2021 (10) TMI 955 - AT - Income Tax

TP Adjustment - Comparable selection - grievances of the assessee that the appellant ought not to be considered as tested party, comparables selected by the TPO who are functionally different from the assessee having different business module and not granting the appellant the option to choose a price that falls within the 5% range of arithmetic mean of comparables as contemplated under proviso of section 92C(2) - HELD THAT - Merit in contention of assessee that Comparables selected by the TPO are functionally different on account of the fact that the assessee did not have its own manufacturing facility, the business model of the assessee is quite different coupled with fact that the appellant is operating only in domestic market whereas the comparables namely Rane (Madras) Limited and Gabriel India Ltd. had sufficient export turnover. We are conscious of the fact that two companies cannot be compared with accurate arithmetic precision; however, the factors that would influence the profit margin substantially should be kept in mind while rejecting the comparables. In the present case, this is first year of operation; the appellant does not have its own manufacturing facilities and is purely operating in domestic market. In our considered view, these factors certainly would have substantially impact on the profit margin of the assessee. Therefore, findings of the authorities below cannot be sustained under the facts and circumstances of the present case. The impugned order is therefore hereby set-aside and the issue of computation of Arm's Length Price is restored to the file of the Assessing Officer. The Assessing Officer would refer the matter to the TPO for making search for fresh set of comparables, who accordingly, recommend the computation of Arm's Length Price afresh. The grounds raised by the assessee are allowed for statistical purpose only.

Issues Involved:

1. Adjustment in Arm's Length Price (ALP) of international transactions.
2. Selection of the appellant as the tested party.
3. Rejection of foreign Associated Enterprises (AEs) as the tested party.
4. Selection of comparable companies by the CIT(A).
5. Computation of operating margin of the appellant.
6. Rejection of fresh search proposed by the appellant.
7. Consideration of initial years of operation in loss computation.
8. Granting the option to choose a price within +/- 5% range of the arithmetic mean of comparables.
9. Adducing additional evidence.

Issue-wise Detailed Analysis:

1. Adjustment in Arm's Length Price (ALP) of International Transactions:

The appellant challenged the CIT(A)'s addition to the total income due to adjustments in the ALP of international transactions, specifically for the import of materials, receipt of engineering support services, and administrative support services. The appellant argued that the adjustments were unjustified, as the transactions were conducted at arm's length.

2. Selection of the Appellant as the Tested Party:

The appellant contended that the CIT(A) erred in considering it as the tested party, arguing that it performed simpler functions and was the least complex entity. The appellant claimed dependence on the intangibles of its AEs, making it unsuitable as the tested party. The CIT(A) rejected this argument, stating that the appellant was not performing simpler functions compared to its AEs and that the AEs' data was not verifiable.

3. Rejection of Foreign AEs as the Tested Party:

The CIT(A) rejected the appellant's AEs as the tested party, citing the lack of complete and reliable data for benchmarking the international transactions. The appellant argued that the AEs were the least complex entities and should have been considered the tested party. The CIT(A) upheld the TPO's decision to select the appellant as the tested party due to the unavailability of verifiable data for the AEs.

4. Selection of Comparable Companies by the CIT(A):

The appellant argued that the comparable companies selected by the TPO were functionally different and involved in full-fledged in-house manufacturing, while the appellant outsourced its manufacturing. The CIT(A) rejected this argument, stating that the comparables were in the business of manufacturing auto components and that the use of contract manufacturing did not significantly alter profitability. The Tribunal found merit in the appellant's contention, noting the differences in business models and market operations, and directed the TPO to search for a fresh set of comparables.

5. Computation of Operating Margin of the Appellant:

The appellant contended that the CIT(A) erred in computing the operating margin by considering foreign exchange gain as non-operating income. The Tribunal did not specifically address this issue in the judgment, but it was part of the overall contention regarding the selection of comparables and the computation of ALP.

6. Rejection of Fresh Search Proposed by the Appellant:

The appellant argued that the CIT(A) erred in rejecting the fresh search proposed by the appellant for comparables. The Tribunal directed the TPO to conduct a fresh search for comparables, taking into account the appellant's business model and market operations.

7. Consideration of Initial Years of Operation in Loss Computation:

The appellant claimed that its loss was due to the initial years of operation and not due to international transactions. The CIT(A) rejected this argument, but the Tribunal found that the initial years of operation and the lack of manufacturing facilities would impact the profit margin. The Tribunal directed the TPO to consider these factors in the fresh computation of ALP.

8. Granting the Option to Choose a Price within +/- 5% Range of the Arithmetic Mean of Comparables:

The appellant argued that it should be granted the option to choose a price within the +/- 5% range of the arithmetic mean of comparables as per the proviso to section 92C(2) of the Act. The Tribunal did not specifically address this issue in the judgment, but it was part of the overall contention regarding the selection of comparables and the computation of ALP.

9. Adducing Additional Evidence:

The appellant's prayer for adducing additional evidence was dismissed as no such prayer was made during the hearing.

Conclusion:

The Tribunal found merit in the appellant's contentions regarding the selection of comparables and the impact of the business model and market operations on the profit margin. The Tribunal set aside the impugned order and directed the TPO to conduct a fresh search for comparables and recompute the ALP, considering the appellant's business model and market operations. The appeal was partly allowed for statistical purposes.

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