2024 (4) TMI 265 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Comparable companies in dispute namely, Roto Pumps and Simmonds Marshal Ltd. are engaged in totally dissimilar business and financials of such comparable companies selected by the TPO would give wholly incongruent results owing to overwhelming product dissimilarity. AO/TPO to our mind wrongly modified transfer pricing analysis of the assessee by wrongfully including these two companies with inherent dissimilarity. The CIT(A) has set right the glaring error committed by the AO/TPO. We thus see no reason to interfere with the finding of facts arrived at by the CIT(A). The grievances raised by the Revenue as per its grounds no.1 and 2 are thus devoid of any merit. Hence, we decline to interfere. Interest earned on fixed deposits as part of operating profit while calculating Profit Level Indicator (PLI) for the purposes of comparability analysis - HELD THAT - As assessee submits that once the comparables namely, Roto Pumps and Simmonds Marshall Ltd. are excluded for the purposes of comparability analysis and determination of ALP, nothing turns on grievances of the Revenue in present appeal emanating from alternative ground raised before the CIT(A). Revenue has not rebutted such observations on behalf of the assessee. Foreign exchange gain / loss as non-operating in nature while calculating the margins of the assessee-company as well as comparable companies for the purposes of determination of ALP - HELD THAT - As assessee pointed out on the similar footings that once the comparative analysis with reference to Roto Pumps and Simmonds Marshall Ltd. is set right are excluded, the adjudication of such grievance raised on behalf of the Revenue becomes inconsequential due to absence of any adverse impact on the interest of the Revenue.Revenue has again not rebutted such observation. Revenue appeal dismissed.

Summary

Issues:
The judgment involves issues related to transfer pricing adjustments made by the Assessing Officer (AO) under Section 143(3) r.w. Section 144C(3) of the Income Tax Act, 1961 for Assessment Year 2013-14. The key issues include the inclusion of certain companies as comparables for determining the arm's length price (ALP) of international transactions, treatment of interest earned on fixed deposits, and classification of foreign exchange gain/loss as operating or non-operating while calculating profit margins.

Inclusion of Comparables:
The Appellant challenged the inclusion of companies 'Roto Pumps Ltd.' and 'Simmonds Marshall Ltd.' as comparables by the Transfer Pricing Officer (TPO) and the AO due to product dissimilarity. The Appellant argued that the products manufactured by these companies were not functionally comparable to the Appellant's products, leading to incorrect transfer pricing analysis. The Commissioner of Income Tax (Appeals) (CIT(A)) found merit in this plea and excluded the comparables from the final set for determining the ALP. The Tribunal upheld the CIT(A)'s decision, noting the significant product dissimilarity that would result in incongruent financials.

Interest Earned on Fixed Deposits:
The Revenue challenged the CIT(A)'s decision to include interest earned on fixed deposits as part of operating profit while calculating the Profit Level Indicator (PLI) for comparability analysis. However, since the comparables in question were already excluded, the Tribunal deemed this ground of appeal as inconsequential and dismissed it as it did not impact the Revenue's interests.

Foreign Exchange Gain/Loss Treatment:
Another challenge by the Revenue was regarding the classification of foreign exchange gain/loss as non-operating while calculating margins for the Appellant and comparable companies. Similar to the previous issue, the Tribunal considered this challenge as immaterial in light of the exclusion of the contentious comparables. As it did not affect the Revenue's interests, this ground of appeal was summarily dismissed.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to exclude dissimilar comparables for determining the ALP. The challenges related to interest earned on fixed deposits and foreign exchange gain/loss were deemed inconsequential due to the exclusion of the comparables. The judgment was pronounced on 04/04/2024.