2022 (8) TMI 198 - AT - Income Tax

TP Adjustment - Comparable selection - Revenue is aggrieved by the inclusion of Gorani Industries Limited (GIL) in the list of comparable - HELD THAT - In view of the fact that the Trading revenue in the case of GIL is more than double of the assessee and only the consolidated figures are meant to be compared we hold that Gorani Industries Limited cannot be considered as comparable. The obvious reason is that the profit margin widely varies in a Manufacturing model of activity vis- -vis the Trading model. In view of such an extensive fluctuation in the Trading and Manufacturing revenue streams of the two companies we hold that GIL cannot be considered as comparable. The impugned order is overturned to this extent and this company is directed to be excluded from the list of comparables. Inclusion of Butterfly Gandhimathi Appliances Limited (BGAL) in the list of comparables - It can be seen from the above that GAL merged with BGAL and the transactions of assets and liabilities etc. of GIL have been incorporated in the books of BGAL as on 31-03-2012 which is relevant to the assessment year under consideration. In view of the fact that the figures of this company for the year are influenced by the merger taking place we hold that the extraordinary financial event makes it incomparable. We therefore order to exclude this company from the list of comparables. Proportionate adjustment - restricting the transfer pricing adjustment to the extent of international transactions rather than the entity level is no more res integra in view of several judgments rendered by various higher forums including 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 should be restricted only to the international transactions and not the entity level transactions. The Hon ble High Court in has held that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. Here it is pertinent to mention that the Department s SLP against the judgment in the case of Phoenix Mecano (India) Pvt. Ltd. has since been dismissed by the Hon ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. 2018 (7) TMI 798 - SC ORDER Also see CIT Vs. Thyssen Krupp Industries Pvt. Ltd. 2015 (12) TMI 1076 - BOMBAY HIGH COURT and CIT Vs. Tara Jewels Exports (P). Ltd. 2015 (12) TMI 1130 - BOMBAY HIGH COURT . We therefore set aside the impugned order on this score and direct that the transfer pricing adjustment should be restricted only to the extent of the international transactions. The impugned order on the issue of transfer pricing adjustment of the international transactions of Purchase of Raw Material Purchase of traded goods and Sale of finished goods is set aside and the matter is remitted to the file of the AO/TPO for a fresh determination in the terms indicated above. Needless to say the assessee will be allowed reasonable opportunity of hearing in such fresh proceedings.

Summary

Issues:
1. Time bar for filing Cross Objection due to Covid pandemic.
2. Inclusion of Gorani Industries Limited in the list of comparables.
3. Inclusion of Butterfly Gandhimathi Appliances Limited in the list of comparables.
4. Proportionate adjustment in transfer pricing.

Issue 1: Time bar for filing Cross Objection due to Covid pandemic
The Cross Objection was filed 14 days late, citing the Covid pandemic as the reason for the delay. The Tribunal accepted the reason, referring to the Supreme Court's cognizance of the challenges faced by litigants due to Covid-19 and extended the time limit for filing appeals. Consequently, the delay was condoned, and the Cross Objection was admitted for disposal on merits.

Issue 2: Inclusion of Gorani Industries Limited in the list of comparables
The dispute arose from the inclusion of Gorani Industries Limited (GIL) in the list of comparables for determining the Arm's Length Price (ALP) of international transactions. The Tribunal analyzed the revenue streams of the companies and concluded that GIL, with a significantly different revenue mix compared to the assessee, could not be considered comparable. Therefore, the Tribunal directed the exclusion of GIL from the list of comparables.

Issue 3: Inclusion of Butterfly Gandhimathi Appliances Limited in the list of comparables
The Tribunal examined the merger of Gangadharam Appliances Limited with Butterfly Gandhimathi Appliances Limited (BGAL) and found that the financial figures of BGAL for the relevant assessment year were influenced by the merger, making it incomparable. Consequently, the Tribunal ordered the exclusion of BGAL from the list of comparables.

Issue 4: Proportionate adjustment in transfer pricing
Regarding the proportionate adjustment in transfer pricing, the Tribunal referred to previous judgments, including those of the jurisdictional High Court, emphasizing that the adjustment should be restricted to international transactions and not entity-level transactions. Citing relevant case laws, the Tribunal set aside the previous order and directed that the transfer pricing adjustment should be limited to the extent of international transactions only.

In conclusion, the Tribunal allowed the appeal of the Revenue and partly allowed the cross objection of the assessee. The matter of transfer pricing adjustment was remitted to the Assessing Officer/Transfer Pricing Officer for a fresh determination following the directives provided in the judgment. The assessee was granted a reasonable opportunity of hearing in the fresh proceedings.