2016 (10) TMI 103 - AT - Income Tax

Transfer pricing adjustment - working of the PLI by the assessee and by the TPO/AO - bone of contention is the fluctuating price of aluminium - main contention of the assessee is that since it had a fixed price contract with its USA based AE and which contract has been accepted by the revenue authorities, it is not proper to give effect to the extra ordinary items of cost due to higher cost of raw material i.e. Aluminium - Held that - We find that if the adjustment for raw material i.e. higher cost of aluminuim during the year under consideration is taken as extra ordinary item for the computation of PLI, then the margins of the assessee are within the range of 5% with the PLI of the comparable companies. It is also an admitted fact that the profit margin of the assessee is directly affected by the price of the aluminium during the year under consideration. Since, the assessee is having a fixed price contract with its AE, it cannot be increase the sale price whereas the margins of the comparable companies are not restricted by fixed sale price. Therefore, the margin of the assessee company will definitely be less due to increase in the price of aluminium qua the sale price. Therefore, the adjustment in respect of the substantial increase in the cost of raw material i.e. aluminium has to be made for the working of correct PLI. We, therefore, do not find any error or infirmity in the computation of the Upward Adjustment as worked out by the First Appellate Authority after giving the benefit of adjustment for raw material extra ordinary item . We decline to interfere. Appeal filed by the Revenue is accordingly dismissed

Issues Involved:
1. Restriction of transfer pricing adjustment.
2. Admission of additional evidence by CIT(A).
3. Adjustment for increase in raw material prices.
4. Consideration of foreign exchange fluctuation gain as operating income.
5. Inclusion of increase in closing stock as part of operating costs.
6. Granting standard deduction of 5%.
7. Overall correctness of CIT(A)'s order.
8. Assessee's cross-objection regarding transfer pricing adjustment and comparables.

Detailed Analysis:

1. Restriction of Transfer Pricing Adjustment:
The Revenue contended that the CIT(A) erred in restricting the transfer pricing adjustment to ?21,44,692/- from ?3,00,89,890/- made by the Assessing Officer (AO)/Transfer Pricing Officer (TPO). The CIT(A) found that the TPO's exclusion of Ion Exchange (India) Ltd. as a comparable was justified due to differences in business activities and turnover. The CIT(A) also adjusted for the extraordinary increase in raw material costs and foreign exchange gains, resulting in a reduced adjustment.

2. Admission of Additional Evidence by CIT(A):
The Revenue argued that the CIT(A) violated Rule 46A by admitting additional evidence without allowing the AO/TPO to verify it. The CIT(A) considered financial data from the Prowess database to correct the TPO's PLI calculation, which the Revenue claimed was done without due process.

3. Adjustment for Increase in Raw Material Prices:
The CIT(A) granted an adjustment for the increase in raw material prices, considering it an extraordinary item under Rule 10B(e)(iii). The assessee demonstrated that the price of aluminum, a key raw material, fluctuated significantly, impacting profit margins. The CIT(A) accepted this adjustment, reducing the transfer pricing adjustment accordingly.

4. Consideration of Foreign Exchange Fluctuation Gain as Operating Income:
The CIT(A) included foreign exchange fluctuation gains as operating income, despite the fixed price contract with the associated enterprise (AE). The CIT(A) reasoned that these gains were directly derived from exports and should be included in the operating revenue.

5. Inclusion of Increase in Closing Stock as Part of Operating Costs:
The CIT(A) included the increase in closing stock as part of operating costs, noting that the increase was primarily in finished goods rather than raw materials. This adjustment was made to accurately reflect the operating costs and profit margins.

6. Granting Standard Deduction of 5%:
The CIT(A) granted a standard deduction of 5% to the assessee, which the Revenue contested. The CIT(A) applied the proviso to Section 92C(2), allowing this adjustment to account for variations within the permissible range.

7. Overall Correctness of CIT(A)'s Order:
The Revenue argued that the CIT(A) should have upheld the AO's order in its entirety. However, the CIT(A) made several adjustments based on detailed financial analysis and consideration of extraordinary items, resulting in a reduced transfer pricing adjustment.

8. Assessee's Cross-Objection:
The assessee's cross-objection challenged the remaining transfer pricing adjustment of ?21,44,692/-. The assessee argued that the calculation of the Profit Level Indicator (PLI) was incorrect and that Ion Exchange (India) Ltd. should be considered a comparable. The CIT(A) upheld the TPO's exclusion of Ion Exchange due to differences in business activities and turnover. The assessee also sought the benefit of the +/- 5% range, which the CIT(A) granted, reducing the adjustment further.

Conclusion:
The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal and the assessee's cross-objection. The Tribunal agreed with the CIT(A)'s adjustments for raw material price increases, foreign exchange gains, and the inclusion of closing stock in operating costs. The standard deduction of 5% was also upheld, and the final transfer pricing adjustment was limited to ?21,44,692/-. The Tribunal found no error or infirmity in the CIT(A)'s detailed analysis and computation.

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