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Facts
The assessee, an Indian subsidiary, is engaged in importing and distributing high-performance plastic products, and also manufacturing some products. The case involves transfer pricing adjustments concerning international transactions with its Associated Enterprises. The TPO and DRP made additions to the assessee's total income based on their analysis of segmental profitability and transfer pricing methods.
Held
The Tribunal found that the assessee's grounds of appeal were partly allowed. The issue was remitted back to the AO/TPO for de novo verification of the FAR analysis and to consider appropriate methods like CUP, RPM, or CPM if applicable, before resorting to TNMM, with proper opportunity to the assessee.
Key Issues
Dispute over segmental classification (trading vs. manufacturing) for minimal alteration activities and the appropriate transfer pricing method (TNMM vs. CUP) for determining arm's length price.
Sections Cited
143(3), 144C, 144B, 234A, 234B, 234C, 153, 92CA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI RENU JAUHRI
Per: Smt. Beena Pillai, J.M.: The Present appeal filed by the assessee is against the order dated 25/10/2024 passed by the Income Tax department Assessment unit, under section 143(3) r.w.s. 144C r.w.s 144B of the Act, on following grounds of appeal: “ On the facts, and in the circumstances of the case, and in law, the Appellant craves to prefer an appeal against the order dated 25
October 2024 passed by the Assessment Unit, National Faceless Assessment Centre, Income Tax Department (hereinafter referred to as the 'learned AO") under Section 143(3) r.w.s. 144C(13) read with Section 144B of the Income-tax Act, 1961 ('Act'), in pursuance to the directions issued by the Hon'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 erred in not providing the allocation methodology to be adopted for allocation of COGS expense thereby leading to incorrect computation of adjustment in respect of the trading segment.
4. Incorrect approach adopted in respect of the manufacturing segment 4.1 On the facts and circumstances of the case and in law, the learned DRP erred in rejecting the CUP analysis submitted by the Appellant as an alternate benchmarking analysis wherein CUP details were provided for more than 96% of the international transactions (i.e. 96% in case of purchases and 97% in case of sales) for justifying the AL.P of the international transactions in the manufacturing segment.
A.Y. 2021-22 Roechling Industrial India Private Limited 4.2 On the facts and circumstances of the case and in law, the learned AO/TPO/DRP erred in not allowing the COGS adjustment made to the manufacturing segment of the Appellant.
Assessment order time barred On the facts and circumstances of the case and in law, the AO/National Faceless Assessment Centre has erred in issuing Assessment Order dated 25 October 2024 beyond the time limit as prescribed under Section 153 of the Act. The Appellant submits that the Assessment Order being barred by limitation is without jurisdiction and void ab initio and hence, the same is liable to be quashed.
6. Erred in calculating interest u/s 234A, 234B and 234C On the facts and circumstances of the case and in law, the learned AO has erred in calculating interest u/s Section 234A, 234B and 234C and included the same while calculating the tax demand.” Brief facts of the case are as under: 2. The assessee (formerly known as Roechling Engineering Plastics (India) Private Limited) was incorporated in India on 05/01/2001 as wholly owned subsidiary of Roechling Industrial SE & Co. KG (formerly known as Roechling Engineering Plastics SE & Co. KG) It is engaged in the business of distribution of high-performance plastic products. It imports thermoplastic materials, laminated woods and reinforced glass materials (hereinafter referred to as plastic products') from its Associated Enterprises (hereinafter referred to as AE’s) and sells the same to the third-party customers in India by minimally altering the plastic products as per the needs of the customers. Besides, the assessee also undertakes manufacturing activities, where it purchases raw materials (hereinafter referred to as plastic sheets) from its AEs and moulds them into finished products.
