2020 (10) TMI 1147 - AT - Income Tax

TP Adjustment - MAM selection - Comparable selection - Whether turnover as not relevant comparability factor to select the comparable companies? - HELD THAT - Yuken India Ltd. and WPIL Limited having high economic scale and R D function are not functionally comparable to the assessee, whose turnover is low and is not performing any R D functions. Accordingly, we direct the exclusion of Yuken India Ltd. and WPIL Limited from the final list of comparables. Roto Pumps - major sale turnover of the said concern is in the form of export sales i.e. to the extent of 60.25% as against export turnover of the assessee at 5.18%. Further, Roto Pumps is also having different product segment of spare parts, wherein sale of spares is to the extent of 50% in contrast to the sale of finished products by the assessee. The assessee has filed the details of the break up of the sale of finished goods in Note-6.h of audited financial statement, and in these circumstances, we hold that the concern Roto Pumps is to be excluded from the final list of comparable, both on geographical differences and also on being functionally not comparable to the assessee. Computation of PLI of the comparable - assessee states that the TPO did not provide the calculation of the PLIs of the comparable companies - HELD THAT - As before DRP, the same along with annual report were filed, which was rejected on the ground that the assessee had not given required data and valid reason for difference in margin. We are of the view that where the annual reports are available in public domain then the PLIs are to be computed based on such annual reports. The AO/TPO is thus directed to verify the correctness of the PLIs from the annual reports and revise the average of the PLIs of the finally selected comparables. Consequently, the ground of appeal no.5 and additional ground of appeal no.14 are allowed. Exclude the foreign exchange fluctuation cost while computing the PLI of the assessee - Case followed MERCEDES-BENZ INDIA PVT. LTD. 2019 (8) TMI 443 - ITAT PUNE Whether TP adjustment is not made in proportion to value of international transaction? - Tribunal in Assessment Year 2013-14 had also given similar directions and the same may be adopted. We find merit in the plea of the assessee and following the ratio laid down by the Tribunal in assessee s own case for Assessment Year 2013-14 2018 (4) TMI 1835 - ITAT DELHI we direct the Assessing Officer accordingly to recompute if any. Not giving direction regarding carry forward/brought forward losses - HELD THAT - AO is directed to carry out the necessary verification in this regard and decide the same in accordance with law after affording reasonable opportunity of hearing to the assessee.

Issues Involved:
1. Legality of the assessment order.
2. Incorrect calculation of Profit Level Indicator (PLI) of the assessee.
3. Incorrect calculation of PLI of comparables.
4. Rejection of comparable companies.
5. Cherry-picking of comparables.
6. Rejection of adjustments under Rule 10B(3).
7. Voluntary transfer pricing adjustment.
8. Transfer pricing adjustment proportionate to the value of international transactions.
9. Claim of brought forward losses and unabsorbed depreciation.
10. Interest charged under sections 234B/234C.
11. Penalty proceedings under section 271(1)(c).
12. Additional grounds regarding computation of PLIs and exclusion of Roto Pumps Ltd.

Detailed Analysis:

1. Legality of the Assessment Order:
The assessee challenged the assessment order passed by the Assessing Officer (AO) consequent to the order of the Transfer Pricing Officer (TPO) as being bad in law and void-ab-initio. The primary contention was that the TPO's order was non-est due to the non-application of mind and extraneous reasons applied for changing the PLI of the assessee.

2. Incorrect Calculation of PLI of the Assessee:
The assessee argued that the TPO incorrectly computed the PLI by excluding certain items such as commission and insurance claim recovered as operating income. The Tribunal directed the AO/TPO to re-examine these items and decide after affording reasonable opportunity to the assessee.

3. Incorrect Calculation of PLI of Comparables:
The Tribunal found merit in the assessee's claim that the AO/TPO incorrectly computed the PLIs of comparable companies. It was directed that the PLIs should be computed based on the annual reports available in the public domain.

4. Rejection of Comparable Companies:
The Tribunal held that Yuken India Ltd. and WPIL Ltd. should be excluded from the final list of comparables due to their high economic scale and R&D functions, which made them not functionally comparable to the assessee.

5. Cherry-picking of Comparables:
The Tribunal agreed with the assessee that the TPO/DRP had erred in cherry-picking new companies as comparables without considering the comparability criteria under Rule 10B(2).

6. Rejection of Adjustments under Rule 10B(3):
The Tribunal directed the AO/TPO to exclude the foreign exchange fluctuation cost while computing the PLI of the assessee, as the assessee had a high import content, and the fluctuation was an extraordinary item.

7. Voluntary Transfer Pricing Adjustment:
The Tribunal held that the voluntary transfer pricing adjustment of ?39,65,940 offered by the assessee should be considered in case any transfer pricing adjustment is made.

8. Transfer Pricing Adjustment Proportionate to the Value of International Transactions:
The Tribunal directed the AO to recompute the transfer pricing adjustment proportionate to the value of international transactions, following the ratio laid down in the assessee's own case for the Assessment Year 2013-14.

9. Claim of Brought Forward Losses and Unabsorbed Depreciation:
The Tribunal directed the AO to verify the claim of brought forward losses and unabsorbed depreciation and decide in accordance with the law after affording reasonable opportunity of hearing to the assessee.

10. Interest Charged under Sections 234B/234C:
The Tribunal did not specifically address this issue in the detailed analysis but generally, such issues are remanded back to the AO for re-computation based on the final assessed income.

11. Penalty Proceedings under Section 271(1)(c):
The penalty proceedings under section 271(1)(c) were not specifically addressed in the detailed analysis but are typically contingent on the final outcome of the assessment order.

12. Additional Grounds Regarding Computation of PLIs and Exclusion of Roto Pumps Ltd.:
The Tribunal allowed the additional ground of appeal for the exclusion of Roto Pumps Ltd. from the final list of comparables due to differences in area of operations, nature of products sold, and market in which goods are sold.

Conclusion:
The Tribunal directed the AO/TPO to re-examine and recompute various aspects of the assessment, including the computation of PLI, inclusion/exclusion of certain comparables, and consideration of voluntary transfer pricing adjustments. The appeal of the assessee was allowed, and the AO was instructed to carry out necessary verifications and adjustments in accordance with the Tribunal's directions.

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