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2016 (6) TMI 633 - AT - Income TaxTransfer pricing adjustment - Selection of Premier Ltd. as a comparable - Held that - It is clear that the assessee itself has considered the comparability at the entity level rather than only at the engineering segment level as is being contended now. However, in the interest of equity and justice, it is necessary to examine this issue as to whether only the engineering segment of Premier Ltd., needs to be taken for determining its comparability. It was contended that before us that this issue was raised before the DRP, but the DRP had not adjudicated on the same. Therefore, we deem it appropriate to remand this issue to the file of the Assessing Officer/TPO for fresh consideration as to whether only the engineering segment of this company should be considered for comparability. Needless to add that the assessee shall be afforded adequate opportunity of being heard and submit details required in the matter, which shall be considered by the Assessing Officer/TPO before deciding the matter in accordance with law. T.P. Adjustment made at Enterprise Level - Held that - TPO ought to have either accepted the explanations furnished by the assessee or adopted the recast segmental details proposed by him after rejecting the explanations of the assessee. Instead of adopting either of the two, the TPO proceeded to consider the financial results at the entity level, without adducing proper reasons. In this factual matrix, we are unable to agree with the stand of the TPO. It is settled principle, upheld in several decisions, that the T.P. Adjustment has to be done only in respect of the assessee s international transactions with AEs and not on the non-AE component of the transactions. We, therefore, direct the TPO to make the adjustments only for the international transactions and not on the non-AE component of such transactions Incorrect Margin - assessee contends that the TPO has wrongly computed the average margin of the comparable companies at 18.76% whereas the average margin of the comparable selected by the TPO works out to 6.40% - Held that - We find from a perusal of the TPO s order under Section 92CA of the Act, at para 10.4 / page 10 thereof, the TPO has selected 7 companies as comparables to the assessee, giving the individual margins of each company and has computed the margin of the comparable companies at 13.57%. From the details extracted by the TPO in the table of seven comparable companies at page 10 of the TPO s order, prima facie, it appears that the average margin is certainly computed wrongly at 13.57% and rather should be 9.618%. The figures of average margin given by the assessee at 18.76% and 6.40% also, prima facie, appear to be at variance with those emerging from the TPO s Table at page 10 of his order. In this factual matrix, we direct the TPO to examine the margins of comparable companies and compute the margins correctly after affording the assessee adequate opportunity of being heard. Adjustment for under utilization of capacity - as per assessee that its capacity utilization was only to the extent of 14.84% of its installed capacity, mainly due to the economic slow down - Held that - The capacity worked out by the assessee, is the total installed capacity. However, the optimum capacity that can be utilized is the right figure that needs to be adopted for comparability. It is well known that manufacturing industries cannot always operate to full installed capacity. It will be a wrong assumption to make that the comparable companies are all operating to their full installed capacity. The capacity to which the manufacturing units can be reasonably expected to operate is the optimum capacity and this can / will vary from industry to industry. It is essential to understand the capacity at which the comparable companies operated during that relevant period. The capacity at which the comparable companies operate has to be compared with the capacity utilization of the assessee to evaluate the under-utilisation of capacity, in the case on hand. The underlying principle is that if the manufacturing unit operates at less than optimum capacity, then it will affect the recovery of fixed cost, thereby affecting profitability. However, it is seen that the adjustment has been worked out by the assessee by considering all the non-operating costs also and there is no relation to the capacity utilization of the comparable companies. In view of the above, the TPO and DRP cannot be faulted for holding that the assessee has not established the quantum of capacity utilization adjustment with evidences and supporting details. In this view of the matter, we deem it appropriate, in the interest of justice and equity, to remand the issue back to the file of the TPO to work out the capacity utilization adjustment. Entitlement to the benefit of / - 5% while computing the ALP of international transactions - Held that - Prior to the amendment made by Finance Act (No.2) Act, 2009 and Finance Act, 2012, the proviso to Section 92C(2) of the Act provided that the ALP would be taken to be the Arithmetical Mean ( AM ) or at the option of the assessee, a price which may vary from the AM by on account not exceeding 5% of such AM. Thus, the ALP was / - 5% from such AM. The new section 92C(2A) mandates that if the arithmetical mean price falls beyond / - 5% from the price charged in the international transactions, then the assessee does not have any option referred to in section 92C(2). Thus, as per the above amendment, it is clear that the / - 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not allowable in the assessee s case. The various judicial decisions cited pertain to the period prior to the retrospective amendment in section 92C(2A) of the Act and are not applicable to the facts of the assessee s case. In view of the amendment brought about therein by Finance Act, 2012, this ground raised by the assessee is not maintainable and is accordingly dismissed. Set off of carry forward losses - Held that - As find from a perusal of the orders of assessment, that this issue has not been addressed by the Assessing Officer, we direct the Assessing Officer to examine and verify the assessee s claim for set off of carried forward losses in accordance with law, after affording the assessee adequate opportunity of being heard in the matter. Treatment of Foreign Exchange Gain as operating in nature - Held that - As operating revenue should be computed by including the foreign exchange gain which is clearly arising out of the export business; is related to the profit and loss account and is in the revenue field. However in the case on hand, the assessee has stated that the foreign exchange gain is arising out of restatement of receivables/payables which are Balance Sheet items and we do not find any clear finding in this regard in the orders of the authorities below. Therefore, we remand the issue back to the Assessing Officer /TPO to examine / determine whether the entire foreign exchange gain has arisen out of the export business of the assessee and thereafter to that extent treat the same as operating in nature while computing the margins of the assessee and the comparable companies after affording the assessee adequate opportunity of being heard and submit details submissions in the matter.
