TMI Blog2022 (12) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... h is evident from the workings available - Hence, the entire FAR is also duly complied with by the assessee in the instant case. Even with lower risk that AE segment as accepted by the ld DRP is having, as evident from the segmental workings available we find that assessee had made higher margins with AE as compared to non-AE transactions. Hence, certainly, the assessee s international transaction with AE using Internal TNMM as the MAM is at arm s length, which has to be accepted in the instant case. We hold accordingly. Hence, the ground Nos. 2-6 raised by the assessee are allowed. Inclusion of five comparables chosen by the assessee by adopting external TNMM as the Most Appropriate Method - External TNMM method adopted by the ld. TPO - As going by the broad functional comparability we hold that even the five comparable companies which were rejected by the ld. DRP ought to be included in the final list of comparables. By this process, effectively all the 12 comparables chosen by the assessee, on without prejudice basis, for applying External TNMM gets approved. Hence, there is no scope for making any adjustment to arm s length price even if External TNMM is adopted in the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterials available on record. We find that assessee company was part of ENPEE group up to 30/01/2015. PIL shareholders entered into share purchase agreement with Huhtamaki PPL Ltd., (HPPL) on 08/07/2014. Consequent to the approval of the share transfer arrangement, the assessee became 100% subsidiary of HPPL effective from 31/01/2015. The assessee, now part of Huhtamaki group is a one-stop source for printed and laminated barrier grade quality flexible packaging materials. PPIL, being a leader in flexible packaging, provides packaging solutions customers globally through a robust international marketing network. Assessee caters to various sectors including food and beverages, FMCG, pharmaceutical, industrial and agro, encompassing world s most recognised brands. 4.1. The various international transactions carried out by the assessee are tabulated in page 2 of the order of the ld. Transfer Pricing Officer (TPO) in para 3. Out of the seven transactions listed thereon, the issues in dispute before us are only with regard to item Nos. 1 2 thereon i.e. export of manufactured finished goods to Associated Enterprises (AEs) Rs.88,98,56,779/- and to export of raw materials and consum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export of manufactured finished goods and raw materials / consumables to AEs. The assessee compared its margins with 12 comparable companies listed in pages 4 5 of the order of the ld. TPO whose margin were in the range of 2.84% to 7.06%. The median of the aforesaid comparables was arrived at 5.55% and since the assessee s margin was 3.31%, the said transaction was treated to be at arm s length as assessee s margin fall within the range of the comparables. The segmental results of the comparable companies were furnished by the assessee before the ld. TPO. However, the ld TPO rejected the same by stating that the same is not on actual basis. Finally, the ld. TPO rejected 9 comparable companies from the chosen list of 12 comparable companies by the assessee and took only 3 comparable companies of the assessee i.e. Packaging India Pvt. Ltd., Umax Packaging Ltd., and TCPL Packaging Ltd., and arrived at the average margin thereon at 8.5%. The ld. TPO by applying 8.5% sought to make an upward adjustment of Rs.8,63,57,985/- on account of export sales made to AE in the following manner:- Particulars In.Rs In. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction by using External TNMM wherein 12 comparable companies have been chosen by the assessee and segmental data thereon were duly provided by the assessee and that the similar data furnished were accepted by the ld. TPO in earlier years. The assessee also pointed out that it had determined profitability of each of the sales segment namely, AE exports, non-AE exports and non-AE domestic, by preparing segmental profitability statement and got the same certified by an independent Chartered Accountant. The assessee also submitted that for the purpose of determining the profitability under each of the segment, all the direct costs were identified and directly attributable to the concerned sales segment. However, with respect to other costs which were not readily identifiable in relation to particular sale segment, the same were allocated to each segment using sales as the most appropriate cost allocation key . Further since AE export and non-AE export segment were functionally comparable in every respect to the assessee by applying Internal TNMM as the Most Appropriate Method and compared the profitability earned in both the segments to establish arm s length nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pancies in the segmental working produced by the assessee but the same were not even informed to the assessee during the course of transfer pricing assessment proceedings and these were made known to the assessee only in the order of the ld. TPO. The ld. TPO had observed that basis for allocating HO expenses and other expenses were not provided by the assessee. This is factually incorrect as the same are allocated in the sales ratio. The ld. TPO had observed that basis for allocating the following income i.e. excess provision written back, HO income, sundry balance written back and insurance claim amount on the basis of sales ratio is incorrect. The assessee submitted before the ld. DRP that these incomes are not directly notified for particular segment and thus allocated on sales ratio. With regard to yet another observation made by the ld. TPO for depreciation related to building and plant and machinery is allocated on sales ratio as against cost of production which is allocated at actual, the assessee submitted that depreciation related to building and plant and machinery forms part of cost of production. The same has been allocated as under:- Allocation to export segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables chosen by the assessee were accepted by the ld. TPO, the ld. DRP further accepted four more comparables chosen by the assessee as under: i) Ecoplast Ltd., ii) Orient Press Ltd., iii) Raj Packaging Industries iv) Uma Polymers Ltd., 4.16. The ld. DRP infact even accepts the fact that the remaining five comparable companies chosen by the assessee are also engaged only in packaging industry but not engaged in flexible packaging industry (which is the business in which assessee is engaged in). The ld. DRP observed that since segmental break-up of the remaining 5 comparables of flexible packaging and normal packaging were not available, hence five comparables were rejected. 4.18. We have heard rival submissions and perused the materials available on record. It is not in dispute that the revised segmental margins given by the assessee before the ld. DRP which are enclosed in pages 496 and 497 of the paper book were duly accepted by the ld. DRP. The entire cost allocation base adopted by the assessee in the revised segmental workings have also been accepted by the ld. DRP. We find that the ld. DRP ultimately observed that date-wise analysis for comparis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y broad functional comparability is required to be seen. Hence, even the regular packaging industry would become broadly functional comparable with flexible packaging industry in which assessee is engaged in. We find that the Co-ordinate Bench of this Tribunal in the case of Watson Pharma Pvt. Ltd., vs. DCIT reported in 168 TTJ 281 by placing reliance on the Bangalore Tribunal decision rendered in the case of GE India Technology Centre Pvt. Ltd., vs. DCIT reported in 141 TTD 245 had observed that TNMM requires only broadly functional end product / services comparability. We find that this decision of Mumbai Tribunal in Watson Pharma in 168 TTJ 281 referred supra has been fully approved by the Hon ble Jurisdictional High Court in the case of PCIT vs. Watson Pharma Pvt. Ltd., reported in 257 Taxman 65. Hence, going by the broad functional comparability by placing reliance on the aforesaid decisions of Mumbai Tribunal which has been approved by the Hon ble Jurisdictional High Court, we hold that even the five comparable companies which were rejected by the ld. DRP ought to be included in the final list of comparables. By this process, effectively all the 12 comparables chosen by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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