TaxTMI 
TaxTMI 
2025 (6) TMI 2143
X X X X Extracts X X X X
X X X X Extracts X X X X
..../ confirming an adjustment of Rs. 22,94,179 /- under Transfer Pricing provisions of the Indian Income Tax Act, 1961 r.w. Rules, 1962. 2.2 Comparability Analysis incorrectly carried out by TPO/DRP: 2.2.1 Comparables wrongly included by TPO/DRP: The TPO and DRP erred in including Bundy India Ltd and Minda TG Rubber Pvt Ltd as comparable companies though they are functionally dissimilar to the Appellant 2.2.1 Comparables wrongly rejected by TPO/DRP: The TPO and DRP erred in excluding Canara Workshop without appreciating that it fell in the same overall segment as that of the Appellant and hence is functionally similar. 2.3 Economic adjustment not provided by TPO/DRP: 2.3.1 3-year comparison for both comparables and Appellant: The TPO/AO and DRP failed to appreciate that considering the severe economic slowdown during FY 2019-20, the weighted average PLI of Brake Division for 3 years ending with the relevant Assessment Year SHOULD have been compared with the weighted average PLIs of the Comparable companies for the three years ending with the relevant Assessment Year, in order to provide a like-to-like comparison as posited by Rule 10B. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... additions by providing 30 days time to accept or to file an objection to DRP. Later the assessee filed an objection before the DRP. On perusal of the objections and after providing the opportunity to the assessee the directions are issued by confirming draft order of the AO by passing an order u/s.144C(5) of the Act dated 06.06.2024. According to the Directions of the DRP the AO passed an order u/s.143(3) r.w.s.144C(3) r.w.s.144B of the Act dated 06.07.2024. 4. Aggrieved by the order of the AO / DRP the assessee is before us. 5. The ld.AR for the assessee submitted the following arguments: Ground No. 1. and 2.1 are general and Ground No.2.2 is not pressed by the ld.AR and hence dismissed as not pressed. 6. Gr No. 2.3: Economic adjustment not provided by TPO/DRP: (i) Financial Year 2019-20 was an extraordinary year of operations: 1) Financial Year 2019-20 relevant to Assessment Year 2020-21 faced severe slowdown in the Indian Automotive industry due to reasons such as : (PB dated 28th January, 2025) a. Switch over to BS IV to BS VI emission norms (skipping BS V) (GOI Circulars there in Page Nos.1 to 6 of Paper Book dated 28th Jan 2025); this r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d years are there) with that of recessionary year (FY 2019-20) PLI of Brake Division, will not be an equitable comparison. So, the assessee requested: a. Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies (one-year vs one-year comparison) ; (or) b. Comparing the weighted average of 3 years PLI of Brake Division, BIPL with that of 3 years PLI of comparable companies (three years vs. three years comparison). The above fair comparison results in the following: Year PLI of Brake Division, BIPL PLI of comparable companies FY 2019-20 alone 5.59 4.85 (or) Average of 3 years viz., FY 2017-18, 2018-19 and 2019-20 9.41 7.39 ** (Page 40 at 1st para to reply dated 16th May 2023 to SCN dated 04.05.2023) (Table in Page 120 of the Paper Book No. 1 dated 26.11.2024, also annexed to this letter) 2.3.(iii). However, the TPO did not even discuss the same during the proceeding nor in his TP Order dated 14.07.2023, though it was raised specifically in Reply to Show Cause Notice. 2.3.(iv) Subsequently, the assessee filed objections before the "DRP"....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Rule 10B(3) (3) An uncontrolled transaction shall be comparable to an international transaction 96[or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or " (emphasis supplied) Also, the OECD guidelines (page 48 of PB dtd. 06.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....understanding of the application of the Notification, a flow chart and Table are attached). We would also like to point out that the range concept applies only when there are six or more comparable companies and so in the impugned assessment year ld. TPO has used only four comparable and has arrived at comparable PLI using simple arithmetic mean. Hence DRP's contention that range concept would even out the impact of one exceptional year does not apply to this instance. Thus, the ld.AR prayed that only FY 2019-20 be compared, or an average of 3 years be compared to arrive at proper comparability as per TP provisions of the Act read with Rules. 2.3.(ix). Without prejudice to the above points, an alternative way of providing suitable economic adjustment is provided below in terms of fixed cost adjustment for lower capacity utilization as follows: Year FY 2019-20 FY 2018-19 Fixed cost / turnover 19.83% 15.89% Turnover of Brake Division Rs.320,430 lakhs Rs.404,189 lakhs Fixed cost incurred Rs. 63,540 lakhs Rs. 64,235 lakhs Quantum of adjustment Rs. 12,616 lakhs Revised PLI of Brake Division, BIPL of FY 2019-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate Method. The TPO considered the 3-year weighted average margin of the new comparable companies chosen to arrive at range for determination of arm's length. The arithmetic mean arrived at 9.23% of comparable companies against the PLI of the assessee at 5.30%. The main contention of the ld.AR is the assessee for the Brakes Division the TPO comparing 3 years weighted average PLI of comparable companies (where two normal years are there) with that of recessionary year (FY 2019-20) PLI of Brake Division, will not be an equitable comparison. Hence, the assessee prayed for: a. Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies (one-year vs one- year comparison) ; (or) b. Comparing the weighted average of 3 years PLI of Brake Division, BIPL with that of 3 years PLI of comparable companies (three years vs. three years comparison). The above fair comparison results in the following: Year PLI of Brake Division, BIPL PLI of comparable companies FY 2019-20 alone 5.59 4.85 (or) Average of 3 years viz., FY 2017- 18, 2018-19 and 2019-20 9.41 7.39 We find that the r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s are there) with that of PLI of Brake Division of only impugned assessment years data, will not be an equitable comparison. Therefore, the TPO has to consider either weighted average of 3 years of both the comparable companies with weighted average of 3 years PLI of Brake Division or Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies. 8.4 We note that the I.T Rules under Rule 10B(2) and 10B(3) require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and read as follows: "Rule 10B(2) (1) ............. (2) For the purposes of sub-rule (1), the comparability of an international transaction 94[or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely :- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such te....