Company Performing Broader Auto Component Functions Qualifies as Comparable and Brought Forward Losses Must Be Set Off

Company Performing Broader Auto Component Functions Qualifies as Comparable and Brought Forward Losses Must Be Set Off

Issue

Whether a company manufacturing core auto components, compressors, and filters qualifies as a valid functional comparable under TNMM, and whether the Assessing Officer must grant set-off of brought forward business losses omitted in the final tax computation sheet.

Facts

• The assessee-company is engaged in manufacturing car air conditioner systems and components, importing raw materials and components from both Associated Enterprises (AEs) and unrelated parties for Assessment Year 2017–18.

• In its Transfer Pricing study using the Transactional Net Margin Method (TNMM), the assessee selected a company manufacturing core auto components, air/gas compressors, fans, pumps, hoods, and automotive filters.

• The Transfer Pricing Officer (TPO) rejected the selected comparable company, despite broader functional comparability and despite accepting the same company as a valid comparable in subsequent assessment years.

• Regarding tax liability computation, both the draft assessment order and the final assessment order acknowledged the set-off of brought forward business losses.

• However, the Assessing Officer omitted the set-off of brought forward losses in the final tax computation sheet, resulting in an inflated tax demand.

Decision

• Transfer Pricing Comparability: Ruled in favour of the assessee. Under TNMM, broader functional comparability is sufficient; considering the broader functions performed by the selected company, it is functionally comparable to the assessee, particularly given its acceptance by the TPO in subsequent years.

• Set-Off of Brought Forward Losses: Ruled in favour of the assessee. The Assessing Officer is directed to allow the set-off of brought forward business losses as recognized in the assessment orders and recompute the final tax liability accordingly.

Key Takeaways

• TNMM Standard for Comparability: Under the Transactional Net Margin Method (TNMM), strict product-level identity is not required; broad functional similarity in manufacturing operations establishes a valid comparable.

• Rule of Consistency in TP: When the Revenue accepts a company as a valid comparable in subsequent assessment years without material changes in functions, it cannot arbitrarily reject the same comparable for the relevant year.

• Rectification of Computation Sheet Errors: Omission of allowed brought forward loss set-offs in the final tax demand computation sheet is a mechanical error that must be rectified to align with the assessment order findings.\