2013 (11) TMI 1320 - AT - Income Tax

Selection of comparable for determining Arms Length Price in Tranfer Pricing Transaction - Whether MALCO is comparable to the assessee for the purpose of determining of arm s length adjustments, if any Held that - When comparing the aluminium coil MALCO itself recognizes that the Properzi wire rods has higher realization and MALCO is relatively small compared to other domestic majors. In the case of the assessee, substantial portion of its production is in aluminium coils and other items On the above ground MALCO cannot be treated as comparable to the assessee - In the case of MALCO the identical product which is being used for comparing MALCO to the assessee being aluminium rolled product represents just about 8% of the total turnover of MALCO In view of above, MALCO cannot be used as comparable for determining the arms length price in the case of the assessee. MALCO has captive mines for extraction of its raw material whereas the assessee has to procure the raw material from the open market - A perusal of the costing of raw-material shows that in the case of MALCO the value of raw material consumed being bauxite is at 347563 MT is Rs.14.04 crores as against in the assessee s case the aluminium ingots and sheets are 25845 MT costing Rs.266 crores - This itself clearly shows that the very foundation of the manufacturing process being the raw materials are difference in the case of MALCO and the assessee - MALCO is manufacturing aluminium ingots and trading in aluminium ingots also whereas the assessee s primary raw material is aluminium ingots. Thus even on this ground MALCO cannot be treated as comparable to the case of the assessee. MALCO is a debt free company, insofar as it has a debt of only Rs.21.77 crores as against Rs.184 crores in the case of the assessee - The interest cost in the case of MALCO being Rs.77 lakhs as against Rs.30 crores in the case of the assessee would make a substantial dent in the profit - Net result of the Transfer price adjustment is an amount of Rs.19.34 crores. If the adjustment in respect of annual financial charges are made then this differential would get completely wiped out as the differential in the interest burden is Rs.30 crores in the case of the assessee whereas it is only Rs.77 lakhs in the case of MALCO Thus, decided in favor of Assessee.

Issues Involved:
1. Adjustment to the arm's length price (ALP) of international transactions with Associated Enterprises (AEs).
2. Rejection of Internal Comparable Uncontrolled Price Method.
3. Rejection of Transactional Net Margin Method (TNMM) analysis.
4. Selection of Madras Aluminium Co. Ltd. (MALCO) as a comparable company.
5. Consideration of objections raised during Dispute Resolution Panel (DRP) proceedings.
6. Adjustment of Rs. 19,34,17,87/- to the value of transactions with AEs.
7. Disallowance of Rs. 2,20,000/- under section 35AC of the Income Tax Act, 1961.
8. Addition of Rs. 1,06,000/- on account of donation.
9. Non-allowance of expenses pertaining to previous years amounting to Rs. 2,07,08,042/-.
10. Jurisdictional error in altering the draft assessment order.

Issue-Wise Detailed Analysis:

1. Adjustment to the Arm's Length Price (ALP) of International Transactions with Associated Enterprises (AEs):
The assessee challenged the adjustment made to the ALP of its international transactions with its AEs. The Transfer Pricing Officer (TPO) and Assessing Officer (AO) had made adjustments based on the selection of MALCO as a comparable company. The assessee argued that MALCO was not a suitable comparable due to significant differences in business operations, products, and financial metrics.

2. Rejection of Internal Comparable Uncontrolled Price Method:
The assessee did not press this ground during the hearing, and consequently, it was dismissed as not pressed.

3. Rejection of Transactional Net Margin Method (TNMM) Analysis:
Similarly, the assessee did not press this ground during the hearing, leading to its dismissal as not pressed.

4. Selection of Madras Aluminium Co. Ltd. (MALCO) as a Comparable Company:
The primary contention was the selection of MALCO as a comparable company. The assessee argued that MALCO's business operations, products, and financial metrics were significantly different from its own. MALCO's primary business was the manufacturing of Properzi Rods, which constituted a significant portion of its sales, whereas the assessee did not manufacture such products. Additionally, MALCO had captive mines for raw material extraction and an integrated power generation facility, unlike the assessee. The Tribunal found merit in these arguments and concluded that MALCO could not be treated as a comparable company for determining the ALP.

5. Consideration of Objections Raised During Dispute Resolution Panel (DRP) Proceedings:
The assessee contended that the DRP did not adequately consider its objections regarding the adoption of MALCO as a comparable company. The Tribunal noted that the DRP had overridden the assessee's objections without proper consideration, leading to a violation of the principles of natural justice.

6. Adjustment of Rs. 19,34,17,87/- to the Value of Transactions with AEs:
The adjustment made by the TPO based on the adoption of MALCO as a comparable company was found to be incorrect. The Tribunal held that the adjustment of Rs. 19,34,17,87/- could not be sustained, and the addition made by the AO on this basis was deleted.

7. Disallowance of Rs. 2,20,000/- under Section 35AC of the Income Tax Act, 1961:
Both parties agreed that the issue of disallowance under section 35AC required verification. The Tribunal restored this issue to the file of the AO for re-adjudication after giving the assessee an opportunity to present relevant details.

8. Addition of Rs. 1,06,000/- on Account of Donation:
Similarly, the issue of the addition on account of donation was restored to the file of the AO for re-adjudication after providing the assessee with an opportunity to present relevant details.

9. Non-Allowance of Expenses Pertaining to Previous Years Amounting to Rs. 2,07,08,042/-:
The assessee did not press this ground during the hearing, leading to its dismissal as not pressed.

10. Jurisdictional Error in Altering the Draft Assessment Order:
The assessee did not press this ground during the hearing, and consequently, it was dismissed as not pressed.

Conclusion:
The Tribunal concluded that MALCO could not be treated as a comparable company for determining the ALP. Consequently, the adjustment made by the TPO and adopted by the AO was deleted. The issues related to disallowance under section 35AC and addition on account of donation were restored to the AO for re-adjudication. The appeal was partly allowed for statistical purposes.

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