TaxTMI 
TaxTMI 
2026 (9) TMI 604
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....or scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. Since the assessee entered into large-value international transactions with its associated enterprises, reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer ("TPO") for determination of arm's length price of the international transactions entered into by the assessee. After considering the submissions filed by the assessee, the TPO, vide order dated 24.07.2023 passed under section 92CA(3) of the Act, made a total transfer pricing adjustment of Rs. 53,34,92,074, as follows: - Particulars Amount of Adjustment Manufacturing and trading of wholesale food. Noodles and Semi Instant food products segment 11,52,47,234 AMP expenditure reimbursable 41,82,44,840 Total Adjustment u/s 92CA 53,34,92,074 3. In conformity, the Assessing Officer ("AO") passed the draft assessment order dated 27.09.2023 under section 144C(1) of the Act, incorporating the transfer pricing adjustment proposed by the TPO. The learned DRP, vide its directions issued under section 144C(5) of the Act, inter alia, rejected the objections file....
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.... 3.1. On the facts and circumstances of the case and in law, the Hon'ble DRP/the Learned AO/Learned TPO erred in making the transfer pricing adjustment to the arm's length price ("ALP") of the Appellant's international transaction pertaining to its Manufacturing activity amounting to Rs. 11,52,47,234. 3.2. While doing so, Hon'ble DRP/the Learned AO / Learned TPO have erred in: * Invoking the provisions of Section 92C(3) of the Act; * Disregarding the TP Study maintained by the Assessee in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('the Rules') and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transactions and holding that the Assessee's certain international transactions are not at arm's length. * Appreciating the characterisation of the Assessee as a licensed manufacturer and also disregarding the fact that the overall value of the international transaction is only 2.39% of the total cost incurred by the Assessee. * Rejecting transaction-by-transaction approach followed by the Assessee and applying entity level Transactional Net Ma....
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....pertaining to its alleged AMP expenses amounting to Rs. 41,87,67,777. 4.2. While doing so, Hon'ble DRP/the Learned AO / Learned TPO have further erred in: (a) treating the Advertisement, Marketing and Promotion ('AMP') expenses incurred by the Appellant in India as an 'international transaction' as per Section 92B of the Act. (b) disregarding the economic characterization of the Appellant as a licensed manufacturer and asserting that a separate compensation is warranted for the alleged excess AMP expenses. (c) assuming an arrangement and understanding between the Assessee and its Associated Enterprise ("AE") to promote the brand / trade name (owned by the AE) (d) characterizing the Appellant's own expenses as an international transaction with its AE, merely based on an alleged excess spend on what Hon'ble DRP/the learned AO / TPO alleges is expenditure on AMP. (e) not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations/results. (f) disregarding the fact that the AMP expenses were incurred 'wholly and exclusively' for purpose of business of the Appellant in India and n....
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....leged AMP expense. While doing so the Hon'ble DRP/the learned AO/TPO further erred in: a. Applying filters like comparable having different financial year ending and Companies who have more than 25% related party transactions of the sales as well as expenses, which are not appropriate. b. Upholding the action of the Learned AO/Learned TPO in including companies in the final list of comparables, which ought to be excluded on the basis of functional dissimilarity, lack of segmentation, and incorrect margin computation. 1. Maagh Advertising & Marketing Services Limited 2. Bright Advertising Private Limited 3. Scarecrow Communications Limited 4. Axience Consulting Private Limited 5. FCB Interface Communications Private Limited 6. YRSK Marketing & Branding Solutions Private Limited 7. Pressman Advertisings Limited 8. SV Media Private Limited 9. Lintas India Private Limited 10. Proactive In & Out Advertising Private Limited 11. Affle (India) Limited 12. Just Dial Limited 13. Saatchi & Saatchi Private Limited 14. Majestic Research Services & Solut....
