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2023 (1) TMI 159 - AT - Income TaxTP adjustment made in the 'Trading segment’ - Selection of MAM - Application by the TPO of the TNMM as the most appropriate method as against the assessee choosing the RPM - This segment consisted of the international transaction of ‘Purchase of traded goods’ at transacted value - HELD THAT:- As the assessee is admittedly engaged in purchase of products from its AE, which have been sold to the unrelated parties as such without carrying out any value addition. Doubtlessly, it is only the RPM which would govern the situation and will have to be applied as the most appropriate method. Simply because the ratio of employee cost and depreciation of the assessee to the revenue under the segment is more in comparison with some of its comparables, that would not thwart the application of the RPM. Such effect of individual higher or lower values of expenses gets ironed out when the gross profit margin is taken. We hold that the AO was not justified in applying the TNMM as the most appropriate method as against the RPM. The impugned order is set aside on this score and the matter is sent back to the file of the AO/TPO for re-determining the ALP of the `Trading segment’ under the RPM with the comparables and allocation of expenses as finally approved by the DRP. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh determination. TP adjustment in the `Manufacturing segment’ - Assembly/Manufacturing’ segment is determining the comparability of the companies selected - HELD THAT:- Mettler Toledo India Pvt. Ltd. - As percentage of the related party transactions of expenses of this company is more than 57% of the total expenses incurred by it, which fails the RPT filter notwithstanding the fact that the percentage of the RPTs of the revenue items is way below 25%. We, ergo, direct to exclude this company from the list of comparables. Avery India Ltd - Turning to the facts of this company, we find that it is into manufacturing weighing machines and has also undertaken contracts. 77% of its revenue is from manufacturing and 23% from contracts. The very fact that this company is engaged into manufacturing of weighing machines and not into any basic level assembly, we hold that it cannot be considered as comparable to the assessee. Essae Teraoka Private Ltd - As seen that the nature of business of this company is multi-dimensional ranging from design, manufacture of electronic weighing and POS system, self-service KIOSK and GPS synchronized clock. It is also into field of constructing and long term leasing of high quality built to suit industrial and commercial space to its clients. This company is also engaged in R&D activity, which is apparent from its Annual report. In view of the clear difference in the nature of business carried by this company vis-à-vis the assessee doing only the low end assembly activity, we hold that there is no comparison between the two. As such, this company is also directed to be excluded. Nitiraj Engineers Ltd. - As seen that it is in the business of wide range of production of electronic weighing scales, currency counting machine and electronic fare meters etc. It has its full-fledged R&D department. It is also engaged in designing and developing electronic hardware and software. In addition, this company also holds intangible assets and has its full-fledged manufacturing facility. In this backdrop of facts, it is directed to be excluded from the list of comparables. Rice Lake Weighing Systems India Ltd. - As gone through the Annual report of this company, which shows that it is engaged in the business of manufacturing, marketing and servicing of road and rail weigh bridges, in-motion electronic weighing systems and other weighing systems mainly used in industrial activities, bulk material handling systems and batching systems. This company also earns royalty income which shows that it has developed its own technical know-how that has been provided to others on payment basis. In addition, this company is also engaged in Research & Development for which it has spent substantial amount. The above distinguishing features make this company incomparable to the assessee company. We, therefore, order for its exclusion. Precia Molen India Pvt. Ltd. - After going through the Annual report of this company, it can be seen that it is engaged in the manufacturing and marketing of electronic weighing systems having huge intensity plant and machinery. This company is also paying royalty for use of technical know-how for the purpose of manufacturing. Since this company is into full-fledged manufacturing, we hold that it cannot be compared with the assessee engaged in low-end assembly function. We, therefore, order to exclude it from the list of comparables. TPO retained only one comparable, viz., Kusum Electrical Industries Ltd. from the assessee’s list and included 9 more. The DRP squeezed the TPO’s list of comparables from 10 to 7 by retaining the one which was chosen by the assessee and allowed by the TPO in his list We have seen supra that the six new comparables of the TPO, sustained by the DRP, are not comparable for the reasons assigned above, thereby leaving one company in the tally of comparables, being, Kusum Electrical Industries Ltd. having negative weighted working capital adjusted margin of (-) 10.26% as determined by the AO in his final order giving effect to the directions of the DRP. As against the ALP of (-) 10.26%, the PLI of the assessee from this segment has been computed by the AO in his final assessment order at (-) 7.23%, which discerns that the transaction is at ALP. The addition under this segment is directed to be deleted.
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