2024 (9) TMI 17 - AT - Income Tax

TP adjustment to the international transactions - Non-Satisfaction of conditions - HELD THAT - Hon ble Delhi High Court has held in the case of Chryscapital Investment Advisers(India)(Pvt.) Limited. 2015 (4) TMI 949 - DELHI HIGH COURT that while determining the comparability of transactions, multiple year data can only be included in the manner provided in rule 10 B(4) and as a general rule, it is not open to the assessee to rely upon previous year s data. It is a well settled principle that the assessee is required to perform Functional Asset and Risk (FAR) analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. If so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to other years. To do so, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. The assessee has not done any such analysis and established that the factors of comparability for the years as selected by it were identical to the facts and factors of the current year. The reliance of the assessee on previous two years data and not using any current year data was not in accordance with the provisions of law and, therefore, the TP study report of the assessee was rightly rejected. The ground taken by the assessee is dismissed. TP adjustment in manufacturing segment - Comparable selection - HELD THAT - Coventry Coil-O-Matic (Haryana) Ltd.(CCHL) is found to be engaged in manufacture of altogether different product and raw material utilized by it was also different. CCHL was manufacturing Auto Suspension Springs and Coil Springs while the assessee was manufacturing tubular products. The raw materials of CCHL was steel wires whereas the assessee s raw materials were copper coated steel strips and sheets. As the product as well as the raw material of CCHL was different from that of the assessee, the two companies were not functionally comparable. Hence, CCHL was correctly rejected by the TPO as a comparable. Frontier Springs Ltd.(FSL) - When the assessee has requested for application of export filter while choosing the comparable; by the same logic import filter also has to be applied to the comparable. And when we consider the import filter, this company can t be considered as functionally comparable to the assessee. Gabriel India Ltd.(GIL) - The raw materials utilized by GIL were tubes, bright bars, shock fluid, non-ferrous metals and steel strips. In addition components such as Pressed Parts, Die Castings, Rubber Parts, Sintered Parts and Forgings etc. were also utilized. Shock absorber is altogether different type of spring which can t be compared with the products being manufactured by the assessee. The other products manufactured by GIL are also found different from the products manufactured by the assessee as there is no similarity in the product profile. Considering the difference in the product profile of the two companies the rejection of GIL as a comparable is upheld. Jamna Auto Industries Ltd.(JAIL) - In the case of Jamna Auto Industries Ltd., the manufacturing product was Spring Spring Leaves and the raw material consumed was spring steel flats. Further, all the raw material of JAIL was indigenously acquired and there was no import of any raw material. Considering this difference in the product and in mode of acquisition of raw materials viz. the import filter, this company couldn t have been considered as a comparable. Hence, rejection of JAIL as a comparable by the TPO is upheld. FCC Rico Ltd.(FCC) - As found from the above chart that the related party transaction of FCC in respect of purchase of raw materials during the year was 37.17%. It is also seen from the order of the Ld. CIT(A) that he had rejected the comparable, where the related party transaction was in excess of 25%. As the related party transaction in this case also exceeds 25%, it is directed that FCC should also be excluded from the set of comparable. Setco Automotive Ltd - Presence of any intangible doesn t make a company ineligible to be considered as a comparable. One has to find out as to how the intangible is effecting the margin of the comparable company. The assessee has not brought out anything on record to demonstrate that the intangible had an impact on the margin of this comparable company. Rather the TPO had analyzed the intangibles owned by Setco Automotive Ltd. and stated that intangible assets owned by this company was not in the nature of those that could affect the margin by enabling the entity to earn the higher margins; which has not been controverted by the assesse. Therefore, the objection of the assessee to this comparable is rejected and the order of the CIT(A) in this regard is upheld. ANG Industries Ltd. - As found from the accounts that the export sales of this company was Rs. 65.24 crores against domestic sales of Rs. 48.22 crores during the Financial Year 2006-07. On the other hand the export to turnover ratio of the assessee company was only 4.72%. As this issue of export filter was neither raised before nor examined by the lower authorities the matter is set aside to the TPO to examine the objection of the assessee on the ground of export filter in respect of this comparable. TP adjustment in ITES segment - assessee company was providing back office support service to its AEs - ALP of the service was determined by the TPO and an adjustment was made - HELD THAT - In the present case, transactions covered under MAP resolution is only the 41.16%. Thus, the facts of the two cases are found to be distinctly different as the transaction not covered under MAP in that case was a miniscule 4% whereas such transactions in this case is substantial 58.48%. Further, this issue can be decided after undertaking FAR analysis of non-UK transactions in order to find out whether there is any distinction in the factors influencing the price between UK and non UK transactions. The assessee has not brought on record any similarities of factors that influenced the price between UK and non-UK transactions. Therefore, we are of the considered opinion that the matter may be restored to the file of the TPO/AO for analysis of factors influencing the price between UK and non-UK AE transactions for ITES segment. If it is found that the factors influencing the price are similar between UK and non-UK transactions, the price adopted for UK transactions may also be adopted for non-UK transactions. In this regard we are guided by decision of Dell International Services India (Pvt.) Ltd. 2016 (9) TMI 403 - ITAT BANGALORE wherein it was held that if after taking a FAR analysis of non-US transactions, it is found that factors influencing the price were similar between US and non-US AE transactions, same price fixed under MAP can be adopted for all the transactions. Nature of expenses - expenditure of Jigs and Fixtures - HELD THAT - It is found that the assessee company is not treating the jigs and fixtures as revenue expenditure in its books of accounts. The company had a policy of writing off of the expense over a period of two years since long term enduring benefit was derived from jigs and fixtures. Undoubtedly, the jigs and fixtures are not in the nature of repairs and maintenance, so as to claim it as a revenue expenditure. They are utilized in the manufacturing process and the assessee has admitted that long term enduring benefit of at least two years is derived from them. The facts of the case Ucal Machine Tools (P.) Ltd. 2016 (7) TMI 907 - ITAT CHENNAI relied upon by the assessee are found to be different. In that case, the issue involved was expenditure on tools such as screw drivers, spanners which are purchased along with the machineries and their replacement was claimed as revenue expenditure. In the present case, the assessee itself is not treating the expenditure in respect of jigs and fixtures as revenue expenditure, rather it is writing off the same in the accounts over two years period. The decision of the Ld. CIT(A) to treat the expenditure on jigs and fixtures as capital expenditure and allow depreciation on the brought forward WDV is upheld. Therefore, this ground is dismissed. Working Capital adjustment - HELD THAT - The matter is set aside to the file of the TPO to verify whether any working capital adjustment was granted while determining the ALP of the international transactions in the A.Y. 2009-10 and 2010-11, as claimed by the assessee. If yes, a similar adjustment may be allowed in the current year as well. The ground is allowed for statistical purpose.

