ITAT Delhi Remands Transfer Pricing Case Due to Alleged Double Addition of TP Adjustments

Mitsui Prime Advanced Composites India Private Limited Vs ITO (ITAT Delhi)

The appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench, arose from the assessment order dated 31.03.2021 passed by the Assessing Officer/National E-Assessment Centre under Sections 143(3), 144C(13), 143(3A), and 143(3B) of the Income-tax Act for Assessment Year 2016-17. The assessee challenged the assessment order passed pursuant to the directions issued by the Dispute Resolution Panel (DRP).

The assessee had filed its return of income declaring nil income on 30.11.2016. The case was selected for complete scrutiny on multiple issues, including tax treatment of investments, advances and loans, reporting of international transactions in Form 3CEB, taxation of foreign remittances, admissibility of business loss deductions, genuineness of share capital, expenditure relating to penalties or fines, correctness of sales turnover disclosures, deductions claimed against business income, and compliance relating to outward foreign remittances.

The assessee was engaged in the business of manufacturing, trading and exporting polypropylene compounds and polyolefin compounds. Since the assessee had entered into international transactions with its associated enterprises, the matter was referred to the Transfer Pricing Officer (TPO) under Section 92CA(3) of the Act. The TPO passed an order proposing transfer pricing adjustments amounting to ₹1,99,32,839. Based on the TPO’s findings, a draft assessment order was issued. The assessee filed objections before the DRP, which were disposed of on 11.09.2020. Thereafter, the Assessing Officer passed the final assessment order making a transfer pricing adjustment of ₹1,81,74,359.

The assessee challenged the assessment on several grounds. It contended that the DRP had failed to appreciate the facts and law while confirming additions proposed by the Assessing Officer and the TPO. The assessee further argued that its total income had been incorrectly assessed at ₹3,81,07,198 against the returned income of nil by making transfer pricing additions twice. According to the assessee, the Assessing Officer had made one addition of ₹1,99,32,839 based on the original TPO order and another addition of ₹1,81,74,359 based on the order giving effect to the DRP directions, resulting in duplication. The assessee also challenged the computation of business income and the restricted set-off of brought forward losses and unabsorbed depreciation.

The assessee additionally disputed the transfer pricing adjustment of ₹1,81,74,359 on the ground that certain inappropriate comparable companies had been included despite differences in functions performed, assets employed, risks assumed, and methods and rates of depreciation. It also contended that certain suitable comparables had been excluded and that adjustments relating to depreciation differences, extraordinary expenses and computation of operating margins had not been properly considered.

During the hearing, the assessee’s authorised representative submitted that the grounds relating to duplication of transfer pricing additions and non-grant of appropriate set-off of losses were interconnected. The Departmental Representative expressed no objection to restoring these issues to the Assessing Officer for reconsideration. The Tribunal noted that the Assessing Officer had assessed the total income at ₹3,81,07,198 against the returned income of nil by making additions twice and computing business income accordingly. Since the Revenue had no objection to reconsideration, the Tribunal set aside the assessment on these issues and restored the matter to the file of the Assessing Officer for fresh adjudication after providing a fair opportunity of hearing to the assessee. Grounds relating to double additions and set-off of losses were therefore partly allowed for statistical purposes.

The Tribunal also examined the assessee’s challenge to the transfer pricing adjustment of ₹1,81,74,359. The assessee argued that three comparable companies selected by the TPO and affirmed by the DRP were functionally dissimilar. The Tribunal noted the assessee’s submissions that one of the comparables manufactured polypropylene staple fibre and yarn with a significantly lower raw material cost-to-sales ratio than the assessee, which manufactured polypropylene compounds and polyolefin compounds. Another comparable manufactured various types of resins and had a substantially different plant and machinery-to-sales ratio. It was also pointed out that this comparable had subsequently been excluded by the TPO in a later financial year on grounds of functional and product dissimilarity. The third comparable was engaged in the manufacture of rubber chemicals, which the assessee contended was not comparable to its business activities.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal filed by the assessee is against the order dated 31.03.2021 of ld. Assessing Officer/Nation E-Assessment Centre, Delhi (hereinafter called `1d. AO’) u/s 143(3) r.w.s 144C(13) and 144C(13) read with section 143(3A) & 143(3B) of the Income Tax Act (hereinafter called ‘the Act’) for Assessment Year 2016-17.

