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

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 ... TP Adjustment - MAM selection - Adjustment to purchase and sale of raw materials from Associated Enterprises ('AEs') (manufacturing segment) - which method is to be applied i.e. internal Cost Plus Method or internal TNMM method or external TNMM method? - as per assessee no opportunity was given by the TPO before rejecting internal TNMM method - HELD THAT:- Opportunities given to the assessee have been tabulated and the assessee’s contentions have been considered. Even the last reply given on 10.10.2017 has been considered before passing the order on 20.10.2017. The TPO has also at pages 28 to 30 of its order dealt with the reply of assessee in this regard. Further in the absence of proper segmental being available, there was no basis on which internal TNMM method could be applied. In the totality of the above said facts and circumstances, we find no merit in the reliance placed upon by the assessee on internal TNMM method. Most appropriate method to be applied, which as per the TPO, in this case was external TNMM method - most appropriate method to be applied, which as per the TPO, in this case was external TNMM method. In the totality of the above said facts and circumstances, we find merit in the exercise carried on by the TPO in this regard, wherein proper show cause notice was issued to the assessee at the start of proceedings itself as to why this method should not be applied in view of the nature of business of assessee, wherein the assessee was engaged in importing of raw material and in some cases, manufacturing certain items and selling the same in domestic market or in some cases, importing then assembling and selling in the domestic market. The household appliances from the manufacturing unit at Pune included kitchen hoods, built in hobs, cooking ranges, cook-tops, etc. The most appropriate method which needs to be applied was the TNMM method. Selection of comparables - Acrysil Ltd. - There is no comparison between kitchen appliances manufactured by assessee and sinks manufactured by Acrysil Ltd. Accordingly, the said concern cannot be selected as comparable to the assessee and the same is rejected. JSL Lifestyle Ltd. - In the absence of segmental being available and the products being different, though some of them are comparable to the products dealt in by the assessee and where the concern was also engaged in R&D activity as against the assessee which was not so engaged, then there is no merit in including the margins of said concern in the final list of comparables. Accordingly, we direct the Assessing Officer / TPO to exclude the same. Gorani Industries Ltd - he said concern was functionally comparable to the assessee as it was engaged in manufacturing and sale of glass, gas, cook tops, chimneys, etc. The said concern was functionally comparable to the assessee and for the instant assessment year had shown marginal profits though OP/OR was only 0.13%; but there is no merit in rejecting the said concern either on the ground it was persistent loss making, which it was not, and even on the ground that it had marginal profits. The assessee on the other hand, had shown margins of 1.94%. Accordingly, we direct the Assessing Officer to include Gorani Industries Ltd. as functionally comparable to the assessee. Where the margins shown by assessee are at 1.94%, then no adjustment needs to be made in the hands of assessee on account of arm's length price of international transactions of purchase of raw material to be made in the hands of assessee. In any case, the adjustment, if any, is to be restricted to the value of international transactions and not to the entity transaction. As in the case of Thyssen Krupp Industries India Pvt. Ltd. [2015 (12) TMI 1076 - BOMBAY HIGH COURT] has laid down the said proposition and merely because an appeal has been filed against one of the judgments of Hon’ble Bombay High Court in CIT Vs. Firestone International Pvt. Ltd. (supra) has been dismissed does not mean that the proposition laid down by the Hon’ble Bombay High Court does not stand. We find no merit in the order of DRP in this regard. 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.