2020 (8) TMI 37 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - In Dover India (P.) Ltd. v. DCIT 2017 (4) TMI 1497 - ITAT PUNE it is held that where a company was performing similar functions with that of the assessee, in absence of revenue establishing that said concern was persistent loss making concern, merely because said concern during relevant year had shown losses, could not be a valid reason for excluding same from list of comparables. We are of the considered view that the principles laid down in the above decisions are applicable to the instant case. A fortiori Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd. and Bhageria Dyechem Ltd. have earned profit in FYs 2009-10, 2010-11, 2012-13 2013-14 and incurred losses only in FY 2011-12. Such fluctuations are normal in competitive business environment and the same cannot be considered as a reason for rejecting the aforesaid comparables. These three comparables are definitely not persistent loss making companies. We direct the AO/TPO to include Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd. and Bhageria Dyechem Ltd. as comparable and compute the arithmetic mean margin and pass consequential order. Needless to say, the AO would give a reasonable opportunity of being heard to the appellant before passing the order. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded.

Issues Involved:
1. Transfer pricing adjustment of ?4,28,76,946 for international transactions related to manufacturing activity.
2. Rejection of economic analysis conducted by the appellant for determining the arm's length price.
3. Use of three-year average data versus single-year data for comparables.
4. Rejection of certain companies as comparables due to losses.
5. Rejection of Sabero Organics Gujarat Ltd. due to a merger and functional non-comparability.
6. Cherry-picking of comparables by rejecting loss-making companies and retaining profit-making ones.
7. Rejection of revised comparability analysis of agrochemical companies.
8. Non-granting of working capital adjustment.
9. Treatment of ?5,54,19,490 received from AE as exceptional income and its impact on operating margin.
10. Non-granting of risk and other economic adjustments.
11. Non-provision of the benefit of a 5% variation/reduction in the value of the international transaction.
12. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Transfer Pricing Adjustment of ?4,28,76,946:
The appellant contested the transfer pricing adjustment made by the TPO and affirmed by the DRP. The TPO had made an adjustment for international transactions related to manufacturing activity, specifically the import of raw materials and export of finished goods. The appellant argued that the TPO's rejection of certain comparables and the use of single-year data were incorrect.

2. Rejection of Economic Analysis:
The TPO rejected the economic analysis conducted by the appellant, which was based on the provisions of the Income-tax Act and Rules. The appellant had used the Transactional Net Margin Method (TNMM) and considered a three-year average of operating margins for comparables. The TPO, however, used only the financial year 2011-12 data.

3. Use of Three-Year Average Data:
The appellant argued that the use of three-year average data provides a more accurate determination of the arm's length price. The TPO's use of single-year data was contested as it did not reflect the economic realities over a period.

4. Rejection of Certain Companies as Comparables:
The TPO rejected Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd., and Bhageria Dyechem Ltd. as comparables because they incurred losses in the financial year 2011-12. The appellant argued that these companies were not persistent loss-makers and had shown profits in other years, making them valid comparables.

5. Rejection of Sabero Organics Gujarat Ltd.:
The TPO rejected Sabero Organics Gujarat Ltd. on the grounds of a merger and functional non-comparability. The appellant contended that there was only a share purchase agreement during the year, and the merger did not affect the company's profitability.

6. Cherry-Picking of Comparables:
The appellant accused the TPO of cherry-picking comparables by rejecting loss-making companies and retaining profit-making ones. This selective approach was argued to be unfair and biased.

7. Rejection of Revised Comparability Analysis:
The appellant's revised comparability analysis, which included only agrochemical companies, was rejected by the TPO. The appellant argued that this revised analysis provided more accurate comparability results.

8. Non-Granting of Working Capital Adjustment:
The TPO rejected the working capital adjustment proposed by the appellant, citing a lack of documentary evidence. The appellant argued that detailed calculations and justifications were provided.

9. Treatment of ?5,54,19,490 as Exceptional Income:
The TPO treated ?5,54,19,490 received from an AE as exceptional income, reducing it from operating income and computing the operating margin at 8.51% instead of 9.38%. The appellant contested this treatment, arguing that it should be considered operating in nature.

10. Non-Granting of Risk and Other Economic Adjustments:
The appellant argued that the TPO did not grant necessary risk and economic adjustments based on the functions, assets, and risk analysis.

11. Non-Provision of 5% Variation/Reduction Benefit:
The appellant contended that the TPO did not provide the benefit of the 5% variation/reduction in the value of the international transaction as per the proviso to section 92C(2) of the Act.

12. Initiation of Penalty Proceedings:
The appellant contested the initiation of penalty proceedings under section 271(1)(c) for concealment of income and furnishing inaccurate particulars, arguing that the facts and circumstances did not warrant such action.

Conclusion:
The Tribunal directed the AO/TPO to include Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd., and Bhageria Dyechem Ltd. as comparables and recompute the arithmetic mean margin. The Tribunal also acknowledged the procedural delays due to the COVID-19 pandemic and extended the time for pronouncement of the order in line with the directives from higher judicial authorities. The appeal filed by the assessee was allowed, and the AO was instructed to pass a consequential order after giving the appellant a reasonable opportunity of being heard.

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