SPECTRIS TECHNOLOGIES PVT. LTD.,GURGAON vs. ACIT, NEW DELHI

The Ld. CIT(A) erred in facts and in law by upholding the rejection of the transfer pricing methodology adopted by the Appellant in its transfer pricing report and in allowing the unjustified approach of the Ld. TPO by: 3.1 Disregarding the segmental analysis carried by the Appellant in its transfer pricing study and instead treating the provision of market agency services and provision of AMC services together as a single business segment. 3.2 Rejecting the Resale Price Method adopted by the Appellant in favour of Transaction Net Margin Method (TNMM) as the most appropriate method for benchmarking the international transactions under AMC segment. 3.3 Selecting inappropriate comparable set in application of the transfer pricing methodology adopted by him. 4. The CIT(A) erred in facts and in law by not providing the benefit of economic adjustment on account of difference in working capital and risk profile in arriving at the arm's length mean margin under TNMM.

That the Ld. AO erred in facts and in law in chanrging and computing interest under section 234B and 234D of the Act. That the above grounds are independent and withtout prejudice to each other. 2. The Ld. Counsel for the assessee at the outset submitted that identical issued has been decided by the Tribunal in assessee’s own case for immediate preceding year A.Y. 2007- 08 wherein the transfer pricing adjustment made by the AO has been deleted. The Ld. Counsel for the assessee further submitted that for the assessment year under consideration i.e. 2008-09 the TPO has considered Agency and Marketing Support Services segment and Annual Maintenance Services segment as a single segment as against the contention of the assessee that both these segment are different, which is accepted by the Tribunal for the immediate preceding years. 3. The Ld. Counsel for the assessee submitted that since the agency marketing support services segment and annual maintenance services segments are held to be two different segments, for the current year for the limited purpose of verification of bench marking adopted by Assessee and the comparables, may be restored to the file of the TPO and in Segment 1 and Segment 2 are benchmarked separately then by applying TNMM the PLI of the assessee as tested party as per segmental accounts is 17.95% and average result of comparable companies is 19.63% and, therefore, it is within permissible tolerance range as per the proviso to Section 92C (2) and hence, no TP adjustment is called for the in the assessee’s case. The Ld. Counsel stated that this aspect can be factually verified by the TPO. The Ld. Counsel for the assessee also made brief submissions as under :- “1. Appellant is a domestic company and is engaged in the business of supplying equipment and products relating to material analysis. It also provides installation and commissioning services and after sales services to its clients in India. Product list includes material, analytical instruments like x-rays analytical equipment. 2. In the return of income appellant had disclosed following international transactions:-

For benchmarking the above international transactions, appellant prepared segmental accounts (copy enclosed at pages 60 to 62 of Paper Book). For international transactions relating to Segment 1 i.e., Agency and Marketing Support Services the most appropriate method used was TNMM and PLI selected was OP/OC. As per reported benchmarking analysis the results of tested party as per segmental accounts was 17.95% as against average result of comparable companies of 19.63%. As regards Segment 2 i.e.. Annual Maintenance Services the most appropriate method selected was RPM with PLI of gross margin / selling price. The tested party margin calculated was 16.78% as against average comparable margin of 14.86%. 4. TPO, however, has disregarded the above benchmarking analysis. It is alleged by him that FAR of segment relating to "Provision for AMC Services" was inextricably linked to the other functions performed by the appellant in Segment 1. TPO has therefore aggregated the income and expenditure with respect to AE and non-AE segments alleging that the segmental accounts have been artificially created for transfer pricing purposes showing profitability in AE related services and losses in the AMC business. He has therefore, aggregated the two segments and determined profitability of the applicant applying TNMM at an entity as a whole level. In this regard, in his order it has been held by the TPO as under:- 7.1.1 The contentions and arguments of the assessee in this regard have been considered in detail. To understand the business of the assessee, it is once again essential to examine the FAR analysis of the assessee in a shopwise manner. Functions performed i) The AE of the assessee Spectris PLC itself and through group companies develops and markets precision instrumentation and controls. ii) The assessee, Spectris India is a supplier of equipment and products which include material analytical instruments like X-ray, analytical equipments. Spectris India also provides installation and commissioning services and after sales support services to its clients in India. (iii) The group companies own all intangibles and carry out all R&D activities. iv) With respect to distribution function, assessee also provides marketing and administrative support services. v) The assessee also provides agency services for selling equipment and spare aprts in India, Nepal and Sri Lanka on which it earns commission income. vi) The assessee also purchase spare parts and equipment from AE for resale in India for normal sales and also against confirmed order. vii) With respect to sale of above equipment on behalf of its AE, the assessee also provides post sale or after sales services in the form of after sales support, supply of spare parts and AMC services. viii) In the TP report on page 16, the assessee has itself mentioned that the following international transactions do take palce in the AMc segment. "Sale of Spare parts & Equipments: Spectric India is responsible for making sale of spare parts and equipment imported by it from it's AE, Sale of spare parts under AMC business can be broadly categorized under three type: Over the Counter Sale - Wherein the customer has not taken any AMC and he purchases only spare part or equipment from Spectris India. Sale to AMC Customer - Wherein the customer has taken AMC from Spectris India, however, it requires certain spare parts which are not covered under AMC. Replacement under AMC wherein the customer has taken AMC from Spectris India and spare part required to be replaced is covered under AMC." 7.1.2 From the above functional analysis, and the analysis made in the show cause notice issued to the assessee quoted above, it is more than apparent that the AMC services are inextricably linked with the main business of the assessee le., sales and purchase of equipment, marketing and administrative support services, agency support services, after sales support services and purchase and sale of spare parts. Also, delivery of AMC services is mentioned under the functional analysis for international transaction relating to 'purchase of spare parts for normal business’. 