2019 (5) TMI 1264 - AT - Income Tax

Tribunal directs reassessment of transfer pricing indicators, denies inclusion of comparable companies

The Tribunal partly allowed the assessee's appeal, directing the Transfer Pricing Officer (TPO) to rework the Profit Level Indicator (PLI) and the ... TP adjustment - sale of engine parts by way of addition of stock difference amount - HELD THAT:- In the financial statements, the Stock difference was shown in the credit side of Profit and Loss account, since the value of closing stock was more than the value of opening stock. Accordingly, the value of raw material consumed was shown at gross figure of ₹ 1172.18 lakhs. While computing PLI, the assessee has reduced the value of stock difference from the value of raw material consumed, i.e., the credit figure was netted off against the debit figure. Hence, this action of the assessee would not change the net profit. TPO was not correct in presuming that the assessee has purposefully done this in order to artificially reduce the operating cost. Even if it is assumed for a moment that the TPO was right, then the reduction of operating cost should have increased the profit margin, since any reduction in expenses should increase the profit. We notice that the assessee has adopted different form of depicting the Profit for the purpose of PLI. Since the credit figure has been netted off against the debit figure, it shall not have any effect on the Net Profit. We notice that an identical view has been expressed by the Delhi bench of Tribunal in the case of ITO vs. E Value Serve.Com [2016 (9) TMI 1363 - ITAT DELHI] Accordingly, we reject the presumption entertained by TPO holding the same as fallacious. Accordingly we direct AO/TPO to re-work the PLI of the assessee. Inclusion of two comparables named M/s Talbros Engineering Limited and Jotindra Steel & Tubes Limited. - HELD THAT:- It is stated that M/s Talbros Engineering Limited is engaged in the business of production of motor vehicle parts and M/s Jotindra Steel Tubes Limited is engaged in the business of manufacture of steel pipes & tubes. We have earlier noticed that the assessee is engaged in the business of manufacture and export of aircraft engine parts, components and sub-assemblies. Before us, the assessee could not show as to how the functional profile of both the comparable companies, referred above, is similar to that of assessee. Accordingly we reject this ground of the assessee. Computation of Net profit margin of comparable companies - According to the assessee, there is difference in the net profit margin computed by the assessee and the TPO in respect of comparable companies - HELD THAT:- In the case of JMT Auto Limited, the Net profit margin computed by the assessee was 5.60%, while the net profit margin computed by the TPO was 11.69%. It shows that there is difference in the methodology adopted by the assessee and TPO for computing Net profit margin. It is a matter of reconciliation and hence, in our view, the assessee should be provided with an opportunity to understand the methodology adopted by TPO or explain the difference, if any in order to reconcile the methodology adopted by it with that of the TPO. Accordingly, this issue requires fresh examination at the end of AO/TPO. Accordingly we restore this issue to the file of AO/TPO. Computation of PLI by adopting Cash profit - A.R submitted that the cash profit should be considered for computing PLI - Ld D.R, on the contrary, submitted that the quantum of depreciation would depend upon the value of assets - HELD THAT:- With regard to this contention of the assessee that the cash profit (profit before depreciation) should be considered as PLI, we notice that the same finds support from the decision rendered by the co-ordinate bench in the case of DCIT vs. M/s Centum Rakon India P Ltd [2018 (7) TMI 1972 - ITAT BANGALORE] . We notice that the co-ordinate bench has expressed the view that the profit before depreciation can be taken as PLI, if there is substantial variation in the manner of charging depreciation by the assessee and comparable companies. Accordingly we direct the AO/TPO to take into consideration the above said contention of the assessee. We also direct the assessee to furnish the details to prove that there is substantial variation in the manner of charging depreciation. Rejection of claim for capacity utilization adjustment - HELD THAT:- the average capacity utilization of M/s Rane Engine Valves Limited and M/s Samkrg Pistons & Rings Limited are comparable with