2018 (6) TMI 1762 - AT - Income Tax

Appeal partly allowed, issues remitted for reconsideration. Tribunal stresses consistency and alignment with past decisions.

The appeal was partly allowed, with various issues remitted back to the Assessing Officer/TPO for reconsideration and recomputation. The Tribunal ... TP Adjustment - change in the method of accounting - transfer pricing adjustment has to be made with respect to international transaction only and not on entire sales of RTS segment - assessee has assailed the directions of DRP in not accepting gain/loss arising from foreign exchange fluctuations as non-operating in nature - HELD THAT:- Reason for accepting change in the method of accounting is concerned, we are satisfied that the change has been made by assessee for the bona-fide reasons. The assessee has changed the method of accounting of foreign exchange fluctuations as non-operating item in line with the judicial pronouncements. The assessee after the change of method in assessment year 2009-10, has been regularly treating foreign exchange fluctuations as non operating item. Therefore, objection raised by the ld. DR against change of treatment given by assessee to foreign exchange fluctuations in the past as operating and now shifting its stand to treat the same as non operating item without any bona-fide reason, is not sustainable. We are of consider view that the assessee has changed method of treating foreign exchange fluctuation as non-operating item for bona-fide reasons. Hence, ground No. 1 raised in appeal by assessee is allowed. Entire RTS segment for calculation of PLI - HELD THAT:- The assessee has prayed for restricting the adjustment on the basis of value of international transactions only. It has been brought to our notice that identical grounds were raised in the appeal for assessment year 2008-09. The Co-ordinate Bench of Tribunal in assessee’s own appeal [2016 (4) TMI 1125 - ITAT PUNE] remitted the issue back to the file of Assessing Officer for recomputation. The Tribunal in principle accepted that transfer pricing adjustment has to be made with respect to international transaction only and not on the entire sale of RTS segment. We remit the issue back to the file of Assessing Officer/TPO to decide the issue de-novo on similar lines. Accordingly, ground Nos. 2 & 3 raised in appeal by the assessee are allowed for statistical purpose. Rejection of comparables by TPO by applying export turnover filter - AR contended before us that export turnover filter of 75% has been applied by the TPO for the first time in the assessment year under appeal - HELD THAT:- Neither the filter was applied in earlier assessment years nor it is applied in the subsequent assessment year. We observe that after applying export turnover filter of 75%, out of total ten comparables selected by assessee in TP study, nine comparables have been rejected by the TPO. TPO has not selected any other company as comparables while determining ALP. The TPO determined ALP by considering ADF Foods Ltd. as only comparable. The Assessing Officer in the first instance should not have applied a filter to select/reject comparables that was neither used in the past nor in the subsequent years. ‘Rule of consistency’ demands that uniform filters should be applied to bench mark the international transactions, if there is no material difference in the facts of different assessment years. We remit this issue back to the file of Assessing Officer/TPO to consider M/s.Haldiram Bhujiawala Ltd. and M/s.Capital Foods Ltd. as comparables along with ADF Foods Ltd and thereafter, determine ALP of the international transactions entered into by assessee with its AEs. Accordingly, ground No. 4 raised in appeal by assessee is allowed for statistical purpose. Incorrect computation of operating margin of ADF Foods Ltd.- As pointed that the correct operating margin of ADF Foods Ltd is 10.31%, whereas the TPO computed the same as 13.83% - HELD THAT:- This issue requires verification of the calculations. Accordingly, we remit this issue back to the file of Assessing Officer/TPO to correctly compute the operating margin of the said company before applying the same for determining ALP. Accordingly, ground No. 5 raised in appeal by assessee is allowed for statistical purpose. Granting benefit of ±5% variation - HELD THAT:- AO/TPO is directed to allow benefit of ±5% tolerance to the assessee in accordance with law. Issues Involved:1. Treatment of foreign exchange loss as non-operating expenses.2. Calculation of Profit Level Indicator (PLI) for the entire RTS segment.3. Adjustment limited to the value of international transactions.4. Rejection of comparables selected by the assessee.5. Incorrect operating margin of ADF Foods Ltd.6. Benefit of ±5% variation as per section 92C(2) of the Act.7. Levy of interest under section 234B of the Act.8. Initiation of penalty proceedings under section 271(1) read with section 274 of the Act.Detailed Analysis:Issue 1: Treatment of Foreign Exchange Loss as Non-Operating ExpensesThe assessee argued that foreign exchange loss should be treated as non-operating expenses, citing various Tribunal decisions. The Tribunal accepted this argument, noting that the assessee had changed its method of accounting for bona fide reasons and in line with judicial pronouncements. The Tribunal allowed this ground, stating that the assessee's change in treating foreign exchange fluctuations as non-operating was justified and consistent with previous decisions.Issue 2: Calculation of PLI for the Entire RTS SegmentThe assessee contended that the adjustment should be limited to the value of international transactions, not the entire RTS segment. The Tribunal referred to its previous decision in the assessee's case for the assessment year 2008-09, where it was held that transfer pricing adjustment should be made with respect to international transactions only. The Tribunal remitted this issue back to the Assessing Officer/TPO for recomputation, aligning with the previous decision.Issue 3: Adjustment Limited to the Value of International TransactionsSimilar to Issue 2, the Tribunal reiterated that the transfer pricing adjustment should be limited to international transactions and not the entire RTS segment. This issue was also remitted back to the Assessing Officer/TPO for recomputation.Issue 4: Rejection of Comparables Selected by the AssesseeThe assessee challenged the TPO's rejection of comparables by applying an export turnover filter of 75%. The Tribunal noted that this filter was applied for the first time in the assessment year under appeal and was not used in previous or subsequent years. The Tribunal directed the Assessing Officer/TPO to consider the comparables M/s. Haldiram Bhujiawala Ltd. and M/s. Capital Foods Ltd. along with ADF Foods Ltd., following the principle of consistency.Issue 5: Incorrect Operating Margin of ADF Foods Ltd.The assessee argued that the TPO incorrectly computed the operating margin of ADF Foods Ltd. at 13.83% instead of 10.31%. The Tribunal remitted this issue back to the Assessing Officer/TPO for verification and correct computation of the operating margin before determining the ALP.Issue 6: Benefit of ±5% Variation as per Section 92C(2) of the ActThe assessee sought the benefit of ±5% variation. The Tribunal directed the Assessing Officer/TPO to allow this benefit in accordance with the law, thus allowing this ground.Issue 7: Levy of Interest under Section 234B of the ActThe Tribunal noted that the charging of interest under section 234B is mandatory and consequential. Therefore, this ground was dismissed.Issue 8: Initiation of Penalty Proceedings under Section 271(1) Read with Section 274 of the ActThe Tribunal found the challenge to the initiation of penalty proceedings premature at this stage and dismissed this ground.General Grounds:The Tribunal found the general grounds raised in the appeal to be non-specific and requiring no adjudication.Conclusion:The appeal was partly allowed, with several issues remitted back to the Assessing Officer/TPO for reconsideration and recomputation, while some grounds were dismissed. The Tribunal's decision emphasized consistency in applying filters and methods across different assessment years and aligned with previous judicial pronouncements.