2022 (3) TMI 1528 - AT - Income Tax

Transfer pricing adjustments remanded for further verification, comparables analysis reviewed, management fees procedural errors found.

The Tribunal remanded the transfer pricing adjustments in the manufacturing segment for further verification, allowing adjustments for capacity ... TP Adjustment - Manufacturing segment - TPO has rejected the segmental profit and loss account given by the assessee and reworked the segmental profit and loss account - HELD THAT:- TPO has not given any reason for rejecting the segmental profit and loss account given by the assessee. TPO has redrawn the segmental profit and loss account on order u/s 92CA. No basis of allocation has been given in the order. Assessee has rightly contended that section 92 of the Act can be applied only in respect of international transactions, i.e., transactions with AE. We hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. It would be just and appropriate to set aside the impugned order on this issue and remand the issue to the TO / TPO to verify the segmental profit and loss account given by the assessee. Assessee shall provide all the details including details of allocation in case in support of segmental drawn by it. The AO / TPO shall give proper opportunity of hearing to the assessee. Capacity adjustment - We find that the settled law is that adjustment on account of capacity utilization has to be granted. The additional evidence now produced go to the root of the issue of determination of ALP on the manufacturing segment. For a proper adjudication of the issue and for substantial cause, the same is admitted and taken on record. Accordingly, we set aside the issue to the file of the AO / TPO, directing to follow the directions given in the case of IKA India Private Limited [2018 (10) TMI 49 - ITAT BANGALORE] Foreign exchange fluctuations adjustment - TPO and the DRP have not properly analysed the submissions of the assessee. There is no analysis whether there was any adverse foreign exchange fluctuations during the relevant assessment year, which is abnormal in nature and what is its effect on the operating margin of the assessee and the comparables. These aspects needs to be analysed - it would be just and appropriate to set aside the impugned order on this issue and remand the issue to the TPO. Impairment of loss - We observe from financial statement, that the agreement to sell is entered into on February 24, 2014 and effective date of sale is August 1, 2014 - assessee has recognised impairment loss during the current assessment year. TPO and the DRP have not properly analysed the issue and thus it would be appropriate to set aside the impugned order on this issue and remand the issue to the TPO. Comparable selection - DRP has not properly analysed the submissions of the assessee. DRP has also observed that the annual report of the comparables was not filed by the assessee but has made general observation that TNMM requires broadly similar comparables and exactly similar companies are not required. This is not proper reason and TPO / DRP are duty bound to specifically analyse the comparables submitted by the assessee and the assessee’s objection to the comparable selected by the TPO. The assessee is also duty bound to file the annual reports and make specific submissions with respect to the comparables. Therefore, the entire TP adjustment made by the TPO in management segment is set aside. The TPO shall undertake a fresh TP analysis and make necessary TP adjustment in accordance with law, after affording reasonable opportunity of hearing to the assessee. TP adjustment of Management Fees - adjustment was not proposed by the TPO but was unilaterally added by the DRP - TPO had apparently accepted the ALP of the management fee transaction, as no adjustment was proposed by him in the TP order - DRP suo moto decided that the ALP of this transaction as Nil and directed the AO / TPO to add the entire amount as adjustment - HELD THAT:- DRP suo moto determined the ALP of this transaction as NIL in the DRP’s directions. We find that the DRP has not adhered to the process prescribed under Rule 10B of the T.P. Regulations and no benchmarking analysis has been done by the DRP. The management charges was part of the cost base while computing the adjustment for manufacturing segment under the TNMM. The question whether the transaction of payment of management fees can be aggregated with the international transaction under the manufacturing segment also requires a fresh look in the light of the submissions made by the learned AR (since management fees is directly