7.1.3 Assets utilized Spectris India deploys the necessary assets for performing its business. It does not own any manufacturing facilities, research and development facilities or other significant assets more importantly, the assessee utilizes the same assets that it uses in its entire business for its AMC business as well. However, it is claimed in the TP report that certain intangibles in the form of technical knowledge of those involved in providing AMC services is present. More specifically it is mentioned in the TP report that the assets utilized for the purchase of spare parts, provision of agency and marketing support services are the same. 7.1.4 Risks assumed Market risk: high for both functions i.e., agency support and AMC business. Inventory risk assessee bears combined inventory risk relating to both business segments Product/service risk: same for both segments. Contract risk: same for both segments Credit risk: credit risk is bome by Spectris India with respect to both businesses Foreign Exchange risk: the assessee bears forieng exchange risk in both segments 7.1.5 The above FAR analysis of functions performed, assets utilized and risks assumed demonstrates that the AMC business is nothing but part of the overall business of the assessee and cannot be artificially segregated into separate segments so as to show extra profits in AE related segment and extra losses in the AMC segments. 7.1.6 The assessee in its reply has not tried to justify segregation of segments into 'Agency and Market Support Services' in which the assessee earns income from sale of equipment, commission Income from agency services and service income from market support service. The second segment l.e., 'AMC business' assessee earns income from sale of spare parts, AMC sales, AMC service income, installation services and services income. It is absolutely not clear as to how the assessee has been able to segregate expreses relating to so many income streams to arrive at an authentic segmentation between different artificially created business segments, when the same is not supported by audited AS17 financials. 7.1.7 No basis for allocation of expenses relating to various income streatms between the two segments have been furnished by the assessee, 7.1.8 Therefore, based on the FAR analysis it is found that AMC segment is inextricably linked to the assessee main business activity. Secondly on examination of accounts also, it has been found that the segmentation carried out by the assessee is artificial. The basis of allocation of expenses has not been provided. The basis of allocation of income streams to the two segments is also not clear. There are unallocated expenses for both segments. Thus, the artificial segmentation carried out to segregate AMC business for TP purposes is hereby rejected" After aggregating the segments reported by the appellant, the TPO has benchmarked the entity level profits of the appellant with a merged set of comparable companies as reported by the appellant for segments 1 and 2. In this regard it is held by the TPO as under: “7.3 Comparable Companies In the show cause notice, it was proposed that the margin of the assessee as calculated above shall be compared with the OP/TC margin of the comparables in the agency and marketing support segment furnished in the TP report. However, the assessee has objected to use of comparables of that segment. The objections of the assessee have been listed in Para 6.3 above. The objections of the assessee in this regard have been considered. I am of the considred view that since the two artificially created business segments of the assessee have been merged for the purpose of transfer pricing analysis it would meet the interest of the justice if comparables used by the assessee in both the segments are merged and their mean margin using OP/OC is used as PLI. All these comparables are selected by the assessee in the Transfer Pricing Report and the assessee at no stage in the transfer pricing proceedings has claimed that the transfer pricing report is not correct." Thereafter the TPO has proposed an adjustment of Rs. 1,79,85,243/- under Chapter X of the Act. 4. It will be relevant to note here that the above allegations and conclusions recorded by the TPO are akin to the case made out by him for immediately preceding assessment year l.e., A.Y. 2007-08. Copy of TPO order dated 27th October, 2010 passed for AY 2007-08 is enclosed at pages 43 to 55 of PB-relevant conclusions are at pages 49 to 52, paras 7 to 7.1.9. 5. For the year under consideration i,e AY 2008-09, being aggrieved by the adjustment proposed by the TPO and made by the AO, the appellant filed an appeal before CIT(A). Vide impugned order dated 27th March, 2014 the CIT(A) has upheld the adjustment made by the TPO for reasons recorded at paras 5.6 to 5.11 (refer pages 13 to 20) of the impugned order. At page 19, para 5.10 the CIT(A) notes that the facts of the case are akin to the case for immediately preceding assessment year i.e., AY 2007-08 and therefore following the conclusions recorded by his predecessor in appellate order passed for AY 2007-08 he has confirmed the addition made by the AO and TPO for AY 2008-09. 