2017 (9) TMI 1881 - AT - Income Tax

TP Adjustment - selection of TNMM method as Most Appropriate Method - Comaparability - capacity utilization - TPO has rejected the three comparables on the premise that the assessee has not furnished the details though said information was ascertainable and discernable from the record reproduced hereinabove but the TP Officer has rejected the three comparables on the premises that the capacity utilization figures of production as well as of the installed capacity are not available in the same units - HELD THAT - Firstly if the TPO is rejecting three comparables on account of non availability of the capacity utilization and installed capacity in the same unit it does not debar the TPO from using his powers under the Act. TPO is duty bound to move a step forward and issue a notice under Section 133 to seek the information of capacity utilization of installed as well as production in the same unit which is not done by the TPO. TPO was under obligation in law to conduct his own TP study if rejected the three comparable were rejected by him by bringing more comparable which are comparable with the profile of the assessee. That exercise of bring more comparables in the form of TP study had not been done by TPO and TPO had determined the ALP adjustment based on only one comparable and further notice under section 133 were not issued to the comparables for seeking the necessary information s on capacity utilization . The case in hand is not one case where it is not possible for TPO to find out the other suitable comparable after rejecting the comparables of the assessee. But no efforts were made by the TPO to find out the more comparable so as to make the ALP adjustment based on mean profit margin of the comparables. In our view the making adjustment on the basis of standalone comparable is not a healthy practice unless the comparable available is internal one and is therefore required to be dissuaded. Adjustment made by the TPO on the basis of one comparable is not sustainable in the eye of law and accordingly we have no hesitation to reject the orders passed by lower authorities however we deem it appropriate to direct the TPO to conduct a fresh TP study after taking into consideration the above said observation and also the profile of the assessee. Accordingly this issue is decided in favour of the assessee for the statistical purposes and entire TP grounds are remanded back to the file of TPO. Depreciation policy adopted by the appellant viz a viz the comparable - appellant advocated an alternative approach of considering cash profit upon sales margin (PBDIT/Sales) as the PLI wherein the depreciaton cost would be taken out from the computation of PBDIT - HELD THAT - We are remanding back the TP issue to be the file of the Transfer Pricing Officer for conducting the fresh TP study after searching the fresh comparables in accordance with law therefore no purpose would be served to adjudicate the present ground as it will be of academic in nature. Accordingly this ground is dismissed as being infructuous.

Summary

Issues Involved:
1. Validity of the order passed by CIT(A) upholding the AO and TPO's orders.
2. Determination of arm's length adjustment to the appellant’s international transaction.
3. Reference made by AO to TPO without recording reasons.
4. Determination of arm's length price by disregarding multiple year data and rejecting comparable companies.
5. Rejection of alternative approach considering PBDIT/Sales as the appropriate PLI.
6. Treatment of foreign exchange gain as non-operating in nature.
7. Validity of initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of the Order Passed by CIT(A):
The appellant argued that the CIT(A) erred in upholding the AO and TPO's orders. However, this ground was deemed general and not adjudicated.

2. Determination of Arm's Length Adjustment:
The appellant contended that the CIT(A)/AO/TPO erred in determining the arm's length adjustment, computing the total income at Rs. 71,163,895 against a claimed loss of Rs. 31,195,218. The TPO rejected three out of four comparables selected by the appellant, using only Brakes India Limited for determining the arm's length price. The Tribunal found that the TPO should have conducted a fresh TP study and sought additional comparables, as making adjustments based on a single comparable is not a healthy practice. The issue was remanded to the TPO for a fresh study.

3. Reference Made by AO to TPO:
This ground was not pressed by the appellant and was dismissed as not pressed.

4. Determination of Arm's Length Price:
4.1 Disregarding Multiple Year Data:
This ground was not pressed by the appellant and was dismissed as not pressed.

4.2 Rejecting Comparable Companies:
The TPO rejected three comparables due to discrepancies in capacity utilization data. The Tribunal noted that the TPO should have sought additional information or conducted his own TP study to find suitable comparables. The Tribunal directed the TPO to conduct a fresh TP study, considering the capacity utilization adjustments and the appellant's profile.

5. Rejection of Alternative Approach (PBDIT/Sales):
The appellant proposed using PBDIT/Sales as the PLI to address differences in depreciation policies and capacity utilization. The Tribunal, remanding the TP issue to the TPO for a fresh study, found it unnecessary to adjudicate this ground, deeming it academic in nature.

6. Treatment of Foreign Exchange Gain:
6.1 Non-operating Nature:
This ground was not pressed by the appellant and was dismissed as not pressed.

6.2 Non-operating Nature in Manufacturing Segment:
This ground was not pressed by the appellant and was dismissed as not pressed.

7. Validity of Penalty Proceedings:
This ground was deemed general and not adjudicated.

Conclusion:
The Tribunal found that the TPO erred in rejecting comparables without conducting a thorough TP study and seeking additional information. The Tribunal remanded the TP issues to the TPO for a fresh study, considering capacity utilization adjustments and the appellant's profile. The appeal was partly allowed for statistical purposes.