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2015 (6) TMI 597 - AT - Income TaxTransfer pricing adjustment - Non-adoption of adjusted PLI of the tested party - Held that - Assessee vide its letter dated 7.9.2009 addressed to the TPO, submitted with prejudice to its earlier submissions that if the adjustment as computed by it was not acceptable, that is, the abnormal costs were not excluded, then the comparables so chosen by it would cease to be comparable. Similar contention was made by the assessee before the DRP vide its letter dated 20.7.2010. We find that the TPO/DRP have not considered this argument of the assesee. They simply held that no adjustment is warranted in the computation of the operating profit of the assessee, with which we also agree. However, they failed to consider if the assessee had in fact, incurred any extraordinary or abnormal costs due to its first year of operation. If, in fact, such abnormal costs were incurred, then it was mandatory on the part of the authorities to adjust the profit margin of comparables to that extent. It appears that both the assessee as well the TPO did not properly approach the transfer pricing analysis in a right perspective. The assessee kept on harping on the adjustment to its profit on an unrealistic basis and the TPO ignored to examine, if the assessee was at all rightly entitled to any adjustment on account of its first year of operation. In our considered opinion, the proper transfer pricing analysis can be done only by first finding out suitable comparables with or without making adjustment in their profit margins in terms Rule 10B(1)(e)(iii). If, in any case, either the comparables are not available or the adjustment as discussed above is not feasible, then, the TNMM cannot be considered as the most appropriate method, which should be ignored and substituted with another suitable method for determining the ALP of the international transaction of Export of finished goods. . Removal of two comparables - Ahmedabad Steelcraft Ltd. - Held that - This company is using its own wind mill against the assessee using generator sets of production. These two models of production have different implications on the operating costs. Apart from that, it is observed that the turnover of this company significantly reduced to ₹ 9.92 crore in the current year from ₹ 36.68 crore in the preceding year due to change in the Government policies. It has been so recognized in the director s report of this company. It has further been mentioned in such report that this company retrenched 105 employees and compensation aggregating to ₹ 42.39 lac was paid during the year. In our considered opinion, the above cited extraordinary and abnormal differences make this company incomparable with the assessee. We, therefore, hold that the TPO was right in excluding this company from the list of comparables. Shiv Agrico Implements Ltd. (Seg.) - Held that - Perusing the relevant material on record including the Annual report of this company for the year in question, we find that this company has reported its revenues in three segments namely, Foundry, rolling and forging; Engineering & Fabrication; and Others. The assessee has chosen Engineering and Fabrication segment of this company to be comparable. We are disinclined to accept the view point of the TPO/AO in excluding this company for the reason of the goods from Foundry, rolling and forging segment moving to Engineering and Fabrication segment. It is obvious that when the goods move from one segment to another, their profitability is accordingly taken into consideration under the respective segment. Once this company has shown its segmental results and the TPO has not pointed out as to how its Engineering and Fabrication segment is dissimilar with that of the assessee, we hold that this company on segment basis should be included in the final set of comparables. Ad hoc disallowance of expenses - Held that - expenses have been incurred by the assessee by way of payment to Clearing & Forwarding agent, viz., Haulage Corporation. Even the reimbursement of expenses have been made to such agent only. When the assessee furnished all the details about such expenses including sample supporting invoices and confirmation from Haulage Corporation, we cannot countenance the addition made on ad hoc basis without the AO specifically pointing out any lacuna in the details submitted by the assessee. We, therefore, order for the deletion of this addition. - Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Adjustment 2. Non-adoption of Adjusted Profit Level Indicator (PLI) 3. Removal of Comparables 4. Ad hoc Disallowance of Expenses Issue-wise Detailed Analysis: I. Transfer Pricing Adjustment: The primary issue in this appeal concerns the addition on account of transfer pricing adjustment amounting to Rs. 21,75,42,500/-. The facts reveal that JCB India Ltd., a wholly owned subsidiary of JCB, UK, set up JCB Manufacturing Ltd. (the assessee) as its 100% subsidiary. The assessee commenced its business on 20.6.2005 and got merged with JCB India w.e.f. 1.4.2009. The assessee reported five international transactions, with the first two being 'Export of finished goods' and 'Import of raw materials,' benchmarked jointly using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) found that the assessee adjusted its PLI from (-)45.23% to 10.79%, which was not accepted. The TPO applied the unadjusted profit margin of (-)45.23% and computed the arithmetical mean of the comparables' operating profit margin at 13.47%, leading to a transfer pricing adjustment recommendation of Rs. 21.75 crore. II. Non-adoption of Adjusted PLI of the Tested Party: The assessee's unadjusted PLI (OP/TC) stood at a loss of (-)45.23%, which was adjusted to 10.79% by reducing operating expenses by more than 50%. The TPO rejected this adjustment, stating that any adjustment should be made to the profit margin of comparables under Rule 10B(1)(e)(iii) and not to the assessee's profit margin under Rule 10B(1)(e)(i). The Tribunal agreed, emphasizing that the transfer pricing provisions require the actual operating costs to be considered without adjustment. Adjustments, if any, should be made to the comparables' profit margins to neutralize material differences, not to the assessee's profit margin. III. Removal of Comparables: The TPO excluded two companies, Ahmedabad Steelcraft Ltd. and Shiv Agrico Implements Ltd. (Seg.), from the list of comparables. The Tribunal upheld the exclusion of Ahmedabad Steelcraft Ltd. due to its functional differences and extraordinary factors such as changes in government policy and retrenchment of employees. However, the Tribunal disagreed with the exclusion of Shiv Agrico Implements Ltd. (Seg.) on the basis that the TPO did not demonstrate how its Engineering and Fabrication segment was dissimilar to the assessee's operations. Therefore, the Tribunal directed the inclusion of Shiv Agrico Implements Ltd. (Seg.) in the final set of comparables. IV. Ad hoc Disallowance of Expenses: The AO disallowed Rs. 2 lac on an ad hoc basis from the expenses claimed by the assessee for payments made to a Clearing & Forwarding agent, Haulage Corporation. The Tribunal found that the assessee provided all necessary details, including sample invoices and confirmations from Haulage Corporation. The AO did not point out any specific issues with the provided details. Therefore, the Tribunal ordered the deletion of this ad hoc addition. Conclusion: The Tribunal set aside the impugned order and remitted the matter to the TPO/AO for a fresh determination of the ALP of the international transaction of 'Export of finished goods' in accordance with the Tribunal's observations. The appeal was partly allowed, and the order was pronounced in the open court on 10.06.2015.
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