2019 (8) TMI 929 - AT - Income Tax

Tribunal Partially Allows Appeal, Excludes Acrysil & JSL, Includes Gorani Industries, Limits TP Adjustment. Penalty & Interest Dismissed.

Elica PB India Pvt. Ltd. Versus The Dy. Commissioner of Income Tax Circle 1 (2), Pune

Elica PB India Pvt. Ltd. Versus The Dy. Commissioner of Income Tax Circle 1 (2), Pune - TMI Issues Involved:1. Adjustment to purchase and sale of raw materials from Associated Enterprises (AEs).2. Rejection of internal Cost Plus Method (CPM) and application of Transactional Net Margin Method (TNMM).3. Selection and rejection of comparable companies.4. Restriction of Transfer Pricing (TP) adjustment to international transactions.5. Initiation of penalty proceedings under sections 271AA, 271G, and 271(1)(c).6. Levy of interest under section 234B.Detailed Analysis:1. Adjustment to Purchase and Sale of Raw Materials from Associated Enterprises (AEs):The assessee contested the adjustment of Rs. 7,78,49,035 made by the TPO, arguing that the international transactions did not meet the arm's length principle. The TPO rejected the assessee's internal Cost Plus Method (CPM) and applied the Transactional Net Margin Method (TNMM). The TPO's decision was based on the absence of contemporaneous data and the failure of the assessee to provide relevant data and evidence. The TPO also noted that the segmental results prepared by the assessee could not be relied upon due to inconsistencies in the profit and loss segments.2. Rejection of Internal Cost Plus Method (CPM) and Application of Transactional Net Margin Method (TNMM):The TPO rejected the internal CPM method due to the lack of data on costs and the inability to allocate direct and indirect costs to related and unrelated transactions. The TPO applied the external TNMM method, comparing the assessee’s margins with those of selected comparables. The TPO found that the internal TNMM method was not applicable as the non-associated enterprise segment was showing losses while the associated enterprise segment was showing profits. The TPO’s decision to apply the external TNMM method was upheld.3. Selection and Rejection of Comparable Companies:The TPO initially selected four comparables, but the final list included only Acrysil Ltd. and JSL Lifestyle Ltd. The assessee argued that these companies were not comparable due to differences in products and business activities. The Tribunal found merit in the assessee's argument, noting that Acrysil Ltd. dealt in kitchen sinks and faucets, which were not comparable to the assessee's kitchen appliances. Similarly, JSL Lifestyle Ltd. was engaged in lifestyle products and R&D activities, which were not comparable to the assessee's business. The Tribunal directed the exclusion of these companies from the list of comparables. The Tribunal accepted the inclusion of Gorani Industries Ltd., as it was functionally comparable to the assessee and had shown marginal profits.4. Restriction of Transfer Pricing (TP) Adjustment to International Transactions:The Tribunal upheld the principle that TP adjustments should be restricted to international transactions and not to the entity level. This was in line with the decisions of the Hon'ble Bombay High Court in Thyssen Krupp Industries India Pvt. Ltd. and CIT Vs. Firestone International Pvt. Ltd. The Tribunal found no merit in the DRP's order to the contrary.5. Initiation of Penalty Proceedings under Sections 271AA, 271G, and 271(1)(c):The grounds related to the initiation of penalty proceedings under sections 271AA, 271G, and 271(1)(c) were deemed premature and were dismissed.6. Levy of Interest under Section 234B:The issue of charging interest under section 234B was considered consequential and was also dismissed.Conclusion:The appeal was partly allowed. The Tribunal directed the exclusion of Acrysil Ltd. and JSL Lifestyle Ltd. from the list of comparables, and the inclusion of Gorani Industries Ltd. The TP adjustment was restricted to international transactions only. The Tribunal dismissed the grounds related to penalty proceedings and the levy of interest as premature and consequential, respectively.