2. Brief facts of case are that, the assessee company filed return of income `NIL’ on 30.11.2016. The case was selected for complete scrutiny assessment on following issues.

3. The notice u/s 143(2) dated 17.07.2017 was issued. Notice u/s 142(1) along with detail questionnaires were issued. The assessee is engaged in business of manufacturing, trading and exporting polypropylene compound and all type of polyolefin compound. The assessee company had entered into international transactions with the Associated Enterprises. The case was referred to the TPO in terms of section 92CA (3) of the Act. The order dated 29.10.2019 of TPO -2(2)(2), New Delhi was received with proposed total adjustment of Rs. 1,99,32,839/-. The draft assessment order dated 18.12.2019 u/s 144C of the Act was passed. The assessee filed objections against draft order. The objections were decided vide order dated 11.09.2020. The ld. AO vide order dated 31.03.2021 made TP adjustment u/s 92CA of Rs. 1,81,74,359/-.

4. Being aggrieved, appellant/assessee preferred present appeal on following grounds:-

A General Grounds

1. The assessment order passed by the Ld. AO in pursuance to the directions issued by the Hon’ble Dispute Resolution Panel (“DRP”) is a vitiated order as the Hon’ble DRP erred both on facts and in law in confirming additions made by the Ld. AO/Ld. Transfer Pricing Officer (“TPO”) to the Appellant’s income by issuing an order without appreciation of facts and law.

2. That the Ld. AD erred in proposing to assess the income of the Appellant at INR 3,81,07,198 as against the returned income declared by the Appellant at INR NIL by making an addition of INR 3,81,07,198/-, being the transfer pricing adjustment, by holding that Mitsui India’s international transactions do not satisfy the arm’s length principle envisaged under the Act.

3. That the Ld. AO grossly erred in assessing the total income of the appellant at INR 3,81,07,198 as against the returned income declared by the Appellant at INR NIL by making addition twice i.e. by making addition of an amount INR 1,99,32,839 as per Ld. TPO order dated 31.03.2016 and addition of an amount INR 1,81,74,359 as per Order giving effect against the DRP Directions given by Ld. TPO dated 09.11.2020.

4. That the Ld. AO grossly erred in assessing the “Income from Business and Profession” of INR 3,54,77,758 instead of Rs. 1,55,44,919 by adding transfer pricing adjustment twice.

5. That the Ld. AO grossly erred in providing the set off of brought forward losses of only amount of INR 19,78,341 as against the total brought forward losses claimed in the Income Tax return of an amount INR 55,48,52,977 (Unabsorbed Depreciation is INR 43,92,99,336 plus Losses is INR 11,55,53,641).

B. TRANSFER PRICING GROUNDS:

6. That the Ld. AO/TPO erred on the facts and in law in enhancing the income of the Appellant by INR 181,74,359 by holding that the Appellant’s international transaction do not satisfy the arm’s length principle envisaged under the Act and in doing so, have grossly erred in:

6.1. Erroneously include some inappropriate comparable companies in the final set of comparables despite of their non comparability due to functions performed, assets employed, risks assumed, Depreciation method and rate charged etc. in comparison with the assessee.

6.2. Without prejudice to ground 6.1 above, erroneously exclude some appropriate comparable companies in the fmal set of comparables despite of their comparability due to functions performed, assets employed, risks assumed in comparison with the assessee.

6.3. Not allowing the adjustment for differential rates/methods of depreciation charged for calculating the margins.

6.4. Not allowing economic adjustment i.e. adjustment for Extra Ordinary or exceptional expenses incurred the appellant during the year.

6.5. Not appropriately computing the operating margin of the Assessee as well as of the comparable companies.

C. OTHER GROUNDS:

7. Ld. AO/TPO has erred both the fact and in law in initiating penalty proceedings under section 271(1)(c) of the Act.

The above grounds of appeal are mutually exclusive and without prejudice to each other.

The appellant craves to be allowed to add, delete or amend any other grounds of appeal either before or at the time of hearing as we may be advised.

5. Ld. Authorized Representative for appellant/assessee submitted that ground of appeal Nos. 1 & 2 are general in nature. Grounds of appeal Nos. 3 to 5 are co-related. Addition of transfer pricing adjustments twice referred to revised Computation of “Income from Business and Profession” was challenged.

