The Bombay High Court upheld the order of the Income Tax Appellate Tribunal ( ITAT ) directing to remand matter to Transfer Pricing Officer ( TPO ) and held that the comparison has to be made between two equals.
Assessee had entered into international transaction with associated enterprises exceeding Rs.15 crores. Considering the nature of transaction, a reference under Section 92CA(1) of the Income Tax Act was made to the TPO. The TPO vide order dated 24th October 2011 determined the ALP and suggested adjustment of Rs.3,59,81,523/- to be made with the international transaction.
The Assessing Officer passed the draft assessment order dated 29th December 2011 and a final order dated 15th February 2012 was passed making an addition on account of international transaction amounting to Rs.3,59,81,523/-. Other additions were also made.
Assessee challenged the assessment order before the Commissioner of Income Tax ( Appeal ) [ CIT(A) ], who partly allowed the appeal. The CIT (A) upheld the order of the Assessing Officer to the extent of addition on account of international transaction amounting to Rs.3,59,81,523/-. This also was unacceptable to assessee, who preferred the appeal before the Income Tax Appellate Tribunal ( ITAT ) against the order dated 11th September 2013 passed by the CIT(A).
The ITAT vide order dated 8th July 2016 partly allowed the appeal filed by assessee by referring the matter back to the file of TPO for fresh adjudication. The TPO was directed to reconsider the capacity under utilisation factor along with other factors for determining TP adjustment. The ITAT observed that two of the comparables objected by assessee needs to be reconsidered to find out as to whether they are fair comparable. Challenging this order, the present appeal has been filed under Section 260A of the Income Tax Act.
A Division Bench of Justices Dr Neela Gokhale and KR Shriram observed that “In the assessment order the TPO provided all set of 12 comparables to assessee. The set of 3 comparables selected by assessee were sent for bench marking. Assessee raised various objections to the proposed comparison and the main ground of objection was that assessee had started production only in the month of May 2007 and the sales have started only from the month of July 2007. Whereas, the comparables were in the business for many years. This objection was rejected by the TPO. The CIT(A) upheld the findings of the TPO.”
“The ITAT has rightly came to a conclusion that comparison has to be made between two equals. We agree with the finding of the ITAT that assessee who started the business in a particular year cannot be compared with assessee who are doing business for many years. On facts, the ITAT has given a finding that though there has been no major sales throughout the whole year, the expenses incurred by assessee are almost the same as compared to the expenses of the next year. It is also a fact that assessee had achieved sales of Rs.62 crores in the next assessment year and assessee could achieve that turnover because the business by that time had got stabilised” the Court noted.
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