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Facts
The assessee, engaged in manufacturing and trading of drip irrigation systems, filed an appeal against the order of the Assessing Officer (AO) concerning the re-computation of the arm's length price (ALP) of international transactions. The AO proposed an upward adjustment of INR 13,68,21,254, primarily by rejecting certain comparable companies and applying a turnover filter.
Held
The Tribunal held that the AO had erred in not including Nimbus Pipes Ltd. as a comparable company, despite the Dispute Resolution Panel (DRP) finding it qualitatively comparable. The AO reiterated the TPO's adjustment without considering Nimbus Pipes Ltd.
Key Issues
Whether the AO erred in excluding Nimbus Pipes Ltd. as a comparable company while determining the arm's length price (ALP) of international transactions for transfer pricing purposes.
Sections Cited
143(3), 144C(13), 144B, 92C, 92CA(3)
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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & SHRI T.R. SENTHIL KUMAR
आदेश आदेश/O R D E R आदेश आदेश
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER
The above appeal has been filed by the assessee against order passed by the Assessing Officer, DC/ACIT TP-2, Ahmedabad [hereinafter referred to as “AO”] dated 15.07.2024 under section 143(3) read with sections 144C(13)/144B of the Income Tax Act, 1961 ("the Act" for short) pertaining to Assessment Year 2020-21 after complying with the directions of the Dispute Resolution Panel(“DRP” for short) on the objections raised by the assessee.
The grounds raised by the assessee are as under: 1.1. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in facts and circumstances of the case and in law, in re-computation of the arm's length price ('ALP') of the international transactions of import / export of raw materials / traded goods by proposing an upward adjustment of INR 13,68,21,254.
1.2. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in applying turnover filter of 10 times of the tested party's turnover and consequentially rejecting 3 comparable companies from the set of comparable companies selected by the Appellant in the Transfer Pricing Study Report (TPSR'). 1.3. On the facts and in the circumstances of the case and in law, the Teamed AO / Hon'ble DRP has erred in concluding that the provision for doubtful debts is operating expense in case of Appellant (though detailed discussion in the directions passed by Hon'ble DRP support the fact that provision for doubtful debts should be treated as non-operating expense), thereby considering the margins of the Appellant at 5.30% instead of 9.54%. 1.4. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in not considering the three years updated margins submitted by the Appellant after considering data for FYs 2019-20. 1.5. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in not considering the updated margin of Signet Industries Ltd at entity level submitted by the Appellant. 1.6. On the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in not considering Nimbus Pipes Ltd as comparable company in the final set of comparable companies.
The grievance raised by the assessee relates to the adjustment made to the arm’s length price (ALP) of the international transactions carried out by the assessee with its Associate Enterprises (AE) in terms of section 92C of the Act.
The facts of the case being that the assessee-company was engaged in the business of manufacturing and trading of drip irrigation systems. During the impugned year, the assessee had entered into several international transaction with its AEs, the details of which are reproduced at page no.2 of the order of the TPO passed under section 92CA(3) of the Act. A report of the international transaction was filed by the assessee in Form No.3CEB along with TP documentation, which was submitted during the TP proceedings and the same revealed that the assessee had used TNMM for benchmarking the majority of its transactions, pointing out that its 3 operating margin at 5.30% was within the 35th percentile to 65th percentile of the data set of comparables selected, as prescribed by Rule 10CA of the Income Tax Rules, 1962, in this regard, being 2.67% and 9.54% respectively. The TPO, however, found that the assessee had selected eight comparables for the purpose of benchmarking its transactions out of which, according to the TPO, four did not satisfy the turnover filter applied by him. Accordingly, he rejected four comparable selected by the assessee, and thereafter noted that the since Rules provided arithmetic mean of data set of the comparable to be taken, where the number of comparable was less than six, he noted that the arithmetic mean of the selected comparable came to 10.67% while that of the assessee was 5.37%. Accordingly, he proposed upward adjustment of Rs.13,28,62,592/- to the ALP of the international transactions.
The assessee objected to the turnover filter applied by the AO, and further pleaded that the provisions for bad and doubtful debts should be included while determining operating margin of the assessee. The TPO rejected both the contentions of the assessee, and taking four comparables, found to be correct by him, after rejecting four comparable, which the assessee had also selected, he passed order u/s 92CA of the Act proposing an upward adjustment of Rs.13,28,62,592/- to the ALP of the international transaction of the assessee.
The assessee objected to the same to the DRP, who after considering the objection of the assessee, passed the order giving necessary directions to the AO. The AO after considering direction of the DRP passed his final order making adjustment to the ALP to the
Aggrieved by the same, the assessee has come up in appeal before the Tribunal raising the above grounds:
During the course of hearing before us, the ld.counsel for the assessee contended that he would first lead his arguments on ground no.1.6 raised before us. His plea was that one of the comparable, Nimbus Pipes Ltd. (NPL for short),which had been proposed by the assessee to be included in the final comparable set, had wrongly not been included in the same, and if the same is included, his operating margin would be in line with that of the final sets of the comparable. He pointed out that the assessee had raised objection to this effect before the DRP also, who after discussing the same, at para 11.2 of his order had found the said entity to be comparable from qualitative comparability point. He drew our attention to para 11.2 of the DRP order as under:
5 9. The ld.counsel for the assessee contended that despite the DRP finding the NPL to be a comparable, the AO had not included the same while determining the ALP of the transaction. He drew our attention to the AO’s order in this regard, who reiterated the adjustment proposed by the TPO of Rs.13,28,62,592/- to the ALP of the international transaction, which was determined without including the NPL as comparable.
The ld.DR, when confronted with this fact, had nothing to say to controvert the factual averments made before us.
In the light of the same, we direct the AO to include Nimbus Pipes Ltd. in the final comparable sets, and thereafter determine whether international transactions of the assessee were at ALP in accordance with law and rules in this regard.
The ld.counsel for the assessee contended that he was not arguing the other grounds raised before us.
In the light of the above, ground no.1.6 of the assessee is allowed, while the remaining ground are not being adjudicated by us, as not pressed.
In the result, the appeal of the assessee is allowed in above terms. Order pronounced in the Court on 7th March, 2025 at Ahmedabad.