6. It is submitted that the appeal for AY 2007-08 has been decided by Hon'ble ITAT vide order dated 7th March, 2024 in ITA No.1818/Del/2013. Hon'ble ITAT has approved the correctness of segmental accounts reported by the appellant and has negated the case made out by TPO aggregating segments 1 and 2 and thereby applying TNMM on an entity level. In this regard, it has been held by the Hon'ble ITAT as under:- “10. We have given thoughtful consideration to the TP study report of the assessee, purchase of spare parts for normal business, AMC. We find that Research and Development are undertaken by the AE of the assessee. All the equipments and spare parts supplied to the assessee by its AE are manufactured by its group companies. The assessee is responsible for all functions relating to inventory management and the assessee enters into a contract with the customers for providing AMC services and accordingly, it is responsible for delivery of services to the customer. 11. Regarding sale of spare parts and equipments, the assessee is responsible for making sale of spare parts and equipment imported by it from its AE. Sale of spare parts under AMC business can be broadly categorized into three types: (i) Over the counter sale wherein the customer has not taken any AMC and he purchases only spare parts or equipment from the assessee. (ii) Sale to AMC customer wherein the customer has taken AMC from the assessee. (iii) Replacement under AMC wherein the customer has taken AMC from the assessee and spare part required to be replaced is covered under AMC. 12. For contracts entered into between the assessee and its customers, the assessee is responsible for delivery of equipment and spare parts and services and, accordingly, it is also responsible for invoicing and collection of charges relating to it. The assessee deploys necessary assets for performing its business. It does not own any manufacturing facilities, research and development facilities or other significant assets for this activity. Employees of the assessee possess technical knowledge especially those who are involved in providing AMC services. 13. However, under provision of Agency and Marketing support services, R & D are undertaken by the AE of the assessee. All the spare parts and equipment supplied to the assessee are manufactured by its AE. The AE of the assessee is responsible for maintaining the requisite inventory levels of all the spare parts and equipment. The assessee does not employ any specific assets, tangible asset for providing agency and administrative services to its AEs or intangible including human resources and does not bear any inventory risk. The assessee does not bear any credit risk. 14. Based on the facts mentioned in the TP Study Report, it can be safely concluded that the assessee's business can be divided into two business segments: (i) AMC service provider, and (ii) Agency and marketing support service provider 15. During the course of TP assessment proceedings, the assessee has explained that for the purpose of TP analysis, it has divided its revenue and expenditure broadly into two segments based on functional, asset and risk analysis and providing AMC services including sale of goods. The assessee has also given basis of allocation/apportionment of revenue and expenses which is as under, …… …… ….. ……. 16. From the above charts, it can be seen that the assessee has allocated common expenses and has also given basis of apportionment. We find that the Id. CIT(A) has put a doubt on whether segmental accounts are to be accepted and the only reason given by the authorities, as we understand from the respective orders, is that it is not audited. 17. Merely because segmental accounts are not audited cannot make them untrustworthy without pointing out any specific defect/error/fallacy in them. Observations of the Id. CIT(A) that non- compete fee and good will has not been allocated is not accepted as the TPO himself has not allocated these expenses. 18. As mentioned elsewhere, the assessee has not only provided segmental account but has also allocated expenses and has given basis of allocation. Considering the facts of the case in totality, we do not find any merit in the stand taken by the TPO/Assessing Officer as confirmed by the Ld. CIT(A). We, accordingly, direct the Assessing Officer to delete the impugned adjustment." 7. Kind reference is invited to the copy of segmental accounts prepared by the appellant for FY 2007-08 (i.e relevant to AY 2008-09) copy enclosed at pages 60 to 62. These segmental accounts are prepared in a similar manner as done for FY 2006- 07 (i.e immediately preceding year). Method of accounting and accounting policies remain same. Basis of allocation / apportionment (refer page 61 and 62 of PB) of revenues and expenditures in the segments also remain same. It is therefore submitted that following the decision of co-ordinate bench for AY 2007-08 the present adjustment of Rs 1,79,85,243/-proposed by the TPO and made by the AO in AY 2008-09 has no legs to stand and therefore it merits to be deleted. 8. It is submitted that once segmental accounts are respected and Segments 1 and 2 are benchmarked separately then in Segment 1 applying TNMM the PLI of appellant as a tested party (as per segmental accounts) is 17.95% and average result of comparable companies is 19.63%. If this is within permissible tolerance range (as per proviso to section 92C(2)), then no Transfer Pricing Adjustment is called for in the present case. This aspect can factually be verified by the TPO.” 4. Heard rival submissions and perused the orders of the authorities below. We find merit in the submission of the Ld. Counsel for the assessee. For the immediately preceding assessment year i.e. A.Y. 2007-08 Tribunal considered identical issue in ITA No.1818/Del/2013 dated 07.03.2024 wherein the Tribunal had accepted that the assessee has two segments and the TP adjustment made by the AO is deleted by observing as under :- “10. We have given thoughtful consideration to the TP study report of the assessee, purchase of spare parts for normal business, AMC. We find that Research and Development are undertaken by the AE of the assessee. All the equipments and spare parts supplied to the assessee by its AE are manufactured by its group companies. The assessee is responsible for all functions relating to inventory management and the assessee enters into a contract with the customers for providing AMC services and accordingly, it is responsible for delivery of services to the customer.

