Appellant's Appeal Partially Allowed, Issues Remitted for Reconsideration

The Tribunal partially allowed the appellant's appeal, remitting the issues of functional adjustment and exclusion of comparables back to the Assessing Officer for reconsideration. However, the claim for the +/- 5% benefit under section 92C(2) of the Act was dismissed in accordance with the amended provisions.

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Issues Involved:
1. Rejection of functional adjustment made to Profit Level Indicator (PLI) of the appellant.
2. Rejection of two comparable companies from the Transfer Pricing analysis.
3. Transfer pricing adjustment without giving benefit of +/- 5 percent as available under proviso to section 92C(2) of the Act.

Detailed Analysis:

1. Rejection of Functional Adjustment Made to PLI of the Appellant:
The assessee argued that the authorities erred in not granting the capacity under-utilization adjustment. The assessee had expanded its output capacity during the year anticipating increased business, which did not materialize. Consequently, the company incurred losses due to under-absorption of fixed costs. The assessee provided detailed workings of under-utilization of capacity and manpower, which were not considered by the Commissioner of Income Tax (Appeals). The Tribunal noted that the authorities rejected the adjustment without examining the factual aspect of increased capacity. The Tribunal referred to various decisions, including those of the Bangalore and Pune Benches, which granted under/low capacity utilization adjustments. The Tribunal remitted the issue back to the Assessing Officer to decide afresh, considering the submissions and documents on record.

2. Rejection of Two Comparable Companies from the Transfer Pricing Analysis:
The assessee contested the exclusion of F I Sofex Limited and Fortune Informatics Limited from the list of comparables on the grounds that they were loss-making companies. The Tribunal found merit in the contention that a comparable should not be rejected merely for incurring losses in a particular year. The Tribunal referred to multiple decisions, including those of the Pune Bench and the Hon'ble Delhi High Court, which held that a company should be excluded only if it is a consistent loss-making entity. The Tribunal remitted the issue back to the Assessing Officer to ascertain whether the excluded companies were consistent loss-makers and decide the issue afresh.

3. Transfer Pricing Adjustment Without Giving Benefit of +/- 5 Percent:
The assessee claimed the benefit of the safe harbor of +/- 5% under section 92C(2) of the Act. However, the Tribunal noted that the Finance Act, 2012, inserted sub-section (2A) with retrospective effect from 01-04-2002, which precludes the benefit if the variation between the arithmetical mean and the actual transaction price exceeds 5%. The Tribunal, agreeing with the amended provisions, dismissed this ground of appeal.

Conclusion:
The Tribunal allowed the appeal of the assessee partly for statistical purposes, remitting the issues of functional adjustment and exclusion of comparables back to the Assessing Officer for fresh consideration, while dismissing the claim for the +/- 5% benefit.

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