TMI Blog2011 (6) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... ng order in this regard. External comparable v/s domestic comparable - the revenue authorities or the DRP deliberated on the acceptability of the six comparable furnished by the assessee summarily dismissing the assessee's submissions in this regard. The same is not proper that the Assessing Officer/TPO have not find mistake with the six external comparable filed by the assessee. They merely held that the domestic comparables are to be relied as the labour related problems are common to both export and domestic segments. In fact, considering the facts relevant to the subsequent assessment year where the Assessing Officer/TPO accepted the six external comparable for the purpose of the TNMM, the assessee conveyed no objection for going to the files of the Assessing Officer/TPO in this regard - Rule of consistency - assessee contested that the external comparable prices for the AY 2006-07 when accepted by AO for that assessment year must be accepted for this year in view of the absence of material facts - Held that:- It is a settled law that the principle of res judicata is inapplicable to Income-tax matters. However, the same is true as long as the facts of different in differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not the internal controlled comparable for determining the arm's length price of the impugned international transaction. 3. The ld.DRP/Assessing Officer erred in not granting an economic adjustment on account of labour unrest while conducting the comparability analysis. The Ld.DRP/Assessing Officer erred in not considering the impact of labour unrest on the appellant's profitability from its international transactions and thereby not comparing the adjusted profitability with the external comparables. 4. On a without prejudice basis, the Ld.DRP/Assessing Officer erred in disregarding the differences in the functional, asset and risk (FAR) profile of the appellant's export segment and the domestic segment while undertaking the benchmarking analysis. Also, the Ld.DRP/Assessing Officer erred in disregarding the adjustments made by the appellant in connection with certain FAR differences between the aforesaid segments while the onus is on the Ld. Assessing Officer to make reasonably accurate adjustments to eliminate the above differences. 5. The Ld.DRP/Assessing Officer erred in upholding the TPO's stance of adjustment of 44.54 per cent being granted, for the differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions, the disputed transactions relates to the 'export of the carpets' and the export sales amount involved works out to Rs. 34,33,26,376. It includes the scrape sales of Rs. 35.20 lakhs (rounded off) too. Corresponding unadjusted total cost is Rs. 39,83,86,412. Thus, net effect is the export loss to the assessee during the year to the tune of -13.57 per cent without adjustments. Per contra, on the domestic segment front, the margin is 27.09 per cent. While filing the return, in view of the applicability of the 'transfer pricing' provisions to the international transactions, the assessee adopted the 'transactional net margin method' - "TNMM" and made adjustments to the said total cost relatable to the 'unabsorbed overheads' and such adjustments as per the assessee works out to Rs. 7,31,73,120. In other words, the said total cost of Rs. 38,93,86,412 was under absorbed by the assessee during the year due to the undisputed labour unrest and therefore, it calls for adjustments as per the transfer pricing guidelines - arm's length principles. Accordingly, assessee made the said economic adjustment of Rs. 7,31,73,120 to the total cost relatable to the exports to the BRA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and confirming the additions made by the revenue. As per Mr. Mitra, a couple of keys issues for adjudication by the Tribunal are as under: (i) export segment cannot be compared with the domestic segment; and external comparables would be more appropriate; and (ii) economic adjustment on account of labour unrest is warranted to arrive at correct profitabalility of the international transaction pertaining to export of carpets. In this regard, the learned Counsel explained the grounds raised in the appeal and proceeded to make various arguments. Some of them are as follows: (i) When the external comparables of the available for making the transfer pricing adjustments to the export segment of the carpet, the decision of the Assessing Officer/TPO combine in resorting to the internal comparables is not proper. This is for the reason in the instant case domestic comparable cases are controlled ones which cannot be compared with the uncontrolled transactions. Demonstration the incorrectness of picking up the domestic comparable, Mr. Mitra referred to 4 of the reasons given in the written synopsis filed before us and they are: A. Domestic segment entails co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. Comparable cases accepted by the department in the subsequent assessment year should be adopted for the purpose of computing the transfer pricing adjustments for the current year also. Ld. Counsel also narrated the facts of that case and stated that the Assessing Officer/TPO initially picked up the domestic comparable cases in that case too as in the case of the present assessee and such a decision was not accepted by the Tribunal vide the cited order dated 23-2-2011. Finally, Ld. Counsel summed up stating that the Assessing Officer/TPO's picked up of the domestic comparable cases in place of the 6 external comparables picked up in the subsequent assessment year erroneously and it is contrary to the established binding decisions of the Tribunal in the matter. Further, the Counsel mentioned that the matter may be set aside for the Assessing Officer/TPO to reject the domestic comparables and adopt the external comparables which were adopted in the subsequent year or any other external comparable cases. In this regard, Ld. Counsel prayed for setting aside the impugned order with the direction to the Assessing Officer to decide the issue afresh honouring the co-ordinate Bench decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to these facts of the unrest. 