Transfer pricing appeal allows adjustments for wastage costs, comparables, and AE transactions. Assessing Officer to re-compute margins.

The appeal was partly allowed in a transfer pricing case involving advisory services. The Tribunal directed adjustments for extraordinary wastage costs and inclusion of certain companies as comparables. It also restricted adjustments to transactions between Associated Enterprises only. The Assessing Officer/TPO was directed to re-compute margins and determine the Arm's Length Price accordingly. The appeal outcome favored the assessee on several grounds, with the order pronounced on October 17, 2018.

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Issues Involved:
1. Transfer pricing adjustment for advisory services.
2. Calculation of arm's length price of advisory services.
3. Rejection of certain companies as comparables.
4. Adjustment for production wastage during the start-up phase.
5. Benefit of +/- 5 percent as per the proviso to section 92C(2) of the Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Act.
7. Restriction of transfer pricing adjustment to transactions between Associated Enterprises (AEs).

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Advisory Services:
The appeal concerns a transfer pricing adjustment of Rs. 2,20,75,181/- made by the DCIT based on directions from the DRP. The adjustment pertains to the value of international transactions involving advisory services provided by the assessee to its associated enterprises (AEs).

2. Calculation of Arm's Length Price of Advisory Services:
The DCIT, following DRP directions, calculated the arm's length price (ALP) of advisory services as NIL, which the assessee contested. The TPO had determined that the advisory services were not at an ALP and thus valued them at NIL, resulting in the said adjustment. The DRP upheld this view, stating that the assessee did not demonstrate the necessity or benefit of the advisory services, nor did it show that such services were unavailable in-house or locally.

3. Rejection of Certain Companies as Comparables:
The TPO rejected three companies—Bright Autoplast Pvt. Ltd., K R Rubberite Ltd., and Lifelong India Ltd.—as comparables. Bright Autoplast was rejected due to high related party transactions (RPT), while K R Rubberite and Lifelong India were deemed not directly relatable to the assessee's product profile. The DRP upheld these rejections.

4. Adjustment for Production Wastage During the Start-up Phase:
The assessee sought an adjustment to its profit level indicator (PLI) for abnormal wastage costs during the start-up phase of its Chennai manufacturing facility. The TPO and DRP rejected this adjustment, arguing that adjustments should be made in the hands of comparables, not the tested party. The DRP only allowed for excess wastage adjustment for the first two months of production.

5. Benefit of +/- 5 Percent as Per Proviso to Section 92C(2) of the Act:
The assessee argued for the benefit of the +/- 5 percent range as per the proviso to section 92C(2) of the Act, which was not granted by the DCIT following DRP directions.

6. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Act:
The assessee contested the initiation of penalty proceedings under section 271(1)(c) of the Act, arguing that it was premature. The appeal on this ground was dismissed as premature.

7. Restriction of Transfer Pricing Adjustment to Transactions Between Associated Enterprises (AEs):
The assessee raised an additional ground that the transfer pricing adjustment should be restricted to transactions between AEs. The DRP and DCIT did not restrict the adjustment to AE transactions only.

Judgment Summary:

- General Grounds: Grounds No. 1, 7, and 8 were dismissed as general in nature.
- Transfer Pricing Adjustment: The Tribunal found merit in the assessee's claim for an adjustment for extraordinary wastage costs and directed the Assessing Officer/TPO to exclude these costs while computing the margins. The Tribunal also held that the TPO cannot determine the ALP of advisory services at NIL without considering the merits of the services rendered.
- Comparables: The Tribunal directed the inclusion of K R Rubberite Ltd. and Lifelong India Ltd. as comparables, while Bright Autoplast Pvt. Ltd. was rightly excluded due to high RPT.
- Adjustment Restriction: The Tribunal directed that any adjustment should be restricted to international transactions between AEs only.
- Outcome: The appeal was partly allowed, with specific directions to the Assessing Officer/TPO to re-compute the margins and determine the ALP of the international transactions accordingly. The grounds of appeal No. 2 to 4 and the additional ground of appeal were allowed, and ground No. 3 was partly allowed.

Order Pronouncement: The order was pronounced on October 17, 2018.

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