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2009 (2) TMI 736 - AT - Income TaxTP Adjustment - Comparable selection - exclusion of Wellwin Industry Ltd. as a comparable - deduction towards “provision of future loss” - Arm’s length price of imported raw material and finished goods - addition made under the head “Transfer Pricing adjustments” was challenged by the taxpayer before CIT - A.O committed an error in the selection of the comparables was reiterated - TPO was wrong in not taking into account the results of the relevant period of Wellwin Industry Ltd, which had suffered losses - The said enterprise was considered by the revenue authorities for a similar exercise for the AY 2003-04 and therefore, there was no justification for excluding it in AY 2004-05. CIT (A) upheld the Transfer Pricing adjustments. HELD THAT:- The company did not maintain separate accounts for the period March 31, 2004. The taxpayer did try to work out the alleged losses of the concern for the period ending March 31, 2004 on some basis by taking average of profits but was unable to show to the revenue authorities that figures so arrived at were correct and reliable for comparison. During the course of hearing of the appeal, we had also asked the ld. counsel to give working of results of the concern for the relevant period on some sound basis, but the ld. Counsel showed his inability to do so. He conceded that results of the concern are not available in the public domain. If that is the position, we see no force in the objection of the taxpayer to non inclusion of Wellwin Industry Ltd. in the list comparables for working mean margin of operating profit under TNM Method. Admittedly, Wellwin Industry Ltd. in the period prior to the financial year under consideration, had shown profit and same was taken into consideration for determining arm’s length price for the AY 2003-04. However, its accounts for the period ended 31.3.2004 are not available and, therefore, could not be taken for working mean margin of profit. On these facts, we do not find any error in the approach of revenue authorities in excluding Wellwin Industry Ltd. for a comparative analysis. Deduction of provision for future loss debited in the profit and loss account - We are of view that for finding operative profit margin of the taxpayer or other similar enterprises, under TNM Method, all receipts and disbursements shown in accounts for the relevant period are required to be scrutinised. Only items of receipt or expenditure having nexus with the operating profit/loss of the enterprises are to be taken into consideration. An item of receipt or expenditure, which has no direct connection with operating profit, is to be ignored. Further, relevant receipts and expenditure for the year ending 31.3.2004 are relevant and not future profit or loss of the subsequent year as discussed earlier. It appears that to settle accounts with Tata Group, which withdrew from the enterprise after 31.3.2004, future losses were also provided in the accounts. Otherwise such provision of future losses, prima facie, had no connection with operating profit of the financial year. We, therefore, permit the assessee to raise alternative ground of appeal on question of deduction of provision for future loss debited in the profit and loss account. In our opinion, consideration of above debit entry is fundamental to computation of correct profit margin of the enterprise. As the question was not raised by the taxpayer before the revenue authorities and was neither examined by the taxpayer nor by TPO, we set aside impugned orders and direct that above question be examined in accordance with law and profit margin of the taxpayer be determined as warranted by facts and circumstances of the case. All relevant details be examined to finally decide the issue. In the interest of justice, the question of claim of deduction of provision of future loss is remitted to the file of AP / T.P.O. In the result, taxpayer’s appeal is allowed, for statistical purposes.
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