ALP determinable on combined accounts approach in case of failure to separate common costs

Tasty Bite Eatables Limited Vs ACIT (ITAT Pune)

Conclusion:  TPO determined ALP on the combined accounts approach rather than the split approach adopted by assessee as assessee failed to substantiate such common material costs were properly allocated segment-wise and Transfer Pricing Adjustment made at entity level should be restricted to international transactions only.

Held: Assessee, who was engaged in the manufacture and sale of ready to eat foods, filed its return declaring total income of Rs.1,88,570, which was subsequently revised to the total income of Rs.9,38,410. It reported certain international transactions. AO made a reference to TPO for determining the Arm’s Length Price (ALP) of international transactions. Instantly with the Ready to Serve Food (RTSF) segment, albeit assessee had two other segments also, namely, Frozen Foods and Sauces. Transactional Net Marginal Method (TNMM) was applied for demonstrating the international transaction of exports under 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, assessee tried to justify RTSF segmental claim by submitting a separate income statement allocating costs and income on a certain basis.  TPO did not accept such allocation as the same was found to be vague and unreliable. Such a segmental Income statement was rejected by TPO, who went ahead with the PLI determination of the RTSF segment on the basis of entity level Profit and loss account. This led to proposing a transfer pricing adjustment of Rs.9,91,05,228. AO notified the draft order with the above referred transfer pricing adjustment. The issue arose for consideration was the computation of the ALP on the basis of entity level data taken by the TPO as against the assessee‟s plea for taking segmental level data. It was pertinent to mention that the international transaction requiring the ALP determination was only the RTSF segment and not the others. Thus, it became more important to ensure that all the relevant costs relating to the RTSF segment were properly accounted for in the segmental Income statement. Any attempt to allocate more costs to this segment at the cost of the other segments need to be eschewed. It transpired that some of the important raw material costs were common to RTFS and Frozen Foods segments. Assessee could not substantiate that such common material costs were properly allocated segment-wise. Faced with such a scenario, he gave up this argument and did not press the grounds challenging the order of the TPO determining the ALP on the combined accounts approach rather than the split approach adopted by assessee. Thus, the authorities below were justified in proceeding with the ALP determination on the basis of combined accounts approach.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee is directed against the final assessment order dated 19.9.2018 passed by the Assessing Officer (AO) u/s.143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter also called „the Act‟) in relation to the assessment year 2014-15.

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