IMERYS CERAMICS INDIA PRIVATE LIMITED ,HYDERABAD vs. DCIT CIRCLE -2(1), HYDERABAD

Brief facts of the case are that assessee is a subsidiary of Imerys Asia Pacific Pte. Limited and is engaged in extraction, mining, processing and trading of feldspar, bentonite (fuller’s earth), quartz and clay. Assessee primarily caters to the ceramic and glass manufacturing industries. For the assessment year 2018-19, the assessee filed its return of income on 29/03/2019, declaring income of Rs. 44,00,853/-.

In view of the international transactions entered into by the assessee during the financial year 2017-18, determination of Arm’s Length Price (ALP) was referred to the learned Transfer Pricing Officer (learned TPO) and by order dated 31/07/2021, learned TPO proposed adjustment of Rs. 8,07,70,470/- out of which, a sum of Rs. 7,49,68,097/- was towards manufacturing activity; whereas other adjustments are in respect of interest expense on CCDs and trade receivables.

Aggrieved, assessee preferred objections before the learned DRP. Learned DRP by order dated 30/06/2022, issued directions pursuant to which the final assessment order was passed adding the adjustments as originally proposed by the learned TPO. Hence, this appeal by the assessee.

Though the appeal is preferred on various grounds, at the time of arguments, learned AR not pressed all the grounds, except grounds relating to the issues of non-consideration of segmental information, non- consideration of TNMM (Transactional Net Margin Method) as MAM (Most Appropriate Method) for transactions related to manufacturing segment, non-consideration of RPM as MAM for transactions relating to trading segment, challenging the comparables selected by the learned

ITA-TP No. 494/Hyd/2022 TPO on basis of industry classification and aggregation under manufacturing segment and the request to restrict the adjustment to the Associated Enterprise (AE) transactions. Now, we shall consider these issues here under.

Coming to the first issue, under grounds No. 2.6 and 2.9, assessee is challenging the action of the Revenue authorities in clubbing the segments into one for the purpose of benchmarking. Assessee is engaged in manufacturing and trading maintaining segmental information and submitted such segmental information before the Revenue authorities. Grievance of the assessee is that both the Revenue authorities clubbed both the segments into manufacturing activity, adopted entity level analysis, ignoring the CMA certified segmentals.

According to the learned TPO, such aggregation of the activities is necessary and the transaction shall be benchmarked under TNMM. According to him, purchase of raw material for further processing, purchase of goods for trading and sale of goods could conveniently be benchmarked only by adopting TNMM at entity level.

Aggrieved, assessee challenged such an approach before the learned DRP. Learned DRP called for and obtained remand report in which the learned TPO considered the segmental information and restricted the transfer pricing adjustment to the transactions with AEs only. Learned DRP, however, did not consider such remand report or the request of the assessee to accept the remand report, holding that it is difficult to arrive at net margins of AE and Non-AE transactions only, the assessee did not provide audited segmental data for AE and Non-AE

Contention of the assessee before us is that the view expressed by the learned TPO in the remand report is in consonance with the law in terms of Rule 10B of the Income Tax Rules, 1962 (“the Rules”). Learned AR submitted that the mandate of the said Rule is that for computing the net margin from the international transaction, only such incomes and expenses having relationship with the international transaction alone have to be considered. He placed reliance on the decision of a Co-ordinate Bench of the Tribunal in the case of TPSC (India) Private Limited vs. DCIT, in ITA-TP No. 225/Hyd/2022, dated 18/03/2024 in support of his contentions.

Learned DR, on the other hand, submitted that the learned DRP recorded a finding that the assessee did not provide audited segmental data for AEs and non-AEs separately to facilitate the verification of cost allocation between the segments and to compute the profits attributable to AE transactions and, therefore, the learned DRP is justified in holding that entity level comparison is best suited in the facts of the case.

