2024 (12) TMI 483 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - A certificate by a chartered engineer certifies that switch mode power supply (SMPS) is an electronic product and not an electrical product as electrical systems deal with the flow of electrical power of charge, while electronic systems deal with the flow of electrons. Electrical devices convert electrical energy into other forms, such as heat, light, or sound, to perform tasks. Electronic devices control the flow of electrons to perform tasks like calculations or amplifications. Hence, SMPS is an electronic product. In general understanding, electronic products are different from electrical products and since we are no technical experts in this domain, we cannot say with certainty about the comparables used by the TPO as to whether, they deal with electronic products or electrical products because that is the prerogative of a technical expert. However, we are of the considered view that the entire controversy would be set at rest if both the parties to this lis bring in their respective comparables which deal in electronic products only. Once there is a level playing field, the determination of the ALP would become easier. We are of the considered view that apples cannot be compared with oranges, though, both are fruits and are kept in the same fruit basket but are totally different from each other. Therefore, in the interest of justice and fair play, we deem it fit to restore the controversy to the file of the TPO. The TPO is directed to bring comparables on record which deal in electronic products supported by the certificate of some technical experts. Since the assessee is a 100% EOU, it would be proper to apply filter of export turnover of more than 75% of the total turnover and further related party transactions (RPT) should be less than 25%. The assessee is also free to bring fresh comparables in line with its business to justify its determination of ALP keeping in mind the filters mentioned hereinabove. Since the representatives of both sides fairly agreed on the aforementioned proposition also made during the course of hearing of the appeals, this issue is restored back to the file of the TPO with the above directions. Hence the grounds raised on this issue are allowed for statistical purposes. Denial of claim of capacity utilization which we direct the TPO to consider while determining the ALP. Addition u/s 40A(a) - Payment in cash payments made in excess of Rs. 20,000/- which needs further verification. Therefore, the AO is directed to examine the issue after affording reasonable and adequate opportunity of being her to the assessee. Since the facts of the captioned appeals are identical, all the appeals are allowed for statistical purposes with the above directions.

Summary

Issues Involved:

1. Transfer Pricing Adjustments
2. Selection of Comparables
3. Capacity Utilization Claim
4. Disallowance under Section 40A(a)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:

The primary issue revolves around the confirmation of a transfer pricing adjustment amounting to Rs. 11,80,30,504/- under section 92CA(3) of the Income Tax Act. The appellant contested that the adjustment was based on extraneous and irrelevant considerations. The Tribunal noted that the Transfer Pricing Officer (TPO) did not accept the margin workings provided by the assessee and instead re-computed the same. The TPO selected comparables that the assessee argued were not functionally comparable, as they were electrical companies, whereas the assessee dealt in electronic products. The Tribunal highlighted the importance of selecting comparables from the same line of business, emphasizing that electronic products differ from electrical products.

2. Selection of Comparables:

The Tribunal addressed the selection of comparables, noting that the TPO rejected the comparables proposed by the assessee, such as Cosmos Ferrite and Aplab Ltd., on the grounds of not meeting the export turnover filter of more than 75%. The Tribunal stressed that the comparables used by the TPO should be in line with the business of the assessee, which is manufacturing electronic products. The Tribunal directed the TPO to bring comparables on record that deal exclusively in electronic products, supported by expert certification, and allowed the assessee to propose fresh comparables in line with its business.

3. Capacity Utilization Claim:

The Tribunal recognized the appellant's claim regarding capacity utilization, which had not been adjudicated by the CIT(A). The Tribunal directed the TPO to consider this claim while determining the Arm's Length Price (ALP), acknowledging its potential impact on the financial metrics used for transfer pricing purposes.

4. Disallowance under Section 40A(a):

The Tribunal addressed the disallowance of Rs. 2,08,825/- under Section 40A(a) for cash payments exceeding Rs. 20,000/-. The appellant argued that these payments were made out of business compulsions. The Tribunal directed the Assessing Officer (AO) to verify the necessity of these payments, providing the assessee an opportunity to justify the business exigencies that warranted such payments.

Conclusion:

The Tribunal restored the issues related to transfer pricing adjustments and selection of comparables to the file of the TPO with directions to ensure the comparables are functionally similar to the assessee's business of electronic products. The Tribunal also directed the TPO to consider the capacity utilization claim and instructed the AO to verify the cash payments under Section 40A(a). Consequently, the appeals were allowed for statistical purposes, providing the assessee an opportunity to substantiate its claims with appropriate evidence and comparables.