2019 (4) TMI 1286 - AT - Income Tax

TPA - Comparable selection - exclusion of BEML Government Companies - HELD THAT - Government Companies operate entirely different controlled environment. Their customers are different. Their raw material suppliers are different. Their profit margins are different. They would not operate in a free competitive environment. Therefore, in our opinion, the orders of the lower authorities need to be reversed. The Co-ordinate Bench of the Tribunal has already taken a view in the matter. Government company like BEML cannot be held as a good comparable to the one like the present assessee a private company under consideration. Regarding the DR s argument about the existence of profit making company in the client list of BEML, we find it is not a sustainable argument. We find Hon ble Bombay High Court has given a categorical finding about the requirement of excluding Government companies like M/s. Engineers India Limited held in the case of M/s. Thyssen Krupp Industries India Pvt. Ltd. 2013 (11) TMI 930 - ITAT MUMBAI , is relevant and binding on us. Shifting of ₹ 10 crores from trading segment to the manufacturing segment on ad-hoc basis - HELD THAT - There is requirement for the Assessing Officer/CIT(A) to undertake the scrutiny of each of the expenditure accounts and analyze the nexus of the expenditure to the trading and manufacture segments on one side and the application of proper and appropriate basis to allocate the expenditure between the segments. AO should also pass a speaking order why the stated sales ratio is inappropriate on given facts. Therefore, we are of the opinion, this issue is required to be remanded to the file of the Assessing Officer/TPO with regard to the approved the applicability of the basis of sales ratio uniformly to all the accounts qua the trading and manufacturing account. With these directions, we remand this issue to the file of the Assessing Officer/TPO for fresh examination of the issue. The Assessing Officer shall grant a reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, relevant ground no.5 is allowed for statistical purposes. Computation of transfer pricing adjustment - additional ground - TP adjustment to the international transactions with non AEs - HELD THAT - We are of the opinion that the said issue raised in the additional ground has to be decided in favour of the assessee. Consequently, we direct the Assessing Officer to restrict the adjustments, if any only to the international transaction with AEs. Accordingly, additional ground is adjudicated in favour of the assessee. Accordingly, the additional ground is allowed. Capacity adjustment to the cost - HELD THAT - Therefore, rejecting the assessee s method for quantifying the capacity utilization adjustment to the tested party, we direct the Assessing Officer to follow the judgement of the Jurisdictional High Court in the case of Petro Araldite (P.) Ltd. 2018 (6) TMI 452 - BOMBAY HIGH COURT . 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.

Summary

Issues Involved:
1. Selection of Comparable Company (BEML Limited)
2. Allocation of Expenses Between Trading and Manufacturing Segments
3. Transfer Pricing Adjustment to International Transactions
4. Capacity Adjustment to Cost

Issue-wise Detailed Analysis:

1. Selection of Comparable Company (BEML Limited):
The assessee contested the inclusion of Bharat Earth Movers Ltd. (BEML) as a comparable company for the financial year 2008-09. The assessee argued that BEML's functions were not comparable due to its diverse product range and significant government shareholding, which influenced its profit margins. The Tribunal found that government companies operate in a different controlled environment with distinct customers, suppliers, and profit margins. Consequently, BEML was not considered a good comparable. The Tribunal relied on the decision in M/s. Behr India Ltd. vs. ACIT, which excluded government companies from the list of comparables. Therefore, the Tribunal reversed the lower authorities' decisions and allowed the assessee's ground.

2. Allocation of Expenses Between Trading and Manufacturing Segments:
The assessee challenged the ad-hoc shifting of ?10 crores from the trading segment to the manufacturing segment. The Tribunal noted that the Assessing Officer/TPO questioned the credibility of the Chartered Accountant's certificate on expense allocation and found the sales ratio method unreliable. The Tribunal directed the Assessing Officer to scrutinize each expenditure account and analyze the nexus of expenses to the trading and manufacturing segments. The issue was remanded to the Assessing Officer for fresh examination, with instructions to pass a speaking order on the appropriateness of the sales ratio method.

3. Transfer Pricing Adjustment to International Transactions:
The assessee raised an additional ground, arguing that transfer pricing adjustments should be limited to international transactions with Associated Enterprises (AEs) and not the entire turnover. The Tribunal agreed, citing the jurisdictional High Court judgment in CIT vs. Firestone International (P.) Ltd., which held that adjustments should be restricted to transactions with AEs. The Tribunal directed the Assessing Officer to make adjustments only to the value of international transactions, allowing the additional ground in favor of the assessee.

4. Capacity Adjustment to Cost:
The Revenue appealed against the CIT(A)'s direction to make capacity adjustments to the cost. The Tribunal referred to the judgment in CIT vs. Petro Araldite (P.) Ltd., which provided a method for capacity utilization adjustment. The Tribunal rejected the assessee's method and directed the Assessing Officer to follow the precedent set by the jurisdictional High Court, making adjustments to the profit margins of comparables. The issue was remanded to the Assessing Officer for fresh examination, with instructions to grant a reasonable opportunity of being heard to the assessee.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the Revenue was partly allowed for statistical purposes. The Tribunal provided detailed directions on each issue, ensuring compliance with legal precedents and principles of natural justice.