S.S. Viswanethra Ravi ORDER
R.S. Syal, Vice President
1. 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. 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 MANU/SC/0946/2021 : 438 ITR 296 (SC) read with judgment in Cognizance for Extension of Limitation, In re MANU/SC/0158/2021 : 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.
3. The Revenue is aggrieved by the inclusion of Gorani Industries Limited (GIL) in the list of comparables.
4. 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 (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.
5. 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 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--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.
6. The assessee pressed only the grounds concerning inclusion of Butterfly Gandhimathi Appliances Limited (BGAL) in the list of comparables and the proportionate adjustment.
7. 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.
8. 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."
9. 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 event makes it incomparable. We, therefore, order to exclude this company from the list of comparables.
10. 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. MANU/MH/4714/2017 : (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. MANU/MH/3729/2015 : (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. MANU/MH/2924/2015 : (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.
11. 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.
12. 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.
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