2014 (12) TMI 803 - AT - Income Tax

Transfer pricing adjustment Selection of Comparables - M/s. Atual Ltd. Held that - They are comparable because as decided in Sony India (P) Limited. Versus Deputy Commissioner Of Income-tax Circle - 9(1) 2008 (9) TMI 420 - ITAT DELHI-H wherein the CIT (A) has given detailed reasoning for holding that both these companies are comparable the view taken by the CIT(A) is correct and there is no unreasonableness in the findings of CIT (A). M/s. Indian Toners and Developers Ltd. Held that - The claim of the assessee was that the company manufactures toners and developers for photocopies laser printers and digital printers it cannot be considered as comparable to the printing inks manufactured by assessee - TPO noted that the company M/s. Indian Toners and Developers Ltd. and assessee has same NIC Code i.e. 24222 hence this company was held as comparable - CIT(A) found that M/s. Atul Ltd. is a comparable as decided in Sony India (P) Limited. Versus Deputy Commissioner Of Income-tax Circle - 9(1) 2008 (9) TMI 420 - ITAT DELHI-H and in respect of M/s. Indian Toners 40 lacs has to be sustained which is on account of opening stock and by rectifying order u/s 154 has reduced the deletion by 40 lacs or odd -The issue in respect to deletion reduced by 40 lacs or odd has been restored to the CIT (A) to decide the same afresh after affording reasonable opportunity of being heard to the assessee as as per order of CIT (A) no opportunity was provided to the assessee - the order of CIT(A) in deleting the addition of 1 crore or odd was correct and upheld Decided partly in favour of assessee.

Issues Involved:
1. Rejection of six comparable companies selected by the assessee.
2. Addition of six new comparable companies by the TPO.
3. Acceptance of Micro Inks Ltd. for the financial year 2005-06.
4. Computation of margins of the comparables.
5. Exclusion of working capital adjustment.
6. Use of data not available to the assessee at the time of transfer pricing documentation.
7. Use of single-year data versus multiple-year data.
8. Non-application of the proviso to Section 92C of the Act.
9. Restriction of set-off allowed for unabsorbed depreciation.

Detailed Analysis:

1. Rejection of Six Comparable Companies:
The Hon'ble DRP, AO, and TPO erred in rejecting six comparable companies selected by the assessee. The assessee contended that these comparables were appropriate and provided detailed justifications for each. For example, Atul Limited was included based on a previous ITAT order, and Chromatic India Ltd. was accepted by CIT(A) in a different assessment year. The Tribunal found that the TPO and DRP did not provide sufficient reasons for rejecting these comparables, especially given the precedents set in earlier rulings.

2. Addition of Six New Comparable Companies:
The TPO added six new comparables, which the assessee argued were not justified. For instance, Asahi Songwon Colours Ltd. was not part of the search results used by the assessee, and Dynemic Products Ltd. was engaged in manufacturing food colors, which was not comparable to the assessee's products. The Tribunal noted that the TPO did not provide valid justifications for including these companies and did not reject the search process or parameters used by the assessee.

3. Acceptance of Micro Inks Ltd. for Financial Year 2005-06:
The TPO accepted Micro Inks Ltd. as a comparable, despite the assessee's contention that it had significant related party transactions exceeding 25%. The Tribunal agreed with the assessee, noting that related party transactions above the threshold should exclude a company from being considered a comparable.

4. Computation of Margins of the Comparables:
The assessee argued that the TPO wrongly computed the margins of the comparables. The Tribunal found that the TPO did not follow the same parameters for margin computation as used in the TP study and did not provide the calculation for comparison. The Tribunal directed the AO to recompute the margins following the guidelines provided.

5. Exclusion of Working Capital Adjustment:
The TPO excluded working capital adjustment, arguing that the assessee did not provide sufficient data. The Tribunal noted that working capital adjustments are essential for comparability and should be examined with caution. However, the TPO's rejection was not justified as the assessee was not given adequate opportunity to furnish the required working.

6. Use of Data Not Available to the Assessee:
The TPO used data not available to the assessee at the time of preparing the transfer pricing documentation. The Tribunal held that using such data is unfair and directed the AO to use only the data available to the assessee during the documentation preparation.

7. Use of Single-Year Data Versus Multiple-Year Data:
The TPO adopted a flawed approach by using single-year data instead of multiple-year data used by the assessee. The Tribunal agreed with the assessee that multiple-year data provides a more accurate picture and directed the AO to use multiple-year data for computing margins.

8. Non-Application of the Proviso to Section 92C of the Act:
The assessee argued that the benefit of a downward variation of 5% should be allowed. The Tribunal held that the 5% margin should be considered if the price determined by the assessee is within 5% of the value of international transactions. If the price is beyond this range, the entire difference should be adjusted.

9. Restriction of Set-Off Allowed for Unabsorbed Depreciation:
The AO restricted the set-off allowed for unabsorbed depreciation. The Tribunal directed the AO to recompute the set-off after considering the rectificatory order passed in the preceding year and in accordance with the law.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to recompute the TP adjustments and set-off of unabsorbed depreciation following the guidelines provided. The order was pronounced in the open Court on 14-11-2014.

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