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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the Revenue and Cross Objection by the
assessee arise out of the order passed by the CIT(A) on 10-12-2021
in relation to the assessment year 2012-13.
2 ITA No.161/PUN/2022 And CO No.21/PUN/ 2022 Frank Faber India India Pvt. Ltd.,
The Cross Objection is time barred by 14 days. The ld. AR
stated that the delay in filing the cross objection was caused due to
Covid pandemic situation prevailing in the country at the material
time. We are satisfied with the reason so stated. The Hon’ble
Supreme Court in Cognizance for Extension of Limitation, In re
438 ITR 296 (SC) read with judgment in Cognizance for Extension
of Limitation, In re 432 ITR 206 (SC) dated 08-03-2021 and 421
ITR 314 has taken a suo motu cognizance of the situation arising
out of the challenges faced by the country on account of COVID-
19 Virus and resultant difficulties that could be faced by the
litigants across the country and accordingly extended the time limit
for filing of the appeals. We, therefore, condone the delay in filing
the instant cross objection and admit the same for disposal on
merits.
The Revenue is aggrieved by the inclusion of Gorani
Industries Limited (GIL) in the list of comparables.
Briefly stated, the facts of the case are that the assessee filed
its return declaring loss of Rs.1.55 crore. Certain international
transactions were reported in Form No.3CEB. The Assessing
Officer (AO) made a reference to the Transfer Pricing Officer
3 ITA No.161/PUN/2022 And CO No.21/PUN/ 2022 Frank Faber India India Pvt. Ltd.,
(TPO) for determining the Arm’s Length Price (ALP) of the
international transactions. In this appeal, we are concerned only
with the transactions of Purchase of raw materials, Purchase of
traded goods and Sale of finished goods, which have been clubbed
by the assessee under the head “Manufacturing Function”. The
AO did not dispute the applicability of the Transactional Net
Margin Method (TNMM) as the most appropriate method. Out of
four comparables chosen by the assessee, the TPO excluded
Gorani Industries Limited and worked out the adjusted arithmetic
mean of the Operating Profit/Operating Revenue of the remaining
companies at 6.16%. Applying it as arm’s length margin, the TPO
worked out the transfer pricing adjustment at Rs.7,30,13,424/-.
The ld. CIT(A) directed to include GIL in the list of comparables,
against which the Revenue has come up in appeal.
The ALP determination of the “Manufacturing Function” has
been done by the TPO considering both Trading transactions and
Manufacturing transactions of the assessee. On a pertinent query,
the ld. AR submitted that the Manufacturing revenue accounts for
77% and revenue from Trading is 23%. Per contra, Trading
revenue of GIL is 56% and Manufacturing revenue is 44%. In
4 ITA No.161/PUN/2022 And CO No.21/PUN/ 2022 Frank Faber India India Pvt. Ltd.,
view of the fact that the Trading revenue in the case of GIL is more
than double of the assessee and only the consolidated figures are
meant to be compared, we hold that Gorani Industries Limited
cannot be considered as comparable. The obvious reason is that the
profit margin widely varies in a Manufacturing model of activity
vis-à-vis the Trading model. In view of such an extensive
fluctuation in the Trading and Manufacturing revenue streams of
the two companies, we hold that GIL cannot be considered as
comparable. The impugned order is overturned to this extent and
this company is directed to be excluded from the list of
comparables.
The assessee pressed only the grounds concerning inclusion
of Butterfly Gandhimathi Appliances Limited (BGAL) in the list
of comparables and the proportionate adjustment.
The assessee included BGAL in the list of comparables,
which was accepted as such by the TPO. It was argued before the
ld. CIT(A) that this company was wrongly included and hence
should be excluded because of its extraordinary financial event.
The ld. CIT(A) remained unconvinced.
5 ITA No.161/PUN/2022 And CO No.21/PUN/ 2022 Frank Faber India India Pvt. Ltd.,
We have examined the Annual report of this company,
whose copy is available at page 427 onwards of the paper book. It
can be seen from the Directors’ report that the fact of merger has
been taken note of at page 464 of the paper book. Page 519 of the
paper book records as under:
“7. Merger with Gangadharam Appliances Limited
A proposal submitted by erstwhile Gangadharam Appliances Limited (GAL), an associate of the Company, for the merger of its entire undertaking with the Company has been approved by the Hon’ble Board for Industrial and Financial Reconstruction (BIFR) vide their order dated 17th August, 2011 with retrospective effect from Ist January, 2009. The Transactions, Assets and Liabilities of GAL has been incorporated in the books of the Company keeping into account the terms of the BIFR Order (supra) and reflected appropriately in the account of the Company as at 31st March, 2012. In terms of the said BIFR Order, one share of the Company was issued for every two shares held by the shareholders of GAL and as a consequence, the paid up share capital of the Company has been increased by Rs.579.39 lakhs.”
It can be seen from the above that GAL merged with BGAL
and the transactions of assets and liabilities etc. of GIL have been
incorporated in the books of BGAL as on 31-03-2012, which is
relevant to the assessment year under consideration. In view of the
fact that the figures of this company for the year are influenced by
the merger taking place, we hold that the extraordinary financial
6 ITA No.161/PUN/2022 And CO No.21/PUN/ 2022 Frank Faber India India Pvt. Ltd.,
event makes it incomparable. We, therefore, order to exclude this
company from the list of comparables.
The only other ground is about the proportionate adjustment.
In this regard we find that the issue of restricting the transfer
pricing adjustment to the extent of international transactions rather
than the entity level is no more res integra in view of several
judgments rendered by various higher forums including the
Hon’ble jurisdictional High Court in CIT Vs. Phoenix Mecano
(India) Pvt. Ltd. (2019) 414 ITR 704 (Bom.) holding that the
transfer pricing adjustment should be restricted only to the
international transactions and not the entity level transactions. The
Hon’ble High Court in has held that the transfer pricing adjustment
made at entity level should be restricted to the international
transactions only. Here, it is pertinent to mention that the
Department’s SLP against the judgment in the case of Phoenix
Mecano (India) Pvt. Ltd. has since been dismissed by the Hon’ble
Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd.
(2018) 402 ITR 32 (St.). Similar view has been taken by the
Hon’ble Bombay High Court in CIT Vs. Thyssen Krupp Industries
Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels
7 ITA No.161/PUN/2022 And CO No.21/PUN/ 2022 Frank Faber India India Pvt. Ltd.,
Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefore, set
aside the impugned order on this score and direct that the transfer
pricing adjustment should be restricted only to the extent of the
international transactions.
To sum up, the impugned order on the issue of transfer
pricing adjustment of the international transactions of Purchase of
Raw Material, Purchase of traded goods and Sale of finished
goods is set aside and the matter is remitted to the file of the
AO/TPO for a fresh determination in the terms indicated above.
Needless to say, the assessee will be allowed reasonable
opportunity of hearing in such fresh proceedings.
In the result, the appeal the Revenue is allowed and the cross
objection of the assessee is partly allowed.
Order pronounced in the Open Court on 01st August, 2022.
Sd/- Sd/- (S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 01st August, 2022 Satish
8 ITA No.161/PUN/2022 And CO No.21/PUN/ 2022 Frank Faber India India Pvt. Ltd.,
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to: 1. अपीलाथ� / The Appellant; 2. ��यथ� / The Respondent; 3. The CIT(A)-13, Pune 4. The Pr.CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “C” / DR 5. ‘C’, ITAT, Pune गाड� फाईल / Guard file 6.
आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
Date 1. Draft dictated on 29-07-2022 Sr.PS 2. Draft placed before author 29-07-2022 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *