2023 (9) TMI 543 - AT - Income Tax

TP Adjustment - comparable selection - functional difference between the assessee and comparable selected - HELD THAT - HSIL Ltd.- We find it difficult that for non-availability of segmental information in the financial statement (standalone), this entity needs to be eliminated from the list of comparables. The approach of the learned DRP is reasonable and correct and a very pragmatic one. By this approach, learned DRP segregated the margins of packing division and culled out the margins of sanitary products. Functional comparability - As submission of learned AR that the annual report shows that HSIL Ltd., is manufacturing 3.8 million pieces sanitaryware and 3 million pieces of faucets and, therefore, significant amount of material that goes into faucet manufacturing. We are not prepared to agree with this approach. With reference to the figures, learned AR took us to Note 25 in the significant accounting policies, where clay, soda ash, cullets, quartz/feldspar and others are mentioned, to say that the assessee does not deal with cullets and quartz/feldspar. Firstly, cullets and quartz/feldspar are useful only in packing division and we are not considering it now. There is no material to show that the other material that is used has nothing to do with the sanitaryware production. Even if some fraction of it is used, ultimately, the learned DRP while referring to the consolidated financial results held that the segmental results reported therein are agreeing with the figures in the financial statement (standalone) and reflect reliable financial performance of the divisions. When the functions are broadly agreeing with each other, it is not possible to count the differences in the description of the products and to eliminate the entity. Though the terms used are generic in nature giving an impression that the company is engaged in diversified activities, the core activity of both the entities is dealing in tiles and sanitaryware. One shall not lose sight of the fact that information contained in the websites of any entity and sometimes in the annual report would be intended to give a very attractive picture of such company and its areas of activity will be mentioned in usually general and wide spread terms to attract the customers and the same cannot be given much weight. In these circumstances, we agree with the findings of the learned DRP and decline to exclude HSIL Ltd., from the list of comparables. Cera Sanitaryware Ltd. - Unlike in the case of HSIL Ltd., in this case, the consumption of raw material suggests the proportions of different activities of this entity, but without any clue about the proportionate revenues. In the case of HSIL Ltd., learned DRP was able to draw figures of sale and profit in respect of sanitaryware division and packing division, but it is not so in this case. Considering this aspect vis- -vis the financials of the company, we are of the considered opinion that in the absence of such information, it would not be safe to compare the assessee with this entity to draw the correct margins. We, therefore, direct the learned Assessing Officer/learned TPO to exclude this company from the list of comparables. Murudeswar Ceramics - DRP found in its directions that segmental details in respect of Murudeswar Ceramics are available and, therefore, vitrified tiles segments is comparable to the assessee. Learned DRP accordingly directed the learned TPO to adopt the vitrified segmental results of the company for the purpose of comparable analysis and margin computation - As Grievance of the assessee now is that this particular direction is not carried out by the learned Assessing Officer/learned TPO to its logical conclusion and, therefore, a direction need be given to the learned Assessing Officer/learned TPO to carry out such direction - DRP reports no objection. Recording the same, we direct the learned Assessing Officer/learned TPO to give effect to the directions of learned DRP on this aspect. Aggregation of transactions - submission on behalf of the Revenue that since the adoption of TNMM as MAM by the assessee and the aggregation of the transactions, both international as well as specified domestics are not disputed by the learned TPO and assessee cannot have any grievance with regard to aggregation of transactions - On a consideration of the material as a whole, we are of the considered opinion that the learned TPO will give an opportunity to the assessee on this aspect and take a view according to law. For this purpose, this issue is restored to the file of the learned Assessing Officer/learned TPO. Ground is accordingly treated as allowed for statistical purposes. Appeal therefore, stands partly allowed for statistical purposes.

Summary

Issues Involved:
1. Exclusion of comparables (HSIL Ltd. and Cera Sanitaryware Ltd.)
2. Consideration of segmental results of Murudeshwar Ceramics Limited.
3. Computation of transfer pricing adjustment for purchase of raw materials.
4. Verification of MAT credit.

Summary:

1. Exclusion of Comparables (HSIL Ltd. and Cera Sanitaryware Ltd.):
The assessee objected to the inclusion of HSIL Ltd. and Cera Sanitaryware Ltd. as comparables. The Tribunal upheld the inclusion of HSIL Ltd., noting that despite its diversified products, its core activity aligns with the assessee's business. The Tribunal found the approach of the Dispute Resolution Panel (DRP) reasonable, as segmental results from consolidated financial statements were reliable. However, Cera Sanitaryware Ltd. was excluded due to significant differences in raw material consumption and the absence of segmental revenue information, making it unsafe for comparison.

2. Consideration of Segmental Results of Murudeshwar Ceramics Limited:
The DRP directed the Transfer Pricing Officer (TPO) to adopt the vitrified segmental results of Murudeshwar Ceramics Limited for comparable analysis and margin computation. The Tribunal recorded no objection from the DRP and directed the TPO to implement this direction.

3. Computation of Transfer Pricing Adjustment for Purchase of Raw Materials:
The Tribunal noted that since the TPO did not dispute the adoption of the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and the aggregation of transactions, the assessee should not have any grievance regarding the aggregation. The Tribunal restored this issue to the TPO for reconsideration, giving the assessee an opportunity to present its case.

4. Verification of MAT Credit:
For the assessment year 2016-17, the Tribunal directed the Assessing Officer to verify and allow the Minimum Alternate Tax (MAT) credit, as it was a matter of verification.

Conclusion:
Both appeals were partly allowed for statistical purposes, with specific directions given for each issue. The Tribunal pronounced the order on August 31, 2023.