Tribunal sets aside TPO & DRP orders, directs fresh TP adjustments. Assessee's appeal allowed.

The Tribunal set aside the TPO and DRP orders, directing a fresh determination of TP adjustments in compliance with specific directions. The assessee's appeal was allowed for statistical purposes, with the order pronounced on April 8, 2022.

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Issues Involved:
1. Violation of principles of natural justice
2. Search process and selection of comparables
3. Adjustment towards Forex fluctuations
4. Exclusion of depreciation from operating cost
5. Adjustment towards capacity utilisation
6. Adjustment towards working capital adjustment
7. Restricting adjustment towards AE transactions

Detailed Analysis:

1. Violation of principles of natural justice:
The assessee argued that the TPO conducted a fresh TP analysis but did not furnish the search process and the accept/reject matrix while selecting a new set of comparables. Additionally, the DRP did not consider the detailed submissions made by the assessee on various issues. The Tribunal observed that the TPO provided the search process in para 4.1.1 of the Order u/s. 92CA, but the assessee objected to the search process and keywords used. The Tribunal noted that this issue was not addressed by the TPO or DRP and remanded the issue to the AO/TPO for fresh determination, ensuring the assessee is given an opportunity of being heard.

2. Search process and selection of comparables:
The Tribunal observed that the DRP did not properly analyze the submissions of the assessee regarding the selection of comparables. The DRP made a general observation that TNMM requires broadly similar comparables, which was deemed insufficient. The Tribunal directed the AO/TPO to specifically analyze the comparables submitted by the assessee and the objections to the comparables selected by the TPO, remanding the issue for fresh determination.

3. Adjustment towards Forex fluctuations:
The assessee claimed an economic adjustment towards Forex fluctuations, arguing that adverse foreign exchange fluctuations increased the import cost of raw materials. The Tribunal observed that the TPO and DRP did not properly analyze whether there were any abnormal foreign exchange fluctuations during the relevant assessment year and their effect on the operating margin of the assessee and the comparables. The Tribunal remanded the issue to the TPO for proper analysis.

4. Exclusion of depreciation from operating cost:
The assessee argued for an adjustment in the comparability analysis if there were differences in depreciation rates between the tested party and comparable companies. The Tribunal noted that there was no analysis of the depreciation policy of the assessee and comparable cases. The Tribunal remanded the matter to the TPO/AO for fresh examination, directing the assessee to demonstrate any differences in depreciation policy and their impact on the computation of the arm's length price.

5. Adjustment towards capacity utilisation:
The Tribunal acknowledged that adjustment on account of capacity utilization should be granted, referencing several judicial decisions supporting this view. The Tribunal directed the AO/TPO to follow the directions given in the case of IKA India (P.) Ltd. v. ACIT, which included obtaining information on capacity utilization of comparable companies and granting the adjustment accordingly.

6. Adjustment towards working capital adjustment:
The Tribunal found that the DRP did not consider the working capital adjustment computation filed by the assessee. Citing the decision in the case of Huawei Technologies India (P.) Ltd., the Tribunal held that working capital adjustment should be allowed as per actual on the final set of comparables. The TPO/AO were directed to allow the adjustment accordingly.

7. Restricting adjustment towards AE transactions:
The assessee contended that the TP adjustment should be restricted only to international transactions with AEs. The Tribunal agreed, referencing the Supreme Court decision in CIT v. Hindustan Unilever Ltd., which held that benchmarking should be done only on AE transactions. The Tribunal directed the TPO to restrict the TP adjustment to AE-related transactions of the assessee.

Conclusion:
The Tribunal set aside the orders of the TPO and DRP, directing the TPO to redetermine the TP adjustment afresh in compliance with the Tribunal's directions. The appeal filed by the assessee was allowed for statistical purposes, and the order was pronounced on April 8, 2022.

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