the assessee company. We notice that the capacity utilization of Sundaram Fasteners Limited is exceptionally higher at 218.24%. We notice that the assessee itself has computed the % of capacity utilization of M/s Sundaram Fasteners Limited on the basis of installed capacity and actual production. A cursory perusal of the same, in our view, would show that there may be some error in it, since it would be difficult to achieve capacity utilization of 218% in the normal industry standard. We notice that the assessee has not attempted to ascertain the facts in this regard and offer reasonable explanations. Accordingly we do not find merit in this ground urged by the assessee and accordingly reject the same. Benefit of +/- 5% range. It is consequential in nature. In view of the above, the issue relating to determination of ALP of international transactions needs to be recomputed in the light of discussions made supra. Computation of deduction u/s 10B - HELD THAT:- According to Ld A.R, the AO was not justified in deducing the brought forward losses and unabsorbed depreciation while computing deduction u/s 10B of the Act. The Ld A.R submitted that the contention of the assessee is supported by the decision rendered in the case of CIT vs. Yokogawa India Ltd [2016 (12) TMI 881 - SUPREME COURT] Accordingly we restore this issue to the file of the AO for examining the claim of the assessee by duly considering the decision of Hon’ble Supreme Court, referred above. Method of allowing set off of brought forward losses and unabsorbed depreciation - HELD THAT:- This issue also needs to be restored to the file of the AO, as the decision taken in the earlier grounds shall have impact on this issue. Accordingly we restore this issue to the file of AO. Issues:1. Transfer Pricing Adjustment2. Inclusion of Comparable Companies3. Computation of Net Profit Margin4. Profit Level Indicator (PLI) Calculation5. Capacity Utilization Adjustment6. Benefit of +/- 5% Range7. Deduction under Section 10B of the Act8. Set-off of Brought Forward Losses and Unabsorbed Depreciation9. Charging of Interest under Sections 234B and 234CTransfer Pricing Adjustment:The assessee challenged the Transfer Pricing adjustment made by the Transfer Pricing Officer (TPO) regarding the sale of engine parts. The TPO added the stock difference amount to the operating cost, which the assessee had netted off against raw material consumed. The Tribunal held that this action did not impact the net profit and rejected the TPO's presumption of artificial reduction in operating costs. The Tribunal directed the TPO to re-work the Profit Level Indicator (PLI) of the assessee.Inclusion of Comparable Companies:The assessee requested the inclusion of two comparable companies, but the Tribunal rejected this claim as the functional profile of the proposed comparables did not match that of the assessee.Computation of Net Profit Margin:There was a discrepancy in the net profit margin calculated by the assessee and the TPO for comparable companies. The Tribunal directed a fresh examination by the Assessing Officer (AO) and TPO to reconcile the methodology differences.Profit Level Indicator (PLI) Calculation:The assessee argued for considering cash profit as PLI, which was supported by precedent. The Tribunal directed the AO/TPO to consider profit before depreciation as PLI and requested the assessee to provide evidence of substantial variation in depreciation methods.Capacity Utilization Adjustment:The assessee claimed a capacity utilization adjustment, citing a lower utilization rate compared to comparable companies. The Tribunal found errors in the assessee's calculations and rejected the claim.Benefit of +/- 5% Range:Due to the recomputation of the Arm's Length Price (ALP) of international transactions, the benefit of the +/- 5% range needed reconsideration.Deduction under Section 10B of the Act:The AO's treatment of brought forward losses and unabsorbed depreciation was challenged by the assessee, citing a Supreme Court decision. The issue was restored to the AO for further examination.Set-off of Brought Forward Losses and Unabsorbed Depreciation:This issue was also restored to the AO for reconsideration based on previous grounds' impact.Charging of Interest under Sections 234B and 234C:The charging of interest under these sections was deemed consequential.In conclusion, the appeal of the assessee was partly allowed for statistical purposes, with various issues being remanded for fresh examination or reconsideration by the relevant authorities.