Regarding sale of spare parts and equipments, the assessee is responsible for making sale of spare parts and equipment imported by it from its AE. Sale of spare parts under AMC business can be broadly categorized into three types: (i) Over the counter sale wherein the customer has not taken any AMC and he purchases only spare parts or equipment from the assessee. (ii) Sale to AMC customer wherein the customer has taken AMC from the assessee. (iii) Replacement under AMC wherein the customer has taken AMC from the assessee and spare part required to be replaced is covered under AMC 12. For contracts entered into between the assessee and its customers, the assessee is responsible for delivery of equipment and spare parts and services and, accordingly, it is also responsible for invoicing and collection of charges relating to it. The assessee deploys necessary assets for performing its business. It does not own any manufacturing facilities, research and development facilities or other significant assets for this activity. Employees of the assessee possess technical knowledge especially those who are involved in providing AMC services. 13. However, under provision of Agency and Marketing support services, R & D are undertaken by the AE of the assessee. All the spare parts and equipment supplied to the assessee are manufactured by its AE. The AE of the assessee is responsible for maintaining the requisite inventory levels of all the spare parts and equipment. The assessee does not employ any specific assets, tangible asset for providing agency and administrative services to its AEs or intangible including human resources and does not bear any inventory risk. The assessee does not bear any credit risk. 14. Based on the facts mentioned in the TP Study Report, it can be safely concluded that the assessee’s business can be divided into two business segments:

From the above charts, it can be seen that the assessee has allocated common expenses and has also given basis of apportionment. We find that the ld. CIT(A) has put a doubt on whether segmental accounts are to be accepted and the only reason given by the authorities, as we understand from the respective orders, is that it is not audited. 17. Merely because segmental accounts are not audited cannot make them untrustworthy without pointing out any specific defect/error/fallacy in them. Observations of the ld. CIT(A) that non compete fee and good will has not been allocated is not accepted as the TPO himself has not allocated these expenses. 18. As mentioned elsewhere, the assessee has not only provided segmental account but has also allocated expenses and has given basis of allocation. Considering the facts of the case in totality, we do not find any merit in the stand taken by the TPO/Assessing Officer as confirmed by the ld. CIT(A). We, accordingly, direct the Assessing Officer to delete the impugned adjustment.”

Since the Tribunal had accepted that the assessee is into two different business segments i.e. AMC service provider and agency market and support services provider the transfer pricing adjustment made by the TPO by considering both the segments as a single segment for the year under consideration is to be revisited. In the light of the order of the Tribunal for the A.Y. 2007-08 and the submissions of the Ld. Counsel for the Assessee, in principle we agree that the assessee is having two segments as observed by the Tribunal in assessee’s own case for the immediately preceding assessment year and, therefore, since the assessee is having segmental account the benchmarking has to be done segment wise separately and thus we direct the TPO to analyze the submissions of the assessee viz-a-viz the segmental accounts and the comparables and pass appropriate order after providing opportunities to the Assessee. 6. In case the PLI of the assessee as tested party as per the segmental accounts is 17.95% and average result of comparable companies is 19.63% and is within permissible tolerance range as per proviso to 92C(2), then no transfer pricing adjustment is called for by the TPO. With these observations we restore this issue to TPO for limited purpose of verification in the light of our above observations. 7. In the result, the appeal of the assessee is allowed for statistical purpose with above observations. Order pronounced in the open court on 17.12.2025. [NAVEEN CHANDRA] [C.N. PRASAD] ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 17.12.2025 NEHA , Sr.P.S.*