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2016 (4) TMI 1177 - AT - Income TaxTransfer pricing adjustment - whether the comparable chosen by assessee i.e. Alphageo (India) Ltd. can be removed for computation of margin and working capital adjustment to the comparables selected by revenue can be allowed while computing margins? - Held that - We find that the assessee s activity in R&T includes undertaking certain samples preparation and chemical analysis activities for the agro chemical business. It supplies to its AEs the necessary formula, information and expertise to enable it to provide R&T activities. Whereas on the other hand, Alphageo (India) Ltd. is in the business of exploration and production of oil. We are of the view that these two companies i.e. the assessee and Alphageo (India) Ltd. are functionally not comparables and cannot be taken into consideration. The argument of Ld. Sr. DR that once assessee has chosen Alphageo (India) Ltd. as comparables it cannot back out now without filing multiple year data. We find that the assessee in the case of Alphageo (India) Ltd. has filed the date of three years to show any variability distortions which are having effect on determination of transfer pricing of the international transaction. We are of the view that the comparables which are available in public domain even after the conduction of the studies by assessee can be taken as comparables and considered for benchmarking. The assessee filed complete multiple year data in the case of Alphageo (India) Ltd. in its paper book, which is referred by Ld. Counsel for the assessee in his arguments. In view of the above discussion, we are of the view that the authorities below were not justified in including Alphageo (India) Ltd. as comparable for benchmarking for determining ALP u/s. 92C(1) and 92C(2) of the Act. For rest of the comparables for benchmarking as selected by revenue has not been disputed by assessee except claim made that working capital adjustment should be given. The assessee s contention regarding adjustment for the differences in working capital level of the assessee and comparable companies selected by revenue, we find that the required data in relation to these companies are not available in the orders of the lower authorities or the details filed by the assessee before us. However, we are of the view that the need to carry out the working capital adjustments is for the reason that the differences on account of working capital cycle not only impact the finance cost but it also affects items of P&L Account like expenses, sale price of product, provision for bad debts etc. and in turn it affects the profit before interest and tax. Accordingly, we are of the view that to take into account the difference in the net working capital requirements between the assessee and comparables selected by revenue, appropriate adjustments should be made on account of debtors and creditors. And adjustment to working capital cycle of assessee should be made vis- -vis the sale and total cost of each of the comparable companies. Let the assessee produce the data and TPO should analyse the same. In view of the above directions, we restore the issue to the file of the AO/TPO to give adjustment accordingly. - Decided in favour of assessee for statistical purposes. Treating the relinquishment of right as short term capital gain - Held that - The assessee declared sale consideration while computing capital gains at ₹ 4,58,52,200/- and claimed cost of acquisition at ₹ 23.31 lacs. SIPCOT has also adjusted a sum of ₹ 1,86,47,800/- towards refund of deposit made by assessee and assessee reduced this amount from the total consideration. The AO as well as CIT(A) included this amount in total sale consideration and computed capital gains accordingly. Now before us, assessee claimed that in case this adjustment of refund of deposit by SIPCOT is to be treated as sale consideration then the assessee should be allowed this as cost of acquisition for the purpose of computing capital gains. We find the plea of the assessee quite reasonable and accordingly direct the AO to consider this refund of deposit made by assessee with SIPCOT as cost of acquisition for the purpose of computation of capital gains. The AO will verify the adjustment of refund of this deposit made by the assessee with SIPCOT and accordingly allow the claim of the assessee. This issue of assessee s appeal is set aside to the file of AO in term of the above direction and is allowed for statistical purposes. Non-deduction of TDS by invoking the provisions of section 40(a)(ia) - non allowing set off of brought forward losses/unabsorbed depreciation while computing taxable income - Held that - AO has not made any disallowance u/s. 40(a)(ia) of the Act and not allowing set off of brought forward losses/unabsorbed depreciation as is apparent from the assessment order and CIT(A) has also given finding of fact qua that. Since the issues are not arising out of the orders of the lower authorities, we dismiss these issues of assessee s appeal.
Issues Involved:
1. Adjustment of Arm's Length Price (ALP) for international transactions in connection with Research & Technical Services (R&T) provided to Associated Enterprises (AE). 2. Treatment of the refund of deposit as short-term capital gain. 3. Disallowance of deduction for non-deduction of TDS under section 40(a)(ia) of the Income Tax Act. 4. Non-allowance of set-off of brought forward losses/unabsorbed depreciation. Issue-wise Detailed Analysis: 1. Adjustment of Arm's Length Price (ALP): The first issue concerns the CIT(A) confirming the AO's action in making an adjustment of ?1,55,48,991 to the ALP determined by the assessee for international transactions related to R&T services provided to its AE. The assessee raised several grounds, including the incorrect consideration of R&T service income, rejection of the economic analysis/transfer pricing study, non-compliance with Rule 10B(4) of the Income-tax Rules, 1962, and the improper selection/rejection of comparable companies. The assessee also contended the non-allowance of working capital adjustments and the benefit of the +/- 5 percent range as per Section 92C(2) of the Act. The Tribunal noted that the TPO accepted 4 out of 9 comparables selected by the assessee and rejected the rest. The CIT(A) upheld the TPO's decision, rejecting three companies (Dolphin Medical Services Ltd., Medinova Diagnostic Service, and N.G. Industries) as comparables due to functional dissimilarity. The Tribunal agreed with the assessee that Alphageo (India) Ltd., which was initially selected as a comparable by the assessee, should also be rejected due to functional dissimilarity. The Tribunal directed the TPO to exclude Alphageo (India) Ltd. and consider the working capital adjustments for the remaining comparables. 2. Treatment of Refund of Deposit as Short-term Capital Gain: The second issue involves the CIT(A) confirming the AO's action in treating the refund of a deposit of ?1,86,47,800 received by the assessee as sale consideration for relinquishment of rights, thereby treating it as short-term capital gains. The assessee argued that if the refund is considered as sale consideration, the cost of acquisition should also be considered while computing the short-term capital gains. The Tribunal found the assessee's plea reasonable and directed the AO to consider the refund of the deposit as the cost of acquisition for computing the capital gains. The AO was instructed to verify the adjustment of the refund made by the assessee with SIPCOT and allow the claim accordingly. 3. Disallowance of Deduction for Non-deduction of TDS: The third issue is related to the disallowance of a deduction of ?11,37,500 for non-deduction of TDS under section 40(a)(ia) of the Act. The CIT(A) noted that there was no discussion made by the AO on this issue in the assessment order, and therefore, it could not be considered in the appellate proceedings. The Tribunal upheld this finding, as the issue did not arise from the orders of the lower authorities. 4. Non-allowance of Set-off of Brought Forward Losses/Unabsorbed Depreciation: The fourth issue concerns the non-allowance of set-off of brought forward losses/unabsorbed depreciation while computing taxable income. Similar to the previous issue, the CIT(A) found no discussion on this matter in the AO's order. The Tribunal dismissed this issue as well, as it did not arise from the lower authorities' orders. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to exclude Alphageo (India) Ltd. as a comparable and to make appropriate working capital adjustments. The Tribunal also directed the AO to consider the refund of the deposit as the cost of acquisition for computing capital gains. The other issues were dismissed as they did not arise from the orders of the lower authorities.
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