2021 (7) TMI 656 - AT - Income Tax

Tribunal dismisses Revenue's appeal, partially allows assessee's appeal on transfer pricing, remits for re-computation.

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. The transfer pricing addition was set aside, and the matter was ... TP Adjustment - Comparable selection - Bharat Earth Movers Limited - HELD THAT:- Authorities below were not justified in including BEML in the list of comparables. We, therefore, direct to exclude it from the final tally of comparables. JCB India Limited - We uphold the inclusion of JCB India Limited in the list of comparables. At the same time, the TPO is directed to carry out reasonably accurate adjustment to the profit of JCB India Ltd. so as to eliminate the effect of a microscopic difference due to Trading sales and service income. Needless to say, the assessee will be allowed an opportunity of hearing. Incorrect methodology for computing capacity utilization adjustment - Both the sides are in agreement that the facts and circumstances of this ground are mutatis mutandis similar to those of the preceding years where this issue came up for consideration before the Tribunal. In its order for the A.Y. 2010-11, the Tribunal dealt with the capacity utilization adjustment raised through ground No.4 and decided through para 7 of its order restoring the matter to the file of AO to be dealt with in accordance with its order for the immediately preceding assessment year viz., A.Y. 2009-10. Respectfully following the Tribunal orders in the assessee‘s own case for immediately preceding two years, we set aside the impugned order on this count and remit the matter to the file of AO/TPO for re-computing working capital adjustment in consonance with the methodology provided by the Tribunal in its order for the earlier years. Adjustment towards voluntary transfer pricing addition offered by the assessee in the computation of total income - We direct the TPO to allow necessary relief qua the suo motu transfer pricing adjustment offered by the assessee, if the resultant transfer pricing addition turns out to be more than that. PLI determination - Direction given by DRP for taking 0.52% as PLI of the assessee, when correct PLI of the assessee, after considering Foreign Exchange (Net) and written back of Excess Provision for doubtful debts as non-operating income, came to 0.2212% - HELD THAT:- While finalizing the transfer pricing order, the TPO adopted margin of assessee from this segment at (-) 0.22% without providing computation for the same. It has also been mentioned in the same para that the assessee filed a rectification application before the TPO. In this backdrop of the facts, the DRP accepted the contention of assessee and accordingly directed the TPO to take assessee‘s PLI at 0.52%. As observed that the assessee filed a rectification application on this score way back on 13.02.2015. A copy of such an application has been placed. Despite such application, the ld. AR stated that the TPO has not passed any rectification order for a period of more than six years. The ld. DR also could not place on record any rectification order having passed by the TPO on this issue. In such circumstances, we are of the considered opinion that the DRP was fully justified in directing the TPO to consider assessee‘s margin at 0.52% as against (-) 0.22% adopted by the TPO in his order. Direction of the DRP to compute transfer pricing adjustment on proportionate basis - HELD THAT:- This issue is fairly settled by a judgment of the Hon‘ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. . [2017 (6) TMI 1240 - BOMBAY HIGH COURT] holding that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. It is pertinent to mention that the Department‘s SLP against this judgment has since been dismissed by the Hon‘ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. [2018 (7) TMI 798 - SC ORDER]. Similar view has been espoused by the Hon‘ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd [2016 (4) TMI 88 - BOMBAY HIGH COURT] and CIT Vs. Tara Jewels Exports (P). Ltd. [2015 (12) TMI 1130 - BOMBAY HIGH COURT]. We, ergo, direct to restrict the transfer pricing addition only to the extent of international transactions in this segment. TP addition made in the impugned order is set aside and the matter is restored to the file of the AO/TPO for re-computing the transfer pricing adjustment in the Manufacturing activity segment. Issues Involved:1. Incorrect methodology for computing capacity utilization adjustment.2. Recomputation of losses to be carried forward in case resultant transfer pricing adjustment is less than voluntary adjustment offered.3. Exclusion of Bharat Earth Movers Limited (BEML) from the list of comparables.4. Inclusion of JCB India Limited in the list of comparables.5. Correct Profit Level Indicator (PLI) of the assessee.6. Computation of transfer pricing adjustment on a proportionate basis.Detailed Analysis:1. Incorrect Methodology for Computing Capacity Utilization Adjustment:The assessee raised an additional ground challenging the methodology adopted by the AO for computing capacity utilization adjustment. The AO considered only depreciation as a fixed cost, contrary to the methodology prescribed in the Hon'ble Mumbai ITAT's ruling in Petro Araldite Private Limited and affirmed by the Hon'ble Bombay High Court. The Tribunal admitted this ground, noting it raised a pure question of law. The issue was remitted to the AO/TPO for re-computation in line with the Tribunal's orders for the preceding years.2. Recomputation of Losses to be Carried Forward:The assessee requested the AO/TPO to recompute the losses to be carried forward if the resultant transfer pricing adjustment after adjudication of all other grounds is less than the voluntary transfer pricing adjustment offered. The Tribunal directed the TPO to allow necessary relief in this regard.3. Exclusion of Bharat Earth Movers Limited (BEML) from the List of Comparables:The assessee sought the exclusion of BEML from the list of comparables, arguing it was a government company with a fixed customer base and functionally different. The Tribunal agreed, citing previous decisions where government companies were excluded as comparables due to the lack of profit motive. The Tribunal directed the exclusion of BEML from the list of comparables.4. Inclusion of JCB India Limited in the List of Comparables:The TPO included JCB India Limited in the list of comparables, which the assessee contested on grounds of non-availability of financial data at the time of preparing the transfer pricing report and functional dissimilarity due to involvement in design services. The Tribunal found the data was available during transfer pricing proceedings and noted the amalgamation of JCB Manufacturers Limited with JCB India Limited occurred in the preceding year. The Tribunal upheld the inclusion of JCB India Limited, noting its minimal trading and service activities (0.35% of manufacturing sales) did not materially affect comparability. The Tribunal directed the TPO to make reasonably accurate adjustments to eliminate the effect of these activities.5. Correct Profit Level Indicator (PLI) of the Assessee:The Revenue challenged the DRP's direction to take 0.52% as the PLI of the assessee, arguing the correct PLI was 0.2212% after excluding non-operating income. The Tribunal noted the TPO did not provide computation for the lower PLI and had not acted on the assessee's rectification application. The Tribunal upheld the DRP's direction to consider the PLI at 0.52%.6. Computation of Transfer Pricing Adjustment on a Proportionate Basis:The Revenue contested the DRP's direction to compute transfer pricing adjustment on a proportionate basis rather than at the entity level. The Tribunal cited judgments from the Hon'ble Bombay High Court and the Hon'ble Supreme Court, holding that transfer pricing adjustments should be restricted to international transactions only. The Tribunal directed the AO/TPO to recompute the transfer pricing adjustment accordingly.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. The transfer pricing addition was set aside, and the matter was remitted to the AO/TPO for re-computation in line with the Tribunal's directions. The order was pronounced in the Open Court on 4th June 2021.