2019 (6) TMI 663 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - application of RPT filter - exclusion of Honda Siel, Hyundai Motors and Maruti Udyog from the final set of comparables on the ground that the quantum of total Related Party Transactions was less than 25% of the total transaction - HELD THAT - AO did not apply any RPT filter but the CIT(A) had applied RPT filter of 15% and the three concerns were excluded in the hands of the assessee. In view thereof, we find no merit in the issue raised by the Revenue vide ground of appeal No.1. We hold that the RPT filter needs to be applied in the present set of facts and the three concerns having not fulfilled RPT filter cannot be included in the final list of comparables. In the case of assessee itself, the Assessing Officer / TPO had applied RPT filter of 25% in assessment year 2005-06. Hence, there is no merit in plea of Revenue. Inclusion of Hindustan Motors as functionally comparable - The case of AO was that it cannot be included in the final list of comparables on the ground that it incurred losses during the year. However, as pointed out by the CIT(A), the said concern was not persistent loss making concern and in such circumstances, there is no merit in excluding Hindustan Motors from the final list of comparables. Accordingly, we uphold the order of CIT(A) in this regard and dismiss ground of appeal No.2 raised by the Revenue Economic adjustment on import duty and adjustments to be allowed on account of capacity under utilization - HELD THAT - The assessee is in second year of operation and has pointed out that it has only utilized 33% of the total capacity whereas the comparables have on an average utilized 50 to 70% of the total capacity and hence, the margins of the comparables need to be adjusted accordingly. The Delhi Bench of the Tribunal in DCIT Vs. Class India Pvt. Ltd. 2015 (8) TMI 755 - ITAT DELHI has laid down the procedure for computing capacity utilization adjustment under the TNM method. Hence, we hold that the said procedure be applied by the Assessing Officer/Transfer Pricing Officer to work out the adjustment on account of capacity utilization. - Decided against revenue

Summary

Issues Involved:
1. Exclusion of Honda Siel, Hyundai Motors, and Maruti Udyog as comparables.
2. Inclusion of Hindustan Motors as a comparable.
3. Economic adjustment towards additional non-cenvatable duties.
4. Adjustment on account of under-utilization of capacity.

Detailed Analysis:

1. Exclusion of Honda Siel, Hyundai Motors, and Maruti Udyog as Comparables:
The Revenue contended that the CIT(A) erred in excluding Honda Siel, Hyundai Motors, and Maruti Udyog from the final set of comparables, arguing that the quantum of total related party transactions (RPT) was less than 25% of total transactions. The assessee applied an RPT filter of 15%, excluding these companies. The Tribunal upheld the CIT(A)'s decision, emphasizing that the RPT filter needs to be applied, and since these companies did not fulfill the 15% RPT filter, they cannot be included in the final list of comparables. The Tribunal cited the case of Sony India Pvt. Ltd. and noted consistency in applying the RPT filter, dismissing Revenue's ground of appeal.

2. Inclusion of Hindustan Motors as a Comparable:
The Revenue argued against including Hindustan Motors, citing its loss during the year. However, the CIT(A) noted that Hindustan Motors was not a persistent loss-making entity, showing an operative profit in the previous financial year. The Tribunal upheld the CIT(A)'s decision, agreeing that Hindustan Motors should be included in the final set of comparables as it was functionally comparable and not consistently loss-making, dismissing Revenue's ground of appeal.

3. Economic Adjustment towards Additional Non-Cenvatable Duties:
The CIT(A) directed the Assessing Officer to allow an economic adjustment for additional non-cenvatable duties paid by the assessee. The Revenue challenged this, arguing that the business model remained consistent over time. However, the Tribunal did not explicitly address this issue in detail, as it became academic following the decisions on other grounds.

4. Adjustment on Account of Under-Utilization of Capacity:
The CIT(A) directed adjustments for under-utilization of capacity, noting the assessee's utilization at 33% compared to 50-70% for comparables. The Tribunal referred to the Bombay High Court's decision in CIT Vs. Petro Araldite (P) Ltd., which supported adjustments for differences in capacity utilization. The Tribunal also cited the Pune Bench's decisions in Tasty Bite Eatables Ltd. and Vishay Components Pvt. Ltd., and the Delhi Bench's procedure in DCIT Vs. Class India Pvt. Ltd. for computing such adjustments. The Tribunal directed the Assessing Officer/Transfer Pricing Officer to apply the prescribed procedure for capacity utilization adjustment, dismissing Revenue's grounds of appeal.

Conclusion:
The Tribunal dismissed both the Revenue's appeal and the assessee's Cross Objection, upholding the CIT(A)'s decisions regarding the exclusion/inclusion of comparables and the adjustments for capacity utilization. The Tribunal emphasized the importance of applying consistent filters and methodologies in transfer pricing assessments.