9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2009 (2) TMI 736 - AT - Income TaxTP Adjustment - Comparable selection - exclusion of Wellwin Industry Ltd. as a comparable - deduction towards provision of future loss - Arm s length price of imported raw material and finished goods - addition made under the head Transfer Pricing adjustments was challenged by the taxpayer before CIT - A.O committed an error in the selection of the comparables was reiterated - TPO was wrong in not taking into account the results of the relevant period of Wellwin Industry Ltd, which had suffered losses - The said enterprise was considered by the revenue authorities for a similar exercise for the AY 2003-04 and therefore, there was no justification for excluding it in AY 2004-05. CIT (A) upheld the Transfer Pricing adjustments. HELD THAT - The company did not maintain separate accounts for the period March 31, 2004. The taxpayer did try to work out the alleged losses of the concern for the period ending March 31, 2004 on some basis by taking average of profits but was unable to show to the revenue authorities that figures so arrived at were correct and reliable for comparison. During the course of hearing of the appeal, we had also asked the ld. counsel to give working of results of the concern for the relevant period on some sound basis, but the ld. Counsel showed his inability to do so. He conceded that results of the concern are not available in the public domain. If that is the position, we see no force in the objection of the taxpayer to non inclusion of Wellwin Industry Ltd. in the list comparables for working mean margin of operating profit under TNM Method. Admittedly, Wellwin Industry Ltd. in the period prior to the financial year under consideration, had shown profit and same was taken into consideration for determining arm s length price for the AY 2003-04. However, its accounts for the period ended 31.3.2004 are not available and, therefore, could not be taken for working mean margin of profit. On these facts, we do not find any error in the approach of revenue authorities in excluding Wellwin Industry Ltd. for a comparative analysis. Deduction of provision for future loss debited in the profit and loss account - We are of view that for finding operative profit margin of the taxpayer or other similar enterprises, under TNM Method, all receipts and disbursements shown in accounts for the relevant period are required to be scrutinised. Only items of receipt or expenditure having nexus with the operating profit/loss of the enterprises are to be taken into consideration. An item of receipt or expenditure, which has no direct connection with operating profit, is to be ignored. Further, relevant receipts and expenditure for the year ending 31.3.2004 are relevant and not future profit or loss of the subsequent year as discussed earlier. It appears that to settle accounts with Tata Group, which withdrew from the enterprise after 31.3.2004, future losses were also provided in the accounts. Otherwise such provision of future losses, prima facie, had no connection with operating profit of the financial year. We, therefore, permit the assessee to raise alternative ground of appeal on question of deduction of provision for future loss debited in the profit and loss account. In our opinion, consideration of above debit entry is fundamental to computation of correct profit margin of the enterprise. As the question was not raised by the taxpayer before the revenue authorities and was neither examined by the taxpayer nor by TPO, we set aside impugned orders and direct that above question be examined in accordance with law and profit margin of the taxpayer be determined as warranted by facts and circumstances of the case. All relevant details be examined to finally decide the issue. In the interest of justice, the question of claim of deduction of provision of future loss is remitted to the file of AP / T.P.O. In the result, taxpayer s appeal is allowed, for statistical purposes.
Issues Involved:
1. Adjustment of Rs 2,01,00,000/- in the arm's length price of imported raw material and finished goods by the taxpayer from its associated concerns. 2. Selection and comparability of companies for benchmarking purposes. 3. Consideration of provision for future losses in computing operating profit. Detailed Analysis: 1. Adjustment of Rs 2,01,00,000/- in the Arm's Length Price: The taxpayer challenged the adjustment made by the Transfer Pricing Officer (TPO) to the arm's length price of imported raw materials and finished goods. The TPO had rejected the taxpayer's bifurcation of the System Integration Division into two sub-business segments (IS-Infra and Balance Systems) and instead applied the Transactional Net Margin Method (TNMM) to aggregated transactions. The TPO found a mean margin of operating profit at 0.42% compared to the taxpayer's disclosed negative figure of -0.84%. Consequently, the TPO made an adjustment of Rs 282 lakhs to the taxpayer's income. 2. Selection and Comparability of Companies for Benchmarking: The taxpayer raised objections to the TPO's selection of comparable companies, arguing significant functional differences between IS-Infra and Balance Systems businesses. The taxpayer contended that the TPO's comparables, such as Nelco Ltd., Eurotherm Del Ltd., and Utility Powertech Ltd., were not appropriate due to their differing business activities or financial data. The taxpayer also argued that Wellwin Industry Ltd., which had suffered losses, should have been included as a comparable, as it was considered in the previous assessment year. The TPO rejected these objections, stating that the system integration segment was the identified business unit, and its operating profit should be considered for benchmarking. The TPO did not find the taxpayer's data for Wellwin Industry Ltd. reliable, as financial data for the year ending March 31, 2004, was not available. 3. Consideration of Provision for Future Losses: The taxpayer argued that Rs 201 lakhs debited as a provision for future losses should not be considered while computing the operating profit for the relevant period. If this provision were excluded, the taxpayer's operating profit margin would be comparable to the average profit of 0.42% adopted by the TPO, negating the need for any adjustment. The Departmental Representative opposed this, stating that this claim was not raised during earlier proceedings and that such provisions were justified and rightly considered as part of operating profit. Tribunal's Findings: The Tribunal found no error in the TPO's exclusion of Wellwin Industry Ltd. due to the unavailability of reliable financial data for the relevant period. The Tribunal upheld the TPO's approach of considering system integration as the identified business unit for benchmarking. Regarding the provision for future losses, the Tribunal allowed the taxpayer to raise this issue, noting its importance in computing the correct profit margin. The Tribunal cited the Supreme Court's decision in National Thermal Power Co. Ltd. vs. CIT, which permits raising new grounds before the Tribunal if they involve questions of law arising from facts already on record. The Tribunal remitted the issue to the Assessing Officer/TPO for examination and determination in accordance with the law. Conclusion: The taxpayer's appeal was allowed for statistical purposes, with the Tribunal directing the Assessing Officer/TPO to re-examine the provision for future losses and determine the correct profit margin. The Tribunal upheld the TPO's exclusion of Wellwin Industry Ltd. and the approach of considering system integration as a single business unit for benchmarking.
|
