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2021 (6) TMI 136 - AT - Income TaxTP Adjustment - computation of the ALP on the basis of entity level data taken by the TPO as against the assessee s plea for taking segmental level data - TPO refused to accept the companies with the financial data of the preceding year and stuck to the comparables companies with the financials concerning the current year only - AR argued for inclusion of Madhur Industries Limited in the list of comparables - HELD THAT - When the turnover filter has been accepted by the TPO, in our considered opinion, a mere higher turnover, but within the permissible filter, cannot be a valid reason for its exclusion. Another reason advanced by the DRP is that the business of this entity is not correctly spelt out or legible . On a pointed query, the ld. AR could not point out the nature of business carried on by this company from the Annual report to merit its inclusion or otherwise in the list of comparables. It is just elementary that a company must be functionally similar in order to qualify for inclusion. All other filters come afterwards only when the functional similarity is established. We overturn the impugned order on the exclusion of this company and direct the AO/TPO to re-decide the issue afresh. As it is a comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company in addition to other filters. If the assessee succeeds in doing so, the TPO will include it in the list of comparables and vice-versa. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. Treatment of export incentives as non-operating - assessee treated export incentive under RTSF segment as operating revenue - TPO abrogated the assessee s contention and treated the same as non-operating - HELD THAT - DRP went on to discuss some subsidy issue for setting up of industry in backward area and held that such subsidy was definitely not related to operations of the assessee, as the same was a type of financial assistance to tide over the crisis during initial period of operations in the industry and eventually agreed with the analysis made by the TPO and came to hold it to be in the nature of an extraordinary income. Firstly, the issue before the DRP was export incentive and not any subsidy. Secondly, it is not any initial period of operations of the assessee as taken note of by the DRP. It appears that the DRP mixed up the facts of some other case, which eventually resulted in miscarriage of justice. Thus we are of the considered opinion that the amount of export incentives is liable to be considered as part of operating revenue. The assessee succeeds to this extent. Granting proportionate adjustment - TPO rejected the assessee s segmental level benchmarking and went ahead with the entity level approach - HELD THAT - This issue is fairly settled by a judgment of the Hon ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd 2017 (6) TMI 1240 - BOMBAY HIGH COURT holding that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. We, ergo, direct to restrict the transfer pricing addition only to the extent of international transactions in this segment. Non granting working capital adjustment - HELD THAT - DRP directed the AO/TPO to allow working capital adjustment after verification. While giving effect to the directions of the DRP, the AO failed to give effect to the same - There is no manner of doubt that the direction given by the DRP is binding on the AO who has to necessarily pass the assessment order in conformity with the directions. This is amply clear from the language of section 144C(13) of the Act AO has not only failed to follow the direction given by the DRP in this regard but is still sitting over the rectification application filed by the assessee for over two and half years. Such an approach needs to be corrected. In such circumstances, we direct the AO/TPO to grant working capital adjustment to the assessee as per the methodology suggested by the DRP, against which the assessee is not aggrieved, in principle - we set-aside the impugned order and remit the matter to the file of AO/TPO for re-determining the Arm s Length Price of the international transactions of RTSF segment. Education cess paid - Allowable deductible expense which is not covered under the u/s 40(a)(ii) - HELD THAT - The issue raised through the additional ground is no more res integra in view of the judgment of Hon ble jurisdictional High Court in Sesa Goa Lt. 2020 (3) TMI 347 - BOMBAY HIGH COURT in which it has been held that Education Cess is not disallowable expenditure u/s.40(a)(ii) of the Act. Similar view was earlier taken by the Hon ble Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd. and Another 2018 (10) TMI 589 - RAJASTHAN HIGH COURT . We, therefore, direct the AO to ascertain the correct amount of education cess and then allow a deduction for it, after allowing opportunity of hearing to the assessee.
Issues Involved:
1. Computation of Arm's Length Price (ALP) using entity level data vs. segmental level data. 2. Inclusion of Madhur Industries Limited in the list of comparables. 3. Treatment of export incentives as operating or non-operating revenue. 4. Granting proportionate adjustment for transfer pricing additions. 5. Granting working capital adjustment. 6. Deductibility of education cess as an expense. Issue-wise Detailed Analysis: 1. Computation of ALP Using Entity Level Data vs. Segmental Level Data: The primary issue was whether the ALP should be computed using entity level data, as determined by the Transfer Pricing Officer (TPO), or segmental level data, as claimed by the assessee. The assessee's segmental income statement was rejected by the TPO due to vague and unreliable cost allocations. The Tribunal upheld the TPO's approach, noting that the assessee could not substantiate a rational allocation of costs to the Ready to Serve Food (RTSF) segment. Consequently, the authorities were justified in using the combined accounts approach for ALP determination. 2. Inclusion of Madhur Industries Limited in the List of Comparables: The assessee argued for the inclusion of Madhur Industries Limited as a comparable company. The TPO and the Dispute Resolution Panel (DRP) excluded this company due to its higher turnover and unclear business profile. The Tribunal noted that the turnover filter adopted by the assessee allowed for higher turnover within permissible limits and that the functional similarity of the company was not established. The Tribunal directed the AO/TPO to re-examine the inclusion of Madhur Industries Limited, giving the assessee an opportunity to prove its functional comparability. 3. Treatment of Export Incentives as Operating or Non-Operating Revenue: The assessee treated export incentives as operating revenue, while the TPO considered them non-operating. The Tribunal highlighted that export incentives are integral to export revenue, as they are intended to make Indian exporters competitive. The DRP's departure from its earlier stance of considering export incentives as operating revenue was not justified. The Tribunal directed that export incentives should be treated as part of operating revenue, aligning with previous Tribunal decisions and the Government's intent behind such incentives. 4. Granting Proportionate Adjustment for Transfer Pricing Additions: The assessee contended that the transfer pricing adjustment should be restricted to the extent of international transactions. The Tribunal referenced the jurisdictional High Court's judgment in CIT Vs. Phoenix Mecano (India) Pvt. Ltd., which held that transfer pricing adjustments should be limited to international transactions. The Tribunal directed the AO/TPO to restrict the transfer pricing addition accordingly. 5. Granting Working Capital Adjustment: The DRP had directed the AO/TPO to allow working capital adjustment after verification, but the AO failed to implement this direction. The Tribunal emphasized that the DRP's directions are binding and must be followed. The Tribunal directed the AO/TPO to grant the working capital adjustment as per the DRP's methodology, ensuring compliance with the directions. 6. Deductibility of Education Cess as an Expense: The assessee raised an additional ground regarding the deductibility of education cess. The Tribunal admitted this ground, referencing the Supreme Court's decision in National Thermal Power Company Ltd. Vs. CIT, which allows raising new legal questions if relevant facts are on record. The Tribunal cited the jurisdictional High Court's judgment in Sesa Goa Ltd. Vs. JCIT, which held that education cess is not disallowable under section 40(a)(ii) of the Act. The Tribunal directed the AO to ascertain the correct amount of education cess and allow it as a deductible expense. Conclusion: The appeal was partly allowed, with the Tribunal directing the AO/TPO to re-determine the ALP of the international transactions in the RTSF segment, include export incentives as operating revenue, restrict transfer pricing adjustments to international transactions, grant working capital adjustment, and allow the deduction of education cess. The Tribunal emphasized the need for compliance with DRP directions and provided the assessee with opportunities to substantiate its claims.
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