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 remitted to the AO/TPO for re-computation in line with the Tribunal's directions.

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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.

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