2023 (3) TMI 1138 - AT - Income Tax

TP adjustment - Comparable selection - Functional dissimilarity - HELD THAT - Auto Ignition Ltd.- On diversified business, export sale, incurring of expenditure on R D activities and presence of intangibles, we are of the considered opinion that Auto Ignition cannot be considered as a comparable company. We, therefore, direct the A.O./TPO to exclude Auto Ignition from the list of comparables. Chheda Electricals - Main ground on which the assessee is seeking exclusion of this company are capacity utilisation and Chheda claiming tax deduction u/s.80IC - The adjustment towards capacity utilisation has been contended as a separate issue by the assessee and hence the exclusion of this cannot be sought on this ground. Further the company enjoying the tax deduction u/s.80IC in our view is not a criteria for seeking exclusion. Further we notice that Chedda is functionally similar to the assessee. We, therefore, uphold inclusion of Chheda Electricals in the list of comparables. Naina Semiconductors Ltd - In view of all these i.e., diversified business, export sale, and incurring of expenditure on R D activities, we are of the considered opinion that Naina cannot be considered as a comparable company. We, therefore, direct the A.O./TPO to exclude Naina from the list of comparables. Hind Rectifiers Ltd. - We notice that the comparable company has earned profits in FY 2012-13 and therefore following the ratio laid down in Affinity Express India P Ltd ( 2016 (3) TMI 1121 - ITAT PUNE we hold that these companies should be included for the purpose of comparability and computation of ALP. Incap Limited - TPO rejected the comparable on the ground that the same did not appear in search undertaken by TPO - We are of the view that identical directions as per PRISM NETWORKS PRIVATE LIMITED case 2022 (2) TMI 1296 - ITAT BANGALORE it would be just and sufficient in the present case hence the regarding inclusion of the aforesaid company as comparable company is hereby set aside to AO/TPO for fresh consideration. Continental Device India Private Limited - We are of the considered view that the exclusion of Continental Device should be upheld as the company is having spends on R D and carry intangible whereas for the assessee the year under consideration is the first year of operation. Working capital adjustment - We remit the issue to the file of AO/TPO to consider the working capital adjustment taking into consideration the details submitted by the assessee after allowing an opportunity of hearing to the assessee. Denial of capacity utilisation - assessee had made an adjustment toward capacity utilisation on the ground that it is the first year of operation in the manufacturing segment - TPO denied the same by stating that the capacity utilisation adjustment can only be made for comparable and not in the hands of the tested party - HELD THAT - We notice that the assessee has submitted the workings for the capacity utilisation of for the manufacturing segment . Considering the details furnished and respectfully following the above decision M/S. TOKAI RIKA MINDA INDIA PVT. LTD. 2023 (3) TMI 706 - ITAT BANGALORE we remit the issue back to the AO/TPO with similar directions. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly. TPO considering the incorrect operating cost - HELD THAT - In the interest of justice to give one more opportunity to the assessee, we remit the issue to the TPO to verify and allow the correct operating expenses for the purpose of computing the operating margin of the assessee. Additions made to building and plant machinery - HELD THT - AO in the remand proceedings has enhanced the disallowance for the reason that invoices were not enclosed for some of the additions and also purchase vouchers were not enclosed for certain other additions. We also notice that the assessee has submitted the full details pertaining to the additions before the lower authorities. Given these facts, in the interest of justice, we are of the considered view that the assessee should be given one more opportunity to substantiate the claim.

Summary

Issues Involved:
1. TP Adjustment
2. Exclusion of Comparables
3. Inclusion of Comparables
4. Working Capital Adjustment
5. Capacity Utilization Adjustment
6. Incorrect Operating Cost
7. Corporate Grounds (Disallowance of Additions to Building, Plant & Machinery and Depreciation)
8. Penalty Proceedings
9. Set-off of Current Year and Brought Forward Losses

Issue-wise Detailed Analysis:

1. TP Adjustment:
The assessee raised issues regarding the TP adjustment of Rs. 7,05,68,803 to the international transaction related to the manufacturing segment. The TPO made an adjustment of Rs. 7,11,01,797/- which was later reduced by the DRP to Rs. 7,05,68,803/- after excluding one comparable, Comstar Automotive Technologies Pvt. Ltd.

2. Exclusion of Comparables:
- Auto Ignition Ltd.: The Tribunal excluded Auto Ignition Ltd. from the list of comparables due to its diversified business, export sales, R&D activities, and intangible assets, which made it functionally dissimilar to the assessee.
- Chheda Electricals & Electronics Pvt. Ltd.: The Tribunal upheld the inclusion of Chheda Electricals as it was functionally similar to the assessee, despite the assessee's arguments regarding capacity utilization and tax benefits under section 80IC.
- Naina Semiconductors Ltd.: The Tribunal directed the exclusion of Naina Semiconductors due to its diversified business, export earnings, and R&D activities, making it functionally dissimilar to the assessee.

3. Inclusion of Comparables:
- Hind Rectifiers Ltd.: The Tribunal directed the inclusion of Hind Rectifiers Ltd. as it had earned profits in one of the three years, following the principle that a company cannot be excluded merely for having losses in two out of three years.
- Incap Limited: The Tribunal remitted the issue back to the AO/TPO for fresh consideration, directing them to examine the financials as the TPO had rejected it without proper examination.
- Continental Device India Pvt. Ltd.: The Tribunal upheld the exclusion of Continental Device due to its R&D activities and intangible assets, aligning it with the exclusion of Auto Ignition and Naina Semiconductors.

4. Working Capital Adjustment:
The Tribunal directed the AO/TPO to compute the working capital adjustment while computing the operating margin of the comparables, following the decision in the case of Huawei Technologies India P. Ltd.

5. Capacity Utilization Adjustment:
The Tribunal remitted the issue back to the AO/TPO with directions to consider the capacity utilization adjustment, following the decision in the case of Tokai Rika Minda India (P) Ltd vs DCIT. The Tribunal emphasized the necessity of adjustments due to the assessee's first year of manufacturing operations and significant idle capacity.

6. Incorrect Operating Cost:
The Tribunal remitted the issue back to the TPO to verify and allow the correct operating expenses for computing the operating margin of the assessee, giving the assessee another opportunity to furnish the required details.

7. Corporate Grounds:
- Disallowance of Additions to Building, Plant & Machinery and Depreciation: The Tribunal remitted the issue back to the AO to consider the various invoices and purchase vouchers submitted by the assessee, giving the assessee one more opportunity to substantiate the claim.
- Incorrect Computation of Depreciation: This issue became academic due to the directions given regarding the disallowance of additions.

8. Penalty Proceedings:
The Tribunal did not separately adjudicate this issue as it was consequential.

9. Set-off of Current Year and Brought Forward Losses:
The Tribunal did not separately adjudicate this issue as it was consequential.

Conclusion:
The appeal of the assessee was partly allowed, with several issues remitted back to the AO/TPO for fresh consideration and verification. The Tribunal emphasized the need for accurate adjustments and fair consideration of the assessee's claims, especially regarding capacity utilization and working capital adjustments.