5.1 Grounds of appeal nos. 6 to 6.5 are regarding enhancing the income of assessee by Rs. 1,81,74,359/- by holding. Appellant/assessee international transactions do not satisfy the arm’s length principle. Ld. AO erroneously included some inappropriate comparable companies in the final set of comparable despite their own comparability due to functions performed, assets employed, risks assumed, depreciation method and rate charged etc. in comparison with the assessee.

5.2 Ld. Authorized Representative for appellant/assessee submitted summary of detailed paper book as well.

6. Ld. Departmental Representative submitted that there is no objection to restoration of the matter to ld. TPO for considering double addition losses carried forward. The exceptional items regarding penalty payment of stamp duty expenses their houses expenses have been rightly considered by the Departmental Authority. TMM matter is appropriately three comparables challenged in the appeal need to be retained.

7. From examination of record, in light of aforesaid rival contentions, it is crystal clear that the appellant/assessee has challenged the action of Departmental Authorities. Grounds of appeal No. 1 & 2 are general in nature.

7.1 Grounds of appeal nos. 3 to 5 regarding transfer pricing adjustments twice and bringing forward loss and unabsorbed depreciation having deemed not set off. Ld. AO have been challenged. Ld. Departmental Representative has given no objection for referring the matter back to ld. AO. Therefore, the action of ld. AO for proposing to the assessee income of assessee as Rs. 3,81,07,198/- as against the returned income declared by the appellant/assessee at “Nil” by making addition twice and income from business and professions of Rs. 3,54,77,799/- are set aside and the matter is restored to the file of Ld. A.O. for adjudication afresh in accordance with law, after affording fair opportunity of hearing to appellant/ assessee. Accordingly, grounds of appeal nos. 3 to 5 are partly allowed for statistical purposes.

7.2 The appellant/assessee challenged enhancing the income of Rs. 1,81,74,359/- by holding that the appellant/assessee transaction do not satisfy the arm’s length price has been challenged in Grounds of appeal nos. 6 to 6.5.

7.3 The appellant/assessee claimed that the comparable companies are inappropriate included despite their non comparability due to functions performed assets employed, risks, assumed, Depreciation method and rate charged etc.

7.4 Zenith Fibers Ltd. selected by ld. TPO as comparable manufactures of PP Staple Fiber and PP Spun and Drf-2 Yarn with cost of raw material to sales as 15.24% while the assessee is manufacturing polypropylene compound and polyolefin compounds with cost of raw material to sales 83.07%.

7.5 Resins & Plastics Ltd manufactures Alkyd Resins, Acrylic Resins, Epoxy Resins, Ketonic Resins, Maleic Resins, Melamine formaldehyde Resins, Organic Compound, Polyster Resins, Polymides Resins, Phenolic Resins and Urea formaldehyde Resins. The assessee is manufacturing polypropylene compound and polyolefin compounds. Plan & Machinery/Sales Ratio-6% against assessee manufacturing polypropylene compound and polyolefin compounds. The companies has been removed by ld. TPO in Financial Year 2019-20 on the basis of functional and product dissimilarity.

7.6 Nocil Ltd manufactures Rubber chemicals. Popular Brands are PILFLEX@Antidegradants, PILNOX Antioxidants, PILCUR@ Accelerators, Post Vulcanization Stabilizer and Pilgard@ Pre-Vulcanization Inhibitor. The assessee is manufacturing polypropylene compound and polyolefin compounds with cost of raw material consumed to sales 28.63%.

7.7 From above, it is evident that three comparables selected by ld. TPO and ld. DRP are not just, fair, reasonable and deserves to be set aside.

7.8 The five comparables selected by the assessee namely as under:-

Along with depreciations policies adopted are submitted. They are required to be considered. Therefore, the impugned action of Ld. A.O. in enhancing the income of Rs. 1,81,74,359/- being not just, fair, reasonable, legal is set aside and the matter is restored to the file of Ld. A.O. for decision afresh in accordance with law after affording fair opportunity of hearing to the appellant/ assessee. Accordingly, grounds of appeal nos. 6 to 6.5 are partly allowed for statistical purpose.

7.9 Ground of appeal no. 7 is in consequential.

8. In the result, appeal of assessee is allowed for statistical purposes.

Order pronounced in the open court on 22.05.2026