ITAT Flags Functional Mismatch in TP Comparables, Sends Matter Back

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has sent back a transfer pricing dispute involving Mitsui Prime Advanced Composites India Private Limited to the Assessing Officer (AO) for fresh review.

The case relates to Assessment Year 2016-17. The company had filed its income tax return showing “Nil” income. The case was later taken up by the tax department for detailed scrutiny on various issues, including foreign transactions, business losses, share capital, foreign remittances and transfer pricing compliance.

The company is engaged in the business of manufacturing and trading in polypropylene and polyolefin compounds. The issue was referred to the Transfer Pricing Officer (TPO) on account of international transactions with its Associated Enterprises (AEs).

The TPO proposed a transfer pricing adjustment to the tune of Rs. 1,99,32,839. Later, after directions from the Dispute Resolution Panel (DRP), the AO finally made an adjustment of Rs. 1,81,74,359.

The company challenged the order before the ITAT, arguing that the tax department wrongly increased its income and even added the transfer pricing adjustment twice. According to the assessee, this resulted in its total income being wrongly assessed at Rs 3,81,07,198 instead of Nil income.

The assessee also argued that the AO failed to properly allow the set-off of carried forward losses and unabsorbed depreciation amounting to more than Rs 55,48,52,977.

On the transfer pricing issue, the company claimed that several companies selected by the TPO as comparables were not actually similar to its business activities. It argued that these companies manufactured very different products and had different business models, raw material costs, risks, and depreciation methods.

The Tribunal examined three comparables selected by the TPO:

• Zenith Fibres Ltd: engaged in manufacturing PP staple fibre and yarn, which the Tribunal noted was different from the assessee’s business.
• Resins & Plastics Ltd: engaged in manufacturing several types of resins and chemicals, unlike the assessee’s polypropylene compounds business.
• NOCIL Limited: engaged in manufacturing rubber chemicals, again, functionally different from the assessee.

The Tribunal observed that these comparables did not appear to be fully suitable because of differences in products, raw material consumption, and business functions.

The assessee had also suggested five other companies as comparables, including:

1. Sreechem Resins Ltd.
2. Pankaj Polymers Ltd.
3. Axel Polymers Ltd.
4. Kingfa Science & Technology (India) Ltd.
5. Machino Polymers Ltd.

The Tribunal said these comparables and their depreciation policies should be properly reconsidered.

As a result, the ITAT set aside the assessment order on major issues and sent the matter back to the AO/TPO for fresh adjudication after giving the company a fair hearing.

The appeal was therefore “partly allowed for statistical purposes“.