The Income Tax Appellate Tribunal (ITAT), Pune Bench ruled that the Transfer Pricing Adjustment (TPA) made at entity level should be restricted to international transactions only.
The assessee, Tasty Bite Eatables Limited is engaged in the manufacture and sale of ready-to-eat foods, filed its return declaring total income which was subsequently revised. The assessee reported certain international transactions in Form No.3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of international transactions.
The assessee reported export of finished goods to its Associated Enterprises (AEs) in the USA and Australia amounting to Rs.71.04 crore and Rs.8.20 crore respectively under this segment. The Transactional Net Marginal Method (TNMM) was applied for demonstrating the international transaction of exports under the RTSF segment at ALP. For doing so, the assessee selected six comparable companies with an average Profit Level Indicator (PLI) of Operating profits to Operating Costs at 6.33% with the data of the F.Ys. 2012-13 and 2013- 14 as against its own segmental PLI at 14.58%. Though the books of accounts were maintained on a consolidated basis for all the three segments and there was a combined Profit and loss account, the assessee tried to justify RTSF segmental claim by submitting a separate income statement allocating costs and income on a certain basis.
The TPO did not accept such allocation as the same was found to be vague and unreliable. Such a segmental Income statement was rejected by the TPO, who went ahead with the PLI determination of the RTSF segment on the basis of entity-level Profit and loss accounts. He computed the assessee’s PLI at 0.83% and an average of the four shortlisted comparables for the relevant year only at 8.08%. This led to proposing a transfer pricing adjustment of Rs.9,91,05,228. The AO notified the draft order with the above-referred transfer pricing adjustment. The Dispute Resolution Panel (DRP) did not provide any succor to the assessee which resulted in the passing of the final assessment order with transfer pricing addition of the above amount.
The coram headed by the Vice President R.S.Syal and Judicial Member S.S.Viswanethra Ravi noted that TPO rejected the assessee‟s segmental level benchmarking and went ahead with the entity level approach. The case of the assessee is that proportionate adjustment ought to have been given and the transfer pricing addition restricted only to the extent of international transactions.
The ITAT directed to restrict the transfer pricing addition only to the extent of international transactions in this segment.
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