TaxTMI 
TaxTMI 
2025 (12) TMI 1914
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the segmental financials. 4. The relevant facts are that the assessee, a limited company, is engaged in the business of manufacturing and export of standardized herbal extract, fine chemical, nutraceuticals, specialty chemicals, cosmeceuticals, phytonutrients and probiotics. The assessee carried it business from several units, including two units which are 100% export-oriented unit (EOU). Majority of its manufactured products are exported to AEs as well as to the third parties. The assessee claimed that its subsidiaries/AEs largely function as marketing or distribution centre for sale of its products. 5. The international transaction entered with the AEs during the year includes export of goods, purchases of materials and income on account of services rendered. The assessee originally benchmarked its international transaction being sale of herbal products to AE using Cost Plus Method (CPM). The case was selected for the assessment and TPO during the assessment proceeding rejected the assessee's TP analysis. TPO adopting the TNMM as most appropriate method, benchmarked the assessee's international transactions and accordingly made upward adjustment of Rs. 39,03,36,915/- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red by the management of the assessee company, and they only certify the correctness of the figures and key allocations of the expenditures and incomes as per the generally accepted rational basis of allocation used in the industry. As per the assessee, the working of the PLI of AEs-segment stand at 12.22% and Non-AEs segment stand at 5.89%. 9. However, the TPO observed that the certificate issued by the Chartered Accountant only confirms the arithmetical accuracy of the figures. It does not certify the correctness of the segmental revenues, expenses, or margins. The breakup between AE and non-AE segments has been prepared by the assessee using general allocation keys, without any independent verification or audit of the segmental data. Therefore, the segmental information is based only on figures provided by the assessee and the same cannot be relied upon. 10. It is further observed that the assessee has not maintained separate and regular books of accounts for AE and non-AE transactions. The segmental details have been prepared only for transfer pricing purposes and are not supported by audited segment-wise accounts. The assessee has also not produced proper supporting....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thmetical accuracy is incorrect, as the statutory audit already covers the correctness of the underlying financial records. 16. It was further submitted that there is no legal requirement under the Income tax Act or the Companies Act for maintaining separate audited accounts for AE and non-AE segments. Once the statutory audit has been completed, there is no mandate for a separate segment-wise audit. The TPO ignored this settled position and proceeded on assumptions without pointing out any specific defect in the allocation methodology adopted by the assessee. 17. The assessee also explained in detail the basis of allocation of income and expenses between AE and non-AE segments. Sales were directly identified on an actual basis. Direct expenses were allocated based on material consumption and usage. Selling, marketing, and business promotion expenses were allocated only to the relevant segment to which they are related. Certain costs, such as warehousing and logistics, were incurred exclusively for non-AE sales and were therefore allocated entirely to the non-AE segment. These allocations were logical, consistent, and clearly documented, but the TPO failed to properly examine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ia. However, a substantial portion of the finished products is sold outside India through the assessee's overseas Associated Enterprises (AEs), which mainly function as marketing and distribution entities. During the year under consideration, the assessee sold nutraceutical products both to its AEs and to non-AE third-party customers, in India as well as outside India. 24. The learned AR explained that since the assessee is engaged in the same business activity of sale of nutraceutical products to both AE and non-AE customers, the transactions are closely comparable in terms of functions, assets, and risks. The assessee had therefore maintained detailed segmental financial information for AE and non-AE sales. These segmental details were supported by working papers and were also certified by an independent Chartered Accountant. Copies of the certified segmental analysis were duly filed before the TPO during the course of transfer pricing proceedings. 25. It was further submitted that, considering the close comparability between AE and non-AE transactions, the assessee had rightly adopted internal TNMM as the most appropriate method. Under this method, the operating margin ear....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l details. Direct costs were allocated based on actual consumption. Common expenses were allocated using reasonable and consistent allocation keys, such as revenue or cost ratios. Certain expenses like advertising, business promotion, and warehouse rent were incurred exclusively for non-AE sales and were therefore fully allocated to the non-AE segment. These allocation principles were clearly explained in the annexures and working papers submitted to the TPO. 30. The learned AR further submitted that even after excluding certain expenses fully allocated to the non-AE segment, the non-AE margin would increase to around 10%, which is still close to the AE margin of 12.33%. This further supports the assessee's claim that the AE transactions are at arm's length and no adjustment is warranted. 31. Reliance was placed on several judicial precedents, including decisions of the Hon'ble Delhi High Court in the case of Sony Ericsson communication India Pvt Ltd vs CIT reported in 55 taxmann.com 240 and various benches of the ITAT, which consistently hold that internal TNMM is the preferred method when reliable internal comparables are available. It was emphasized that tribunals have rep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of account. A Chartered Accountant has certified the segmental financials, confirming their arithmetical accuracy and linkage with the audited accounts. Merely because the certificate mentions arithmetical accuracy, the same cannot lead to an automatic rejection of the segmental results, especially when the underlying books of account are already subject to statutory audit. 37. On examination of the factual allocation of income and expenses, we note that the segmental computation of margins placed at page 68 of the paper book clearly explains the basis of allocation. The income from sales has been allocated to AE and non-AE segments on an actual basis using invoice-level data. This is the most reliable method of allocation and leaves no scope for arbitrariness. As regards expenses, we find that the majority of common expenses have been allocated on a net income basis, which is a reasonable and widely accepted allocation key. 38. It is also evident from the segmental workings that only two categories of expenses, namely rent and advertising/business promotion expenses, have been fully allocated to the non-AE segment. The assessee has explained that these expenses were incurred....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not justified in rejecting the internal TNMM and the segmental results furnished by the assessee. The internal comparables adopted by the assessee are reliable and demonstrate that the margin earned from AE transactions is higher than that earned from non-AE transactions. Accordingly, the international transactions are at arm's length. We therefore direct the learned TPO/AO to accept the internal TNMM adopted by the assessee and delete the transfer pricing adjustment made on this account. The grounds raised by the assessee on this issue are allowed. 43. Coming the other issued raised through ground No. 3 to 12 of the assessee's appeal. At the outset, we note that the issues raised in these grounds are in the nature of alternative claim to the main issue i.e. adoption of internal TNMM raised in the ground Nos. 1 & 2. As we have allowed the assessee ground for adoption of internal TNMM and accordingly we hold that that assessee's international transaction is at ALP, we do not find necessary to adjudicate these ground as they become infructuous in the light of outcome of Ground 1 & 2. Hence, we hereby dismiss the Ground Nos. 3 to 12 of the assessee's appeal as infructuous. 44. I....