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2014 (1) TMI 1395 - AT - Income TaxSelection of comparables - Held that - Under the transfer pricing mechanism, a comparability analysis has to be undertaken for comparing the control transactions with an uncontrolled transaction. This is achieved by identifying potential comparables having similar functions that can stand the test of FAR analysis - The taxing authorities/TPO, should scrutinize the assessee's report on arm's length result and the entire process of arriving at the ALP, whether they are based on transfer pricing principles and statutory provisions or not - If he himself founds some irregularity or mistake in any of the process or the steps undertaken, then he is bound to correct in accordance with the settled principles and law - If the assessee points out some mistake or any irregularity in the arm's length result, then it is incumbent upon the TPO to examine and consider the same and if the assessee's contentions are found to be correct or tenable, then he has to accept the same - The TPO is required under law to analyze every comparables and then only determine the correct ALP based on proper comparability analysis - The assessee has object to the comparables taken by hinself if he have cogent reasons. In respect of Indo wind Energy Ltd and BF Utilities Ltd - these comparables were taken on the basis of data of three financial years which is not permissible under the law. Even the approach of the TPO and the DRP for taking the financials for June and September 2008 is not correct as it is not in conformity with the provisions of rule 10B(4) - Once the financial result for the 31st March 2008 of these comparables are not available, then the same should be excluded from the list - At the functional level also, these companies are entirely different from the assessee - These companies are into business of generation of wind energy whereas the assessee is manufacturing the parts which are used in the generation of solar energy - These two functions are entirely different. M/s. BF Utilities Ltd - This company is a holding company of various submissions and they are into various kinds of manufacturing - The revenues of all the subsidiary and associates are consolidated and do not give proper result of the segments - The revenue of B.F. Utilities Ltd. under the segment of wind energy is only 2%. M/s. Photon Energy Ltd - It is functionally comparable to the assessee and the TPO has rejected on the ground that the financial data was not available in the public domain and segmental results do not give clear profile - These data were duly available and were filed before the DRP. M/s Rajasthan Electronic and Instruments Ltd. - It is very difficult to work out the exact margin on OP/TC and also the working of the operating expenses with regard to the said segment - In the absence of proper segmental details for the working of the margin and the operating expenses, the same shall not be included as comparable. Finally three companies has been selected as comparables - The TPO is directed to look into the operating margin of the finally selected three comparables as aforesaid and bench mark the same with the assessee's PLI of 6.80% to determine the ALP - The issue has been restored. Transfer pricing adjustment relating to provision of engineering services Held that - The assessee has not separately bench marked the engineering services which are being carried out by a separate division - Even while selecting the comparables for manufacturing segment, the assessee has not taken into consideration the services rendered to its A.E., therefore, such a segment has to be separately bench marked - The TPO has not given any criteria for the search of his comparables and has not examined the comparables submitted by the assessee - The assessee should be given proper opportunity to explain its case as to how these transactions can be bench marked for proper determination of the ALP The issue has been restored for fresh adjudication.
Issues Involved:
1. Adjustment in relation to the international transaction for the export of cells and modules. 2. Adjustment on the total turnover instead of applying only to the controlled transactions. 3. Adjustment in relation to the international transaction for the provision of System Engineering services. 4. Granting of credit for tax deducted at source (TDS). Detailed Analysis: 1. Adjustment in Relation to the International Transaction for the Export of Cells and Modules: The assessee disputed the adjustment of Rs. 78,50,77,579 made by the AO concerning the export of cells and modules to Associated Enterprises (AEs). The AO used data not in accordance with Rule 10B(4) and Rule 100(4) of the Income Tax Rules, 1962, and included wind energy companies (Indo Wind Energy Ltd and BF Utilities Ltd) as comparables, which were not appropriate. The AO also considered consolidated financial statements for BF Utilities Ltd instead of standalone financials and rejected certain comparables like Photon Energy Ltd and Rajasthan Electronics and Instruments Ltd. The Tribunal observed that the comparables must be selected based on a proper FAR analysis. The inclusion of Indo Wind Energy Ltd and BF Utilities Ltd was deemed inappropriate as they were engaged in wind energy generation, unlike the assessee, which manufactures solar modules. The Tribunal excluded these companies and included Photon Energy Systems Ltd, which is functionally comparable. Rajasthan Electronics and Instruments Ltd was not included due to the lack of proper segmental details. 2. Adjustment on the Total Turnover Instead of Applying Only to the Controlled Transactions: The assessee argued that the AO erred in making the adjustment on the total turnover instead of only the controlled transactions. The Tribunal agreed, directing the AO to determine the ALP only concerning sales made to the AEs (Rs. 6,41,49,36,255) and not on the entire sales. 3. Adjustment in Relation to the International Transaction for the Provision of System Engineering Services: The AO made an adjustment of Rs. 40,04,672 related to the provision of System Engineering services to AEs. The assessee aggregated these transactions with other transactions at the entity level, which the AO rejected. The AO benchmarked this transaction separately using comparables like Mahindra Consulting Engineers Ltd and others. The Tribunal noted that the TPO did not provide the criteria for selecting these comparables and did not consider the assessee's comparables. The matter was remanded back to the AO/TPO to adjudicate afresh, providing the assessee an opportunity to explain its case. 4. Granting of Credit for Tax Deducted at Source (TDS): The assessee claimed that the AO granted credit for TDS of Rs. 1,34,30,097 instead of Rs. 1,46,90,759. The Tribunal directed the AO to verify the records and allow the correct TDS credit. Conclusion: The appeal was partly allowed for statistical purposes, with directions to the AO/TPO to re-evaluate specific adjustments and provide appropriate credits as per the Tribunal's observations. The Tribunal emphasized the importance of proper FAR analysis and functional comparability in transfer pricing adjustments.
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