TaxTMI 
TaxTMI 
2011 (6) TMI 386
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....g approach adopted by the appellant in the transfer pricing study and thereby making a transfer pricing adjustment of Rs. 161,98,390 to the income of the appellant by holding that the international transaction of "Export of carpets" of the appellant does not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 (the Act). 2. The Ld.DRP/Assessing Officer erred in considering the domestic segment of carpets business (domestic segment) as compared to the export segment of carpets business (export segment) for benchmarking, without appreciating the fact that the domestic segment is a controlled segment as it entails international transaction pertaining to import of raw materials from the associated enterprises and hence, non-comparable. Ld.DRP/Assessing Officer ought to have considered the external uncontrolled comparables and not the internal controlled comparable for determining the arm's length price of the impugned international transaction. 3. The ld.DRP/Assessing Officer erred in not granting an economic adjustment on account of labour unrest while conducting the comparability analysis. The Ld.DRP/Assessing Officer erred in not co....
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.... Act. BRASIA is a contract manufacturer in India for BLK and export the same as per the agreement. BRASIA also made domestic sale of the carpets. BRASIA's actual figures vis-a-vis BLK is 459,217 sq. mts. against the target of 758,032 sq. meters and its domestic figures are 44,589 sq. mts. against the target of 42,525 sq. meters. BRASIA could not meet the export commitments to the BLK and shortage in this regard is just above 3 lakhs sq. meters of carpet. There was labour unrest in the company resulting in the go-slow approach of the labourers, labour strike and lock outs, which effect adversely the budgeted production. (B) Assessee filed the return of income reporting the international transactions. During the year, the assessee imported raw materials, spares and consumables as well as the capital goods. At the same time, the assessee exported the yarn and carpets too. Although there are four of such international transactions, the disputed transactions relates to the 'export of the carpets' and the export sales amount involved works out to Rs. 34,33,26,376. It includes the scrape sales of Rs. 35.20 lakhs (rounded off) too. Corresponding unadjusted total cost is Rs. 39,83,86,412. ....
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.... in his order and proposed addition of Rs. 16.20 crores (rounded off). In response, as per the options available to the assessee, the BRASIA approached the Dispute Resolution Panel (DRP). On hearing the assessee and its objections and submissions, the DRP confirmed the draft order passed by the Assessing Officer and confirmed the proposed addition of Rs. 16.20 crores to the export segment. Finally, the Assessing Officer passed the impugned order dated 27-9-2010 for the assessment year 2006-07 under section 143(3) read with section 144C of the IT Act, 1961 of the Act in the light of the guidelines of the DRP, Pune dated 30-7-2010. 4. Aggrieved with the same, the assessee filed the present appeal before us. During the proceedings before us, Shri Rahul Mitra, Ld. Counsel for the assessee narrated the facts of the case and submitted that the Assessing Officer/TPO/DRP erred in not upholding the decisions of the assessee and confirming the additions made by the revenue. As per Mr. Mitra, a couple of keys issues for adjudication by the Tribunal are as under: (i) export segment cannot be compared with the domestic segment; and external comparables would be more appropriate; ....
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..... In this regard, the ld. Counsel mentioned that the Assessing Officer/TPO cannot be allowed to pick up the domestic comparable cases while there exists external comparable cases, which the department considered valid ones in the subsequent year. (iii) Sri Mitra Ld. Counsel for the assessee demonstrated the erroneous nature of the decisions/ guidelines of the Assessing Officer/TPO/DRP in resorting/sustaining of the decision of the TPO/Assessing Officer in picking up the controlled domestic comparable for making the transfer pricing adjustments and filed various written submission and citations to support his arguments. More particularly, Ld. Counsel filed a copy of a recent order of the Tribunal, Mumbai Benches in the case of NGC Network (India) (P.) Ltd. [IT Appeal No. 5307/M/2008, dated 23-2-2011] and took us through the contents of paragraph 15 for the proposition that the Assessing Officer has to maintain the rule of consistency unless there is change facts materially. Comparable cases accepted by the department in the subsequent assessment year should be adopted for the purpose of computing the transfer pricing adjustments for the current year also. Ld. Counsel also nar....
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....skilled and unskilled employees were employed keeping in view the contracts on hand both domestic and the export orders from the BLK, UK and related production targets and the said targets were completely disturbed and in fact, the export production targets went haywire completely due the disloyalty of the employees by way of their unrest, lock out and their go-slow attitudes. As per the counsel, such abnormal events were directly evidenced by way of the resolutions, which are placed in the files before us and they certainly have the effects on the profits margins and therefore, they require economic adjustments. The revenue authorities have failed to consider the arguments of the assessee in proper perspective. In this regard, the counsel relied on various documents and citations. In fact, Ld. Counsel prayed for setting aside the relevant grounds to the files of the Assessing Officer for considering the reality of the unrest and requirement of the making economic adjustments to these facts of the unrest. 6. Per contra, Sri Hareshwar Sharma, Ld. DR dutifully relied on the orders/guidelines of the Revenue. Further, on this issue relating to domestic comparable vs. external comparab....
