TMI Blog2017 (6) TMI 1298X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsegme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - Dated:- 16-6-2017 - SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM For the Appellant : Shri Ketan Ved For the Respondent : Shri Adarsh Kumar Modi ORDER PER D. KARUNAKARA RAO, AM : This appeal filed by the Assessee is against the order of AO/TPO/DRP for the Assessment Year 2008-09. 2. The grounds raised by the assessee reads as under : The Appellant objects to the order dated October 25,2012 passed by the learned Deputy Commissioner of Income Tax, Circle - 1(2), Pune [ DCIT ] under section 143(3) r.w.s.144C(13) of the Income-tax Act, 1961 [ the Act'] in pursuance of the directions of the learned Dispute Resolution Panel, Pune [ DRP ] dated September 5, 2012 for the assessment year 2008-09 on the following among other grounds: 1. The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to ₹ 5,95,47,550 to the value of international transactions entered into by the Appellant with its Associated Enterprises in respect of international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missed as not pressed by the Ld. Counsel for the assessee. That leave Ground No. 2 and 3 for specific adjudication. To start , we shall take up Ground No.2 along with its subgrounds in the succeeding paragraph. 4. Ground No. 2 relates to benchmarking of transactions involving the Manufacturing segment of the assessee. Brief facts relating to the issue are that assessee is engaged in the business of manufacture and trading of wide range of intravenous (IV) fluids. Company is wholly owned subsidiary of M/s.Fresenius Kabi AG, Germany (FKAG). This, FKAG is, inturn, a wholly owned subsidiary of Fresenius AG, Germany (in short FAG ). There was import of finished goods from the Associated Enterprises and selling them in the domestic market. It is a part of the Trading Segment of the assessee. Further, raw material necessary for manufacturing activity of Intravenous fluids are also imported from the company s Associated Enterprises. Thus, the import of raw materials, finished goods and fixtures, assets as well as export of manufacturing goods, receipt of sales commission, receipt of I.T. services, payment of testing charges and payment of interest on loans are the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the audited accounts. Further, the TPO is of the view that the expenditure allocated among the said subsegments is arbitrary and are not based on the actual expenditure. Therefore, as per the TPO, the figures and expenditure allocated among the 4 subsegments of Manufacturing activity are linked to the sales on the basis of some keys is unsustainable. Thus, the margins of each of the sub-segment are not credible for benchmarking study. Otherwise, it is undisputed that significant expenditure is allocated on keys, such as Production, Manufacture of bottles, ratio of sales revenue, etc. As per the TPO, all transactions are intrinsically closely linked and they are required to be aggregated. In that case, the PLI of this segment is worked at 0.54%. It is the reasoning of the Revenue authorities that the transaction with Associated Enterprises are profit oriented and the domestic transactions are loss oriented . The segregation made by the assessee among the sub-segments is self-serving. Therefore, there is requirement of benchmarking the transactions leading to the adjustment of ₹ 11,45,500/-. In the draft assessment order, the AO adopted the said adjustments to the manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... located 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. 10. Further, regarding the statutory auditing of the segments/subsegments of Manufacturing activity and further, bringing our attention to certain judicial decisions (M/s. 3i Infotech Ltd. in ITA No.21/Mds/2013 order dated 07-05-2013), Ld. Counsel submitted that there is no requirement for auditing of the various segment/sub-segments of the assessee. Thus, it is the argument of the Ld. Counsel that the TPO s twin fold objection that the segmental/sub-segmental accounts are required to be statutorily audited and the allocation expenses being interlaced are not properly allocated, are unsustainable. Therefore, the adjustments made by the TPO are required to be deleted. 11. In reply to the same, Ld. Departmental Representative for the Revenue brought our attention to the fact that the accounts of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO/DRP without giving reasons. Regarding other aspects relating to 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, we are of the considered opinion the 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. 13. Ground No.3 relates to the most appropriate method in case of the trading activity of the assessee the distributor activity. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. is directed to proceed as proposed in draft assessment order. 16. Criticizing the above finding of the DRP, Ld. Counsel for the assessee submitted that the DRP failed to consider the fact that the assessee merely is a distributor engaged in the trading activity of importing finished goods and selling the same in the domestic market. DRP has not given any reasons how Resale Price Method is not applicable to such distribution activity of the assessee and how the TNM method is most appropriate as held by the TPO. 17. Reacting to the reasoning of the TPO regarding the selling and marketing expenses debited to the profit and loss account, Ld. Counsel submitted that there is no value addition to the products distributed by these expenses incurred by the assessee. According to Ld. Authorised Representative, so long as there is Nil value addition to the products distributed by the said expenditure, the Resale Price Method is the most appropriate one. Relying on the following decisions, Ld. Counsel for the assessee read out the contents of relevant paras on this issue : (1) Textronix India Pvt. Ltd. Vs. DCIT in ITA No.1334/Bang/2010 order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identified by the TPO at 12.90%. The GP as a percentage of sales of the assessee is at 35.6% which is much above the percentage of comparables identified by the TPO. In such circumstances, we are of the view that no adjustment could be made by way of ALP. We, therefore, accept the alternative plea of the assessee and delete the addition made by the AO. In view of the above conclusion, we are not going into the other issues on merits raised by the assessee on the approach adopted by the TPO in arriving at the ALP. Thus, ground Nos.2 to 7 are allowed. 20. Further, the Delhi Bench of the Tribunal in the case of M/s. Frigoglass India Pvt. Ltd. (supra) held that Resale Price Method is the most appropriate method in case of a distributor. Relevant operational Para No.5 reads as under : 5. We have heard the rival contentions and perused the material available on record. In our considered view, once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 24. On having held the Resale Price Method is the most appropriate method to the distributor segment of the assessee, there is a need for benchmarking of the transactions applying the good comparables. We find the TPO has given a finding in Para (xi) of Para 8.2 with regard to the adjustments even if Resale Price Method is applied. As stated by the Ld. Counsel for the assessee before Bench, that this part of benchmarking the transactions applying the Resale Price Method should be referred to the file of AO/TPO/DRP for a fresh decision after granting reasonable opportunity of bearing heard to the assessee. 25. Further, Ld. Counsel for the assessee brought our attention to the additional ground filed on 08-03-2015 and 08-06-2015 and submitted that these grounds relate to benchmarking of the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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