2019 (5) TMI 1706 - AT - Income Tax

Transfer Pricing (TP) adjustments - selection of comparable - TPO rejected all the comparables selected by the taxpayer and on the basis of fresh search chosen - TPO has not given adjustment claimed by the taxpayer on account of capacity utilization and customs duty - The taxpayer carried the matter before the ld. DRP by way of filing objections who has retained the final set of comparables chosen by the TPO by dismissing the objections raised by the taxpayer. Held that - TPO/DRP are required to provide working capital adjustment and risk adjustment to the taxpayer as well as comparable company to bring them at par with each other. Further, TPO is directed to identify all the fixed expenses including depreciation and to adjust the same in capacity utilized by exercising his powers available under the Act by calling information qua the capacity utilization by comparable companies. Following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2011-12 2019 (4) TMI 412 - ITAT DELHI , we direct the TPO to examine if non-cenvat-able customs duty of import paid by the taxpayer is materially affecting the PLI of taxpayer company as per mandate of Rule 10B(3) then suitable adjustment be provided to the taxpayer.

Issues Involved:
1. Adjustment in Arm's Length Price (ALP) for international transactions.
2. Rejection of taxpayer's comparables and selection of new comparables.
3. Non-provision of working capital and risk adjustments.
4. Adjustment for capacity utilization and customs duty.
5. Restriction of transfer pricing adjustment to the value of consumption of materials.
6. Use of current year data for determining ALP.
7. Benefit under the proviso to section 92C(2) of the Income-tax Act.

Detailed Analysis:

Adjustment in Arm's Length Price (ALP) for International Transactions:
The taxpayer, engaged in manufacturing and providing engineering design services, entered into international transactions with associated enterprises (AEs). The TPO made an adjustment of INR 9,87,50,638/- in the ALP of these transactions, which was contested by the taxpayer.

Rejection of Taxpayer's Comparables and Selection of New Comparables:
The TPO rejected the taxpayer's comparables and selected new ones based on specific filters such as positive net worth, use of current year data, and turnover criteria. The Tribunal examined each comparable and excluded several on grounds of functional dissimilarity, high R&D expenditure, and lack of segmental information. For instance, Engineers India Ltd. was excluded due to its Government contracts and high-end services, while IBI Chematur was excluded for significant R&D expenditure and high-end services.

Non-provision of Working Capital and Risk Adjustments:
The Tribunal emphasized the necessity of providing working capital and risk adjustments to account for differences between controlled and uncontrolled transactions. It cited the Mentor Graphics case, which mandated adjustments for working capital, risk, and R&D expenses to ensure comparability.

Adjustment for Capacity Utilization and Customs Duty:
The taxpayer sought adjustments for low capacity utilization and customs duty. The Tribunal directed the TPO to provide these adjustments, referencing the taxpayer's own case for AY 2011-12, which established the methodology for capacity utilization adjustments and the impact of customs duty on profitability.

Restriction of Transfer Pricing Adjustment to the Value of Consumption of Materials:
The Tribunal directed the TPO to restrict the transfer pricing adjustment to the value of materials consumed during the year, following the precedent set in the taxpayer's case for AY 2011-12.

Use of Current Year Data for Determining ALP:
The taxpayer contested the use of only FY 2009-10 data, which was not available at the time of transfer pricing documentation. The Tribunal did not specifically adjudicate on this issue, focusing instead on the broader comparability and adjustment issues.

Benefit under the Proviso to Section 92C(2) of the Income-tax Act:
The Tribunal did not provide specific findings on this issue, as it was not pressed during the course of arguments.

Conclusion:
The Tribunal partly allowed the taxpayer's appeal, directing the TPO to make necessary adjustments for capacity utilization, customs duty, and working capital/risk differences. Several comparables selected by the TPO were excluded, and the restriction of transfer pricing adjustment to the value of consumed materials was upheld. The appeal was allowed for statistical purposes, with specific directions for re-evaluation by the TPO.

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