2021 (7) TMI 711 - AT - Income Tax

Adjustment towards foreign exchange fluctuation - non-consideration of impact of abnormal movement in the foreign exchange rates while computing the operating profit margin - HELD THAT - The assessee is claiming reduction in the profit margin of the comparables on the ground that the foreign exchange fluctuation rate varied at 13.54% in this year in comparison with the preceding year. We fail to appreciate as to what is the rationale of comparing the foreign exchange rate for this year with the preceding year when the transactions of the assessee and those of the comparables relate only to the year in question. The foreign exchange rate fluctuation has impacted the assessee in the same way as the comparables. That can't be a reason for allowing any adjustment in the profit margin of the comparables. Adverting to the facts of the instant case, it is seen that the assessee treated foreign exchange fluctuation loss as non-operating and thus computed its operating margin accordingly. Such treatment has been accepted by the TPO also. Once the forex loss has itself been treated and accepted as non-operating for self and the comparables, the same become neutral qua the computation of operating margin, leaving no room for any further adjustment. We, therefore, reject the claim of the assessee. The ground fails. Adjustment towards excess Custom duty paid on imports by it vis- -vis the comparables - HELD THAT - There is no merit in the contention of the assessee. Ordinarily, costly purchases are coupled with the increased sale price of final products, thereby leaving the ultimate profit margin at almost the same level as that with cheap purchases. There can be no adjustment just for the assessee making more imports and consequently paying higher custom duty vis- -vis the comparables making indigenous purchases and paying no custom duty. It has not been shown that the import price of the assessee when added with custom duty was higher than the indigenous purchase price of the comparables or that the goods manufactured by it with such costly purchases were sold at same prices as the comparables. As admittedly, there is no difference in custom duty rate paid by the assessee and its comparables, there can be no question of allowing any reduction in the profit margins of comparables on this score simply because the assessee's percentage of import to total materials purchased is higher than that of the comparables. This ground is therefore, dismissed. Comparable selection - HELD THAT - Bharat Earth Movers Limited as functionally different and further it was a government company with fixed customer base thus be excluded as eligible comparable. JCB India Limited - We uphold the inclusion of JCB India Limited in the list of comparables. At the same time, the TPO is directed to carry out reasonably accurate adjustment to the margin of JCB India Ltd. so as to eliminate the effect of the amalgam of the a microscopic Trading sales and service income, after affording hearing opportunity to the assessee. AR argument stating that if, at all, JCB Ltd. was to be considered as comparable, then the assessee's Manufacturing and Trading activities should also be merged and only one ALP be determined on a consolidated basis - We are not convinced with this argument. The reason is that the assessee itself benchmarked both the segments separately by considering distinct comparables with varying margins. The TPO accepted the ALP under the Trading segment, thereby assigning finality to that. Now, the assessee cannot turn around at this juncture and claim clubbing of the two, which would entail the doing of the entire transfer pricing exercise all over again by the assessee (including preparing a new Transfer pricing study report with altogether new process of selecting comparables) and also the TPO doing everything ab initio. It is because of the difference in the precise nature of Manufacturing and Trading activities having different functions, assets and risks that we have directed hereinabove that suitable adjustment should be made to the profit margin of JCB Ltd. on account of the infusion of its proportionately infinitesimal Trading and Services activities in the Manufacturing activity. Inappropriate computation of working capital adjustment - HELD THAT - We set-aside the impugned order on this aspect and remit the matter to the file of AO/TPO for re-computing the working capital adjustment by adopting the correct figures. Transfer pricing adjustment on entity level rather than restricting it to the AE transactions - TPO computed the transfer pricing addition by considering revenues from 'Manufacturing segment' in totality at the entity level - HELD THAT - This issue is fairly settled by judgment of 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, therefore, direct the AO/TPO to restrict the transfer pricing addition to the extent of international transactions under the segment of 'Manufacturing activity'. Recomputation of losses to be carried forward in case resultant transfer pricing adjustment is less than voluntary adjustment offered in turn of income - Additional ground raised - HELD THAT - The additional ground raised by the assessee is for allowing adjustment towards voluntary transfer pricing addition offered by the assessee in the computation of total income. In this regard, we direct the TPO to allow necessary relief qua the suo motu transfer pricing adjustment offered by the assessee, if the resultant transfer pricing addition turns out to be more than that. The transfer pricing addition made in the impugned order under the Manufacturing activity segment is set aside and the matter is restored to the file of the AO/TPO for recomputing the same in accordance with the directions and observations given hereinabove.

Summary

Issues Involved:
1. Adjustment towards foreign exchange fluctuation.
2. Adjustment towards excess custom duty.
3. Inclusion of BEML and JCB India Limited as comparables.
4. Inappropriate computation of working capital adjustment.
5. Transfer pricing adjustment on entity level.
6. Re-computation of losses to be carried forward in case of resultant transfer pricing adjustment.

Issue-wise Detailed Analysis:

A. Adjustment Towards Foreign Exchange Fluctuation:

The assessee claimed a reduction in the profit margin of comparables due to a 13.54% fluctuation in foreign exchange rates. The Tribunal rejected this claim, stating that the foreign exchange rate fluctuation impacted both the assessee and the comparables similarly. Additionally, since the forex loss was treated as non-operating by both the assessee and the TPO, there was no room for further adjustment.

B. Adjustment Towards Excess Custom Duty:

The assessee sought an adjustment in the profit margin of comparables due to higher custom duty paid on imports. The Tribunal dismissed this claim, noting that the rate of custom duty was similar for both the assessee and the comparables. The Tribunal emphasized that higher imports and consequent higher custom duty alone do not justify an adjustment in profit margins.

C. Comparables:

I. Bharat Earth Movers Limited (BEML): The Tribunal directed the exclusion of BEML from the list of comparables, as it is a government company and profit motive is not a relevant consideration for government undertakings. This decision was consistent with previous Tribunal orders and upheld by higher courts.

II. JCB India Limited: The Tribunal upheld the inclusion of JCB India Limited in the list of comparables. It was noted that JCB India Limited's revenue from non-manufacturing activities was less than 1% of its total revenue, making it functionally similar to the assessee. The Tribunal directed the TPO to make a reasonable adjustment to JCB India Ltd.'s profit margin to eliminate the effect of its non-manufacturing activities.

D. Miscellaneous Issues:

1. Working Capital Adjustment: The Tribunal remitted the issue of working capital adjustment back to the AO/TPO for re-computation using correct figures, as the figures adopted by the TPO were in variance with the balance sheet.

2. Transfer Pricing Adjustment on Entity Level: The Tribunal directed that the transfer pricing adjustment should be restricted to international transactions under the 'Manufacturing activity' segment, in line with the judgment of the Hon'ble jurisdictional High Court and the Supreme Court.

3. Re-computation of Losses: The Tribunal admitted the additional ground raised by the assessee regarding the re-computation of losses to be carried forward in case the resultant transfer pricing adjustment is less than the voluntary adjustment offered. The TPO was directed to allow necessary relief accordingly.

Conclusion: The Tribunal set aside the transfer pricing addition made under the Manufacturing activity segment and remitted the matter to the AO/TPO for re-computation in accordance with the directions provided. The appeal was partly allowed.

Order pronounced in the Open Court on 29th June, 2021.