Appeal partly allowed with adjustments on comparables, foreign exchange gains, and expenses.

The tribunal partly allowed the appeal, directing adjustments including the exclusion of certain comparables, inclusion of foreign exchange gains in operating income, and exclusion of preliminary and pre-operating expenses from operating costs. Other grounds of appeal were dismissed as they were either not pressed or deemed unnecessary for adjudication.

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Issues Involved:

1. Validity of reference to Transfer Pricing Officer (TPO).
2. Selection and rejection of comparables.
3. Inclusion of foreign exchange gains in operating income.
4. Exclusion of preliminary and pre-operating expenses from operating costs.
5. Adjustment to book profits under section 115JB.
6. Levy of interest under sections 234B and 234D.

Detailed Analysis:

1. Validity of Reference to TPO:
The assessee-company contended that the reference made by the Assessing Officer (AO) to the TPO was invalid as it did not establish the necessity or expediency of such a reference. The CIT(A) upheld the validity of the reference, justifying the AO's decision to involve the TPO for determining the arm’s length price (ALP) of international transactions.

2. Selection and Rejection of Comparables:
The TPO initially selected HMT Bearings Ltd. and SNL Bearings Ltd. as comparables but later excluded HMT Bearings Ltd. due to falling revenues and operational issues. The assessee argued that HMT Bearings Ltd. should not have been excluded as its functional comparability was not in dispute and the fall in profit was due to extraordinary expenses like VRS compensation. The tribunal upheld the exclusion of HMT Bearings Ltd., citing its operation in a controlled environment as a public sector undertaking, which is not comparable to the assessee-company operating in an uncontrolled business environment.

Regarding SNL Bearings Ltd., the assessee-company argued for its exclusion due to its predominantly domestic operations, with export sales constituting less than 4% of total revenue, unlike the assessee-company with 100% export sales. The tribunal agreed and excluded SNL Bearings Ltd. as a comparable, referencing the decision in Bechtel India Pvt. Ltd. vs. DCIT, which held that companies with significant domestic operations are not comparable to those with predominantly export operations.

3. Inclusion of Foreign Exchange Gains in Operating Income:
The assessee-company argued that foreign exchange gains should be included in operating revenue. The tribunal agreed, directing the TPO/AO to include foreign exchange gains as part of the operating income, referencing multiple decisions supporting this inclusion.

4. Exclusion of Preliminary and Pre-operating Expenses from Operating Costs:
The assessee-company contended that preliminary and pre-operating expenses should not be included in operating costs as they do not relate to the company’s operational activities. The tribunal upheld this view, directing the AO to exclude these expenses from operating costs and apply this adjustment to comparable companies as well.

5. Adjustment to Book Profits under Section 115JB:
The assessee-company argued that unabsorbed depreciation should not be added back to book profits. The tribunal did not provide a specific ruling on this issue, focusing instead on the transfer pricing adjustments.

6. Levy of Interest under Sections 234B and 234D:
The assessee-company contested the levy of interest under sections 234B and 234D. The tribunal did not specifically address this issue, as the primary focus was on transfer pricing adjustments.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, directing specific adjustments related to the exclusion of certain comparables, inclusion of foreign exchange gains in operating income, and exclusion of preliminary and pre-operating expenses from operating costs. Other grounds of appeal were dismissed as they were either not pressed or deemed unnecessary for adjudication.

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