Summary

Issues Involved:
1. Non-Satisfaction of conditions for making TP adjustment.
2. TP adjustment in manufacturing segment.
3. TP adjustment in ITES segment.
4. TP adjustment in management charges.
5. Standard deduction of 5% variation.
6. Revenue expenditure of jigs and fixtures.
7. Charging of interest under sections 234B and 234D and withdrawal of interest under section 244A.
8. Working capital adjustment.

Detailed Analysis:

1. Non-Satisfaction of Conditions for Making TP Adjustment:
The assessee contended that the AO/TPO did not explicitly establish that any situation envisaged in section 92C(3) of the Act was fulfilled before making adjustments to the international transactions. The TPO had not pointed out any deficiency in the TP study report prepared by the assessee. However, it was found that the information or data used by the assessee in the computation of ALP was not reliable or correct, which is a precondition under section 92C(3) of the Act. The TP study report was intended for policy making and not for determining the ALP for the current year. The use of past two years' data instead of current year data was not in accordance with Rule 10B of the IT Rules.

2. TP Adjustment in Manufacturing Segment:
The assessee argued that the TPO disregarded the methodical search process and rejected 5 out of 8 comparables without considering Rule 10B(2) of the IT rules. The TPO included certain comparables with abnormal sales and super normal profits and rejected loss-making companies. The CIT(A) directed the use of 11 comparables for computing ALP. The Tribunal examined each comparable and upheld the rejection of Coventry Coil-O-Matic (Haryana) Ltd., Frontier Springs Ltd., Gabriel India Ltd., and Jamna Auto Industries Ltd. due to differences in product profile and raw materials. The Tribunal also upheld the inclusion of Setco Automotive Ltd. and remanded the issue of ANG Industries Ltd. for further examination.

3. TP Adjustment in ITES Segment:
The assessee provided back-office support services to its AEs, and an adjustment of Rs. 44,47,175/- was made by the TPO. The assessee accepted the MAP resolution for transactions with UK AEs, which determined a margin of 18%. The Tribunal found that the transactions covered under MAP resolution were only 41.16% and remanded the issue to the TPO/AO to analyze factors influencing the price between UK and non-UK transactions.

4. TP Adjustment in Management Charges:
The assessee initiated MAP under Article 27 of the DTAA between India and the UK for management fee adjustment of Rs. 145,54,002/-. The MAP resolution allowed 70% of the management fee adjustment. The assessee requested the withdrawal of this ground, and the Tribunal dismissed it as withdrawn.

5. Standard Deduction of 5% Variation:
The ground regarding the standard deduction of 5% variation as provided under section 92C(2) of the Act was not pressed by the assessee and was dismissed.

6. Revenue Expenditure of Jigs and Fixtures:
The assessee claimed write-off of Rs. 31,49,367/- as revenue expenditure, which was disallowed by the AO. The CIT(A) treated it as capital expenditure and allowed depreciation. The Tribunal upheld the CIT(A)'s decision, noting that the assessee derived long-term benefits from jigs and fixtures and treated them as capital expenditure in its books.

7. Charging of Interest under Sections 234B and 234D and Withdrawal of Interest under Section 244A:
The ground regarding the charging of interest under sections 234B and 234D and withdrawal of interest under section 244A was consequential and dismissed.

8. Working Capital Adjustment:
The assessee raised an additional ground for working capital adjustment. The Tribunal remanded the issue to the TPO to verify if such an adjustment was granted in A.Y. 2009-10 and 2010-11. If granted, a similar adjustment should be allowed for the current year.

Conclusion:
The appeal was partly allowed, with certain issues remanded for further examination and others dismissed or upheld based on the evidence and legal provisions. The Tribunal's decision emphasized adherence to the correct application of transfer pricing rules and the importance of reliable data in determining the ALP.