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2017 (6) TMI 1298 - AT - Income TaxTP Adjustment - benchmarking of transactions involving the Manufacturing segment of the assessee - non-requirement of furnishing of the audited accounts of the segmental accounts and subsegmental accounts - HELD THAT:- Bringing our attention to various sub-paragraphs Ld. Counsel demonstrated that the allocation of expenses was mostly based on the actual expenditure with the exception of expenditure relating to “other expenses” and “General Admin expenses”. These are allocated based on production units and sales basis respectively. Ld. Counsel for the assessee is of the opinion that expenditure relating to payment of employees and selling and marketing expenses is allocated based on cost centres. The expenditure, which is allocated not based on the actual, is extremely negligible against ₹ 55 crores out of gross expenditure of ₹ 106 crores determined by the TPO. Thus the same constitutes a patent mistake which requires amendment. This mistake has driven the officers to the wrong conclusions in the matter. Statutory audit - We understand the requirement of auditing the accounts of the assessee and it has the strength of the provisions of Section 44AB of the Act. But when it comes to the TP study matters, there is responsibility cast on the assessee to conduct TP study and there is a role/participation of the assessee. As in the matter DRP should have given reasons as to how the TP study also demands the Auditing of the segmental accounts or sub-segmental accounts. As such, it is not clear as to why the contents of page 492 of the paper book is not audited before filing the same before the lower authorities or the Tribunal. Assessee is under obligation to discharge the onus as to how said artificial allocation of expenses does not constitute a self-serving exercise rather than the reliable/credible TP study needed for benchmarking of the International transactions under consideration. In the absence of the same, the role of the AO or the TPO in making adjustments is sustainable in law. However, holding this view at this point of time constitutes premature. It is also noticed that the decisions furnished by the assessee’s counsel regarding the non-requirement of furnishing of the audited accounts of the segmental accounts and subsegmental accounts, were ignored by the TPO/DRP without giving reasons. Allocation of interlaced expenditure, such as Employees cost, Selling and Marketing expenses, General Admin Expenses etc., we are of the opinion that basis for allocating the said expenses among the 4 sub-segments does not appear to be the actual expenditure although they were argued by the Ld. Counsel for the assessee as actuals. There is some adhoc allocation based on certain keys/parameters such as sales, cost centres, production units is involved. In our view, prima facie, the decisioin of the TPO/DRP constitutes reexamination. Therefore, issue of adjustment to the manufacturing segment is required to be remanded to the file of AO/TPO/DRP for fresh adjudication of the issue. AO is directed to grant reasonable opportunity of being heard to the assessee in accordance with the principles of natural justice. Thus, the relevant issue raised in Ground No.2 with its sub-grounds are allowed for statistical purposes. Most appropriate method in case of the trading activity of the assessee - it is settled legal position at the various Benches of the Tribunal that, in case of distribution activity, even when there are selling and marketing expenses are borne by the assessee, there cannot be any value addition to the product in question. In such cases, Resale Price Method is the most appropriate one and accordingly we reverse the decision given by the AO/TPO/DRP in thrusting on the assessee the TNM method to the transaction under consideration. In any case, it is not the case of the Revenue the assessee is not into distribution activity. Accordingly, in principle, Ground No.3 raised by the assessee is allowed. Admission of additional ground - benchmarking study of the international transactions in the trading segment applying Resale Price Method - HELD THAT:- Additional ground, being legal in nature, are required to be admitted and should be remitted to the file of the AO/TPO/DRP for considering his benchmarking studies applying Resale Price Method. We find these grounds relate to the aspects of benchmarking of International transactions of trading activity. In our view, TPO should be directed to apply Resale Price Method as most appropriate method for the reasons discussed above and undertake the exercise of benchmarking them as per the rules on the subject.
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