2018 (7) TMI 2351 - AT - Income Tax

TP Adjustment - Determination of operating revenue - DRP by ratifying the decision taken by TPO also considered foreign exchange gain as non-operating by applying the Safe Harbour Rules - HELD THAT - We are of the considered view that in order to compute the operating margin of the taxpayer, foreign exchange gain is to be considered as part of operating income for computing the operating margin of taxpayer as well as comparable companies. So, Ground No. 2 is determined in favour of the taxpayer. Computation of margins of comparable companies - compute the margin of the company considered as comparable by the taxpayer for the purpose of TNMM - When there are apparent discrepancies in the margin in OP/Sales computed by TPO as well as taxpayer, the TPO is directed to verify the margin and to reconsider the same to bring on record the correct margin of the aforesaid comparable companies. So, Ground as determined in favour of the taxpayer for statistical purposes. Selection of comparable companies - ANG Industries Ltd. be excluded as comparable on the ground that the same is engaged in diversified activities and segmental reporting is not available. So, in these circumstances, we find ANG chosen by the TPO/DRP not a valid comparable. Elofic is not a valid comparable keeping in view the diversified market of Elofic and failing the export income to total sales filter. WABCO's provision of catering to after market segment and carrying out significant R D activities benefiting the company makes it incomparable to the taxpayer which is a routine manufacturer. So, we order to exclude WABCO. DRP not providing adjustment on account of high depreciation to the total cost in the case of the taxpayer - Keeping in view the fact that in taxpayer s own case for AY 2009-10, difference in capacity in which the taxpayer is operating and the capacity in which comparable companies are operating were recognised, we are of the considered view that the issue is required to be sent back to the TPO to decide in the light of the revenue s own order in taxpayer s own case for AY 2009-10 and in view of the decisions rendered by the coordinate Benches of the Tribunal (supra). Ground determined in favour of the taxpayer for statistical purposes. DRP not considering cash profits for the purpose of TNMM in order to provide for excessive depreciation in case of the taxpayer vis- -vis comparable companies - When the taxpayer has brought on record the complete analysis of cash profits earned by the taxpayer to be compared with complete analysis of cash profit earned by the comparable companies extracted in the preceding paras, we are of the considered view that the issue is required to be decided afresh by the TPO in the light of the decision rendered in ACIT vs. Gates India (P) Ltd. 2017 (8) TMI 282 - ITAT DELHI and Schefenacker Motherson Ltd. 2009 (6) TMI 125 - ITAT DELHI - So, ground is allowed for statistical purposes.

Summary

Issues Involved:

1. Addition to the total income due to adjustment in the Arm's Length Price (ALP) of international transactions.
2. Consideration of foreign exchange gain as part of operating income.
3. Computation of margins of comparable companies.
4. Selection of comparable companies based on export turnover filter and diversified operations.
5. Adjustment for high depreciation in the total cost.
6. Consideration of cash profits for the purpose of Transactional Net Margin Method (TNMM).
7. Adducing additional evidence in support of the grounds raised.

Issue-wise Detailed Analysis:

1. ALP Adjustment:

The taxpayer challenged the addition of Rs. 19,357,801 to the total income on account of ALP adjustment of international transactions. The Transfer Pricing Officer (TPO) initially proposed an enhancement of Rs. 4,19,64,587, which was later rectified to Rs. 2,21,29,016. The taxpayer's margin was compared to an average margin of 8.56% from selected comparables, leading to the proposed adjustment.

2. Foreign Exchange Gain:

The taxpayer argued that foreign exchange gain should be considered part of operating income while computing operating margins. The TPO and Dispute Resolution Panel (DRP) treated it as non-operating, applying Safe Harbour Rules. However, the taxpayer cited Delhi High Court decisions in Cash Edge India Pvt. Ltd. and Fiserv India Pvt. Ltd., which ruled in favor of treating foreign exchange gain as operating income for the relevant assessment year. The Tribunal agreed with the taxpayer, emphasizing the need for consistency and legal precedent.

3. Computation of Margins:

The taxpayer disputed the margin computation of comparable companies, highlighting discrepancies in the TPO's calculations. The Tribunal directed the TPO to verify and reconsider the margins to ensure accuracy, thus determining this issue in favor of the taxpayer for statistical purposes.

4. Comparable Companies Selection:

The taxpayer sought exclusion of certain companies (ANG Industries Ltd., Elofic Industries Ltd., Wabco- JVS (India) Ltd., and Brakes India) based on export turnover and diversified operations. The Tribunal found that these companies, with significant export sales and diversified operations, were not comparable to the taxpayer, which had minimal export sales and a focused market. The Tribunal ordered their exclusion, aligning with previous Tribunal decisions emphasizing geographical and operational comparability.

5. High Depreciation Adjustment:

The taxpayer contended that high depreciation should be adjusted in the total cost due to being in the second year of production. The Tribunal recognized the difference in capacity utilization between the taxpayer and comparables, directing the TPO to reconsider the issue in light of the taxpayer's own case for the previous assessment year and relevant Tribunal decisions.

6. Consideration of Cash Profits:

The taxpayer argued for the consideration of cash profits instead of net operating profit under TNMM, citing excessive depreciation. The Tribunal referred to previous decisions allowing cash profits in exceptional circumstances and directed the TPO to reassess the issue, considering the taxpayer's detailed analysis of cash profits.

7. Additional Evidence:

The taxpayer sought the opportunity to present additional evidence in support of the grounds raised. The Tribunal did not specifically adjudicate this issue, as it was general in nature.

Conclusion:

The appeal was allowed for statistical purposes, with the Tribunal directing the TPO to reassess several issues, including the computation of margins, exclusion of certain comparables, and adjustments for depreciation and cash profits, in accordance with legal precedents and the taxpayer's arguments.