Tribunal partially allows appeal, directs fresh determinations in transfer pricing case.

The appeal was partly allowed by the Tribunal, directing fresh determinations and adjustments in the case involving transfer pricing adjustments in the Manufacturing and IT Enabled Services segments, inclusion/exclusion of comparable companies, disallowance of stock written off in the Domestic Tariff Area, and calculation of deductions under Sections 10A and 10B of the Income-tax Act. The Tribunal provided specific directions for each issue, aligning with relevant court judgments and remitting certain matters back to the Assessing Officer for reconsideration in accordance with previous orders.

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Issues Involved:

1. Transfer Pricing Adjustment in the Manufacturing Segment.
2. Inclusion/Exclusion of Comparable Companies in the Manufacturing Segment.
3. Transfer Pricing Adjustment in the IT Enabled Services/Back Office Services Segment.
4. Disallowance of Stock Written Off in Domestic Tariff Area (DTA).
5. Calculation of Deduction under Sections 10A and 10B of the Income-tax Act.

Detailed Analysis:

I. Manufacturing Segment

1. Transfer Pricing Adjustment:
- The primary issue concerns the transfer pricing adjustment in the Manufacturing segment of the assessee, who is engaged in manufacturing electrical capacitors and resistors.
- The AO referred the matter to the TPO, who applied the Transactional Net Margin Method (TNMM) and determined the Arm’s Length Price (ALP) of the international transactions.
- The TPO calculated the Operating Profit (OP) after depreciation at 0.30% and proposed a transfer pricing adjustment of Rs. 19,23,48,242/-.
- The Tribunal held that operating profit should be calculated after depreciation since it is an integral part of the operating cost. Adjustments are allowed only if there is a difference in the rates of depreciation on the same assets.
- The Tribunal also held that foreign exchange loss related to trading transactions should be considered as operating cost as per the Delhi High Court ruling in Pr. CIT Vs. B.C. Management Services Pvt. Ltd.

2. Restriction of Transfer Pricing Adjustment:
- The Tribunal directed that the transfer pricing adjustment should be restricted only to international transactions with Associated Enterprises, not at the entity level, aligning with the judgments of the Bombay High Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. and other similar cases.

3. Working Capital Adjustment:
- The Tribunal directed the AO/TPO to give effect to the DRP’s direction to examine and adopt the correct operating margin of comparable companies after working capital adjustment.

4. Inclusion/Exclusion of Comparable Companies:
- CTR Manufacturing Industries Limited: The Tribunal excluded this company from the list of comparables due to functional dissimilarity and the lack of segmental information.
- K. Dhandapani & Company Ltd.: The Tribunal upheld the non-inclusion of this company due to significant differences in the products manufactured and the substantial portion of revenue from non-comparable items.
- Keltron Components Complex Limited: The Tribunal included this company as a comparable, noting that the amalgamation of three subsidiaries was reflected in an earlier year, not affecting the current year’s financials.
- Gujarat Poly AVX Electronics Limited: The Tribunal remitted the matter to the AO/TPO to verify if this company is a persistent loss-making entity. If not, it should be included as a comparable.

II. IT Enabled Services/Back Office Services Segment

1. Transfer Pricing Adjustment:
- The assessee provided various back office services to its AEs, applying TNMM with the PLI of OP/OC.
- The Tribunal remitted the matter to the AO/TPO to ascertain the precise nature of services rendered under IT support services and then examine the comparability of the challenged companies.

2. Working Capital and Risk Adjustment:
- The Tribunal directed the AO/TPO to grant working capital adjustment and risk adjustment in line with the directions given in the assessee’s case for the A.Y. 2008-09.

III. Disallowance of Stock Written Off in Domestic Tariff Area (DTA)

- The Tribunal remitted the matter to the AO for a fresh decision in accordance with the directions given in its order for the A.Y. 2007-08.

IV. Calculation of Deduction under Sections 10A and 10B

- The Tribunal allowed the assessee’s claim, directing that the deduction should be allowed on a standalone basis for eligible units, as per the Supreme Court judgments in CIT vs. Yokogawa India Ltd. and CIT Vs. J.P. Morgan Services India Pvt. Ltd.

Conclusion:
The appeal was partly allowed, with the Tribunal directing fresh determinations and adjustments as per the detailed analysis above. The order was pronounced in the open court on 13th January 2020.

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