TaxTMI 
TaxTMI 
2026 (6) TMI 598
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.... ALP of the international transactions carried out with the AE. 5. The brief facts of the case on hand are that the assessee, a private limited company, is engaged in manufacture and sale of transmission automobile components and diesel engines to its group companies in India, Thailand, New Zealand, Australia etc. During the period under consideration, the assessee provided manufacturing services to its AE's. The assessee benchmarked its transaction under manufacturing segment by adopting TNNM as most appropriate method and further PLI as OP/OC which arrived at 0.17% for manufacturing segment. The assessee for the comparability analysis under manufacturing segment selected 14 comparables. 5.1 However, the TPO during the assessment proceedings rejected 08 comparables out of 14 comparables selected by the assessee. The assessee's 06 comparables accepted by the TPO are detailed as under: (a) Q H Talbros Ltd. (b) Gajra Gears Pvt Ltd (c) MSL Driveline Systems Ltd (d) Musashi Auto Parts India Pvt Ltd (e) GNA Axies Ltd (f) RACL Geartech Ltd 6. Thereafter, the TPO applied own filter and selected 09 additional comparable compani....
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....d comparable fails the RPT filter applied by the TPO and therefore deserves to be excluded from the final set of comparables. 13. On the contrary, the Ld. DR vehemently supported the orders of the TPO and the Ld. DRP. It was submitted that MSL Driveline was originally selected by the assessee itself in its TP study report and therefore the assessee cannot now seek its exclusion without demonstrating any material change in facts or functional profile. The Ld. DR further contended that there is no inconsistency in the financial statements as alleged by the assessee. It was submitted that the disclosures relied upon by the assessee are being misread and the existence of RPT, if any, does not automatically render the comparable unacceptable unless it breaches the prescribed threshold. 13.1 It was further argued that the assessee has adopted an incorrect method for computing the RPT percentage by aggregating RPT and comparing the same with total revenue and total expenditure. As per the Ld. DR, the correct approach is to compute RPT either with reference to revenue or expenses, and on such correct computation, the comparable does not fail the RPT filter applied by the TPO. Accordi....
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....rables i.e. (a) Bharat gears Ltd and (b) JMT Auto Ltd 16. Regard Bharat Gears Ltd. and JMT Auto Limited, the assessee submitted before the Ld. DRP that the said comparables were rejected by the TPO on the grounds that it was persistent loss-making companies. The assessee contended that the TPO has applied this filter based on Profit Before Tax (PBT) instead of Operating Profit (OP), which is not appropriate for transfer pricing analysis. 17. However, the Ld. DRP rejected the contention of the assessee and upheld the action of the TPO in applying the persistent loss filter based on PBT. 18. Aggrieved by the directions of the Ld. DRP, the assessee is in appeal before us. 19. Before us, Ld. AR submitted that Bharat Gears was originally accepted by the assessee in response to the show cause notice dated 20.09.2023 but was subsequently rejected by the TPO on the ground that it is a persistent loss-making company (TPO order page 9). It was further submitted that even the Ld. DRP has observed that the said comparable had earned profit in AY 2018-19, which shows that it is not a persistent loss-making company. 19.1 The assessee placed reliance on the decision of the Hon'ble ....
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..... 21.4 In this regard, we find support from the decision of the Hon'ble Chennai Tribunal in the case of Genesys Telecom Labs India Pvt. Ltd. vs. DCIT in IT(TP)A No. 38/CHNY/2024 dated 28.11.2024, wherein it was held that persistent loss filter should be applied based on operating results and not on PBT, and that a company cannot be treated as a persistent loss-maker if it has earned profit in one of the relevant years. The relevant para is reproduced below: "Moreover the Bangalore Bench of ITAT in the case of Inteva Products India Automotive Pvt. Ltd., in IT(TP)A No.2843/Bang/2017 (order dated 23.12.2020) and KBACE Technologies Pvt. Ltd., in ITA No.3189/Bang/2018 (order dated 29.01.2020) had held that persistent loss filter can be applied only if there is successive losses in three years and if there is a profit in any one financial year out of three successive financial years, then that company cannot be excluded from the list of comparable on the basis of persistent loss making filter." 21.5 Respectfully following the above judicial precedent, we hold that Bharat Gears and JMT Auto cannot be excluded merely on the ground of persistent losses in the given facts of t....