linked with the operation of the assessee). This aspect has not been analysed in a proper perspective. Thus issue remanded to the AO / TPO for fresh determination. TP Adjustment of ITES Segment - comparable selection - HELD THAT:- Exclusion of companies as functionally dissimilar with that of assessee ITES segment. Working Capital Adjustment - ITES segment - HELD THAT:- Respectfully following the decision of Huawei Technologies India (P.) Ltd. [2018 (10) TMI 1796 - ITAT BANGALORE] we also hold that the working capital adjustment is to be allowed as per actuals, after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/ AO are accordingly directed. After proposing the TP adjustment on account of management fees, the DRP suo moto proposed disallowance of the same management fees u/s 37 - assessee has not furnished the details of the expenses - HELD THAT:- We are of the view that the protective disallowance of management fees u/s 37 of the I.T. Act needs to be considered afresh since the issue of transfer pricing adjustment of management fees has already been remitted back to the AO/TPO for fresh examination. Issues Involved:1. Transfer Pricing Adjustment in Manufacturing Segment2. Transfer Pricing Adjustment for Management Fees3. Transfer Pricing Adjustment in ITES Segment4. Protective Disallowance of Management Fees under Section 37Detailed Analysis:1. Transfer Pricing Adjustment in Manufacturing Segment:*Facts and Contentions:*- The assessee, a subsidiary of the Brady Group, operates in three segments: Manufacturing, Trading, and Services.- The TPO recomputed the segment details, disregarding the assessee's adjustments for capacity utilization and Forex fluctuations, and added amounts for exchange and impairment losses.- The TPO selected a new set of 26 comparables, rejecting the assessee's set of 29 comparables.- The DRP upheld the TPO's adjustments.*Tribunal Findings:*- The TPO did not provide reasons for rejecting the assessee's segmental profit and loss account.- Transfer pricing adjustments should be restricted to AE-related transactions.- The issue was remanded to the AO/TPO for verification of the segmental profit and loss account.- Adjustment for capacity utilization is allowed, referencing the case of IKA India Private Limited.- The issue of Forex fluctuations needs proper analysis and was remanded to the TPO.- The impairment loss issue was also remanded for proper analysis.- The DRP did not properly analyze the comparables; the issue was remanded for fresh TP analysis.*Result:*- Grounds 4 to 13 were allowed for statistical purposes.2. Transfer Pricing Adjustment for Management Fees:*Facts and Contentions:*- The assessee justified the ALP of management fees using the TNMM method.- The TPO did not propose any adjustment, but the DRP unilaterally determined the ALP as Nil and added the entire amount as adjustment.*Tribunal Findings:*- The DRP did not provide the assessee an opportunity to furnish information/documents.- The DRP did not follow the process prescribed under Rule 10B of the TP regulations.- The issue requires a fresh look, considering whether management fees can be aggregated with the manufacturing segment transactions.*Result:*- Grounds 14 to 22 were allowed for statistical purposes.3. Transfer Pricing Adjustment in ITES Segment:*Facts and Contentions:*- The assessee maintained segmental details, but the TPO revised them and selected a new set of six comparables.- The assessee objected to the inclusion of Infosys BPO Limited and Microland Limited and the exclusion of Informed Technologies, Crystal Voxx, and Jindal Intellicom.*Tribunal Findings:*- Infosys BPO Limited and Microland Limited were excluded based on functional differences and significant brand value.- Informed Technologies, Crystal Voxx, and Jindal Intellicom were included as they met the service income filter and were functionally similar.- Working capital adjustment should be allowed as per actuals, referencing the case of Huawei Technologies India (P.) Ltd.*Result:*- Grounds 23 to 34 were partly allowed for statistical purposes.4. Protective Disallowance of Management Fees under Section 37:*Facts and Contentions:*- The DRP proposed a protective disallowance of management fees under Section 37, citing lack of details.*Tribunal Findings:*- The issue needs reconsideration as the transfer pricing adjustment of management fees has been remitted back for fresh examination.*Result:*- Grounds 35 to 37 were allowed for statistical purposes.Conclusion:- The appeal in IT(TP)A No.790/Bang/2019 was dismissed as infructuous.- The appeal in IT(TP)A No.103/Bang/2019 was partly allowed.