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2018 (8) TMI 1807 - HC - Income TaxTP Adjustment - Tribunal directing the AO/TPO to confine arm's length adjustment to the value of international transactions in the manufacturing segment of the asses see - TPO chosen TNMM method as the most appropriate method for determination of arm's length - Working capital adjustment - HELD THAT - This court in a recent judgment in Principal CIT v. Softbrands India Pvt. Ltd. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT has held that in these type of cases, unless an ex facie perversity in the findings of the learned Income-tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under section 260A of the Act is not maintainable .No substantial question of law - Decided against revenue
Issues Involved:
1. Arm's length adjustment in the manufacturing segment. 2. Computation of operating margin including forex gain/loss. 3. Working capital adjustment. 4. Treatment of royalty. 5. Computation of operating margin excluding lease expenditure. 6. Exclusion of certain comparables based on functional dissimilarity. Detailed Analysis: Issue 1: Arm's Length Adjustment in the Manufacturing Segment The Tribunal directed the Assessing Officer/Transfer Pricing Officer (AO/TPO) to confine the arm's length adjustment to the value of international transactions in the manufacturing segment of the assessee. The Tribunal relied on its previous decision in the assessee's own case, which had not reached finality. The Tribunal noted that the TPO had chosen the Transactional Net Margin Method (TNMM) as the most appropriate method and accepted the same comparables selected by the assessee for benchmarking analysis. Issue 2: Computation of Operating Margin Including Forex Gain/Loss The Tribunal directed the AO/TPO to compute the operating margin of the assessee and comparable companies, including forex gain/loss arising from foreign exchange fluctuations in respect of sale proceeds. The Tribunal highlighted that excluding forex gain/loss from the operating margins would result in serious injustice to the assessee. The Tribunal admitted the additional ground raised by the assessee, emphasizing consistent treatment of operating margins. Issue 3: Working Capital Adjustment The Tribunal noted that the Dispute Resolution Panel (DRP) had directed the TPO to compute the working capital adjustment for comparables. However, the TPO did not comply with these directions. The Tribunal set aside the issue to the AO/TPO to provide proper working capital adjustment without any artificial restriction, referencing the case of Citrix R&D India Pvt. Ltd., which held that the TPO cannot restrict the working capital adjustment artificially. Issue 4: Treatment of Royalty The Tribunal observed that the TPO treated the arm's length price (ALP) of royalty as nil, arguing that the assessee failed to produce evidence on how the royalty was computed and the benefits derived from the technology transfer. The Tribunal disagreed with the TPO, stating that the justification and benefits derived from the technology transfer are beyond the scope of determining the ALP. The Tribunal emphasized that the TPO should determine the ALP by comparing prices and noted that the TPO had accepted the royalty and service charges for the assessment year 2012-13. The Tribunal set aside the issue to the AO/TPO for re-examination. Issue 5: Computation of Operating Margin Excluding Lease Expenditure The Tribunal found merit in the assessee's contention that if sub-lease income is excluded from the operating profit, the corresponding lease expenditure should also be excluded from the operating cost while computing the operating margin. The Tribunal directed the AO/TPO to compute the operating margin after excluding the corresponding lease expenditure and to confine the adjustment to the value of international transactions only. Issue 6: Exclusion of Certain Comparables Based on Functional Dissimilarity The Tribunal noted that the TPO rejected a company as a comparable because it had 90% of its income from Dubai operations, whereas the assessee had 100% income from Indian operations. The Tribunal set aside the issue of comparability to the AO/TPO for re-adjudication after considering the correct facts and details. The Tribunal also referenced its earlier decision, which excluded a company based on functional dissimilarity, noting no substantial difference in the business activity for the year under consideration. Conclusion: The High Court referenced its recent judgment in Principal CIT v. Softbrands India Pvt. Ltd., stating that unless an ex facie perversity in the Tribunal's findings is established, the appeal under section 260A of the Act is not maintainable. The court emphasized that issues related to comparables and filters do not give rise to substantial questions of law. Consequently, the High Court dismissed the appeal filed by the Revenue, stating that no substantial question of law arises in the present case.
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