2022 (12) TMI 201 - AT - Income Tax

TP adjustment - Comparability - Functional dissimilarity - functions of a manufacturer and assembler - HELD THAT - Assessee is mainly engaged in the assembling of Hydraulic accessories. From the table furnished above, we noticed that Asco (India) Ltd. is fullfledged manufacturer and it manufactures Solenoid Valves involving high technology and it constitute 74% of the turnover. This is evident from the fact that the average selling price of Solenoid Valves manufactured by Asco (India) Ltd. is Rs. 4,492/- per piece, while selling price of product assembled by the assessee ranges from Rs. 288/- to Rs. 1802/- per piece. Asco (India) Ltd. has got a technical collaboration for manufacture of valves and accordingly owned intellectual property right therein. Hence there is wide difference in the functions of a manufacturer and assembler. It is further stated that the assessee s hydraulic products used fluids for movement of parts of a system. M/s Asco (India) Ltd. manufacturers Nuematic products which use Air as a medium for movement of parts of a system. Thus we are of the view that Asco (India) Ltd. could not be functionally comparable with the assessee and hence it cannot be considered as comparable company in the hands of the assessee. Accordingly, we direct the Assessing Officer/TPO to exclude Asco (India) Ltd. from the list of comparable companies and rework arm s length price accordingly. Appeal filed by the assessee is treated as allowed.

Summary

Issues:
Transfer pricing adjustment based on selection of comparable companies.

Analysis:
The appeal challenges the order confirming a transfer pricing adjustment of Rs.2,15,41,666/- for A.Y. 2008-09. The assessee, a subsidiary of a German company, is engaged in manufacturing hydraulic accessories and components in Mumbai. Initially, the assessee did not select comparable companies due to its unique business nature. However, during proceedings, it provided seven comparable companies, of which four were accepted by the Assessing Officer. The TPO used the TNMM method, comparing the mean margin of these companies (17.82%) with the assessee's margin (13.56%), resulting in the proposed adjustment. The CIT(A) upheld this decision, leading to the current appeal.

During the hearing, the AR pressed for the exclusion of Asco (India) Ltd. as a comparable company. The AR argued major differences in functions, assets, and risks between the assessee and Asco (India) Ltd. The AR highlighted various disparities, including the nature of manufacturing, product range, technical collaborations, intellectual property rights, and investments in new products. The Departmental Representative, however, contended that broad comparability suffices for transfer pricing studies, opposing the exclusion of Asco (India) Ltd.

Upon review, it was observed that the assessee primarily engages in assembling hydraulic accessories, with manufacturing contributing only 2.27% to turnover. In contrast, Asco (India) Ltd. is a full-fledged manufacturer specializing in high-tech Solenoid Valves, constituting 74% of its turnover. The significant differences in functions, products, intellectual property rights, and asset utilization between the two companies led to the conclusion that Asco (India) Ltd. cannot be considered functionally comparable with the assessee. Consequently, the Tribunal directed the exclusion of Asco (India) Ltd. from the list of comparable companies, instructing the AO/TPO to rework the arm's length price accordingly.

In conclusion, the appeal was allowed, emphasizing the importance of functional comparability in transfer pricing analyses. The judgment underscores the necessity of considering detailed functional dissimilarities between companies to ensure a fair and accurate determination of transfer pricing adjustments.