A.Y. 2021-22 Roechling Industrial India Private Limited 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 Method used for transaction (Rs.) determining the ALP 1 Purchase of Raw 4231110 TNMM Material TNMM 2 Purchase of Goods 348982272 TNMM 3 Sale of Traded goods 606943 TNMM 4 Sale of Manufactured 40903966 goods 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 115564 Charges TNMM 10 Technical Support 96590 Charges 11 Interest on ECB 14883612 CUP 2.3. The Ld.TPO further noted that the assessee computed its net profit Margin(hereinafter referred to as NPM) under trading segment at 5.24% and NPM under manufacturing segment at 9.41% annexed herewith as Annexure 1. 2.4. From the details filed, the Ld.TPO observed that, the assessee benchmarked the international transactions using segmental profitability for the trading and manufacturing segment for justifying the arm's length price of various international transactions. The segmental profitability working forming part of the TP study was submitted by the assessee vide submission dated 23/09/2023 as under: 1. Trading Segment Consisting of Trading of Thermoplastics, Composites and Thermoplastics machining 2. Manufacturing Segment - Consisting of Manufacturing of Thermoplastics 3. Service segment (domestic segment) Type of Date of Date of Response Date of Response Re Notice/C Notice/Com Compliance of the response if type mar ommuni munication given Assessee received (full/part/ ks, cation received/n adjournm if ot received ent) any Notice 05.07.2023 19.07.2023 Received 19.07.2023 u/s 142(1) Notice 26.07.2023 05.08.2023 Received 05.08.2023 u/s 142(1) Notice 25.09.2023 02.10.2023 Received 19.10.2023 u/s 142(1) Notice 12.10.2023 19.10.2023 Not u/s Received 142(1) Show 01.11.2023 08.11.2023 Received 08.11.2023 Video cause Conferenc Notice e (VC) was sought by the assessee. VC 09.11.2023 16.11.2023 Not Adjournm Attended ent sought VC 17.11.2023 20.11.2023 Attended 20.11.2023 Full 2.5. The Ld.TPO noted that, the assessee recognised sale from minimal alterations as manufacturing in its financials. But due to difference in FAR and also difference in products, for the purpose of segmental analysis in the transfer pricing study, the activity of minimal altering of the products was considered to be trading activity and accordingly assessee categorized it as sale of trading goods.
2.6. The Ld.TPO called upon the assessee to explain as to why the segmental profitability worked out by the assessee 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 was submitted that, functions for minimal altering activity is more akin to trading activity, for transfer pricing analysis. c) Sample invoice copies for purchase of raw materials and purchase of goods for trading were submitted to demonstrate the difference between the products used in manufacturing and the products sold as trading goods. d) Illustration in respect of various products were provided to show the difference in the purchase cost from AE and the sale price of the products when sold to customers as traded goods, as against the sale price of the products sold to customers after alteration under products sold as Composites/Thermoplastics Machining. These were submitted by the assessee to demonstrate that the profit margin earned by assessee from sale of Composites/ Thermoplastics Machining is higher than the profit margin earned for sale of pure traded goods and less A.Y. 2021-22 Roechling Industrial India Private Limited than the profit margin earned from sale of manufactured goods It was submitted that the sale of Composites/Thermoplastics Machining cannot be classified as manufacturing sales. 2.8. The assessee was called upon to submit revised segmental working under four separate segments. The Ld.TPO after considering the submissions of the assessee disregarded clubbing of minimal alteration activity with trading segment. Instead, the Ld.TPO, clubbed minimal alteration activity with manufacturing segment. The Ld.TPO clubbed cost of minimal alteration segment with trading segment. The segmental margin derived by the Ld.TPO is as under: Trading Manufacturing NPM 33.39% NPM 19.73% 2.9. A rectification application was filed before the Ld.TPO to consider the segments prepared by the Appellant, as the segmental drawn by the Ld.TPO had errors. The assessee in rectification application submitted that, it followed systematic approach while preparing the segmental working using appropriate allocation. The Ld.TPO rejected the rectification application. The Ld.TPO passed order dated 14/10/2023, proposing adjustment of Rs.3,09,42,753/-.
On receipt of the order under section 92CA(3), The Learned Assessing Officer (hereinafter referred to as Ld.AO) passed draft assessment order on 12/12/2023 proposing to assess the total income at Rs.1,94,66,778/- considering the proposed adjustments amounting of Rs.3,09,42,753/- on account of Transfer Pricing adjustment.
