2017 (11) TMI 1975 - AT - Income Tax

Tribunal revises adjustments in Design Engineering & Manufacturing segments; emphasizes functional comparability in transfer pricing.

The Tribunal partially allowed the assessee's appeal, revising the adjustments in the Design Engineering Services and Manufacturing Function segments. The ... TP Adjustment - comparable selection for Design Engineering Services - HELD THAT:- Rolta India Ltd. having different accounting period cannot be selected as comparable and hence, the same is directed to be excluded from the final list of comparables. Accentia Technologies Ltd. was engaged in KPO services, then the margins of same cannot be compared with the margins of assessee being functionally different. Accordingly, we hold so and direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables. KLG Systel Ltd. - We direct the Assessing Officer/TPO to apply segmental details of activity which is functionally comparable to the assessee in order to work out the margins of said concern. Accordingly, we direct the Assessing Officer/TPO to re-compute the margins of KLG Systel Ltd. and include the same in final list of comparables. Neilsoft Ltd. - From the details filed by the assessee, we find that in all the earlier years, wherein the said concern was selected as comparable and its margins were applied as part of final set of comparables, the said concern was showing profits and only in this year it had shown marginal loss; hence there is no merit in excluding the said concern from the final set of comparables in the instant assessment year on the ground that it has shown losses. In the absence of Revenue establishing that the said concern was persistent loss making concern, merely because the said concern during the year had shown losses, the margins of the said concern could not be excluded. Accordingly, we hold so and direct the Assessing Officer to include the margins of said concern in order to benchmark international transactions of Design Engineering Services Division of assessee. The ground of appeal No. 2 raised by the assessee is thus, allowed. Exclusion of Manufacturing Division - non-allowance of capacity under-utilization in the Manufacturing Division of the assessee - Though the assessee had received support payments from its associated enterprises at ₹ 3.16 crores but it had still suffered losses because of under-utilization of the capacity. The assessee wanted carve out on account of capacity under-utilization. Following the same parity of reasoning as in assessment year 2009-10, we hold that the assessee is entitled to said carve out. Accordingly, we direct the Assessing Officer to allow the capacity under-utilization in the hands of assessee. Secondly, we also hold that there is no merit in the orders of TPO/Assessing Officer in holding that support payments received from associated enterprises should have been to the extent of under-utilization of capacity. Applyingin CIT Vs. Whirlpool [2015 (12) TMI 1188 - DELHI HIGH COURT], we reverse the findings of Assessing Officer/TPO in this regard and delete the addition made in the hands of assessee in the Manufacturing Segment Consequently, the ground of appeal No. 3.1 raised by the assessee is allowed. Issues Involved:1. General Ground of Appeal2. Transfer Pricing Adjustment for Design Engineering Services3. Transfer Pricing Adjustment for Manufacturing Function4. Nature of Support Payment from Associated EnterprisesDetailed Analysis:General Ground of Appeal:The first ground of appeal raised by the assessee was general in nature and was dismissed by the Tribunal. The ground of appeal No. 4 was not pressed by the assessee and was also dismissed.Transfer Pricing Adjustment for Design Engineering Services:The assessee contested the transfer pricing adjustment of Rs. 27,27,007/- made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) in the Design Engineering Services segment. The key issues were the inclusion of Accentia Technologies Ltd. and Rolta India Ltd. as comparables and the exclusion of KLG Systel Ltd.1. Rolta India Ltd.: The Tribunal held that Rolta India Ltd., having a different year ending (30.06.2009) compared to the assessee (31.03.2010), could not be selected as a comparable. This was based on the precedent set in the assessee's own case for the assessment year 2009-10 and the Bombay High Court's ruling in CIT Vs. PTC Software (I) Pvt. Ltd.2. Accentia Technologies Ltd.: The Tribunal excluded Accentia Technologies Ltd. from the final list of comparables, as it was engaged in high-end KPO services and had undergone extraordinary events during the year, making it functionally different from the assessee. This decision was consistent with the Tribunal's earlier rulings in similar cases.3. KLG Systel Ltd.: The Tribunal directed the AO/TPO to apply the segmental details of KLG Systel Ltd., which were functionally comparable to the assessee, to work out the margins. This was in line with the Tribunal's decision in the assessee's own case for the assessment year 2009-10.4. Neilsoft Ltd.: The Tribunal included Neilsoft Ltd. in the final set of comparables, despite its negative margins for the year, as it was not a persistent loss-making concern and had shown profits in earlier years. This inclusion was supported by the Bombay High Court's ruling in CIT Vs. Welspum Zucchi Textiles Ltd.Transfer Pricing Adjustment for Manufacturing Function:The assessee challenged the addition of Rs. 78,98,570/- made by the AO/TPO in the Manufacturing Function segment. The key issue was the non-allowance of capacity under-utilization adjustment.1. Capacity Under-utilization: The Tribunal held that the assessee was entitled to an adjustment for capacity under-utilization, as it was in the initial stage of setting up its manufacturing unit and had suffered losses. This decision was based on the Tribunal's ruling in the assessee's own case for the assessment year 2009-10 and the precedent set in Tasty Bite Eatables Ltd.2. Support Payments: The Tribunal rejected the TPO's view that the support payments received from associated enterprises should have covered the under-utilization of capacity. The Tribunal relied on the Bombay High Court's ruling in CIT Vs. Whirlpool, which held that hypothetical transactions could not be used for transfer pricing adjustments.Nature of Support Payment from Associated Enterprises:The assessee argued that the support payment of Rs. 3.21 crores received from associated enterprises was capital in nature and hence not taxable. However, this ground was not pressed by the assessee and was dismissed.Conclusion:The Tribunal allowed the appeal of the assessee partly. The adjustments made in the Design Engineering Services and Manufacturing Function segments were revised, and the general and unpressed grounds were dismissed. The Tribunal's decision emphasized the importance of functional comparability and the inadmissibility of hypothetical transactions in transfer pricing adjustments.