On a careful perusal of the record, we find that the assessee provided the CMA certified segmental information derived from the audited segment reporting disclosures of the annual financial statements and such details could be found in the Paper Book. Further, in the case of TPSC (India) Private Limited (supra), a Co-ordinate Bench of the Tribunal

Respectfully following the decision of the Hon’ble Bombay High Court in the case of Tara Jewels Exports (P.) Ltd., (supra) as followed in the case of TPSC (India) Private Limited (supra), on principle, we hold that the adjustment has to be done to arrive at ALP by considering the transactions with AEs only. For undertaking such an exercise, we restore the issue to the file of the learned Assessing Officer/learned TPO. Grounds are allowed accordingly.

Coming to the issue of non-consideration of TNMM for manufacturing segment, the case of the assessee is that, it provided all the details and segmental analysis before the learned TPO in the remand proceedings and the remand report is not considered by the learned DRP. Case of the assessee is that it had undertaken separate analysis for the distinct transactions, but the learned TPO, on a fresh economic analysis, benchmarked the entire operations of the assessee at entity level by comparing the same to the companies engaged in manufacture of ceramic products.

According to the learned TPO, the manufacturing activity of the assessee comprises of purchase of raw material from AEs for further processing, purchase of goods and sale of goods and, therefore, TNMM at the entity level is the appropriate method. Learned DRP concurred with the reasoning of the learned TPO. According to the learned DRP, though the assessee has purchases and sales with both AEs and non-AEs, there is no segregation of accounts for AEs and non-AEs and margins are computed for aggregate values including transactions with AEs and non-AEs, ever as per the TP report.

Learned AR submitted that the details of the segmental analysis are furnished by the assessee and were available before the Revenue authorities, and even considered by the learned TPO in the remand proceedings. Learned AR further submitted that under similar circumstances, a Co-ordinate Bench of the Tribunal in the case of Palred Technologies Ltd. vs. DCIT in & 268/Hyd/2015, followed the same procedure. Learned DR placed reliance on the orders of the Revenue authorities.

We have gone through the record in the light of the submissions made on either side. In terms of Rule 10B(1)(e)(2) and Para 3.27 of OECD guidelines, internal comparables may have a more direct and closer relationship to the transaction under review than external comparables, the financial analysis may be easier and MAM reliable as it will presumably rely on identical accounting standards and practices for the internal comparable and for the controlled transaction, and in addition, access to information on internal comparables may be both more complete and less costly.

In the case of Palred Technologies Ltd. (supra), a Co-ordinate Bench of the Tribunal noticed the directions issued by the Bench in M.A.No. 19/Hyd/2017 in for the assessment year 2008-09 to the learned Assessing Officer to consider only the segmental results of the AE transaction and also the internal TNMM for the purpose of benchmarking of the international transactions. The same direction is followed in the case of Palred Technologies Ltd. (supra). Same is the case in the case of Satyam Venture Engineering Services in ITA No. 1464/Hyd/2014.

In these circumstances, following the view taken in the decisions referred above, we accept the contention of the assessee and restore this issue to the file of the learned Assessing Officer/learned TPO with a direction to consider only the operating profit/operating cost of AEs segment only and to consider the internal TNMM where the services are rendered by the assessee to AEs and non-AEs are similar. This ground is treated as allowed for statistical purposes.

The other issue is in relation to the non-consideration of RPM for trading segment. According to the assessee, it is merely purchasing goods from AEs and reselling them to the third-party customers, without making any value addition and, therefore, they have adopted RPM method as the MAM. It is the case of the assessee that it has submitted ledger copies and segmental financials at gross level and also detailed functional analysis to the Revenue authorities by highlighting the fact that they are only purchasing and selling the same goods without any value addition.

Learned TPO, however, was of the opinion that the purchases from the AEs cannot be compared with entity level of the comparables and the vital information is not available in public domain. According to the learned TPO to apply the RPM method, it is necessary that the details of the comparables should also be compared by keeping all other parameters constant.

Assessee canvassed before the learned DRP that it is engaged in two distinct and separate entities and majority of the sales were rendered to non-AEs in the year. The bulk of its transactions with AEs is only purchases for trading and, therefore, it cannot be categorized as a manufacturing activity. Learned DRP held that the costs in regard to the distribution function are different from manufacturing function and any comparison is not a reliable profit indicator. Learned DRP also found that the accounting of direct and indirect costs by comparable companies would affect the reliability of such data.

