TMI Blog2012 (4) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... ic adjustment on account of labour unrest while conducting the comparability analysis. The Ld. DRP / AO erred in not considering the impact of labour unrest on the appellant s profitability from its international transactions and thereby not taking cognizance of the directions passed by the Hon. Pune Tribunal for the AY 2006-07, wherein under similar circumstances the Hon. Tribunal has directed to provide for economic adjustment on account of labour unrest. 3. The Ld. DRP / AO erred in making a transfer pricing adjustment of ₹ 33,527,903 without appreciating the fact that the appellant is availing tax holiday benefits under Section 10B of the Act, and hence, there would not have been any untoward motive of desiring a tax advantage by manipulating transfer prices of its international transactions. 4. The Ld. DRP / AO erred in not giving cognizance to the explanatory circular issued by the Central Board of Direct Taxes ( CBDT ) which clarifies that the amendment to the proviso to Section 92C(2) is applicable in respect of Assessment Year 2009-10 and onwards. Thus, the Ld. DRP / AO erred in not granting the benefit of +/- 5% range as per the proviso to Section 92C(2) as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... labour. Therefore, the unadjusted operating margin of 13.57% (-ve) needs to be adjusted by adjusting the total cost of the export segment. Such adjustments, which are attributable to the under absorbed overheads, work out to ₹ 7.32 cr (rounded off). In effect, the adjusted operating margin works out to 5.88% as against the operating margin of 7.12% of the external comparable. The difference being only below 2%, the same has to be ignored in view of the proviso to section 92C(2) of the Act. Further, the as per the assessee, the domestic comparables is improper here as the AO rejected the external comparable prices summarily and honoured the same in the subsequent year and therefore, there is inconsistency in AO s approach, which is improper. Further, in these matters of such inconsistency, the assessee relied on decisions of the Tribunal in the cases of Fiat India P Ltd (supra) and E-gain Communication P Ltd (supra). 8. Per contra, the case of the revenue is that the principle of res judicata is inapplicable to the income tax matters and AO/TPO/DRP is free to decide the issue AY-wise depending on the facts of the case of that year. The unanswered queries of the revenue ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame labour, the same machines are being used for export as well as domestic segments, it is difficult to accept the contention of the assessee that the labour unrest affected only export and not a domestic segment. In fact, initially the asessee had denied having two separate segments. The assessee has given the break up on estimate basis. Since the same set up of facilities are being used the same man power, the same machines and same labour employed for manufacturing carpets for export and for domestic sale, it cannot be accepted that the labour strike or under utilization of capacity affected export segment only and the profitability went down because of the labour strike. Moreover, it was for a limited period and the loc out, admittedly has been for 19 days only. In these circumstances, we do not consider it necessary to interfere with the decision of AO/TPO. 11. Regarding the rule of consistency and the relevant decisions on the topic, we have examined the facts for the AY 2006-07 and 2007-08. So far as the external comparables, turn over details of export and domestic segments and other relevant facts are concerned, we find similarity of the facts between both the years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retrospective increase was with respect to an unrelated party because these are commercial decisions which the assessee may take according to its business needs and cannot be questioned unless they are found not genuine. The position is however different in case of transactions with a related party as in the present case, which has to be compared to unrelated party transactions to fine out the arm s length price. In this case arm s length price has been computed by the assessee with respect to certain comparables as mentioned in para 4 using TNMM. These 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 adjustments this year also. However, it is noted that the assessee has worked out the arm s length price on the basis of transactions relating to the comparable for A.Y 002-03 as at the relevant point of time complete details in respect of A.Y 2003-04 were not available. In our view when the facts and figures in relation to the relevant assessment year i.e. AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export segments or the international transactions involving the AE. If the external comparables are available, AO/TPO may even attempt the compute the operating profits as per the TNMM considering the external comprables that fall in the periods of labour unrest and unrest-free period of the same AYs too. In any case, admittedly and undisputedly, the AO/TPO have not reckoned and adopted the external comparable cases cited by the assessee for making the transfer pricing adjustments and the orders are free of any reasoning by the AO/TPO/DRP. Therefore, we are of the opinion that the matter should be set aside for examining the issue de novo after granting the reasonable opportunity of being heard to the assessee. Accordingly, all the relevant grounds raised in this regard are set aside. 14. The other key issue raised by the Counsel relates to economic adjustments on account of labour unrest warranted to arrive at the correct profitability of the international transaction pertaining to export of carpets. As discussed in the other paragraphs of the order, assessee made adjustment to the total cost and the said adjustment works out to ₹ 7,31,73,120/- on account of unabsorbed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction . 15. From the above, it is clear the AO has authority vide clause (iii) above to make the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or anomaly in the said comparable. Such adjustments are authenticated by the OECD guidelines too. In this regard, we have perused the important findings of the Tribunal in the case of the Fiat India P Ltd (supra) placed at page 191 of the paper book. For the sake completeness, the same is reproduced as under ++ as regards the adjustments made by the assessee to work out its operating margin for comparing the same with the profit margin of comparable cases, it was held that there was a material difference in the facts of the assessee s case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences. Further, the TPO himself has allowed similar adjustments made by the assessee in the immediate precedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of nil production of the carpets for the export, etc. (iv) compare the economic activity of the company during these disturbed periods with that of the normal period of the year; (v) if fact the authorities may compare the operating profits of the company considering the external comparables ie prices that fall in the labour unrest and that fall in the normal period of the previous year as the AY registers both the periods; (vi) regarding the variable cost segment of the claimed overheads, there is need for examining the essentiality of the incurring of such expenditure considering the prudence of the management and the factors relating to the commercial expediency of the conducting of the business. TPO/AP shall pass a speaking order in this regard. AO/TPO is required to grant reasonable opportunity of being heard to the assessee in the set aside proceedings. Accordingly, the relevant grounds are set aside. 18. There are other grounds raised in the appeal relating to applicability of the provisions of section 10B of the Act, the applicability of the provisions of the proviso to section 93C(2) of the Act etc. On hearing the parties, we find these issues should go to the files ..... X X X X Extracts X X X X X X X X Extracts X X X X
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