Tribunal Decision: Transfer Pricing Appeal Partially Allowed

The Tribunal partly allowed the appeal, setting aside the transfer pricing addition under the Manufacturing activity segment and remitting the matter to the AO/TPO for re-computation as per directions. The Tribunal excluded BEML as a comparable due to its government status and upheld the inclusion of JCB India Limited, directing a reasonable adjustment to its profit margin. The issue of working capital adjustment was remitted for re-computation, and the transfer pricing adjustment was restricted to international transactions in the manufacturing segment. The Tribunal also allowed re-computation of losses to be carried forward based on the resultant transfer pricing adjustment.

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Issues Involved:
1. Adjustment towards foreign exchange fluctuation.
2. Adjustment towards excess custom duty.
3. Inclusion of BEML and JCB India Limited as comparables.
4. Inappropriate computation of working capital adjustment.
5. Transfer pricing adjustment on entity level.
6. Re-computation of losses to be carried forward in case of resultant transfer pricing adjustment.

Issue-wise Detailed Analysis:

A. Adjustment Towards Foreign Exchange Fluctuation:

The assessee claimed a reduction in the profit margin of comparables due to a 13.54% fluctuation in foreign exchange rates. The Tribunal rejected this claim, stating that the foreign exchange rate fluctuation impacted both the assessee and the comparables similarly. Additionally, since the forex loss was treated as non-operating by both the assessee and the TPO, there was no room for further adjustment.

B. Adjustment Towards Excess Custom Duty:

The assessee sought an adjustment in the profit margin of comparables due to higher custom duty paid on imports. The Tribunal dismissed this claim, noting that the rate of custom duty was similar for both the assessee and the comparables. The Tribunal emphasized that higher imports and consequent higher custom duty alone do not justify an adjustment in profit margins.

C. Comparables:

I. Bharat Earth Movers Limited (BEML): The Tribunal directed the exclusion of BEML from the list of comparables, as it is a government company and profit motive is not a relevant consideration for government undertakings. This decision was consistent with previous Tribunal orders and upheld by higher courts.

II. JCB India Limited: The Tribunal upheld the inclusion of JCB India Limited in the list of comparables. It was noted that JCB India Limited's revenue from non-manufacturing activities was less than 1% of its total revenue, making it functionally similar to the assessee. The Tribunal directed the TPO to make a reasonable adjustment to JCB India Ltd.'s profit margin to eliminate the effect of its non-manufacturing activities.

D. Miscellaneous Issues:

1. Working Capital Adjustment: The Tribunal remitted the issue of working capital adjustment back to the AO/TPO for re-computation using correct figures, as the figures adopted by the TPO were in variance with the balance sheet.

2. Transfer Pricing Adjustment on Entity Level: The Tribunal directed that the transfer pricing adjustment should be restricted to international transactions under the 'Manufacturing activity' segment, in line with the judgment of the Hon'ble jurisdictional High Court and the Supreme Court.

3. Re-computation of Losses: The Tribunal admitted the additional ground raised by the assessee regarding the re-computation of losses to be carried forward in case the resultant transfer pricing adjustment is less than the voluntary adjustment offered. The TPO was directed to allow necessary relief accordingly.

Conclusion: The Tribunal set aside the transfer pricing addition made under the Manufacturing activity segment and remitted the matter to the AO/TPO for re-computation in accordance with the directions provided. The appeal was partly allowed.

Order pronounced in the Open Court on 29th June, 2021.

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