TPO must select fresh electronic product comparables after chartered engineer confirms SMPS classification

The ITAT Mumbai directed the TPO to select fresh comparables dealing specifically in electronic products rather than electrical products, following a chartered engineer's certificate establishing that switch mode power supply (SMPS) is electronic, not electrical. The tribunal emphasized that electronic and electrical products cannot be compared, requiring technical expert certification for proper comparable selection. For the 100% EOU assessee, filters of export turnover exceeding 75% and related party transactions below 25% must be applied. The TPO was also directed to consider capacity utilization in ALP determination. Cash payment additions under section 40A(a) exceeding Rs. 20,000 require further verification with adequate opportunity for the assessee. All appeals were allowed for statistical purposes with these directions.

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Issues Involved:

1. Transfer Pricing Adjustments
2. Selection of Comparables
3. Capacity Utilization Claim
4. Disallowance under Section 40A(a)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:

The primary issue revolves around the confirmation of a transfer pricing adjustment amounting to Rs. 11,80,30,504/- under section 92CA(3) of the Income Tax Act. The appellant contested that the adjustment was based on extraneous and irrelevant considerations. The Tribunal noted that the Transfer Pricing Officer (TPO) did not accept the margin workings provided by the assessee and instead re-computed the same. The TPO selected comparables that the assessee argued were not functionally comparable, as they were electrical companies, whereas the assessee dealt in electronic products. The Tribunal highlighted the importance of selecting comparables from the same line of business, emphasizing that electronic products differ from electrical products.

2. Selection of Comparables:

The Tribunal addressed the selection of comparables, noting that the TPO rejected the comparables proposed by the assessee, such as Cosmos Ferrite and Aplab Ltd., on the grounds of not meeting the export turnover filter of more than 75%. The Tribunal stressed that the comparables used by the TPO should be in line with the business of the assessee, which is manufacturing electronic products. The Tribunal directed the TPO to bring comparables on record that deal exclusively in electronic products, supported by expert certification, and allowed the assessee to propose fresh comparables in line with its business.

3. Capacity Utilization Claim:

The Tribunal recognized the appellant's claim regarding capacity utilization, which had not been adjudicated by the CIT(A). The Tribunal directed the TPO to consider this claim while determining the Arm's Length Price (ALP), acknowledging its potential impact on the financial metrics used for transfer pricing purposes.

4. Disallowance under Section 40A(a):

The Tribunal addressed the disallowance of Rs. 2,08,825/- under Section 40A(a) for cash payments exceeding Rs. 20,000/-. The appellant argued that these payments were made out of business compulsions. The Tribunal directed the Assessing Officer (AO) to verify the necessity of these payments, providing the assessee an opportunity to justify the business exigencies that warranted such payments.

Conclusion:

The Tribunal restored the issues related to transfer pricing adjustments and selection of comparables to the file of the TPO with directions to ensure the comparables are functionally similar to the assessee's business of electronic products. The Tribunal also directed the TPO to consider the capacity utilization claim and instructed the AO to verify the cash payments under Section 40A(a). Consequently, the appeals were allowed for statistical purposes, providing the assessee an opportunity to substantiate its claims with appropriate evidence and comparables.

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