2016 (12) TMI 1414 - HC - Income Tax

Determination of arm s length price under Section 92C - whther net profit margin of the comparable company is required to be adjusted to bring the international transaction by the assessee Company and that of the comparable company at the same pedestal? - Held that - Tribunal, after rightly observing that the adjustments in the net operating profit margin on account of any strike etc. was to be made in the profit margin of the comparable company, erred in rejecting the case of the assessee Company on the ground that the assessee had failed to bring on record any material to show that the profit of the comparable companies had been hit by a strike. The profit margin of the comparable company was required to be adjusted after taking into account a strike like situation as had taken place in the assessee company. Our order would show that qua question no. 1, we have upheld the order of the Tribunal remitting the matter to the TPO for fresh assessment in accordance with law. Questions no. 4 and 5 are also to be decided afresh. While deciding question no. 1, the second question would also be considered and decided by the TPO on making appropriate adjustments in the profit margin of the comparable company after taking into account a strike like situation in the comparable company as had taken place in the assessee Company.

Issues:
1. Transfer pricing adjustment remand
2. Abnormal operating expenses adjustment
3. Comparable company selection
4. Depreciation claim on moulds
5. Sales tool expenses claim

Transfer Pricing Adjustment Remand:
The appellant sought to challenge the Tribunal's decision to remand the issue of transfer pricing adjustment due to the TPO's alleged lack of reasons for rejecting the CUP method. The High Court dismissed the appeal and ordered a review on the second question. The Court clarified that the assessment proceedings should be conducted by the Assessing Officer, not the TPO, on remand.

Abnormal Operating Expenses Adjustment:
The appellant claimed an adjustment in operating margin due to a strike affecting production and sales, seeking to exclude abnormal fixed costs. However, the TPO rejected the claim based on increased sales figures and the appellant's risk profile. The Tribunal upheld the rejection, stating that the appellant failed to prove higher operating expenses during the strike period or demonstrate a need for adjustment in the net operating profit margin.

Comparable Company Selection:
The Tribunal found no justification for reducing operating costs during a strike period, as corresponding cost reductions were expected. It emphasized adjusting the net operating profit margin of comparable companies to align international transactions. The Court noted that adjustments for abnormal events like strikes should be made in the profit margin of comparable companies, not the appellant's margin.

Depreciation Claim on Moulds:
The issue of depreciation on moulds, raised by the appellant, was to be decided afresh, along with other questions, as per the High Court's order. The Court highlighted the need for appropriate adjustments in the profit margin of comparable companies, considering strike-like situations affecting operations.

Sales Tool Expenses Claim:
The High Court's order specified that questions regarding depreciation on moulds and sales tool expenses were to be reviewed and decided afresh. The TPO was directed to consider and make necessary adjustments in the profit margin of comparable companies, taking into account abnormal events like strikes that impact operations.

This detailed analysis of the judgment addresses each issue raised by the appellant, focusing on transfer pricing adjustments, abnormal operating expenses, comparable company selection, depreciation claims, and sales tool expenses. The High Court's decision provides clarity on the need for adjustments in profit margins of comparable companies to align with international transactions and considers the impact of abnormal events on financial assessments.

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