 and reduced the quantum of TP adjustment from Rs. 3,43,68,897/- to Rs. 2,41,85462/-. On perusal of the objections and after providing the opportunity to the Assessee, the DRP issued directions u/s.144C(5) of the Act dated 25.06.2024 in principle confirming the major adjustments but granted minor relief to the Assessee by allowing the alternate prayer in respect of miscellaneous expenses. According to the Directio....
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.... the TPO are also fullfledged risk bearing entities similar to that of non-AE manufacturing segment and therefore the reasoning of the DRP for not accepting the Non-AE segment for internal TNMM comparison is flawed. The Ld.AR also contended that the DRP has made another observation to reject internal TNMM i.e. the DRP has held that internal TNMM could have been useful for comparing domestic transactions and not overseas AE transactions as the market dynamics are different. For this purpose, the Ld.AR invited our attention and highlighted the fact that even in respect of the comparable companies adopted by TPO, majority of them are into export as well as domestic market and therefore the Ld.AR contended that the TPO cannot adopt contrary stands to reject Internal TNMM. 5.3 Per contra the Ld. DR relying on the DRP directions argued that while the internal TNMM could have been useful for comparing the domestic transactions, it is not suitable for comparing and evaluating transactions with overseas associated enterprises due to difference in market dynamics, currencies, regulations, costs and risk factors. The Ld. DR pointed out that the turnover of Non-AE segment is Rs. 12,724,731/....
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.... could be considered for comparison. 5.6 We have heard the rival contentions perused the material available on record gone through the orders of the lower authorities along with the paper books filed and case laws relied upon. We find that the TPO while conducting the TP assessment has in principle accepted the basis of segmentation and has not raised any question on the allocation parameters, allocation keys etc., We also find that in respect of manufacturing segment the TPO has in fact adopted the AE segmental PLI of 5.01%, which impliedly goes to show that even the TPO has accepted the segmental. However, when it comes to comparison, the TPO has adopted external TNMM instead of internal TNMM i.e. comparing the international transaction in AE segment with Non-AE segment. The TPO has not given any specific reasoning for doing so. In our considered view, when the TPO has accepted segmental workings and relied on the segmental margin of the Manufacturing segment for the purpose of benchmarking, the TPO should have also considered internal TNMM instead of external TNMM. We believe and have also held that internal TNMM is superior to external TNMM. Our view is supported by the guid....
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.... segmentation, following the decisions of Birla Soft (supra), we set aside the order of the AO /TPO and remit this issue back to the file of the AO / TPO for determining the arm's length price in respect of the international transactions undertaken with the associated enterprise be determined by making internal comparison of profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segments." 5.8 Following the aforesaid Tribunal decision, the jurisdictional Tribunal in the case of Pos Hyundai Steel Manufacturing India Private limited Vs DCIT in ITA.No. 2485/Chny/2024 order pronounced on 04.06.2025 has upheld the application of internal TNMM over external TNMM. The relevant extract of this Tribunal in the case of POS-Hyundai is as under: "10. In view of the above view of the judicial precedents we are also of the view that Internal TNMM is more superior than external TNMM more so when audited segmental are available. Accordingly, in principle we hold that in Internal TNMM is the most appropriate method." 5.9 The Mumbai Tribunal In the case of Boston Consulting Group India Private Ltd vs. ....
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....idered over external TNMM. 5.12 We shall now advert to the findings and conclusion of DRP and the contention of the Ld. DR. The DRP has pointed two specific reasons viz., First, the Non-AE segment is a full-fledged entrepreneur bearing all risks and Second, the geography of the AE and the Non-AE is different. We find that the TPO has also considered external comparable companies which are fullfledged entrepreneur, which has also been upheld by DRP, that being the case the DRP's reasoning for rejection of comparison with Non-AE segment which is also similarly placed as that of the external comparable companies is flawed and we do not approve the same. Further, the second reasoning of the DRP is that of geographical difference. In this regard, the Ld.AR contended that the TPO had not applied the export turnover filter of 75% and hence as a result companies operating in the domestic market were also selected by the TPO. Hence it is the contention of Ld.AR that there is functional as well as geographical similarity between the comparable companies selected/accepted by the TPO and the non-AE manufacturing segment of the assessee. Here again we find that the external comparable compan....
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....d no.2.13 of the assessee is allowed. 6. Additional Grounds of appeal: Miscellaneous expenses should be treated as operating item for both Assessee and comparable companies. 6.1 The Ld.AR explained that during the TP assessment the TPO had considered miscellaneous expense as operating for Assessee but considered the same as non-operating for comparable companies. The DRP in its directions directed the TPO to adopt for consistent treatment of miscellaneous expense as non-operating expense for both the Assessee as well as comparable companies allowing the alternative ground raised by the assessee. Since the alternate ground was allowed by the DRP, the Assessee while filing the appeal before the Tribunal, inadvertently missed raising the primary ground on the treatment of miscellaneous expense as operating expense in nature while computing the margins of the Assessee as well as the comparable companies. The same is raised as an additional ground. Thus, the Ld.AR argued that the miscellaneous expenses are incurred as a part of the business operations of the entity and are often recurring and routine in nature making them essential to the business operations and hence it should be....
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....aised as part of additional grounds of appeal in favour of the assessee. 6.6 Since the grounds of appeal No. 2.13 on internal TNMM and the additional grounds of appeal on miscellaneous expense is held in favour of the assessee, the other grounds of appeal, i.e. ground Nos. 2.1 to 2.12 becomes academic and hence we are not adjudicating the same. 7. Gr. No. 2.14 to 2.18 notional interest on outstanding receivables 7.1 The TPO has held that outstanding receivable is a separate international transaction and attributed interest for credits beyond 30 days by considering interest at the rate of 6 months average LIBOR plus 350 basis points. The Assessee has contended before DRP that it has not charged interest for NonAE transactions and even its AE has not charged interest in respect of trade payables by the Assessee. The DRP did not accept these contentions and in principle upheld the adjustment but gave specific directions to restrict the quantum of adjustment up to the end of the financial year. Aggrieved by the order of the lower authorities, the assessee is in appeal before us. 7.2 We find that the outstanding payable by the assessee to its AE is Rs. 147,57,21,371/- whi....