Tribunal excludes Jolly Board Ltd, reclassifies impairment losses, and deletes management fees adjustment.

The Tribunal partially allowed the appeal by directing the exclusion of Jolly Board Ltd. from the set of comparables, treating impairment losses as non-operating expenditure, and deleting the transfer pricing adjustment related to management fees. The decision was rendered on 18th May 2022.

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Issues Involved:
1. Inclusion of Jolly Board Ltd. as a comparable entity.
2. Incorrect computation of operating margin of the appellant and comparable companies.
3. Treatment of impairment loss as an operating item.
4. Treatment of miscellaneous income as non-operating.
5. Computation of Arm's Length Price (ALP) of management fees as NIL.

Issue-wise Detailed Analysis:

1. Inclusion of Jolly Board Ltd. as a Comparable Entity:
The lower authorities included Jolly Board Ltd. in the final set of comparable entities, despite the appellant's argument that Jolly Board Ltd. was functionally dissimilar. The Tribunal found that Jolly Board Ltd. was engaged in composite business activities, including manufacturing and realty/property development, without segment-wise financial results. Therefore, it was directed that Jolly Board Ltd. should be excluded from the final set of comparables due to the difficulty in deriving segment-wise financial results.

2. Incorrect Computation of Operating Margin:
The appellant argued that the lower authorities incorrectly computed the operating margin by including impairment losses and excluding management service fees. The Tribunal observed that the impairment losses should be treated as non-operating expenditure since they arose due to extraordinary circumstances related to the closure of manufacturing operations. Consequently, the Tribunal directed the TPO to exclude impairment losses while computing the appellant's Profit Level Indicator (PLI).

3. Treatment of Impairment Loss as an Operating Item:
The Tribunal found that the impairment losses of Rs.464.67 Lacs were extraordinary and arose due to the closure of manufacturing operations. These losses were not part of routine business activities and should be treated as non-operating expenditure. The Tribunal directed the TPO to exclude impairment losses while computing the appellant's PLI, supporting the view with the decision of the Delhi Tribunal in Insofer Mfg. India Pvt. Ltd.

4. Treatment of Miscellaneous Income as Non-operating:
The lower authorities treated miscellaneous income as non-operating without appreciating its nature. The Tribunal did not specifically address this issue in detail in the provided text.

5. Computation of ALP of Management Fees as NIL:
The appellant contended that the lower authorities erred in computing the ALP of management fees at NIL. The Tribunal noted that the appellant had a management service agreement with its AE, and the payments were recurring and allowed in earlier and subsequent years. The Tribunal found that the lower authorities' conclusion that the services should bring direct benefits to the appellant was not logical. The Tribunal directed the TPO/AO to delete the TP adjustment related to management fees, citing the decision of the Chennai Tribunal in Siemens Gamesa Renewable Power (P.) Ltd., which held that the ALP of management fees could not be taken as nil without a valid comparable.

Conclusion:
The Tribunal allowed the appeal partly, directing the exclusion of Jolly Board Ltd. from the set of comparables, treating impairment losses as non-operating expenditure, and deleting the TP adjustment related to management fees. The appeal was pronounced on 18th May 2022.

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