2018 (5) TMI 262 - HC - Income Tax

Compute the TP Adjustment proportionate to AE turnover - assessee has applied TNMM at entity level - prorata adjustment when TNMM is applied at entity level - Held that - Transfer Pricing Adjustment is not to be done at the entity level but only in respect of international transactions of the Respondent with its Associated Enterprise (AE). This, on the application of proportionate method. See CIT v/s. M/s. Ratilal Becharlal & Sons 2015 (11) TMI 1524 - BOMBAY HIGH COURT Comparability selection criteria - Held that - Companies functionally dissimilar with that of assessee to be deslected. If the extra ordinary loss incurred in the subject Assessment Year as excluded while arriving at the profit of the Respondent-Assessee, then even in the absence of M/s. Rajasthan Udyog & Tools Ltd., and M/s. Hitco Tools Ltd., being considered to be a comparable, the profit margin of the Respondent-Assessee, would fall within /5% of the profit margin of the comparables as permitted under Section 92C of the Act

Summary

Issues:
1. Transfer Pricing Adjustment Method - Entity Level vs. Proportionate Method
2. Inclusion of Comparable Segment - Diamond Tools and Gang Saw Blades
3. Inclusion of Hitco Tools as Comparable Company

Issue 1: Transfer Pricing Adjustment Method - Entity Level vs. Proportionate Method

The Revenue challenged the Tribunal's direction to compute the Transfer Pricing Adjustment (TP Adjustment) proportionate to Associated Enterprise (AE) turnover, arguing that TNMM at entity level should be applied, not prorata adjustment. The High Court referred to previous decisions and held that TP Adjustment is only for international transactions with AEs, not at entity level. The issue was settled by various court decisions and not considered a substantial question of law.

Issue 2: Inclusion of Comparable Segment - Diamond Tools and Gang Saw Blades

The TPO excluded M/s. Rajasthan Udyog & Tools Ltd. as a comparable, stating it was not functionally comparable. The DRP upheld this decision, but the Tribunal found the segment of Diamond Tools and Gang Saw Blades to be functionally comparable. The Tribunal's finding was based on facts and not challenged by the Revenue, leading to the conclusion that no substantial question of law arose.

Issue 3: Inclusion of Hitco Tools as Comparable Company

M/s. Hitco Tools was excluded as a comparable due to being a persistent loss-making unit, which was accepted by the Assessing Officer. However, the Tribunal found M/s. Hitco Tools was not persistently loss-making and had shown profits in recent years. The Tribunal's decision was based on factual findings and not shown to be arbitrary, leading to the dismissal of the question as it did not raise a substantial question of law.

The Respondent argued that the inclusion of M/s. Rajasthan Udyog & Tools Ltd. and M/s. Hitco Tools Ltd. as comparables was unnecessary due to extraordinary losses, which would still keep the profit margin within permissible limits. However, the court did not consider this argument due to its findings on the other issues.

In conclusion, the High Court dismissed the appeal, stating no substantial question of law arose in the issues raised by the Revenue. No costs were awarded in the judgment.