2019 (6) TMI 1627 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - We observe that the issue is squarely covered in favour of the assessee by assessee s own case for assessment year 2009-10 2019 (4) TMI 1286 - ITAT PUNE wherein it has been categorically held by the Co-ordinate Pune Bench that BEML Limited being a Government Company even without going into the merits of the functional test of BEML Limited, it cannot be considered as a comparable to that with the assessee since Government Companies operate entirely in different controlled environment, customers are different, raw material suppliers are different, profit margins are different and would not operate in a free competitive environment. Capacity adjustment by recommending a method without justifying the reliability of the method - HELD THAT - As relying on M/S PETRO ARALDITE P. LTD. 2013 (8) TMI 403 - ITAT MUMBAI we find this issue should be remanded to the file of the Assessing Officer to follow the precedent in existence on this issue and make the adjustment in any after granting a reasonable opportunity of being heard to the assessee. Non-availability of authentic bifurcation of the transactions between the AE and Non-AE - inappropriate computation of transfer pricing adjustment on the total turnover of the assessee from manufacturing operations instead of adjustments, if any only on the value of international transactions pertaining to manufacturing operations - HELD THAT - Transfer pricing adjustments should be restricted to the value of the international transactions. Since this is a case of import transactions, we agree with the assessee and direct that the transfer pricing adjustments should be restricted to the value of the international transactions. Hence, this objection of the assessee is accepted.

Summary

Issues Involved:

1. Inappropriate transfer pricing adjustment.
2. Non-consideration of economic and commercial reasons for losses.
3. Selection of BEML Limited as a comparable company.
4. Rejection of capacity utilization adjustment methodology.
5. Initiation of penalty proceedings under section 271(1)(c).
6. Comparability of JCB India Limited.
7. Comparability of Action Construction Equipment Limited.

Issue-wise Detailed Analysis:

1. Inappropriate Transfer Pricing Adjustment:
The assessee contended that the Assistant Commissioner of Income-tax erred in proposing an upward adjustment of ?20,24,62,986 to the international transactions related to manufacturing operations for FY 2009-10, despite the transactions being at arm's length. The Tribunal did not specifically adjudicate this issue as it was considered general in nature.

2. Non-consideration of Economic and Commercial Reasons for Losses:
The assessee argued that the transfer pricing adjustment ignored the economic and commercial reasons for losses in manufacturing operations. This ground was dismissed as not pressed by the assessee during the hearing.

3. Selection of BEML Limited as a Comparable Company:
The Tribunal addressed whether BEML Limited, a government company, could be considered comparable to the assessee. The Tribunal referred to the decision in the assessee's own case for the preceding year, where it was held that government companies operate in a different controlled environment and thus cannot be considered comparable. The Tribunal reversed the lower authorities' decision and allowed the exclusion of BEML Limited as a comparable.

4. Rejection of Capacity Utilization Adjustment Methodology:
The assessee's methodology for capacity utilization adjustment was rejected by the TPO. The Tribunal noted that in the preceding year, the issue was remanded to the Assessing Officer following the judgment of the Jurisdictional High Court in CIT vs. Petro Araldite (P.) Ltd. The Tribunal followed the same approach and remanded the issue to the Assessing Officer for re-evaluation.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee argued that the initiation of penalty proceedings was inappropriate as the transfer pricing adjustment resulted from a difference of opinion. This ground was considered premature and required no adjudication.

6. Comparability of JCB India Limited:
The assessee contended that JCB India Limited was functionally different and should not be considered comparable. This ground was dismissed as not pressed by the assessee.

7. Comparability of Action Construction Equipment Limited:
The assessee argued that Action Construction Equipment Limited was functionally similar and should be considered comparable. This ground was also dismissed as not pressed by the assessee.

Revenue's Appeal:

Inappropriate Computation of Transfer Pricing Adjustment:
The Revenue challenged the DRP's decision to restrict the transfer pricing adjustment to the value of international transactions instead of the total turnover. The Tribunal upheld the DRP's decision, noting that it is a settled position of law to restrict adjustments to the value of international transactions. The Revenue's appeal was dismissed.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the Revenue was dismissed. The Tribunal emphasized the need for a fair comparison and adherence to established legal principles in transfer pricing adjustments.