2025 (7) TMI 1681 - AT - Income Tax

Loss-making but functionally similar companies can be comparables under Transfer Pricing Rule 10B

The ITAT Delhi held that several companies selected as comparables by the TPO were inappropriate due to functional dissimilarity, differences in core ... TP Adjustment - Comparable selection - criteria of functional similarity/dissimilarity - comparable companies selected by the TPO are into manufacture of ‘noncore’ auto parts - HELD THAT:- As in the case of Sanden Vikas India Ltd [2019 (12) TMI 1694 - ITAT DELHI] while deciding similar issue, held at a manufacturer of noncomparable company cannot be compared with entities manufacturer core-auto components under TNMM with non-core auto components manufacturer. Roop Automotives Limited company manufactures 'core auto components' hence ex-facie it is not a proper or suitable comparable. The company manufactures the components for four wheeler in commercial and passenger vehicles category, unlike the Assessee Company which serves the two wheeler vehicle industry. As relying on case of Sanden Vikas India Ltd [2019 (12) TMI 1694 - ITAT DELHI] we are of the considered opinion that, Roop Automotives Limited is not an appropriate comparable. FIEM Industries Ltd. is entirely dis-similar to the assessee company in Functions/ Assets/ Risks hence it is not a proper comparable and has to be excluded as a comparable. It has huge Research & Development facilities, as well as export earnings. Hence the above Copmpany is not a proper comparable with the Assessee. GNA Axles Limited company manufactures 'core auto components' hence the above Company is not a proper or suitable comparable. As relying on case of Sanden Vikas India Ltd [2019 (12) TMI 1694 - ITAT DELHI] we are of the considered opinion that, GNA Axles Limited is not an appropriate comparable. Sankei Giken India (P) Ltd Company it is not an appropriate comparable with the assessee who is manufacturing non-core components for two wheelers only. Aurangabad Electricals Ltd. is not an appropriate comparable with the assessee who is manufacturing non-core components for two wheelers only. Roots Industries India Ltd. is established company since 1970 whereas it is the first year of operation by assessee. It is not only into automobiles industry, but has varied and diversified areas of manufacturing such as medical aerospace lab testing and commercial furniture manufacturing, which are not in the automobile industry. On the other hand, the Assessee's products are only in the automobile Industry. Hence functionally it is entirely mis-matched and not a proper comparable. In addition it has huge exports as well as R&D activities. For this it is obvious that this is not a proper comparable with the assessee as this company has full-fledged manufacturing facilities in different countries and vide range of products including electric horns, medical aerospace as well as commercial furniture. Whereas Assessee manufacture non-core components for two wheelers only in India.Root Industries India Ltd. is not an appropriate comparable. Talbros Engineering Private Limited is not an appropriate comparable as Annual Report of the Company under disclosure of principal products or services the types of products are: Rear Axle Shafts, Brakes, Radiators, mufflers, Exhaust Pipes, clutches. Thus clearly all products manufactured are core auto component as per Rule 10TA(b)(iii) of the Income Tax Rules. Remsons Industries Limited is not an appropriate comparable. Accordingly, we direct the Ld. TPO to exclude the said company from comparables. Auto Line Industries cannot be excluded as comparable considering it as persistent loss making company. It is well settled now that where a company has earned profit in any year out of three years, it cannot be termed as persistent loss making company, hence the above Company cannot be excluded as comparable. The coordinate bench of the Tribunal in the case of Nokia Siemens Network India (P.) Ltd. [2019 (8) TMI 167 - DELHI HIGH COURT] held that loss-making companies should not be excluded where there was no dispute as regards functional profile of assessee being similar to said company. Appeal of the Assessee is allowed. ISSUES: Whether the adjustment of Rs. 4,39,30,329/- to international transactions relating to purchase of raw materials, other materials, and payment of royalty under Section 92CA of the Income Tax Act, 1961 was correctly made.Whether the selection of comparables by the Transfer Pricing Officer (TPO)/Dispute Resolution Panel (DRP) was appropriate, including the rejection or inclusion of certain companies based on core vs. non-core auto components distinction, financial data reliability, and functional comparability.Whether the Cost Plus Method (CPM) or Transactional Net Margin Method (TNMM) was correctly applied in determining arm's length price.Whether the penalty proceedings under Section 271(1)(c) of the Income Tax Act were rightly initiated where the addition sustained was a mere difference of opinion without omission or misrepresentation.Whether companies with persistent losses for two years (instead of three) should be excluded as comparables.Whether companies with turnover less than Rs. 1 crore should be excluded as comparables.Whether export incentives under Rule 10B(2)(d) of the Income Tax Rules should have been adjusted.Whether companies with export income exceeding 35% of total revenue are suitable comparables.Whether Remsons Industries Ltd. is an appropriate comparable company.Whether Auto Line Industries Co. should be included as a comparable despite prior rejection based on loss-making status. RULINGS / HOLDINGS: The adjustment of Rs. 4,39,30,329/- under Section 92CA was upheld subject to exclusion and inclusion of certain comparables as directed by the Tribunal.The TPO/DRP erred in including companies manufacturing core auto components as comparables for a taxpayer manufacturing non-core auto components; accordingly, companies such as Roop Automotives Ltd., FIEM Industries Ltd., GNA Axles Ltd., Sankei Giken India (P) Ltd., Aurangabad Electricals Ltd., Roots Industries India Ltd., Talbros Engineering Private Ltd., and Remsons Industries Ltd. were excluded as inappropriate comparables.The rejection of the Cost Plus Method and adoption of TNMM by the TPO was not specifically overturned, but the Tribunal emphasized the necessity of proper Functional Analysis (FAR) and comparability consistent with the core/non-core distinction.Penalty proceedings under Section 271(1)(c) were held to be erroneous as the addition was a 'mere difference of opinion' and did not reflect any omission or misrepresentation of facts; thus, penalty was to be dropped.Companies with persistent losses for two years but with profit in one of the three years cannot be excluded as comparables; Auto Line Industries Co. was directed to be included as a comparable.The exclusion of companies solely on the basis of turnover less than Rs. 1 crore was not upheld as a valid ground for exclusion.The issue of adjustment for export incentive under Rule 10B(2)(d) was raised but no specific ruling was recorded in the judgment excerpt provided.The treatment of companies with export income more than 35% of total revenue as comparable was challenged but no specific ruling was recorded in the judgment excerpt provided. RATIONALE: The Tribunal applied the statutory provisions of the Income Tax Act, 1961, specifically Sections 92CA, 143(3), 144C, and 271(1)(c), along with Rule 10TA and Rule 10B of the Income Tax Rules, 1962.The Tribunal relied on precedent decisions by coordinate benches distinguishing between core and non-core auto components for transfer pricing comparability analysis, emphasizing that 'a company manufacturing core components cannot be compared with company manufacturing non-core auto components.'The Tribunal underscored the importance of comprehensive Functional Analysis (FAR) in selecting comparables under TNMM, recognizing that 'functional dissimilarities are subsumed and taken care of at the net margin level' but not to the extent of including fundamentally different product manufacturers.The Tribunal followed established case law that persistent loss-making status requires losses for three consecutive years to justify exclusion, citing decisions that a company with profit in one of three years cannot be excluded on this ground.The Tribunal emphasized that penalty under Section 271(1)(c) should not be levied where the difference arises from a bona fide difference of opinion rather than concealment or misrepresentation.The Tribunal's approach reflects a doctrinal consistency with prior rulings on transfer pricing comparability and penalty imposition, reinforcing the necessity of functional and product similarity in comparables and fair treatment in penalty proceedings.