2018 (6) TMI 164 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee is a public company engaged in the business of manufacture and sale of electrical automobile components such as starters alternators wiper motors fan motors magnetos etc. for four wheelers and two wheelers thus companies functionally dissimilar with that of assessee need to be deselected from final list. We find that the comparables have not been analysed by the Ld. TPO in light of the submissions of the assessee which have been simply disregarded without analysing the claim of the assessee and without passing a reasoned order. Accordingly in such a situation we have no other option but to restore the entire issue of the selection of the comparables to the file of the TPO for making a fresh comparability analysis after duly considering the evidences and submissions of the assessee in this regard. The assessee shall be given due opportunity to present its case by the TPO. We however also direct that the assessee will not be at liberty to pray for inclusion of any other new comparables except the 6 comparables which it has already requested for inclusion before the TPO. Working capital adjustment - Held that - As seen that the TPO has not allowed working capital adjustment to be made to the results of the companies selected by him on account of differences between the working capital requirements of the assessee vis- -vis these companies. The TPO is directed to allow working capital adjustments to the assessee as per law while carrying out the fresh comparability analysis which has been restored to him Allow the assessee the benefit of proportionate adjustment to the assessee as per law and restrict the adjustment only in respect of international transaction. Calculation of operating margins of the assessee vis-a-vis the comparables selected by the TPO. These grounds are also restored to the file of the TPO for being adjudicated a fresh after duly considering the submissions of the assessee as well as the evidences being filed in support of the same. Disallowance of royalty and disallowance pertaining to provision for bad and doubtful debts - Held that - This issue is covered in favour of assessee in assessee s own case by the judgment of the Hon ble Delhi High Court in CIT vs. Denso India Ltd.(2015 (1) TMI 824 - DELHI HIGH COURT) wherein it was held that the royalty paid by the assessee to its parent company was revenue expenditure and could not be treated as capital expenditure. The TPO has disallowed the impugned amount being 25% of royalty payment by observing the same as being capital in nature. However the issue is clearly covered in favour of the assessee in assessee s own case by the judgment of Hon ble Delhi High Court as aforesaid and accordingly we direct that this disallowance to be deleted. As far as the issue of disallowance pertaining to provision for bad and doubtful debts is concerned it is seen that the assessee had filed an application for additional objections vide letter dated 01.07.2010 before the Ld. DRP. However the Ld. DRP has not considered/ adjudicated this issue. Therefore it would be in interest of justice if this issue is restored to the office of the Ld. DRP for considering the objections of the assessee and passing speaking order on the same.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparable Companies
3. Working Capital Adjustment
4. Proportionate Adjustment for International Transactions
5. Calculation of Operating Margins
6. Disallowance of Royalty
7. Disallowance of Provision for Bad and Doubtful Debts

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolves around the enhancement of the appellant's income by ?115,226,756 due to the Transfer Pricing (TP) adjustment under Section 92CA(3) of the Income Tax Act, 1961. The appellant argued that the TP adjustment was made without proper empirical evidence or sound analysis. The Tribunal found that the Transfer Pricing Officer (TPO) had not considered the appellant's submissions and evidences adequately, leading to an inappropriate benchmarking approach.

2. Selection of Comparable Companies:
The appellant initially identified 13 comparable companies, but the TPO rejected these and selected four different companies, later reducing them to three. The Tribunal noted that the TPO dismissed the appellant's comparables and objections summarily without proper reasoning. Consequently, the Tribunal restored the issue of selecting comparables to the TPO for fresh analysis, directing the TPO to consider the appellant's evidence and submissions properly.

3. Working Capital Adjustment:
The appellant sought a working capital adjustment to account for differences in working capital requirements between itself and the comparable companies. The Tribunal directed the TPO to allow working capital adjustments as per law while conducting the fresh comparability analysis.

4. Proportionate Adjustment for International Transactions:
The appellant argued that the TP adjustment should be proportionate to its international transactions, not extending to domestic transactions. The Tribunal, referencing the Delhi High Court's judgment in CIT vs. Keihin Panalfa Ltd., accepted this principle and directed the TPO to restrict the adjustment to international transactions only.

5. Calculation of Operating Margins:
The appellant contended that the TPO erred in computing operating margins for both the appellant and the comparables. The Tribunal restored this issue to the TPO for reevaluation, directing the TPO to consider the appellant's submissions and evidence.

6. Disallowance of Royalty:
The TPO disallowed 25% of the royalty payment, considering it capital in nature. However, the Tribunal noted that this issue was already settled in favor of the appellant by the Delhi High Court in CIT vs. Denso India Ltd., which held that the royalty payment was revenue expenditure. Therefore, the Tribunal directed the deletion of this disallowance.

7. Disallowance of Provision for Bad and Doubtful Debts:
The appellant's additional objections regarding the disallowance of ?22,34,415 for bad and doubtful debts were not considered by the Dispute Resolution Panel (DRP). The Tribunal restored this issue to the DRP for reconsideration, directing the DRP to pass a speaking order after considering the appellant's objections.

Conclusion:
The appeal was allowed for statistical purposes, with specific directions for the TPO and DRP to reconsider various issues, ensuring due consideration of the appellant's submissions and evidence. The Tribunal emphasized the need for a reasoned order and proper analysis in the selection of comparables, working capital adjustments, and the computation of operating margins.