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.... Ltd. v. ITO [2009] 118 ITD 243 (Pune). 8. Per contra, the case of the revenue is that the principle of res judicata is inapplicable to the Income-tax matters and Assessing Officer/TPO/DRP is free to decide the issue assessment year-wise depending on the facts of the case of that year. The unanswered queries of the revenue are as to how there can be two different operating margins i.e., -13.57 per cent and 27.09 per cent for export and domestic segments respectively of the same product in the same year. Further, how the labour unrest effected the export segment of the carpet manufacture and not the domestic. Therefore, these two operating margins are justly compared and different being above 40 per cent i.e., -13.57 per cent to 27.09 per cent, the addition of Rs. 16,20 crores is justified and consequently, there is no need for economic adjustments to the labour's pressure tactics to get their demands met i.e., go-slow approach, lock out etc. 9. The above rival stands are considered and we now proceed to adjudicate the two focal issues underlined by the Ld. Counsel for the assessee. We shall take up the first issue first and the same is whether the export segment can be compared w....
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....he lock out, admittedly has been for 19 days only. In these circumstances, we do not consider it necessary to interfere with the decision of Assessing Officer/TPO." 11. Regarding the 'rule of consistency' and the relevant decisions on the topic, we have examined the facts for the assessment years 2006-07 and 2007-08. So far as the external comparables, turn over details of export and domestic segments and other relevant facts are concerned, we find similarity of the facts between both the years. The argument of the assessee is that the external comparable prices for the impugned assessment year 2006-07 supplied by the assessee, when accepted by the Assessing Officer for the assessment year 2007-08, must be accepted for that year in view of the absence of material facts and also in view of the rule of consistency. We have considered this argument and in our opinion, it is a settled law that the principle of res judicata is inapplicable to Income-tax matters. However, the same is true as long as the facts of different in different assessment years. Otherwise, the rule of consistency is relevant to Income-tax matters and Assessing Officer cannot be ignore the same. There ought to be ....
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....of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e., 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also. However, it is noted that the assessee has worked out the arm's length price on the basis of transactions relating to the comparable for assessment year 2002-03 as at the relevant point of time complete details in respect of assessment year 2003-04 were not available. In our view when the facts and figures in relation to the relevant assessment year i.e., assessment year 2003-04 are now available then the transfer pricing adjustments have to be computed based on the said facts and figures. In case working is to be made on the basis of figures for assessment year 2002-03, then in our view the transactions in assessee's own case for the said year which have been found to be at arm's length in that year should be adopted as basis as the business being same, it will give better results. Merely because the transaction is with an associate enterprise cannot be the ground to reject it as a comparable when the trans....
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....and adopted the external comparable cases cited by the assessee for making the transfer pricing adjustments and the orders are free of any reasoning by the Assessing Officer/TPO/DRP. Therefore, we are of the opinion that the matter should be set aside for examining the issue de novo after granting the reasonable opportunity of being heard to the assessee. Accordingly, all the relevant grounds raised in this regard are set aside. 14. The other key issue raised by the Counsel relates to economic adjustments on account of labour unrest warranted to arrive at the correct profitability of the international transaction pertaining to export of carpets. As discussed in the other paragraphs of the order, assessee made adjustment to the total cost and the said adjustment works out to Rs. 7,31,73,120 on account of unabsorbed overheads and underutilization of the capacity. Assessing Officer/TPO rejected the claim as they resorted to consider the domestic comparable as proper in this case stating that the said labour unrest is common to both export and domestic segment. In this regard, the counsel relied upon the decision of the Mumbai Bench in the case of Fiat India (P.) Ltd. (supra) for the ....
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....ke the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or anomaly in the said comparable. Such adjustments are authenticated by the OECD guidelines too. In this regard, we have perused the important findings of the Tribunal in the case of Fiat India (P.) Ltd. (supra) placed at page 191 of the paper book. For the sake completeness, the same is reproduced as under. "** ** ** ++ as regards the adjustments made by the assessee to work out its operating margin for comparing the same with the profit margin of comparable cases, it was held that there was a material difference in the facts of the assessee's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences. Further, the TPO himself has allowed similar adjustments made by the assessee in the immediate preceding years i.e., assessment years 2002-03, 2003-04 as well as in the immediate succeeding years i.e., 2005-06 and 2006-07 wherein the facts involved were similar to that of the year under consideration i.e., assessment year 2004-05; + accordingly, ....