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.... within the 35th and 65th percentile range of the weighted average of operating margin of comparable companies, it was claimed that the transaction is at arm's length. 8. During the transfer pricing assessment proceedings, the TPO, by considering the assessee as the tested party with an operating margin of -1.36% on operating cost and applying additional filters, arrived at a final set of 14 companies, which were considered as comparable for benchmarking the international transaction in the manufacturing segment. Since the 35th and 65th percentile range of weighted average operating margin of 14 companies considered as comparable by the TPO ranged between 2.38 % to 6.83%, with a median of 3.84%, the TPO by applying the arm's length margin, i.e. 3.84%, proposed an adjustment of Rs. 11,52,47,234/- in respect of the international transaction of in manufacturing segment, vide order passed under section 92CA(3) of the Act. 9. The learned DRP, vide its directions issued under section 144C(13) of the Act, rejected the objections filed by the assessee and upheld the findings of TPO in respect of benchmarking the international transaction of the manufacturing segment. In conformity wi....
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.... is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act." 14. We find that the Hon'ble Bombay High Court also concurred with the view taken by the Hon'ble Delhi High Court in CIT vs. Keihin Panalfa Ltd., reported in (2016) 381 ITR 407 (Delhi). Accordingly, respectfully following the aforesaid decisions, we direct the AO/TPO to restrict the transfer pricing adjustment, if any, to the international transactions entered into by the assessee with its associated enterprises. 15. We shall now deal with the submissions regarding the company sought to be excluded for benchmarking the international transaction in relation to the manufacturing segment. (a) Amway India Enterprise Private Ltd. 16. The first company which is sought to be excluded by the assessee is Amway India Enterprise Private Ltd. This company was selected as the comparable by the TPO, vide order passed under section ....
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....nual Report of Avenue Food Plaza Private Limited, forming part of the paper book from pages 331 - 351, we find that this company has declared the fast-food centres as its single reportable segment. Since the assessee in the present case is engaged in the production of ready-to-cook instant noodles, we are of the considered view that Avenue Food Plaza Private Limited cannot be considered as functionally comparable to the assessee. Accordingly, we direct the AO/TPO to exclude Avenue Food Plaza Private Limited for benchmarking the international transaction in relation to the manufacturing segment. (c) Euro India Fresh Foods Ltd 20. The next company which is sought to be excluded by the assessee is Euro India Fresh Foods Ltd. This company was selected as a comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that this company is engaged in manufacturing of products similar to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking ....
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....assessee for benchmarking the international transaction in relation to the manufacturing segment. (e) Haldiram Bhujiwala Ltd. 24. The next company sought to be excluded by the assessee is Haldiram Bhujiwala Ltd. This company was considered as a comparable by the TPO, vide order passed under section 92CA(3) of the Act. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking the international transaction in relation to the manufacturing segment. 25. We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Haldiram Bhujiwala Ltd., forming part of the paper book from pages 503-617, we find that the company manufactures sweets, including dairy-based sweets. As the assessee in the present case is engaged in producing ready-to-cook instant noodles, we are of the considered view that this company cannot be considered comparable to the assessee, as it provides ready-to-eat food items, whereas the asses....
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.... 28. To sum up, we direct Amway India Enterprise Private Ltd., Avenue Food Plaza Private Limited, Euro India Fresh Foods Ltd, Haldiram Bhujiwala Ltd., and MTR Foods Private Ltd. to be excluded while benchmarking the international transaction in relation to the manufacturing segment. While the directions of the AO/TPO to consider GITS Foods Products Private Ltd. as comparable for benchmarking the international transaction in relation to the manufacturing segment are upheld. 29. Accordingly, Grounds No. 3.1 - 3.6 raised in assessee's appeal are partly allowed. 30. Grounds No. 4.1 - 4.5, raised in assessee's appeal, pertain to the transfer pricing adjustment on account of advertisement, marketing and sale promotion ("AMP") expenses. 31. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case pertaining to this issue are that during the transfer pricing assessment proceedings, from the TP study as well as the audited financials of the assessee, it was observed that the assessee is involved in advertising, marketing and brand building services for its associated enterprises. It was noticed that the assessee w....