2018 (4) TMI 1835 - AT - Income Tax

TPA Computation - comparable selection - rejection of the comparable Continental Valves Ltd., on account of failing low turnover filter of ₹ 5 crore applied by Ld. TPO - HELD THAT - On verification of profit and loss account of this comparable it is observed that purchase of raw materials constitute materials consumed in production process and not for trading process which establishes this comparable to be engaged in carrying out manufacturing activity only. Further from TPO order passed by Ld.TPO for assessment year 2011-12, as well as DRP for assessment year 2012-13 it is observed that this comparable has been accepted during these assessment years. On perusal of the order by Ld.TPO for the year under consideration it is observed that he has nowhere disputed functional dissimilarity of this comparable with that of assessee. Even for the year under consideration this company is carrying on with similar manufacturing activity. No reason to reject this comparable from the final list more so when it has already been accepted by the authorities below in the immediately preceding assessment years which has not been disputed by the revenue authorities before this Tribunal - we direct Ld.TPO to consider this comparable in the final list. Yuken India Ltd - This company is engaged in manufacture of oil hydraulic equipment and the product range of this company includes power units- Parison controller, cylinders and Piston accumulators. Thus broadly it is into manufacturing activity and with TNMM as MAM to determine ALP, broad functional dissimilarities get automatically adjusted. Accordingly this comparable is directed to be included in final list of comparables. Appropriate working capital adjustment may be granted to assessee. WIPL Ltd - Merely because this company is having a huge turnover and is submitted to be having its own R D wing, cannot make it functionally dissimilar, more so when TNMM is used as the most appropriate method. This was what Ld.AR submitted while arguing comparability in case of Continental Valves Ltd. We are inclined to set aside this comparable back to Ld.TPO for due verification of functional similarities/dissimilarity of this company with that of assessee. Assessee is directed to provide entire company profile along with its full financials to Ld. TPO for the year under consideration. Dynamatic Technologies Ltd. - We are unable to verify the functional comparability of this company with assessee due to insufficient materials regarding this comparable. However from observations of Ld. TPO we observe that this company is into manufacturing activity of engineering products with huge turnover - set aside this comparable back to Ld.TPO for due verification. Comparability based upon turnover being a relevant factor - WIPL Ltd., Dynamatic Technologies argued for exclusion due to high turnover - We do not have before us financials and complete functional profile of these comparables in the paper book and are unable to ascertain authenticity of arguments advanced by Ld.AR. - unable to ascertain whether there are any segmental information in respect of manufacturing segment undertaken by these comparables and the risk assumed by these comparables to be compared with that of assessee, which is an important factor that could affect the turnover of companies. TPO shall verify from the records placed by assessee as directed hereinabove - direct Ld.TPO to decide comparability of these companies, with that of assessee by taking into consideration observations made in the case of CIT vs. Agnity India Technologies Pvt. Ltd.. 2013 (7) TMI 696 - DELHI HIGH COURT . PLI computation - considering foreign exchange gain/loss, as operating item and provision for bad debts and bank charges/fixed interest as non-operating expenses for the purpose of computing PLI of assessee as well as that of comparables - HELD THAT - It is observed that Ld. AO has failed to follow directions of DRP and has computed incorrect PLI of comparables. This is evident from order passed by Ld. TPO under section 154. We also direct Ld. TPO to provide the computation of PLI in respect of the comparables to assessee in the interest of principle of natural justice. This ground raised by assessee stands allowed for statistical purposes. Incorrect calculation of operating cost and operating revenue of assessee - HELD THAT - TPO is directed to look into the computation and adopt correct figures as per law. Assessee is thus directed to provide all necessary details for purposes of computing the value of international transaction as per law. Considering the proportionate transfer pricing adjustment made by assessee suo moto in the return of income - HELD THAT - We agree with the proposition made by Ld.AR regarding restricting adjustment to ₹ 56,10,222/- suo moto offered by assessee, in the event adjustment to be recomputed by Ld. TPO/AO (as per the directions hereinabove) is less than ₹ 56,10,222/-. - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Comparable by TPO
3. Selection of New Comparables by TPO
4. Cherry Picking of Comparables
5. PLI Calculation Not Provided to Appellant
6. Incorrect Calculation of Operating Cost and Operating Revenue
7. Proportionate Transfer Pricing Adjustment
8. Interest Charged Under Sections 234B and 234C
9. Penalty Proceedings Under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appellant contended that the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) erred in making a transfer pricing adjustment of ?1,42,38,110/- on account of Arm's Length Price under section 92CA of the Income Tax Act, 1961. The tribunal found merit in the appellant's argument and directed the TPO to reconsider the comparables and adjustments.

2. Rejection of Comparable by TPO:
The TPO rejected Continental Valves as a comparable due to a low turnover filter of ?5 crore. The tribunal noted that the turnover filter applied by the TPO was on the higher side and inconsistent with previous years where Continental Valves was accepted. The tribunal directed the TPO to include Continental Valves in the final list of comparables.

3. Selection of New Comparables by TPO:
The TPO selected new comparables, namely Yuken India Ltd, WPIL Ltd, and Dynamatic Technologies Ltd, which the appellant argued had high turnover and different functional profiles. The tribunal accepted Yuken India Ltd as a comparable due to its manufacturing activities. However, for WPIL Ltd and Dynamatic Technologies Ltd, the tribunal set aside the selection and directed the TPO to verify the functional similarities and provide complete financials for a proper comparison.

4. Cherry Picking of Comparables:
The appellant argued that the TPO cherry-picked comparables without considering the appellant's objections. The tribunal found that the TPO's approach was inconsistent and directed a re-evaluation of the comparables, particularly WPIL Ltd and Dynamatic Technologies Ltd, based on functional similarities and turnover filters.

5. PLI Calculation Not Provided to Appellant:
The appellant contended that the TPO did not provide complete details of the Profit Level Indicator (PLI) recalculated for the comparables. The tribunal observed that the Assessing Officer (AO) failed to follow the DRP's directions and computed incorrect PLIs. The tribunal directed the TPO to provide the computation of PLIs to the appellant.

6. Incorrect Calculation of Operating Cost and Operating Revenue:
The appellant argued that the TPO incorrectly calculated the operating cost and operating revenue, leading to an erroneous transfer pricing adjustment. The tribunal directed the TPO to adopt the correct figures for operating cost and revenue as per law and recompute the value of international transactions.

7. Proportionate Transfer Pricing Adjustment:
The appellant submitted that if the recomputed adjustment is less than the suo moto adjustment of ?56,10,222/- offered in the return of income, no further adjustment should be made. The tribunal agreed with this proposition and directed that the adjustment be restricted to ?56,10,222/- if the recomputed value is less.

8. Interest Charged Under Sections 234B and 234C:
The appellant argued that the interest charged under sections 234B and 234C was wholly illegal. The tribunal did not specifically address this issue in detail, but it is implied that the interest charges would be reconsidered based on the revised adjustments.

9. Penalty Proceedings Under Section 271(1)(c):
The appellant contended that the penalty proceedings initiated under section 271(1)(c) were on untenable grounds as there was no concealment of income or submission of inaccurate particulars. The tribunal did not specifically address this issue, but it is implied that the penalty proceedings would be reconsidered based on the revised adjustments.

Conclusion:
The tribunal allowed the appeal filed by the assessee, directing the TPO to reconsider the comparables and adjustments, provide complete details of PLI computation, and adopt correct figures for operating cost and revenue. The tribunal also directed that the adjustment be restricted to ?56,10,222/- if the recomputed value is less. The appeal was allowed for statistical purposes.