2024 (12) TMI 819 - AT - Income Tax

TP Adjustment - rejecting M/s. RRB Energy Ltd. as a comparable company and making adjustment on AE purchases on account of lower margin - commercial/extraordinary parameters influencing the business of the assessee for lower margin - HELD THAT - The assessee has challenged TPO adjustment as a downward adjustment on the AE purchases. A.O has taken two comparables i.e., Bellis India Ltd. @ 5.08% and Indo Wind Energy Ltd. (Segmental) @ 3.58% and arrived at average of net profit margin of 4.33% of comparables. AO has rejected the comparable of M/s. RRB Energy Ltd. taken by the assessee on the ground that the company is showing huge negative margin and the major portion of income is from services and there is a fluctuation in margin showing abnormal year of operation. AO computed the segmental margin of the assessee at 1.79% and compared with comparable margin of 4.33% and made adjustment of AE purchases. Assessee has objected exclusion of M/s. RRB Energy Ltd. from the comparable company and had sought proper adjustment under Rule 10B to account for the economic difference between the assessee and comparable companies. TPO and the DRP have dealt both the issues in their order and they have given reason for exclusion of M/s. RRB Energy Ltd. as a comparable company. TPO and Ld. DRP have also given reason for not giving custom duty adjustment. No infirmity in the order of AO and therefore the grounds of appeal raised by the assessee are rejected. Appeal filed by the assessee is dismissed.

Summary

Issues:
1. Rejection of M/s. RRB Energy Ltd. as a comparable company.
2. Adjustment on AE purchases due to lower margins.
3. Failure to consider commercial/extraordinary parameters influencing business.
4. Lack of appropriate adjustments under Rule 10B of the Income Tax Rules.

Analysis:
1. The judgment pertains to an appeal by the assessee against the final assessment order for Assessment Year 2012-13 under the Income-tax Act, 1961. The primary contention raised in the appeal was the rejection of M/s. RRB Energy Ltd. as a comparable company for transfer pricing purposes. The Transfer Pricing Officer (TPO) had made a downward adjustment on AE purchases based on the comparables' margins. The Dispute Resolution Panel (DRP) upheld the TPO's decision, citing reasons such as negative profit margins of M/s. RRB Energy Ltd. and relocation of its facilities, leading to abnormal expenses. The DRP also dismissed the assessee's objections regarding commercial and extraordinary parameters affecting business losses, stating these were common industry issues. The Hon'ble DRP relied on a previous tribunal order and rejected the assessee's objections, resulting in the final order by the Assessing Officer (AO) in line with the DRP's directions.

2. The second issue involved the adjustment on AE purchases due to lower margins. The AO considered two comparables and arrived at an average net profit margin of 4.33%. The assessee contested this adjustment, particularly the exclusion of M/s. RRB Energy Ltd. The AO justified the exclusion based on the negative margins and fluctuating profitability of the company. The assessee sought adjustments under Rule 10B to address economic differences with comparable companies. Both the TPO and DRP provided detailed reasons for their decisions, including the exclusion of M/s. RRB Energy Ltd. and the denial of custom duty adjustments. The DRP's reliance on a prior ITAT Chennai order further supported the decision to reject the assessee's grounds of appeal.

3. The failure to consider commercial and extraordinary parameters influencing the business was a key aspect of the appeal. The assessee highlighted issues such as delays in approvals, cost fluctuations, and adverse foreign exchange movements impacting business performance. However, the TPO and DRP deemed these factors as common industry challenges, already factored into the profit margin analysis. The DRP's alignment with a previous tribunal decision reinforced the rejection of the assessee's objections related to these parameters. The judgment emphasized the thorough analysis conducted by the TPO and DRP in addressing these concerns, leading to the dismissal of the appeal.

4. Lastly, the issue of the lack of appropriate adjustments under Rule 10B of the Income Tax Rules was raised by the assessee. The judgment outlined how both the TPO and DRP had addressed this issue in their orders, providing reasons for the exclusion of certain comparables and the denial of specific adjustments. The decision highlighted the detailed consideration given to the economic variances between the assessee and comparable companies, ultimately upholding the TPO and DRP's rationale for the adjustments made. The dismissal of the appeal signified the alignment with the assessment conducted by the tax authorities based on the provisions of the Income-tax Act and relevant rules.

In conclusion, the judgment upheld the assessment order, emphasizing the meticulous analysis conducted by the tax authorities in determining transfer pricing adjustments and addressing the objections raised by the assessee. The decision underscored the importance of consistent application of transfer pricing principles and the consideration of industry-specific challenges in such assessments.