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2012 (6) TMI 650 - AT - Income TaxTransfer pricing - arm s length price (ALP) - selection of comparable - set-off of unabsorbed depreciation - held that - If the findings of ld. CIT(A) are taken into consideration, which in our humble view remained uncontroverted, then the mean profit on the basis of 8 companies mentioned above are not applicable on the facts of the present case. Therefore, arm length price adopted by ld. TPO on international transactions were not correct. On application under section 154, the ld. CIT(A) has held that an addition of ₹ 40 lacs has to be sustained which is on account of opening stock and by rectifying order under section 154 has reduced the deletion by ₹ 40 lacs or odd. The issue in respect to deletion reduced by ₹ 40 lacs or odd has been restored by us to the file of ld. CIT(A) to decide the same afresh after affording reasonable opportunity of being heard to the assessee as, as per order of ld. CIT(A), no opportunity was provided to the assessee. Therefore, we hold that the order of ld. CIT(A) deleting the addition of ₹ 1 crore or odd was correct and we confirm the order to that extent. The AO disallowed depreciation for the reason that the same cannot be allowed to be set off of brought forward unabsorbed depreciation against current year s income from other sources. The ld. CIT(A) allowed the issue in favour of the assessee - brought forward unabsorbed depreciation can be allowed from the current year s income from other sources. - Decided in favor of assessee.
Issues Involved:
1. Deletion of addition on account of Arm's Length Price (ALP) determined by Transfer Pricing Officer (TPO). 2. Deletion of disallowance of expenses out of picnics and other expenses. 3. Set-off of unabsorbed depreciation of earlier years against current year's income from other sources. 4. Rectification order under section 154 and its implications. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Arm's Length Price (ALP) Determined by TPO: The department challenged the deletion of Rs. 1,45,52,537/- by the CIT(A) as determined by the TPO under section 92CA(3). The TPO had reduced the operating profit of the appellant company by Rs. 35.34 lakhs, arguing that it was the closing stock pertaining to trading goods. The CIT(A) disagreed, stating that the operating profit component pertaining to trading goods should be excluded, not the closing stock alone. The CIT(A) also included Atul Ltd. as a comparable, rejecting the TPO's exclusion based on related party transactions. The CIT(A) found that the TPO incorrectly included Indian Toners and Developers Ltd. as a comparable, noting significant differences in products and operations. Ultimately, the CIT(A) recalculated the mean operating profit margin of comparables at 4.98%, concluding that the percentage of adjustment to ALP was less than 5%, thus no adjustment was required. 2. Deletion of Disallowance of Expenses out of Picnics and Other Expenses: The AO had disallowed Rs. 3,09,031/- out of total expenses of Rs. 12,36,123/- incurred on picnics, get-togethers, and other welfare activities, questioning their business purpose. The CIT(A) allowed the expenses, citing that they were incurred for employee welfare and business necessity, and the AO could not pinpoint any instance where the expenditure was not for employees' welfare. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere. 3. Set-off of Unabsorbed Depreciation of Earlier Years Against Current Year's Income from Other Sources: The AO disallowed the set-off of brought forward unabsorbed depreciation against current year's income from other sources. The CIT(A) allowed the set-off, referencing the Delhi High Court decision in Escorts Electronics Ltd. v. CIT, which permits such set-offs. The Tribunal confirmed the CIT(A)'s order, as the findings remained uncontroverted. 4. Rectification Order Under Section 154 and Its Implications: The CIT(A) had passed an order under section 154, reducing the deletion by Rs. 40,42,759/-. The assessee amended its cross-objection and filed an appeal against this rectification order. The Tribunal noted that ground no. 6.6, related to comparable companies identified by the department, was not disposed of by the CIT(A). The Tribunal restored this issue to the CIT(A) for fresh consideration, emphasizing the need for reasonable opportunity for both parties to be heard. The Tribunal also restored the issues raised in the appeal against the order under section 154 to the CIT(A) for fresh decision. Conclusion: The Tribunal dismissed the department's appeal and allowed the assessee's cross-objection and appeal for statistical purposes. The Tribunal upheld the CIT(A)'s decisions on the deletion of ALP addition, disallowance of expenses, and set-off of unabsorbed depreciation, while remanding the rectification order issues back to the CIT(A) for fresh consideration.
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