2017 (2) TMI 1449 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - Assessee company is engaged in the manufacture of tube pipes automatic components and tubular products primarily in the auto industry thus companies functionally dissimilar with that of assessee need to be deselected from final list. TPO not considered the Forex loss as non-operative in nature while calculating the operative margin of the company - HELD THAT - Foreign exchange loss or gain due to reinstatement of balance outstanding at the end of the year cannot be held as operating profit/loss since the same is on account of notional loss to comply with the accounting standards. With regard to the foreign exchange loss incurred in business operations for purchase of materials or for international transaction do not give any extra benefit to the AE who supplies the material since the AE receives the payment in foreign exchange and the assessee also makes the payment in foreign exchange. The loss was due to exchange difference between the foreign currency and the Indian currency. Therefore while computing the PLI operating income for the purpose of PLI both foreign exchange loss or gain should be excluded from the operating income. The DRP has allowed loss on Forex to exclude from the operating income relying on the safe Harbour Rules which provide for exclusion of Forex loss from operating expenses. Therefore we do not find any infirmity in the directions given by the DRP to exclude both foreign exchange loss or gain of the tested party as well as comparables from the operating income. This ground of Revenue is dismissed. Working capital adjustment - Assessee has not furnished the pricing model and reasons for extending extraordinary credit to its clients. Similarly the assessee did not furnish the pricing models of the comparable companies as well as the AE. The terms and conditions of sale and interest clause if any require verification - HELD THAT - The issue of working capital adjustment requires verification of facts from the assessment records of the assessee and the data of comparables companies in the light of discussion made above. Therefore we remit the matter back to the file of the AO to examine the assessee s claim of working capital adjustment on facts and make appropriate adjustment on facts and merits. It is needless to say that the Assessing Officer should give opportunity to the assessee to present the case. This ground of the assessee is allowed for statistical purposes. Idle capacity utilization - HELD THAT - The assessee has not furnished the details of installed capacity and capacity utilized and the reasons for non-utilization of the installed capacity and resources available and utilized by the assessee. Similarly the assessee has also not furnished the details of the comparable companies installed capacity and utilized capacity and the levels of break even. In the absence of reasons for non-utilization of installed capacity the claim for capacity adjustment is unfounded. The assessee claimed to be in the second year of operation but furnished the details in respect of sales to fixed costs which is insufficient information to decide whether installed capacity was due to start ups or not. The assessee did not explain the reasons for non-utilization of optimum capacity and therefore this objection of the assessee cannot be accepted and the decision of the Co-ordinate Bench in the case of M/s.Mando India Steering Systems Pvt. Ltd. 2015 (4) TMI 176 - ITAT CHENNAI is not applicable and this ground is dismissed. Selection of Armtek Ltd as comparable - HELD THAT - In the instant case the assessee is following accounting year from April to March and the comparable company M/s.Amtek Ring Gears Ltd. is following June 2008 to June 2009. Once the company is following a different accounting year there will be a wide range effects in the operating results and the company seized to be a good comparable. The AO has not reconciled the financials of the comparable company to the corresponding period of the tested party by collecting necessary information and re-casted the financials. Therefore we direct the AO to exclude the M/s.Amtek Ring Gears Ltd. as comparable. This ground of Cross-Objection of the assessee is allowed. RPT filter - HELD THAT - TPO has applied the RPT filter of 25% and the assessee objected for restricting it to 25%. The DRP has rejected the assessee s objection on the ground that the 25% has become more or less acceptable and it gets support from the fact that 26% is a threshold limit for treating the company as AE u/s.92A. Similarly Sec.40A(2)(b) treats 20% as the threshold limit for having substantial interest in the company. Therefore the DRP held the application of 25% is reasonable. No argument has been made by the assessee on this ground and we consider that as per the reasoning given by the DRP for application of 25 application of RPT appears to be reasonable and this ground is dismissed. Not considering the fresh set of comparables submitted by the assessee for bench marking the margins - HELD THAT - DRP has rejected the objection of the assessee stating that the additional set of companies were nothing but cherry picked by the Ld.AR without proper objectives and analysis. During the appeal hearing the Ld.AR did not place any additional information except reiterating the submissions made before the DRP. The Ld.AR has not placed TP analysis and the FAR analysis and the financials of the additional comparables before the tribunal. Therefore we uphold the directions of the DRP and this ground of the appeal is dismissed.

