2022 (5) TMI 1538 - AT - Income Tax

TP Adjustment - treatment of impairment losses as operating in nature - computing assessee s PLI - computation of correct margins of the assessee - as argued that the expenditure was extra-ordinary in nature since the factory assets were revalued on account of closure of manufacturing operations and the assets were disposed-off in the subsequent years - HELD THAT - From the facts, it is discernible that the impairment losses arose due to extra-ordinary circumstances. The factory assets were revalued on account of closure of manufacturing operations and the assets were disposed-off in the subsequent years. The assessee customer did not purchase the quantity committed by them prior to setting up of plant and the assessee was unable to utilize the idle capacity. Owing to adverse market conditions, the assessee decided to discontinue manufacturing operations which could not be said to be routine business activities since the same would dent assessee s financial substantially. This event could be considered as one-off event and not part of routine business activities. This fact has adequately been highlighted by the assessee in its financial statements. Depreciation and amortization (including impairment loss) has jumped from 222.43 Lacs in earlier year to Rs.677.93 Lacs in this year. No such losses have been observed in the summarized financial statements of the comparable entities as extracted by Ld. TPO . Therefore, the impairment losses in our considered opinion, have to be treated as non-operating expenditure and the same are to be excluded while computing assessee s PLI. The decision of Delhi Tribunal in Insofer Mfg. India Pvt. Ltd. 2020 (8) TMI 928 - ITAT DELHI also support the view that the impairment losses were not related to normal business operation and therefore, could not be treated as operating expenditure to compute assessee s PLI. Selection of M/s Jolly Boards Ltd as comparable - We find that this entity is in composite business i.e., manufacturing as well as in realty and property development. However, segment-wise or product-wise performance has not been provided. Its other income includes profit on sale of investments and income (net) from property development. Therefore, in such a case, in the absence of segmental results, it would be very difficult to derive the segment-wise financial results by apportioning indirect expenditure as directed by Ld. DRP. This entity could not be held to be comparable to the assessee. We direct Ld. TPO / AO to exclude this entity from final set of comparable. The grounds raised by the assessee, in this regard, stand allowed. Determination of ALP of management fees paid by the assessee to its AE - The opinion of lower authorities that the services should be need based or the same should bring benefits to the assessee has no logic since the requirement of the services has to be assessed from assessee s point of view. The assessee had filed email communications etc. in support of receipt of services which has been billed on monthly basis by AE. Therefore, to determine of the ALP of these transactions, merely on the basis of presumptions, could not be held to be sustainable. The decision of Chennai Tribunal in Siemens Gamesa Renewable Power (P.) Ltd. 2017 (11) TMI 1743 - ITAT CHENNAI held that the ALP of management fees could not be taken as nil in the absence of a valid comparable. The lower authorities could not simply arrive at a conclusion that the quality and volume of services as received by the assessee were not commensurate with the payment made. In this order, the bench has referred to various other decisions taking the same view. We find that ratio of this decision is squarely applicable to the facts of the present case. Accordingly, we direct Ld. TPO / AO to delete this TP adjustment. The grounds thus raised stand allowed.

Summary

Issues Involved:
1. Inclusion of Jolly Board Ltd. as a comparable entity.
2. Incorrect computation of operating margin of the appellant and comparable companies.
3. Treatment of impairment loss as an operating item.
4. Treatment of miscellaneous income as non-operating.
5. Computation of Arm's Length Price (ALP) of management fees as NIL.

Issue-wise Detailed Analysis:

1. Inclusion of Jolly Board Ltd. as a Comparable Entity:
The lower authorities included Jolly Board Ltd. in the final set of comparable entities, despite the appellant's argument that Jolly Board Ltd. was functionally dissimilar. The Tribunal found that Jolly Board Ltd. was engaged in composite business activities, including manufacturing and realty/property development, without segment-wise financial results. Therefore, it was directed that Jolly Board Ltd. should be excluded from the final set of comparables due to the difficulty in deriving segment-wise financial results.

2. Incorrect Computation of Operating Margin:
The appellant argued that the lower authorities incorrectly computed the operating margin by including impairment losses and excluding management service fees. The Tribunal observed that the impairment losses should be treated as non-operating expenditure since they arose due to extraordinary circumstances related to the closure of manufacturing operations. Consequently, the Tribunal directed the TPO to exclude impairment losses while computing the appellant's Profit Level Indicator (PLI).

3. Treatment of Impairment Loss as an Operating Item:
The Tribunal found that the impairment losses of Rs.464.67 Lacs were extraordinary and arose due to the closure of manufacturing operations. These losses were not part of routine business activities and should be treated as non-operating expenditure. The Tribunal directed the TPO to exclude impairment losses while computing the appellant's PLI, supporting the view with the decision of the Delhi Tribunal in Insofer Mfg. India Pvt. Ltd.

4. Treatment of Miscellaneous Income as Non-operating:
The lower authorities treated miscellaneous income as non-operating without appreciating its nature. The Tribunal did not specifically address this issue in detail in the provided text.

5. Computation of ALP of Management Fees as NIL:
The appellant contended that the lower authorities erred in computing the ALP of management fees at NIL. The Tribunal noted that the appellant had a management service agreement with its AE, and the payments were recurring and allowed in earlier and subsequent years. The Tribunal found that the lower authorities' conclusion that the services should bring direct benefits to the appellant was not logical. The Tribunal directed the TPO/AO to delete the TP adjustment related to management fees, citing the decision of the Chennai Tribunal in Siemens Gamesa Renewable Power (P.) Ltd., which held that the ALP of management fees could not be taken as nil without a valid comparable.

Conclusion:
The Tribunal allowed the appeal partly, directing the exclusion of Jolly Board Ltd. from the set of comparables, treating impairment losses as non-operating expenditure, and deleting the TP adjustment related to management fees. The appeal was pronounced on 18th May 2022.