Issues Involved:
1. Selection of Premier Ltd. as a comparable. 2. T.P. Adjustment made at Enterprise Level. 3. Incorrect Margin Computation. 4. Adjustment for under-utilization of capacity. 5. Benefit of +/- 5% deduction in ALP computation. 6. Set off of carry forward losses. 7. Charging of interest under Sections 234B and 234D. 8. Treatment of Foreign Exchange Gain as operating in nature. Detailed Analysis: 1. Selection of Premier Ltd. as a Comparable: The assessee contested the inclusion of Premier Ltd. as a comparable, arguing it did not satisfy comparability tests and should only consider its engineering segment. The Tribunal noted the assessee initially selected Premier Ltd. in its T.P. Study and failed to provide evidence against its comparability. However, the Tribunal remanded the issue to the TPO to reconsider whether only the engineering segment should be used for comparability, ensuring the assessee is given the opportunity to present relevant details. 2. T.P. Adjustment made at Enterprise Level: The assessee maintained that adjustments should be made only for the manufacturing segment, not at the enterprise level. The Tribunal agreed, stating the TPO should have considered segmental details provided by the assessee. The Tribunal directed the TPO to make adjustments only for international transactions and not on the non-AE component, thus allowing the grounds. 3. Incorrect Margin Computation: The assessee argued that the TPO incorrectly computed the average margin of comparable companies. The Tribunal found discrepancies in the TPO's computation and directed the TPO to re-examine and correctly compute the margins after affording the assessee an opportunity to be heard. 4. Adjustment for Under-utilization of Capacity: The assessee claimed adjustments due to under-utilization of capacity, supported by a Chartered Engineer's Certificate. The TPO and DRP rejected the claim due to insufficient evidence. The Tribunal, referencing the Petro Araldite P. Ltd. case, acknowledged the principle of capacity under-utilization adjustment but found the assessee's evidence insufficient. The issue was remanded to the TPO to work out the adjustment following the guidelines from the cited case, allowing the assessee to provide necessary details. 5. Benefit of +/- 5% Deduction in ALP Computation: The assessee sought the benefit of +/- 5% variation in ALP computation. The Tribunal noted the amendment by Finance Act, 2012, which clarified that the +/- 5% variation is not for adjustment purposes but to justify the price charged in international transactions. Consequently, the ground was dismissed as not maintainable. 6. Set off of Carry Forward Losses: The assessee claimed it was wrongly denied the benefit of set off of carried forward losses. The Tribunal directed the Assessing Officer to examine and verify the claim in accordance with the law, ensuring the assessee is given an opportunity to be heard. 7. Charging of Interest under Sections 234B and 234D: The assessee contested the levy of interest under Sections 234B and 234D. The Tribunal upheld the charging of interest as consequential and mandatory, directing the Assessing Officer to recompute the interest while giving effect to the Tribunal's order. 8. Treatment of Foreign Exchange Gain as Operating in Nature: The Revenue contested the DRP's decision to treat foreign exchange gain/loss as operating in nature. The Tribunal upheld the DRP's decision, following precedents set by co-ordinate benches, which treated foreign exchange gain/loss arising from business operations as part of operating revenue. However, the Tribunal remanded the issue to the Assessing Officer/TPO to verify if the entire foreign exchange gain arose from the assessee's export business and to treat it as operating revenue accordingly. Conclusion: Both the Revenue's appeal and the assessee's cross appeal for Assessment Year 2010-11 were partly allowed for statistical purposes, with several issues remanded for reconsideration and verification by the TPO/Assessing Officer.
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