Summary

Issues Involved:

1. Inclusion of M/s. Ceekay Daikin Ltd. as a comparable.
2. Exclusion of foreign exchange loss from operating income.
3. Working capital adjustment.
4. Adjustment for idle capacity utilization.
5. Selection of Amtek Ring Gears Ltd. as a comparable.
6. Application of the RPT filter at 25%.
7. Consideration of a fresh set of comparables.
8. Exclusion of interest expenditure while computing PLI.

Detailed Analysis:

1. Inclusion of M/s. Ceekay Daikin Ltd. as a Comparable:

The Revenue challenged the DRP's direction to include M/s. Ceekay Daikin Ltd. as a comparable, arguing that the company had an exceptional year due to the introduction of a new product, 'one way clutch,' which affected its margins. The DRP, however, found that the company was functionally comparable to the assessee and that the introduction of the new product did not significantly impact the overall turnover. The Tribunal upheld the DRP's decision, noting that there was no evidence of extraordinary events or changes in accounting policies that would disqualify M/s. Ceekay Daikin Ltd. as a comparable.

2. Exclusion of Foreign Exchange Loss from Operating Income:

The Revenue contended that foreign exchange (forex) loss should be considered as part of operating income, citing OECD guidelines and previous ITAT decisions. The DRP, however, directed the exclusion of forex loss from operating income, relying on Safe Harbour Rules which exclude forex fluctuations from operating expenses. The Tribunal supported the DRP's decision, emphasizing that forex losses due to external market forces do not benefit the AE and should be excluded from operating income for PLI computation.

3. Working Capital Adjustment:

The assessee requested a working capital adjustment, which the DRP rejected due to a lack of evidence showing extraordinary credit periods from the AE. The Tribunal remitted the matter back to the AO for verification of the assessee's claim, allowing the assessee to present additional evidence regarding the pricing models and terms of sale.

4. Adjustment for Idle Capacity Utilization:

The DRP rejected the assessee's claim for an adjustment for idle capacity utilization, citing insufficient evidence and lack of detailed computation. The Tribunal upheld this decision, noting that the assessee did not provide adequate information on installed and utilized capacity or reasons for non-utilization, making the claim unfounded.

5. Selection of Amtek Ring Gears Ltd. as a Comparable:

The assessee objected to the inclusion of M/s. Amtek Ring Gears Ltd., which follows a different financial year. The Tribunal directed the exclusion of this company as a comparable, referencing a previous decision that a company with a different financial year cannot be considered a good comparable unless financials are reconciled to match the tested party's period.

6. Application of the RPT Filter at 25%:

The TPO applied a Related Party Transaction (RPT) filter of 25%, which the assessee contested. The DRP upheld the TPO's application, reasoning that 25% is a reasonable threshold supported by provisions in Sections 92A and 40A(2)(b) of the Income Tax Act. The Tribunal found this application reasonable and dismissed the assessee's objection.

7. Consideration of a Fresh Set of Comparables:

The DRP rejected the assessee's fresh set of comparables, labeling them as cherry-picked without proper analysis. The Tribunal upheld this decision, noting the lack of additional information or TP analysis from the assessee to support the inclusion of these comparables.

8. Exclusion of Interest Expenditure while Computing PLI:

The assessee's objection to the exclusion of interest expenditure while computing the PLI of comparable companies was dismissed by the DRP. The Tribunal also dismissed this ground, as no arguments were raised by the assessee during the appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objections, remitting the issue of working capital adjustment back to the AO for further examination. The Tribunal upheld the DRP's decisions on other issues, including the inclusion of M/s. Ceekay Daikin Ltd. as a comparable, exclusion of forex loss from operating income, and application of the RPT filter at 25%.