TMI Blog2023 (9) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... location of expenses to the segment - First item is `Employees cost - TPO has rightly excluded the salaries of site Directors/Managers etc. from the ambit of common employee cost for allocation. Depreciation - Assessee allocated depreciation only in respect of building amounting to Rs. 58,837/- to the trading segment. It was fairly conceded by the assessee before the TPO that Land, Building, Warehouse and other facilities were also used for the trading activity - depreciation on these items also needed to be allocated to the trading segment. However, depreciation on plant and machinery, which is peculiar to the manufacturing segment alone, is required to be excluded from the ambit of common base of depreciation, which has rightly been done by the TPO. Other expenses - The assessee did not allocate expenses on account of Local travel, Lodging, Communication expenses, Stationary, Courier charges to the trading segment, having turnover of Rs. 28.00 crore. Obviously, some sort of travelling would be required for the trading segment including visiting clients. Similarly, stationary etc. would also be needed for this segment as part of any office expense. In our considered op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emitted to the file of the AO/TPO. TP Adjustment - selection of MAM - CUP or TNMM - TPO observed that the assessee applied the TNM method in respect of international transaction of `Sale of finished goods at the transacted value, but CUP method should have been applied instead of the TNMM - HELD THAT:- As against the item COMITE 31R, the assessee sold 15000 units for the month of February, 2014 to its AE as against third party export of 25 units. Similarly for August, 2013, the item sold is COMITE 86. Sale to AEs is of 3000 units and to third parties of 40,000 units. Such difference in the quantity sold to the AEs and non-AEs appears for other months as well. In view of such huge quantitative differences, one cannot say that the price charged for a product sold in huge quantity can be taken as comparable price for the sale of lower units of the same product. Thus the CUP is not the most appropriate method in the facts of the case. If the CUP method is excluded, what remains is the TNMM, as was applied by the assessee. We, therefore, hold that the ld. CIT(A) was justified in accepting the assessee s contention that the TNMM should be applied in respect of international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... During the course of the transfer pricing proceedings, the TPO observed that the assessee had not properly allocated the expenses between the manufacturing and trading segments inasmuch as inadequate/no expenditure under the heads Employee benefit, Depreciation, Sales Commission and Other expenses was allocated to the Trading segment. On being called upon, the assessee furnished a revised working of the Trading segment computing Profit Level Indicator (PLI) of OP to OR at (-) 0.88%. The TPO observed that the assessee itself accepted that expenses to the tune of Rs. 34,88,446/- were earlier not allocated to the trading segment under the transfer pricing study report. He observed that various expenses were not/improperly allocated to the trading segment. The TPO also observed that allocation of some expenses between trading and manufacturing segments on the basis of gross profit ratio was not correct. He noted that the assessee allocated salary of only one employee at Rs. 6.90 lakh to the trading segment. Considering the FAR analysis, it was opined that the trading was much more than a single person activity. He held that the salaries of Directors and Finance personnel etc. were also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee with omission of several expenses in the allocation, the assessee came out with a revised figure of allocation at Rs. 28.37 crore, thereby and increasing the allocation of expenses to the trading segment by Rs. 34,88,446/-. Despite an opportunity granted by the TPO, the assessee still did not come clean by not properly allocating Employee cost, Depreciation and Other expenses as discussed supra . This demonstrates that the assessee failed to properly apportion the expenses between the manufacturing and trading segments, as has been correctly adjudicated by the ld. CIT(A). The assessee s solitary grievance in this regard is, therefore, not jettisoned. 5. Having held that the ld. CIT(A) was justified in rejecting the allocation of expenses by the assessee to the trading segment, the next question is about the proper allocation of expenses to the segment. The first item is `Employees cost . The assessee made allocation to the trading segment by considering only one person s salary as employee cost at Rs. 6.90 lakh. It goes without saying that the Directors also devoted their time to the trading segment in the same way as they did for the manufacturing segment. Similar is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account the weight of the higher or lower amounts of the sales or gross profit. In our view, the gross profit ratio cannot be a yardstick to allocate the expenses dehors the actual figures. This can be understood with the help of an example. Suppose out of total sales of Rs. 100/- made by an assessee, sale under the manufacturing segment is Rs. 10/- and in the trading segment are Rs. 90/-. Further, suppose that the rate of gross profit in the manufacturing segment is 20% and in the trading segment is 2%. Though revenue from the trading activity is a major constituent at 90% of the total, but the gross profit ratio will be unevenly poised at 20%:2%. Further suppose that total common expenses are Rs. 30/-. If we allocate the common expenses in the ratio of gross profit rates, then expenses only to the tune of Rs. 2.72 will be allocated to the trading segment and Rs. 27.28 to the manufacturing segment. This is totally illogical because the manufacturing segment will have to bear the allocation of common expenses at Rs. 27.28 against its total revenue at only Rs. 10/-, which is preposterous. The allocation of common expenses needs to be done involving the figures having some base of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking capital adjustment. In this regard, the assessee calculated the working capital adjustment on segmental basis. However, it could not substantiate the figures of Receivables, Payables, Inventories relating to trading segment. The TPO also observed difference in the figures of Inventory of traded goods as per Annual report at Rs. 10.76 crore and as taken for working capital adjustment at Rs. 8.13 crore. When pointed out, the assessee accepted this mistake. The TPO also noticed certain defects in the calculation of working capital adjustment of comparables, in which the assessee had also considered advances to and from customers, prepaid expenses, other payables etc. In view of the above facts, the TPO rejected the assessee s computation and recomputed the working capital adjustment. The ld. CIT(A) gave certain directions for the computation of the working capital adjustment, against which the Revenue is aggrieved. 13. At the outset, the ld. AR submitted that the TPO had not given adequate opportunity to the assessee to submit correct figures after noticing certain defects. We observe that the CIT(A), too, has not gone into such details taken note of by the TPO and simply ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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