2017 (5) TMI 1632 - AT - Income Tax

Tribunal revises transfer pricing adjustments, upholds disallowances, and provides guidance on penalty and interest issues.

Vishay Components Pvt. Ltd. Versus Asst. Commissioner of Income-tax, Circle-7, Pune

The Tribunal partly allowed the assessee's appeal, directing re-evaluation on specific grounds related to transfer pricing adjustments for manufacturing ... Transfer pricing adjustment in the manufacturing segment - comparable companies selection - considering single year’s data in order to arrive at the PLI of comparable cases - Held that:- We uphold the order of Assessing Officer / TPO in considering single year’s data in order to arrive at the PLI of comparable cases, while applying transfer pricing provisions. The Tribunal has decided this issue in assessment year 2007-08 in paras 15 to 18 and the same are being referred to and are not being reproduced for the sake of brevity. The ground of appeal No.4 raised by the assessee is thus, dismissed. Non-consideration of +/- 5% range - Held that:- Assessee is not entitled to the standard deduction under the proviso to section 92C(2) of the Act. However, where transfer pricing adjustment is within +/-5% range, then the assessee is entitled to the said benefit. Accordingly, the ground of appeal No.5 is dismissed. Comparable selection - The assessee was engaged in the manufacture of resistors and capacitors which in turn, were used in various electronic applications / products. The assessee had Domestic Tariff Area unit for manufacturing capacitors and low end resistors, and an Export Oriented Unit for manufacturing certain high end resistors which are exported to overseas group entities, thus companies functionally dissimilar with that of assessee need to be deselected. Assessee has applied the filter and rejected the concern whose turnover from capacitors and resistors was less than 75% of the total turnover. Non-exclusion of depreciation while calculating Profit Level Indicator of the assessee as well as the comparable companies arose before the Tribunal - Held that:- the assessee had made submissions for differential depreciation adjustment which was without prejudice to his claim. The assessee claims that the rate of depreciation i.e. depreciation / average written down value charged by the assessee at 17.97% was higher than average rate of depreciation charged by the comparable companies i.e. 12.07%. The assessee submits that excess depreciation should be excluded while computing operating margins of the assessee. We find no merit in the said plea of the assessee under Rule 10B(1)(e)(iii) of the Rules, adjustment if any, has to be made in the hands of comparables and not in the hands of tested party. We dismiss the plea of the assessee in this regard. However, in case the assessee is able to establish that there is material difference in the claim of depreciation by the assessee vis-à-vis comparables, then suitable adjustment may be allowed in the hands of comparables after due verification by the Assessing Officer / TPO. We direct the Assessing Officer to allow the risk adjustment, if any, and re-compute the margins of comparables and compute the TP adjustment, if any, in the hands of assessee. Computation of total income, wherein the Assessing Officer has not considered the loss but had computed the income by taking business income at Nil. The assessee fairly pointed out that it has already filed an application under section 154 of the Act before the Assessing Officer, which is pending. Accordingly, we find no merit in the said plea of assessee and the same is rejected. The Assessing Officer shall dispose of the application under section 154 of the Act as per law. Issues Involved:1. Transfer Pricing Adjustment2. Disallowances/Additions other than Transfer Pricing Adjustment3. Initiation of Penalty Proceedings4. Erroneous Levy of InterestDetailed Analysis:1. Transfer Pricing Adjustment:General Grounds:- The assessee challenged the transfer pricing adjustment of Rs. 19,94,63,764 related to its manufacturing activity and back-office segment, arguing that the analysis undertaken to determine the arms-length price was not accepted. The Tribunal dismissed the general grounds.Specific Grounds:- Non-Consideration of Contemporaneous Data: The Tribunal upheld the TPO's reliance on current information for determining the arm's length price, dismissing the ground as it was previously decided against the assessee.- Use of Single Year Data: The Tribunal upheld the TPO's use of single-year data for determining the arithmetic mean of margins of comparables, following previous decisions.- Non-Consideration of +/-5% Range: The Tribunal held that the assessee is not entitled to the standard deduction under the proviso to section 92C(2) of the Act but can benefit if the transfer pricing adjustment is within the +/-5% range.Manufacturing Activity:- Selection/Rejection of Comparable Companies: The Tribunal directed the AO to verify the inclusion/exclusion of Keltron Group and Gujarat Poly-Avx Electronics Ltd. based on persistent loss-making criteria.- Rejection of K Dhandapani and Company Ltd.: The Tribunal upheld the rejection of this company as a comparable due to the assessee's own filter criteria.- Operating Margins of Tibrewala Electronics Ltd.: The Tribunal remitted the issue back to the TPO to verify the claim regarding the treatment of currency options as operating costs.- Non-Exclusion of Depreciation: The Tribunal directed the AO to allow suitable adjustments in the hands of comparables if material differences in depreciation claims are established.- Capacity Utilization Adjustment: The Tribunal dismissed the ground, following previous decisions.- Computation of Transfer Pricing Adjustment: The Tribunal directed the AO to compute the adjustment only with reference to the value of international transactions.Back-Office Activity:- Selection of Comparables: The Tribunal directed the exclusion of Accentia Technologies Ltd., Coral Hubs Ltd., Cross Domain Solutions Ltd., and E4e Health Solutions from the final set of comparables due to functional dissimilarity.- Inclusion of Comparables: The Tribunal upheld the exclusion of R Systems International Ltd., Ace Software Exports Ltd., Aditya Birla Minacs Worldwide Ltd., and Informed Technologies India Ltd. based on various criteria including different accounting periods and functional dissimilarity.- Working Capital Adjustment: The Tribunal directed the AO to dispose of the application under section 154 of the Act filed by the assessee regarding the computation error.- Risk Adjustment: The Tribunal directed the AO to allow risk adjustment and re-compute the margins of comparables, following the principles laid down in previous cases.2. Disallowances/Additions Other than Transfer Pricing Adjustment:- Stock Written-Off in Domestic Tariff Area: The Tribunal remitted the issue back to the AO for reconsideration following the directions in the previous assessment year.- Total Income Computation: The Tribunal rejected the assessee's plea regarding the computation of total income and directed the AO to dispose of the application under section 154 of the Act.3. Initiation of Penalty Proceedings:- The Tribunal found the ground premature and rejected it.4. Erroneous Levy of Interest:- The Tribunal rejected the ground, following the decision in the previous assessment year.Conclusion:The appeal of the assessee was partly allowed, with directions for re-evaluation on specific grounds and dismissal of other grounds based on previous judgments and established principles.