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.\