Tribunal allows two entities in transfer pricing comparability analysis despite initial rejection for losses

ITAT Chennai ruled on transfer pricing adjustments involving comparability analysis. The tribunal directed inclusion of two entities initially rejected as loss-making, finding they were not persistently loss-making. One entity with related party transactions was properly included under broad comparability requirements. Issues regarding another entity's segmental data and forex loss components were remanded to AO for fresh adjudication with directions for the assessee to provide requisite details. Economic adjustments were denied as previously rejected by tribunal. Additional depreciation claim was dismissed as it would disturb subsequent years' depreciation calculations and was revenue neutral.

---

---

ISSUES:

1. Whether the Transfer Pricing Officer (TPO) and Assessing Officer (AO) erred in rejecting the Transfer Pricing (TP) study maintained by the assessee and undertaking fresh benchmarking search, contrary to Section 92C(3) of the Income-tax Act.
2. Whether the rejection of multiple year data for comparability analysis in transfer pricing was justified.
3. Whether the selection and rejection of comparable companies by the TPO and AO complied with the principles of functional and broad comparability under the Transactional Net Margin Method (TNMM).
4. Whether the inclusion of companies with significant related party transactions as comparables was appropriate.
5. Whether the AO erred in treating foreign exchange losses as operating expenses in computing net profit margins for transfer pricing purposes.
6. Whether appropriate economic adjustments, such as customs duty adjustments, should have been allowed in transfer pricing comparability analysis.
7. Whether the claim for additional depreciation on new plant and machinery was rightly rejected for lack of a revised return.
8. Whether the disallowance of foreign exchange loss under Section 43A of the Act as capital in nature was justified, particularly distinguishing between losses on External Commercial Borrowings (ECB) and buyer's credit.
9. Whether the penalty under Section 271(1)(c) was rightly imposed in the absence of concealment or furnishing inaccurate particulars of income.

RULINGS / HOLDINGS:

1. The rejection of the Transfer Pricing study and undertaking of a fresh benchmarking search by the TPO and AO did not violate Section 92C(3) of the Act, as the TPO followed the prescribed search process and filters, and the assessee failed to establish non-compliance with these filters.
2. The use of contemporaneous single-year data for comparability is mandated under extant rules, and rejection of multiple year data was upheld.
3. The inclusion of comparable companies was appropriate under TNMM, which requires "broad functional comparability" rather than strict product comparability; however, the issue regarding segmental margins of one comparable (JBM Auto Ltd.) was restored for reconsideration upon submission of segmental data.
4. The inclusion of a company with significant related party transactions as a comparable was upheld, given the absence of segmental financial data to the contrary and the broad comparability requirement under TNMM.
5. Foreign exchange losses linked to import transactions are to be treated as operating in nature for the purpose of computing net profit margins in transfer pricing.
6. Economic adjustments such as customs duty and forex adjustments were not allowed as the assessee did not claim these in its own TP study and prior Tribunal decisions did not grant such adjustments.
7. The claim for additional depreciation was rightly rejected as the assessee neither claimed it in the return nor in the books, and allowing it would disturb depreciation computations in subsequent years; the claim was held to be revenue neutral and thus disallowed in the assessment year under consideration.
8. The disallowance of foreign exchange loss under Section 43A was upheld to the extent the assessee failed to provide requisite details to bifurcate capital and revenue nature losses; however, the matter was restored for fresh adjudication with directions to the assessee to substantiate its claim distinguishing ECB (capital) and buyer's credit (revenue) losses.
9. Penalty under Section 271(1)(c) was not imposed as there was no concealment or furnishing of inaccurate particulars of income; mere difference of opinion does not warrant penalty, and the assessee acted in good faith with due diligence.

RATIONALE:

1. The Court applied the statutory provisions of the Income-tax Act, 1961, specifically Sections 92C(3), 43A, 32, 37(1), and 271(1)(c), and principles under the Transfer Pricing Regulations including the Transactional Net Margin Method (TNMM).
2. The rejection of multiple year data was based on the requirement of contemporaneous data for comparability as per transfer pricing rules.
3. The broad functional comparability standard under TNMM was emphasized over strict product comparability, consistent with established transfer pricing jurisprudence.
4. Section 43A, as amended, supersedes accounting standards (AS-11) regarding foreign exchange adjustments on capital assets, limiting allowance to realized rupee liability on actual payment.
5. The Court recognized the necessity for clear bifurcation of foreign exchange losses into capital and revenue components for proper tax treatment and directed reassessment accordingly.
6. The penalty provisions under Section 271(1)(c) require concealment or furnishing of inaccurate particulars; mere disagreement on transfer pricing adjustments does not constitute concealment or misreporting.
7. No doctrinal shift or dissenting opinion was recorded; the Court followed established legal principles and prior decisions, including reliance on a High Court decision regarding forex loss treatment in transfer pricing.

---