2011 (3) TMI 860 - AT - Income Tax

Reference to DRP - Arms length price - Non speaking order - TNMM method - Depreciation - assessee is a domestic company having 94.03% equity holding with Geodis Asia and 5.97% equity holding with INDEV Shipping Services - in the case of IL Gin Electronic India Pvt. Ltd 438/Del/2008 in which it has been held that the adjustment can be made only to the extent of difference in the arm s length operating profit with adjusted profit with reference to the international transaction and not to the total turnover of the assesseAppeal is allowed by way of remand to DRP As per the principles of natural justice, if anything which goes in favour of the assessee and which has been ignored, if can be produced before the completion of the assessment, must be taken into consideration while framing the assessment - It can be seen from the order of the DRP that the objections of the assessee regarding adjustment of working capital, capacity utilization and fixed asset have not been taken into consideration - Appeal is partly allowed

Issues Involved:
1. Rejection of objections by DRP without a speaking order.
2. Consideration of adjusted book profit vs. profit as per books of account for computing net profit margin.
3. Consideration of turnover related to international transactions only for arm's length price calculation.
4. Use of current financial year data for comparability analysis.
5. Inclusion of current year data for Coastal Roadways Ltd. and North Eastern Carrying Corporation Ltd.
6. Exclusion of Transport Corporation of India as a comparable.
7. Allowance of 5% range adjustment as standard deduction.
8. Adjustments for capacity utilization, working capital, and fixed assets.
9. Disallowance of depreciation on computer peripherals, printers, and UPS.
10. Initiation of penalty proceedings.
11. Charging of interest under sections 234B and 234D.

Issue-wise Detailed Analysis:

1. Rejection of objections by DRP without a speaking order:
The DRP's order was found to be non-speaking and cryptic, lacking reasons for rejecting the assessee's objections. This violates principles of natural justice. The Tribunal cited the case of Vodafone Essar Ltd. v. Dispute Resolution Panel-II, emphasizing the need for quasi-judicial authorities to provide cogent reasons in their orders. The matter was restored to the DRP for re-adjudication with a speaking order.

2. Consideration of adjusted book profit vs. profit as per books of account for computing net profit margin:
The assessee's claim of a net profit margin of 4.95% based on adjusted figures was rejected. The TPO and DRP found that the actual figures from audited financials should be considered, as per Rule 10B(1)(e)(i), which emphasizes "net profit margin realized." The Tribunal upheld this decision, stating that hypothetical figures cannot be used to calculate net profit margin.

3. Consideration of turnover related to international transactions only for arm's length price calculation:
The assessee argued that only the turnover related to international transactions should be considered. The Tribunal found merit in this claim and restored the issue to the DRP for verification. The DRP was directed to pass a speaking order after verifying the extent of international transactions.

4. Use of current financial year data for comparability analysis:
The Tribunal upheld the TPO's decision to use current financial year data, as mandated by Rule 10(4). The proviso allowing data from previous years was found inapplicable in this case, as no exceptional circumstances were demonstrated by the assessee.

5. Inclusion of current year data for Coastal Roadways Ltd. and North Eastern Carrying Corporation Ltd.:
The Tribunal found that the current year data for these companies, submitted before the DRP, should be considered. The issue was restored to the DRP for verification and inclusion of this data in the comparability analysis.

6. Exclusion of Transport Corporation of India as a comparable:
The assessee contended that Transport Corporation of India did not have a negative net worth. The Tribunal restored this issue to the DRP for verification and directed a re-adjudication based on the correct financial data.

7. Allowance of 5% range adjustment as standard deduction:
The Tribunal noted that the DRP had not recorded any findings on this issue. The matter was restored to the DRP for re-adjudication, with a direction to consider the assessee's claim for a 5% standard deduction.

8. Adjustments for capacity utilization, working capital, and fixed assets:
The Tribunal found that the DRP had not provided a speaking order on these adjustments. The issue was restored to the DRP for a detailed re-adjudication, ensuring a reasoned order is passed after considering the assessee's claims.

9. Disallowance of depreciation on computer peripherals, printers, and UPS:
The Tribunal restored this issue to the DRP, noting that the assessee was not given an opportunity of hearing. The DRP was directed to adjudicate the issue after providing a reasonable opportunity to the assessee.

10. Initiation of penalty proceedings:
The Tribunal found this ground to be premature and dismissed it without adjudication.

11. Charging of interest under sections 234B and 234D:
The Tribunal directed that interest should be charged on the finally computed income after giving effect to its order, making this issue consequential.

Conclusion:
The appeal was partly allowed, with several issues restored to the DRP for re-adjudication, ensuring compliance with principles of natural justice and proper verification of facts.

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