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....iation at higher rates compared to its comparables, a suitable adjustment should be made to the operating margins of the comparables. 28. The Ld. DRP, however, rejected the contentions of the assessee. It was observed that both the assessee and the comparables have followed the Straight-Line Method (SLM) of depreciation and the differences in depreciation arise only due to variation in useful lives of assets. The Ld. DRP further held that under TNMM, differences in individual cost components such as depreciation or administrative expenses do not materially affect the analysis, as the focus is on net profit margins. On this basis, the objections of the assessee were rejected. 29. Aggrieved by the order/ directions of the AO/TPO and Ld. DRP, the assessee is in appeal before us. 30. The Ld. AR before us submitted that the assessee has made substantial investment in capital goods and therefore its depreciation cost is significantly higher, amounting to 11.08% of operating revenue as against average of 5.25% in case of comparables. It was submitted that due to such high depreciation, the operating margins of the assessee do not reflect its true functional profitability. 30.1....
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....te data is available to quantify such differences. In the present case, no scientific basis has been provided to justify such adjustment. Accordingly, it was submitted that both the claims of the assessee are devoid of any merit and have been rightly rejected by the lower authorities. 32. We have considered the rival submissions of both the parties and perused the materials on record. The limited issue before us under this ground is with respect to the alternate plea of the assessee for grant of depreciation adjustment. From the preceding discussion by assessee at para 30 above, we note that the assessee is operating in a capital- intensive industry and has demonstrated that its depreciation to operating revenue is significantly higher at 11.08% as against around 5.25% in case of comparables. Such variation, in our considered view, arises on account of differences in asset base, age of assets, and depreciation policies followed by the respective companies. These factors materially impact the operating margins and therefore cannot be ignored while carrying out comparability analysis under TNMM. 32.1 The contention of the Ld. DRP that differences in individual cost components d....
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....ordingly, the same is dismissed as not pressed. 35. Ground No. 14 raised by assessee relates to working capital adjustment. 36. At the outset, we note that the assessee at the time of hearing did not press this ground. Accordingly, the same is dismissed as not pressed. 37. Ground No. 15 raised by assessee relates to proportionate adjustment restricting to the international transactions only. 38. The relevant facts are that the assessee has entered into international transactions with its AEs, which constitute only 6.24% of its total operating cost. The assessee contends that transfer pricing provisions u/s. Chapter X apply only to international transactions and not to the transactions carried out with unrelated parties. 39. However, the TPO made TP adjustment on the entire operating cost of the assessee without restricting the same to the value of international transactions. 40. Aggrieved assessee filed objections before the Ld. DRP 41. Before the Ld. DRP, the assessee submitted that the TP adjustment, if any, should be restricted only to the value of international transactions and not to be extended for the transactions carried out with the non-AE transactions....
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....P adjustment, if any, only to the value of international transactions entered into by the assessee with its AEs. 46. Ground Nos. 16, 17 and 18 are interconnected and pertain to the disallowance made u/s. 143(1) of the Act. 47. The relevant facts are that the return of income of the assessee was processed u/s. 143(1) of the Act wherein adjustments aggregating to Rs.77,78,48,41,731 on account of GST collected by assessee and Rs.7,84,12,553 u/s. 43B were made. The notice u/s. 143(2) was issued on 28.06.2022, whereas intimation u/s. 143(1) was issued subsequently on 22.09.2022. The CPC/AO processed the return u/s. 143(1) and made prima facie adjustments despite the fact that scrutiny proceedings had already been initiated by issuance of notice u/s. 143(2) of the Act. 48. Aggrieved assessee filed objections before the Ld. DRP. 49. Before the Ld. DRP, the assessee submitted that once notice u/s. 143(2) of the Act has been issued, the Department cannot resort to processing the return of income u/s. 143(1) of the Act. It was contended that the adjustments made u/s. 143(1) of the Act are without jurisdiction and void ab initio. Reliance was placed on the decision of the Hon'ble ....