Assessee is, therefore, before us in this appeal, contending that in the trading segment, where there is no value addition and the entire activity is nothing, but buying and selling without any value addition and also where the segmental information is also provided, RPM is the MAM and gross margin analysis would be required to be analysed for the trading segment. Assessee placed reliance on the decision of a Co-ordinate Bench of the Tribunal in the case of DCIT vs. Commvault Systems (India) Private Limited, in ITA-TP No. 282/Hyd/2022. Learned DR placed reliance on the orders of the Revenue authorities.

We have gone through the record in the light of the submissions made on either side. The decision in the case of Commvault Systems (India) Private Limited (supra) relied upon by the assessee, the Bench followed the decision in in assessee’s own case for the assessment year 2013-14 wherein Commvault Systems (India) Private Limited (supra) was found to be a distributor. Though on principle, we agree with the findings in such decision that in the case of distributors, RPM is the MAM, but such status of the assessee in this case has to be verified. According to the Revenue authorities, assessee is involved both in purchase of goods from AEs and reselling them to the non-AEs and since the segmental information is not available, RMP cannot be accepted as MAM.

However, on a perusal of record, we find that the ledger copies and segmental financials at gross level were submitted before the Revenue authorities in support of the contention of the assessee that it did not involve any value addition activity and merely, they were selling goods as they were purchased in the same. Since it is a verifiable fact, we restore the issue to the file of the learned Assessing Officer/learned TPO to verify whether the assessee is not making any value addition to the goods purchased from the AEs before they are sold and if segmental financials are available, to the extent of such sales without making any value addition, to accept the RPM as the MAM. Grounds are answered accordingly.

Fourth issue under challenge is in respect of the classification of the assessee as manufacturing segment and benchmarking the same accordingly. Assessee submits that the AE transactions of the assessee in ITA-TP No. 494/Hyd/2022 the manufacturing segment are only to 5.2% when compared to the non- AE transactions and, therefore, comparing the same at entity level in manufacturing segment, is unreasonable and, therefore, has been praying that in view of the volumes in its trading segments, the assessee may be compared with the entities in trading segment. There is no contradiction to the fact pleaded by the assessee that AE transactions of the assessee are very low at 5.2% when compared to the third party transactions in manufacturing segments. If that is true, it would be unreasonable to classify the operations of the assessee under manufacturing segment. Hence, this issue is restored to the file of the learned Assessing Officer/learned TPO to verify the fact as to the volumes of the operations of the assessee and if the majority of the transactions of the assessee with AEs relate to the trading segment, it would be reasonable to classify the assessee for the purpose of economic analysis for aggregation under trading segment. This ground is accordingly treated as allowed for statistical purposes.

The last issue relates to the question whether the TP adjustment should be restricted to the AE transactions only. Learned TPO computed the adjustment entity as against the request of the assessee to restrict them to the AE transactions. In the remand report submitted to the learned DRP, the learned TPO submitted that transactions with non-AEs have no relevance, are impact for computing the ALP adjustment and the ALP adjustment should be restricted to the AE transactions only. Assessee pleaded before the learned DRP to accept the remarks of the learned TPO and to restrict the ALP adjustment to the extent of purchases from AEs.

Learned DRP was of the opinion that having adopted the TNMM as the MAM, comparison is possible only with such entities, whose P&L Account is available at entity level and, therefore, the profit of the tested party at entity level could be compared with the average of profit levels of the comparables irrespective of its PLI.

Having heard the learned AR and learned DR, we are of the considered opinion that to the facts of the case, the view taken by a Co-ordinate Bench of the Tribunal in the case of TPSC (India) Private Limited (supra), is applicable on all fours and following the same, we direct the learned Assessing Officer/learned TPO to consider the margin analysis to AE segment alone. This ground is allowed.

In the result, appeal of the assessee is treated as allowed for statistical purposes.