TaxTMI 
TaxTMI 
2025 (3) TMI 2019
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble Dispute Resolution Panel 2, Mumbai ('DRP'), on the following grounds: On the facts, and circumstances of the case, and in law, the learned AO has, based on the directions of the DRP, erred in making additions of INR 1,61,14,337 to the Appellant's total income. 2. On the facts and circumstances of the case and in law, the proposed adjustment has been made by the learned AO/TPO/ DRP with a pre-determined mindset and not followed the principles of natural justice and basic tenets of transfer pricing regulations. 3. Incorrect approach while drawing the segmental working 3.1 On the facts and circumstances of the case and in law, the learned AO/TPO/DRP failed to take cognizance of the additional evidence filed by the Appellant in form of certificate obtained from the Statutory Auditor of the Appellant certifying the segmental working. 3.2 On the facts and circumstances of the case and in law, while determining the arm's length price in respect of the trading segment, the learned AO/TPO has made errors in considering incorrect COGS number while computing the segmental margin of trading segment and the learned DRP further err....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erred to as plastic sheets) from its AEs and moulds them into finished products. 2.1. The assessee filed its return of Income for the year under consideration on 14/03/2022 declaring loss of Rs. 1,16,04,545/-. The Ld.AO observed that, there was international transaction exceeding threshold limit. The assessee's case was thus referred to the Learned Transfer Pricing Officer (hereinafter referred to as the Ld.TPO). 2.2. Upon receipt of the reference, the Ld.TPO called upon the assessee to furnish details of international transactions in Form 3CEB. The Ld.TPO observed that assessee had following international transactions with its AE's: No. Nature of transaction Value of transaction (Rs. ) Method used for determining the ALP 1 Purchase of Raw Material 4231110 TNMM 2 Purchase of Goods 348982272 TNMM 3 Sale of Traded goods 606943 TNMM 4 Sale of Manufactured goods 40903966 TNMM 5 Purchase of FA 278721 TNMM 6 Receipt of Commission 1459208 TNMM 7 Provisions of Services 33699 TNMM 8 Mgmt. Support Services 17118108 TNMM 9 Website Maintenance Charges 115564 TNMM ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee should not be rejected due to the mismatch in the revenue numbers provided in the segmental profitability working for the trading and manufacturing segment vis-à-vis disclosures in financial statement of the assessee. 2.7. The assessee in response submitted that the revenue from Composites and Thermoplastics Machining is clubbed under the trading segment revenues and provided reasons justifying such clubbing of revenue under trading segment vide its submission dated 23/08/2023 and 31/08/2023 as under: a) The Assessee provided evidences in form of photos, ledgers for demonstrating the difference between the products sold as Composites and Thermoplastics machining and products sold as manufactured goods. The photos show that under minimal altering activity the assessee used less machines and less labour, while in manufacturing activity more complex machines and more labour was used. b) It was submitted that, there was difference in FAR profile of products sold as composites and thermoplastics machining and products sold as manufactured goods. The assessee submitted that FAR clearly shows that, the functions under both activities are different. It w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee on receipt of the draft assessment order, filed its objection before the DRP. 3.2. Before the DRP, the assessee also submitted that, in the event the Ld.TPO's approach in aggregating minimal alteration activity as manufacturing activity is accepted, the segmental details submitted by the assessee may be considered in order to correct segmental computation. The assessee in support also submitted segmental certificate obtained from the statutory auditor of the assessee as additional evidence, to show that, the segmental drawn by the Ld.TPO is incorrect. 3.3. The DRP on receipt of the additional evidence forwarded the same to the assessing officer calling for remand report. The assessing officer rejected the additional evidence by stating that, the same was not submitted during the transfer pricing proceedings and that it is an afterthought. 3.4. The DRP during the course of proceedings raised the issue in relation to allowability of Cost of Goods Sold (hereinafter referred to as COGS) adjustment and capacity adjustment made by the assessees to the margins earned from the manufacturing segment based on certified segmental details. The DRP rejected thus adjustment and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue to difference in FAR and difference in products, the activity of the minimal alteration has be construed as training activity an accordingly characterized as trading segment. It is submitted that, activity of minimal alteration in the product received from AE and the product sold to the costumer after such alteration is not very much different viz-a-viz from the manufacturing activity were the final product is total different than the raw material used. The Ld.AR submitted that for the proposes of transfer the activity of minimum alteration was treated as trading activity. 5.1 The Ld.TPO without considering the functions, assets involved and risk assumed by the assessee under trading, minimal alteration, manufacturing and service segments, bench marked minimal alteration activity to be the manufacturing activity. 5.2 The Ld.AR further submitted that even if such classification is accepted, the segmental details considered by the Ld.TPO are incorrect. Ld.AR raised following objection to the segmental working for trading segment by the Ld.TPO: Nature of Income/Expense As per segmental drawn by TPO Assessee's arguments Sale of operations Revenue from Thermoplas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....considered other Operating Revenue pertaining to Trading sales as well as sale after minimal alteration under the Trading segment, which is incorrect. Request your goodself to refer to Annexure 2 vide submission dated 31 August 2023. In the segmental working, we have provided all the 4 segments, trading, sale after minimal alteration, manufacturing sales and Service segment, which is non-AE segment, having the correct allocation of other operating revenue and Other income. Other Income Your goodself has considered other income pertaining to Trading sales as well as sale after minimal alteration under the Trading segment, which is incorrect. 5.3 The Ld.AR submitted that, revenue from sale of product pertaining to minimal alteration segment were clubbed under manufacturing segment. However, in respect of cost allocation, the Ld.TPO considered expenses allocated to training and minimal alteration segment, as per assessee's submission, and treated them to be combined cost under the training segment. Further, the Ld. TPO also allocated service segment to be a separate transaction not linked to manufacturing and trading segments. But, while drawing the segmental under manufac....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 6.2 It is further noted that, assessee had higher sales as previous years. It was submitted that an adjustment of capacity as well as cost of goods sold to sales ratio must be considered under the TNMM method in order to compute the margin and to iron out difference with the comparables if any. In the alterative the assess submitted CUP details to benchmark the transaction linked to manufacturing segments as and alternate benchmarking approached which was not accepted by the Ld.AO/TPO/DRP. 6.3 We note that this Tribunal in Metaal toys (Supra) analysed the manner in which most appropriate made is to be selected under the TNMM method to determine ALP. This Tribunal observed that, under TNMM major thrust is to derive operating profit at transactional level by identifying operating expenses to both tested party and independent comparable. This requires a lot of adjustment to determine the actually operating profit. 6.4 However, while applying method like CUP, the preference is in respect of the hundred percent similarity in FAR, products or services rendered by the tested party with the comparables. This Tribunal held that, if ALP of the transaction can be determined by applyin....