A.Y. 2021-22 Roechling Industrial India Private Limited 3.1. The 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 the segmental details furnished by the assessee for following reasons: “1) The assessee has drawn up segmentals which are not reliable or matching with commonly followed accounting practices. 2) It has undertaken adjustment to its margins which are not openly disclosed or easily discernible. 3) It has made adjustments to its own margins whereas Rule 10B(1)(e) prescribes making adjustments to margins of the comparables.
A.Y. 2021-22 Roechling Industrial India Private Limited 4) The loss in manufacturing segment of the assessee is admittedly due to its lower selling price. This is a conscious business decision on the part of the assessee, to earn lower margins, but continue to make sales. Having taken the decision, it cannot now make suo-moto adjustments in margins and also claim to be at Arm's Length. 5) It is immaterial why the loss has occurred. The fact that it has occurred, needs to be correctly reflected in its accounts. 6) Adequate justification for the COGS adjustments and Capacity adjustments have not been given. Covid-19 affected the entire world and almost every industry adversely. It resulted in lockdowns which were uniform for all comparables, the other effects like labour shortage, idle capacity plagues all the comparables too. It can thus be concluded that if there are mistakes in the computation of segments by the TPO, so are there in the assessee's own case. Thus, directions are issued as below on various grounds:”
3.5. The DRP gave following directions to the Ld.AO: • DRP rejected the COGS adjustment and capacity adjustment and the application of CUP method for manufacturing segment. • It directed the TPO to redraw the segments considering the Minimal alteration segment to form part of manufacturing segment. • Direct costs (employee cost, depreciation) to be allocated on actuals. • Indirect costs to be allocated using reasonable allocation keys. • The unadjusted figures (without COGS and capacity adjustment) need to be considered.
On receipt of the DRP direction the Ld.AO passed the assessment order by making addition of Rs. 1,61,14,337/- in the trading segment. Aggrieved by the Ld.AO the assessee is in appeal before this Tribunal.
A.Y. 2021-22 Roechling Industrial India Private Limited 5. The Ld.AR submitted that, though the financial statements recognizes sales from minimal alteration as manufacturing activity, however due 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 As per segmental drawn Assessee’s arguments Income/Expense by TPO Sale of operations Revenue from For the purpose of Thermoplastics is only segmental analysis for considered in the transfer pricing, we trading segment have considered the Sale from Composites, Sale from Thermoplastic machining and Sale of Thermoplastics together as Revenue from trading sales (detailed submission given for the same) COGS COGS considered by For the purpose of your goodself is segmental analysis for incorrect, COGS only for transfer pricing, we Thermoplastics trading have considered the should be INR Cost of Goods Sold for 192,649,527 (as given Composites, in submission dated 31 Thermoplastic August 2023) machining and Thermoplastics together as COGS under the trading segment Employee benefit Your goodself has Request your goodself to expense considered employee refer to Annexure 2 vide cost pertaining to submission dated 31 Trading sales as well as August 2023. In the sale after minimal segmental working, we alteration under the have provided all the 4 Trading segment, which segments, trading, sale is incorrect. after minimal alteration, Diff in employee The expense considered manufacturing sales benefit expenses pertains to service and Service segment, segment which is Non- which is non-AE AE segment. segment, having the correct allocation of employee cost. Depreciation Your goodself has Request your goodself to considered depreciation refer to Annexure 2 vide pertaining to Trading submission dated 31 sales as well as sale August 2023. In the after minimal alteration segmental working, we under the Trading have provided all the 4 segment, which is segments, trading, sale incorrect. after minimal many alteration, manufacturing sales and Service segment, which is non-AE segment, having the allocation of depreciation correct Other Expenses Your goodself has Request your goodself to considered other refer to Annexure 2 vide expenses pertaining to submission dated 31 Trading sales as well as August 2023. In the sale after minimal segmental working, we alteration under the have provided all the 4 Trading segment, which segments, trading, sale is incorrect. after minimal alteration. Diff in other expenses The expense considered manufacturing sales pertains to service and Service segment, segment which is Non- which is non-AE segment, having the AE segment correct allocation of other expenses. Other Operating Your goodself has Request your goodself to Revenue considered other refer to Annexure 2 vide Operating Revenue submission dated 31 pertaining to Trading August 2023. In the sales as well as sale segmental working, we after minimal alteration have provided all the 4 under the Trading segments, trading, sale segment, which is after minimal alteration, incorrect. manufacturing sales Other Income Your goodself has and Service segment, considered other income which is non-AE pertaining to Trading segment, having the sales as well as sale correct allocation of after minimal alteration other operating revenue and Other income. 