6. Per contra, Sri Hareshwar Sharma, Ld. DR dutifully relied on the orders/guidelines of the Revenue. Further, on this issue relating to domestic comparable vs. external comparable and the rule of consistency, the ld. DR argued vehemently stating that the principle of res judicata does not apply to the Income-tax matters and mentioned that every assessment year is independent. On the comparable, Ld. DR is of opinion, the onus is on the assessee to bring correct comparable to justify its claim and the non-requirement of the transfer pricing adjustments. Consequently, as per the Ld. DR, the six external comparables used by the Assessing Officer/TPO in subsequent years need not be adopted for the current assessment year. Tribunal's Finding 7. We have heard the parties and perused the draft order/orders/guidelines of the DRT of the Revenue as well as the cited decision before us. Correct operating margin of the export segment and the need for the adjustments based the correct comparables in accordance with the transfer pricing guidelines are the broad area of disputes. In this regard, the rival stands are as follows. Assessee's case is that the unad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re considered and we now proceed to adjudicate the two focal issues underlined by the Ld. Counsel for the assessee. We shall take up the first issue first and the same is whether the export segment can be compared with the domestic segment when the Assessing Officer accepted the external comparables were accepted as appropriate in the subsequent assessment year. This issue has various facets and they are: (i) what is wrong with the external comparable adopted by the assessee; (ii) whether, it is justified to adopt the domestic comparable where the domestic segment consists of only 8.86 per cent against the 91.14 per cent of the export segment in terms of volume; (iii) rule of consistency; and (iv) the existing decision on this issue etc. 10. To discuss the above, on the issue of 'external comparable' versus the 'domestic comparable', the revenue authorities or the DRP deliberated on the acceptability of the six comparable furnished by the assessee. We find they have summarily dismissed the assessee's submissions in this regard. In our opinion, the same is not proper that the Assessing Officer/TPO have not find mistake with the six external comparable filed by the assessee. They m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same is true as long as the facts of different in different assessment years. Otherwise, the rule of consistency is relevant to Income-tax matters and Assessing Officer cannot be ignore the same. There ought to be uniformity in treatment and consistency when the facts and circumstances are identical as held by the Mumbai Tribunal in Gopal Purohit v. Jt. CIT [2009] 122 TTJ 87/29 SOT 117. Recent judgment of the Mumbai High Court in the case of CIT v. Gopal Purohit [2010] 188 Taxman 140, of course, in connection with the issue of proper head of income for taxing the gains on sale of the shares is relevant for the conclusion and it read as follows. " there ought to be uniformity in treatment and consistency in various years when the facts and circumstances are identical no substantial question of law arises." 12. Further, we have perused the decision of the Mumbai Benches in the case of NGC Network (India) (P.) Ltd. (supra) relied upon by the assessee on the of rule of consistency and need for not taking the domestic comparables and the need for taking up the external comparable in matters of the 'transfer pricing' adjustments. The perusal of paragraph 15 which is reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year should be adopted as basis as the business being same, it will give better results. Merely because the transaction is with an associate enterprise cannot be the ground to reject it as a comparable when the transaction is at arm's length. However as we have held earlier, in our view it will be most appropriate to compare the transactions for the same year i.e., assessment year 2003-04 for which the figures are available in respect of comparables which have already been accepted by the department. We therefore set aside the order of CIT(A) and restore the matter to the file of Assessing Officer for reworking of the transfer pricing adjustments using TNMM on the basis of facts and figures available for assessment year 2003-04 in respect of the comparable selected by the assessee and pass fresh order after allowing opportunity of hearing to the assessee." 13. From the above, it is evident that ' comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e., 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case stating that the said labour unrest is common to both export and domestic segment. In this regard, the counsel relied upon the decision of the Mumbai Bench in the case of Fiat India (P.) Ltd. (supra) for the proposition that in cases of adoption of TNMM, the assessee are entitled to adjustments on account of under utilization of capacity. We have examined the issue in depth and find there is no dispute on the facts relating to the labour unrest. Nevertheless, there is some confusion on the length/period of the labour unrest or agitations. The revenue holds the company was closed for 19 days and on the contrary the assessee holds that the said period run into more than 5/6 months in the year under consideration. Thus, considering our decision that the need for the Assessing Officer/TPO to adopt the external comparable for the reasons given above, there is need for setting aside this key issue also to the files of the Assessing Officer for examining the issue of economic adjustments. Philosophically, in matters of TNMM cases, the Assessing Officer is empowered to make the adjustments and the relevant rules are reproduced as under. "Section 10B( a )-( d )** ** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years 2002-03, 2003-04 as well as in the immediate succeeding years i.e., 2005-06 and 2006-07 wherein the facts involved were similar to that of the year under consideration i.e., assessment year 2004-05; + accordingly, no infirmity is found in the impugned order of the CIT(A) as the adjustments made by the assessee in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the assessee company with its associated concerns during the year under consideration were at arm's length requiring no adjustment/addition on this issue." 16. From the above, it is evident that the assessee is entitled to economic adjustments in the circumstances of under capacity utilization of the company. Of course, such adjustments must be restricted to fixed cost/overheads only. In the instant case, the Assessing Officer/TPO did not have the occasion to go into the period or the extent of the labour unrest, break up of the claimed adjustments amounting Rs. 7.32 crores (rounded off), fixed cost versus the variable cost etc. as they summarily rejected the external comparables in view of their preference to the operating profits of the do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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