2019 (12) TMI 1694 - AT - Income Tax

TP Adjustment - comparable selection - CIT (A) justification in directing the TPO to exclude the comparables without any proper FAR analysis - taxpayer contended that since taxpayer is manufacturing non-core auto component viz. air-conditioner compressors and components used for cooling interiors of the car it cannot be compared with manufacturing company which is into the manufacturing of core components without which car cannot run. HELD THAT - We are of the considered view that distinction of the core and non-core auto components is the key to benchmark the international transactions undertaken by the taxpayer in this case and this view is supported with the decision of Minda Acoustic Ltd. 2019 (5) TMI 2034 - ITAT DELHI had made the distinction between core and non-core auto components as per Clause (b) (h) of Rule 10TA of the Income-tax Rules 1962 applicable to the identical facts. Tribunal making distinction in core and non-core auto components we are of the considered view that benchmarking in this case is required to be carried out with FAR analysis of the comparables keeping in view the distinction between core and noncore auto components because a company manufacturing core components cannot be compared with company manufacturing non-core auto components. When we further examine the contention raised by the ld. AR for the taxpayer that apart from M/s. Subros Ltd. Jagan Lamps Ltd. and Swaraj Automotives Ltd. are the suitable comparables to benchmark the international transactions it has come on record that Jagan Lamps Ltd. is manufacturer of auto bulbs halogen bulbs head lights automotive electrical spares and other related products and Swaraj Automotives Ltd. is manufacturer of seats of a kind used for automobiles. We are constrained to record that when we go by the product comparability as held in Rampgreen Solutions Pvt. Ltd. 2015 (8) TMI 931 - DELHI HIGH COURT relied upon by the ld. AR for the taxpayer again there is no comparability between the taxpayer and Swaraj Automotives Ltd. Jagan Lamps Ltd.. We are of the considered view that in view of the slipshot TP analysis made by the ld. TPO as well as ld. CIT (A) conditional remand cannot be made. At the same time we are of the considered view that to determine the arm s length price of the international transaction undertaken by the taxpayer fresh open ended TP analysis is required to be made by the TPO keeping in view the factum of product comparability as well as keeping in view the distinction between the core and non-core auto component manufactured for the purpose of comparability of the companies vis- -vis the taxpayer. The taxpayer has also challenged non-grant of benefit of arm s length range of /- 5% under the second proviso of section 92C (2) of the Act. Since the case is remitted back to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer the TPO is directed to decide this issue in accordance with the provisions contained under Rule 10TA. Appeal filed by the Revenue is allowed for statistical purposes.

Summary

ISSUES:

Whether the adjustment made to the international transaction value and consequent addition to income was justified.Whether the product classification of the taxpayer as 'Automobile Ancillaries' versus 'Engine Part Segment' was correctly determined for transfer pricing purposes.Whether the comparables selected by the taxpayer for benchmarking manufacturing segment transactions were appropriate and should have been accepted.Whether the transfer pricing approach adopted by the taxpayer was correctly rejected.Whether the filters applied by the authorities to reject comparables based on related party transactions exceeding 15% of sales and export sales exceeding 25% were correctly applied.Whether consumption of raw material as a percentage of total expenditure is a valid filter for selection or rejection of comparables.Whether the broader business profile of the taxpayer requires selection of comparables based on a broader industrial sector classification.Whether the Function, Assets, and Risk (FAR) profiles of comparables were properly evaluated.Whether the response of the taxpayer to comparables proposed to be added was duly considered.Whether the conclusion that only one company (Subros India Ltd.) is comparable was justified.Whether the benefit of safe harbor limit of +/- 5% was correctly applied or denied.Whether the Commissioner of Income Tax (Appeals) erred in directing the Transfer Pricing Officer (TPO) to exclude comparables without proper FAR analysis.Whether the distinction between core and non-core auto components is relevant and determinative for selecting comparables in transfer pricing analysis.Whether remand to the TPO for fresh transfer pricing analysis is necessary.

RULINGS / HOLDINGS:

The adjustment of Rs.3,46,21,430 to the international transaction value was upheld subject to correct benchmarking, but the safe harbor limit of +/- 5% benefit was denied as only one comparable was accepted, consistent with the proviso to section 92C(2).The product classification of the taxpayer as manufacturing non-core auto components (air-conditioning compressors and related parts) was accepted over the classification as core engine parts, given that non-core components are not vital for vehicle operation.The comparables selected by the TPO were rejected by the Commissioner of Income Tax (Appeals) for lack of product similarity and failure of quantitative filters; however, the CIT(A) erred in excluding comparables without conducting proper FAR analysis.The transfer pricing approach adopted by the taxpayer (TNMM with Operating Profit/Sales as PLI) was acknowledged as appropriate, but benchmarking requires proper selection of comparables based on FAR and product similarity.The filters relating to related party transactions and export sales were not properly applied by the authorities, and rejection of comparables on these grounds was not justified without adequate reasoning.Consumption of raw material as a percentage of total expenditure was a valid filter for comparability, and rejection of comparables with very low raw material consumption relative to the taxpayer was justified.The broader business profile requiring selection of comparables based on a broader industrial sector was not accepted; product and functional similarity were held to be more determinative.The evaluation of FAR profiles of comparables was inadequately performed by the CIT(A), who failed to conduct a proper FAR analysis before rejecting comparables.The taxpayer's responses to the addition of certain comparables were not sufficiently considered by the CIT(A).The conclusion that only Subros India Ltd. was comparable was premature and made without proper FAR analysis of other comparables.The benefit of safe harbor limit of +/- 5% under the proviso to section 92C(2) was not applicable where only one comparable was accepted.The CIT(A) erred in directing exclusion of comparables without proper FAR analysis, violating principles of transfer pricing comparability assessment.The distinction between core and non-core auto components is a key factor in benchmarking international transactions, supported by statutory definitions under Rule 10TA and precedent, and must be considered in FAR analysis.The matter was remitted to the TPO for fresh, open-ended transfer pricing analysis incorporating proper FAR and product comparability assessments, and for application of safe harbor provisions in accordance with Rule 10TA.

RATIONALE:

The Court applied the statutory framework of transfer pricing under the Income-tax Act, particularly section 92C(2) and Rule 10TA of the Income-tax Rules, 1962, which govern the determination of arm's length price and comparability factors including FAR analysis.Precedents such as the decision in Rampgreen Solutions Pvt. Ltd. emphasize the necessity of product and functional similarity for reliable benchmarking under TNMM.The Tribunal relied on the coordinate Bench decision in Minda Acoustic Ltd. to draw a clear distinction between core and non-core auto components, interpreting Rule 10TA clauses (b) and (h) to define core auto components as vital for vehicle operation, thereby necessitating comparability within the same category.The Court found that the CIT(A) failed to conduct a meaningful FAR analysis before excluding comparables, which is a doctrinal requirement for transfer pricing comparability assessment.The denial of the safe harbor benefit was consistent with the proviso to section 92C(2), which requires multiple comparables to apply the +/- 5% range.The remand for fresh transfer pricing analysis reflects a doctrinal insistence on comprehensive and methodical application of comparability criteria, including FAR and product classification, before determining arm's length price adjustments.No dissenting or concurring opinions were noted; the judgment reflects a reaffirmation of established transfer pricing principles emphasizing rigorous FAR and product comparability analysis.