The Ahmedabad Bench of Income-tax Appellate Tribunal in case of: Erhardt+Leimer (India) Private Limited v. ACIT (ITA Nos. 3298/Ahd/2011 & 2880/Ahd/2012) held that consistent loss-making companies cannot be rejected as comparable unless the functional profile is different, and various comparability adjustments including capacity adjustment, volume adjustment and warranty cost adjustment are to be allowed.
The tribunal further explained that, comparable entities cannot be rejected outright merely on the basis of consistent loss-making status and that a comprehensive functional analysis is vital for reliable results. Additional, the tribunal said that in instances of a substantial investment in fixed assets, incremental depreciation is to be excluded in computing the profit level indicator.
However, if the taxpayer’s profit level meter has gone through a substantial hit due to capacity underuse, the difference must be adjusted with respect to comparable entities instead of the tested party for effective comparability.
