2019 (3) TMI 1401 - HC - Income Tax

TP adjustment - ascertaining the Arms Length Price through the method of Transactional Net Margin Method with the aid of the results of one M/s Schrader Duncan Limited being taken as comparable - assessee seeked to remove M/s Schrader Duncan Limited fro comparable list - Revenue argues that when the assessee itself for the purpose of TNMM, had referred to the said M/s Schrader Duncan Ltd as a comparables, it would not thereafter be open for the assessee to take up a different stand during the course of the assessment - Tribunal rejected revenue contentions - HELD THAT - Merely because the assessee at one stage had referred to M/s Schrader Duncan Ltd. for the purpose of benchmarking, would not mean that the assessee cannot, even though the facts so suggest, take the legal contention that two were not comparable. On merits also the Tribunal examined the facts on record, found that the products manufactured and dealt with by the two companies were vastly different and that, therefore, there was no functional similarity between the assessee and the suggested comparable. No question of law, therefore, arise. Exclusion of M/s Areva T & D as comparable - turnover of the said company was high as compared to the assessee - TPO had rejected the assessee s objections to the selection of said company on the ground of vast difference in the turnover and dissimilarities of the products between the two companies - DRP however accepted the assessee s objections also upheld by Tribunal - HELD THAT - We do not find that the Tribunal has committed any error. The Tribunal has referred to the relevant materials on record and noted that the products manufactured by M/s Areva T & D were firstly different from those manufactured by the assessee and further ordered that there was substantial difference in the turnover between the two companies. No question of law, therefore, arises. The Income Tax Appeal is dismissed.

Summary

Issues:
1. Exclusion of M/s Schrader Duncan Ltd. as comparable for determining Arms Length Price (ALP) through Transactional Net Margin Method (TNMM).
2. Justification for excluding M/s Schrader Duncan Ltd. as comparable based on functional differences.
3. Exclusion of M/s Areva T & D as comparable due to high turnover compared to the assessee.

Analysis:

Issue 1: Exclusion of M/s Schrader Duncan Ltd. as comparable
The appeal challenges the Income Tax Appellate Tribunal's judgment on the exclusion of M/s Schrader Duncan Ltd. as comparable for ALP determination using TNMM. The Revenue argued that the assessee previously referred to M/s Schrader Duncan Ltd. as comparable, making it inconsistent to later claim otherwise. However, the Tribunal found functional differences between the companies. The assessee manufactured measuring instruments, while M/s Schrader Duncan Ltd. dealt with hydraulic and pneumatic equipment used in automotive sectors. The Tribunal concluded that the products were vastly different, making them not functionally similar for benchmarking purposes. The High Court agreed with the Tribunal's findings, stating that no legal issue arose.

Issue 2: Functional differences for exclusion of M/s Schrader Duncan Ltd.
The second question revolved around the functional differences between the assessee and M/s Schrader Duncan Ltd. The Tribunal upheld the exclusion based on the significant disparity in the products manufactured and dealt with by the two companies. While the assessee focused on measuring instruments, M/s Schrader Duncan Ltd. specialized in hydraulic and pneumatic equipment for automotive use. The High Court concurred with the Tribunal's analysis, emphasizing the lack of functional similarity between the companies, leading to the exclusion of M/s Schrader Duncan Ltd. as a comparable.

Issue 3: Exclusion of M/s Areva T & D due to high turnover
Regarding the exclusion of M/s Areva T & D as comparable due to high turnover compared to the assessee, the Transfer Pricing Officer rejected the selection based on turnover differences and product dissimilarities. However, the Dispute Resolution Panel accepted the assessee's objections, which the Tribunal upheld on appeal. The Tribunal noted that M/s Areva T & D was engaged in Power Transmission and Distribution Business, dealing with different products than the assessee's measuring instruments. The substantial turnover gap further supported the exclusion. The High Court found no error in the Tribunal's decision, as the companies were functionally and turnover-wise dissimilar, leading to the dismissal of the Revenue's appeal.

In conclusion, the High Court dismissed the Income Tax Appeal, affirming the Tribunal's decisions on the exclusion of comparables based on functional and turnover differences. No legal issues were found, and no costs were awarded.