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 manufacturing and trading segment, the Ld. TPO clubbed the revenue from service segment. It is submitted that, the Ld. TPO consider only two segment as international transaction being, trading and manufacturing segment. The Ld.AR thus submitted that, there are errors in respect of allocation of revenue as well as A.Y. 2021-22 Roechling Industrial India Private Limited cost while drawing segmental accounts by the Ld. TPO. It is submitted that due to thus errors, there is loss in trading segment which not true projection of the revenue earned by the assessee. 5.4 The Ld.AR submitted that, assessee sought for adjustment in respect of COGS and Capacity adjustment that was denied by the DRP, though the Ld.TPO while drawing segmental consider these adjustment. The Ld.AR submitted that, owing to the impact of COVID situation the ratio of COGS to sales was higher during the year under consideration as compared to earlier years. He submitted that, such adjustment were warranted for the margin of assessee to be at par with the margins earned by comparable companies. The Ld.AR in support relied on the decision of coordinated bench of this Tribunal in case of Mattel Toys India pvt Ltd. Vs. DCIT in for A.Y. 2002-03 vide order dt. 12.06.2013 to support his submission in respect of the appropriate method to be adopted as well as necessary adjustment to consider in order to compute the margins to be at arms length.
On the Contrary, the Ld.DR submitted that, the issue may be remitted to the Ld Ld.AO/TPO for necessary verification on FAR analysis. It was submitted that, the assessee itself adopted TNMM and subsequently shifted to CUP cannot be allowed. We have perused submission advice by both sides in light of record placed before us. 6.1 We note that assessee is into two main transaction linked to the manufacturing segment i.e. purchase of raw material and sale of finished goods. Assessee originally bench marked the A.Y. 2021-22 Roechling Industrial India Private Limited transactions by using net profit margin under three broad segment being trading, manufacturing and minimal alteration segment. Assessee had clubbed the revenue from minial alteration segment under the trading segment which was rejected by the Ld.TPO. The Ld.TPO opined that minimal alteration activity is a manufacturing activity. Be that as it may, while drawing segmental details the Ld.TPO did not consider the revenue of the segments and the cost that was allocated to respective segments. 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 A.Y. 2021-22 Roechling Industrial India Private Limited Tribunal held that, if ALP of the transaction can be determined by applying CUP, RPM, CPM then it should be preferred. Only when these traditional methods are rendered inapplicable, TNMM should be resorted to.
In our opinion, the Ld.AO/TPO must consider the FAR of the assessee under the segments and apply CUP is there are comparables available to determine arms length price. In the event CUP cannot be applied due to lack of details and similarity in FAR with the comparables, TNMM may be adopted, with appropriate adjustments. It is noted that assessee had higher sales as compared to previous years. Any adjustment in respect of the same is to be made only the comparables do not have such situation. This Tribunal in Mattel Toys (I) Pvt. Ltd.(supra), observed as under: 41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it is not precluded from raising the contentions / objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the transfer pricing is to examine whether the price or the margin arising from an international transactions with the related party is at ALP or not. The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated A.Y. 2021-22 Roechling Industrial India Private Limited as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the learned Departmental Representative and also the observations of the Assessing Officer and the learned Commissioner (Appeals) that the assessee cannot resort to adoption of RPM method instead of TNMM.
Based on the above discussions, we deem it appropriate to remit the issue back to the Ld.AO/TPO for de novo verification to pass a detailed order having regards to the FAR of the assessee. Needless to say that proper opportunity of being heard must be granted to the assessee. Accordingly grounds raised by the assessee stands partly allowed for statistical purposes. In the result the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in the open court on 17/03/2025