2016 (3) TMI 1121 - AT - Income Tax

Transfer pricing adjustment - AO rejecting functional (capacity utilization) adjustment - Capacity adjustment should be allowed in whose hands? - Held that - The authorities below have adjusted the operating costs of the assessee in allowing the capacity adjustment. As against that, the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. How to compute capacity utilization adjustment under TNMM - Held that - the capacity utilization adjustment has to be granted where there has been under utilization or lower utilization of the capacity. In the facts of the present case, we deem it appropriate to remit the issue back to the file of Assessing Officer to decide this issue afresh after considering the submissions of the assessee, documents on record and decisions of the Tribunal. Accordingly, ground no. 2 raised in the appeal is allowed for statistical purpose. Selection of comparable - Held that - the comparables F I Sofex Limited and Fortune Informatics Limited although were having loss in the year of comparison but whether they were consistent loss making companies has not been ascertained by the TPO before rejecting the same. A company is said to be bad comparable if it is a consistent loss making entity. Accordingly, we are of the opinion that this issue needs a revisit to the Assessing Officer. The Assessing Officer after considering the submissions of the assessee and documents on record shall decide the issue afresh in the light of the decisions discussed above. Accordingly, this ground of appeal of the assessee is allowed for statistical purpose. Benefit of 5% in transfer pricing adjustment u/s. 92C(2) - Held that - In view of the newly inserted sub-section (2A) to section 92C the assessee is not eligible to claim the benefit of 5% in the variation between the arithmetical mean of the assessee and the comparables and entities. Moreover, the ld. AR of the assessee has conceded that this issue is to be decided against the assessee in the light of amended provisions. - Decided against assessee

Summary

Issues Involved:
1. Rejection of functional adjustment made to Profit Level Indicator (PLI) of the appellant.
2. Rejection of two comparable companies from the Transfer Pricing analysis.
3. Transfer pricing adjustment without giving benefit of +/- 5 percent as available under proviso to section 92C(2) of the Act.

Detailed Analysis:

1. Rejection of Functional Adjustment Made to PLI of the Appellant:
The assessee argued that the authorities erred in not granting the capacity under-utilization adjustment. The assessee had expanded its output capacity during the year anticipating increased business, which did not materialize. Consequently, the company incurred losses due to under-absorption of fixed costs. The assessee provided detailed workings of under-utilization of capacity and manpower, which were not considered by the Commissioner of Income Tax (Appeals). The Tribunal noted that the authorities rejected the adjustment without examining the factual aspect of increased capacity. The Tribunal referred to various decisions, including those of the Bangalore and Pune Benches, which granted under/low capacity utilization adjustments. The Tribunal remitted the issue back to the Assessing Officer to decide afresh, considering the submissions and documents on record.

2. Rejection of Two Comparable Companies from the Transfer Pricing Analysis:
The assessee contested the exclusion of F I Sofex Limited and Fortune Informatics Limited from the list of comparables on the grounds that they were loss-making companies. The Tribunal found merit in the contention that a comparable should not be rejected merely for incurring losses in a particular year. The Tribunal referred to multiple decisions, including those of the Pune Bench and the Hon'ble Delhi High Court, which held that a company should be excluded only if it is a consistent loss-making entity. The Tribunal remitted the issue back to the Assessing Officer to ascertain whether the excluded companies were consistent loss-makers and decide the issue afresh.

3. Transfer Pricing Adjustment Without Giving Benefit of +/- 5 Percent:
The assessee claimed the benefit of the safe harbor of +/- 5% under section 92C(2) of the Act. However, the Tribunal noted that the Finance Act, 2012, inserted sub-section (2A) with retrospective effect from 01-04-2002, which precludes the benefit if the variation between the arithmetical mean and the actual transaction price exceeds 5%. The Tribunal, agreeing with the amended provisions, dismissed this ground of appeal.

Conclusion:
The Tribunal allowed the appeal of the assessee partly for statistical purposes, remitting the issues of functional adjustment and exclusion of comparables back to the Assessing Officer for fresh consideration, while dismissing the claim for the +/- 5% benefit.