2022 (3) TMI 1133 - AT - Income Tax

TP Adjustment - comparability - HELD THAT - Companies functionally dissimilar with that of assessee funnctions need to be deslected. MAT computation u/s 115JB - HELD THAT - Provision for bonus as well as provision for long term service are both ascertained liability and cannot be added to book profit under section 115JB. Determination of ALP in respect of international transaction of textile machinery manufacturing segment and auto components manufacturing segment - HELD THAT - The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm s length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. Transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. Adoption of PLI - HELD THAT - We direct the TPO to adopt PLI as OP/Sales. The TPO is directed to compute the ALP in accordance with the directions contained in this order, after affording opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Determination of Profit Level Indicator (PLI) for both textile machinery and auto components manufacturing segments.
2. Comparability of Hindoostan Mills Ltd. and Laxmi Machine Works Ltd.
3. Restriction of Transfer Pricing (TP) adjustment to transactions with Associated Enterprises (AEs).
4. Deduction of Education Cess and Secondary and Higher Education Cess.
5. Disallowance of provisions for gratuity, long service award, and bonus while computing 'book profits' under section 115JB of the Income Tax Act, 1961.

Detailed Analysis:

1. Determination of Profit Level Indicator (PLI):
The assessee argued that the PLI should be operating profit on sales (OP/Sales) instead of operating profit on total cost (OP/TC). The Tribunal referred to its decision in the assessee's own case for AY 2010-11, where it was directed that PLI should be adopted as OP/Sales. The Tribunal reiterated this stance, directing the AO/TPO to adopt OP/Sales for comparing the assessee’s margin in both segments.

2. Comparability of Hindoostan Mills Ltd. and Laxmi Machine Works Ltd.:
The Tribunal addressed the assessee's objection to the inclusion of Hindoostan Mills Ltd. as a comparable company, noting that Hindoostan Mills Ltd. is engaged in the manufacture of textiles, which is functionally dissimilar to the assessee's textile machinery manufacturing segment. The Tribunal directed the TPO/AO to reconsider the comparability of Hindoostan Mills Ltd. The Tribunal also directed the TPO/AO to re-examine the comparability and margin computation of Laxmi Machine Works Ltd.

3. Restriction of Transfer Pricing (TP) Adjustment:
The Tribunal upheld the assessee's plea that TP adjustments should be restricted to transactions with AEs. It cited the DRP's directions for AY 2010-11 and various judicial precedents, including decisions from the Hon'ble Bombay High Court and ITAT Bangalore, which supported the restriction of TP adjustments to AE-related transactions only. The Tribunal directed the AO/TPO to recalculate the adjustment by excluding non-AE transactions.

4. Deduction of Education Cess and Secondary and Higher Education Cess:
The Tribunal dismissed the additional ground raised by the assessee regarding the deduction of education cess and secondary and higher education cess under section 37(1) of the Act. It referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. K. Srinivasan, which held that surcharge and additional surcharge are part of income-tax, thus disallowing the deduction of education cess.

5. Disallowance of Provisions for Gratuity, Long Service Award, and Bonus:
The Tribunal addressed the assessee's contention regarding the disallowance of provisions for gratuity, long service award, and bonus while computing 'book profits' under section 115JB. It held that provisions for bonus and long service award are ascertained liabilities and cannot be added to book profit under section 115JB. The Tribunal directed the AO/TPO to exclude these provisions from the computation of book profit.

Conclusion:
The appeals by the assessee were partly allowed. The Tribunal directed the AO/TPO to adopt OP/Sales as the PLI, reconsider the comparability of Hindoostan Mills Ltd. and Laxmi Machine Works Ltd., restrict TP adjustments to AE-related transactions, and exclude provisions for bonus and long service award from the computation of book profit under section 115JB. The additional ground regarding the deduction of education cess was dismissed.