2014 (12) TMI 892 - AT - Income Tax

Transfer pricing adjustment Adjustment to the profitability on deprecation for like to like comparison of business model Held that - The assessee is engaged in the business of trading of diagnostic instruments and consumables manufactured by its associated enterprises - assessee entered into international transactions representing purchase of goods from the associated enterprises - the arm s length price of the international transaction is to be benchmarked on Transaction Net Margin Method (TNMM) - To compute Transaction Net Margin Method of the assessee, data of M/s. Span Diagnostics Limited was found to be comparable by Transfer Pricing Officer. As per the Transfer Pricing Officer, the Transaction Net Margin Method of M/s. Span Diagnostics Limited works out to 9.22% whereas the Transaction Net Margin Method of the assessee in respect of aforesaid international transactions comes to 5.75%. The depreciation charged by the assessee in its books of accounts is on Written Down Value (WDV) method whereas the depreciation charged in the case of M/s. Span Diagnostics Limited is on Straight-line method, hence for comparing Transaction Net Margin Method of the two companies, adjustment in respect of depreciation is must thus, the matter is to be remitted back to the Transfer Pricing Officer for proper verification of the claim of the assessee regarding huge difference in the amount of depreciation between the assessee company and the chosen comparable case and also the difference in the method of providing of depreciation in the two companies - if the methods of depreciation adopted by the two companies are different, then the net margins arrived at are not strictly comparable unless suitable adjustment is made in the amount of depreciation so as to adopt depreciation under the same method in the two cases thus, the TPO is directed to take into consideration the difference in the method of providing depreciation in the case of the assessee and the chosen comparable case and if the methods are different, then to make suitable adjustment for the same as per law Decided in favour of assessee. Claim of depreciation in respect of instruments placed at customers site and capitalized in the books of accounts disallowed Held that - As decided in assessee s own case for the earlier assessment year, it has been held that AO is right in its rim to examine the agreements entered between the assessee company and its customers for determining the nature of transaction - It is the primary duty of the assessee to furnish all such agreements if required by the Revenue - assessee has failed to do so in spite of the repeated requests made by the AO thus, the matter is to be remitted back to the AO for examination of the agreements Decided in favour of assessee. Claim of provision of sick leave u/s 43B disallowed Held that - The AO has made disallowance by invoking the provisions of clause (f) of Section 43B and the same was confirmed by CIT (A) also on the basis of Section 43B as decided in Exide Industries Limited And Another Versus Union Of India And Others 2007 (6) TMI 175 - CALCUTTA High Court wherein it was held that clause (f) of Section 43B is arbitrary, unconscionable and dehors of the Hon ble Supreme Court decision, and therefore, not valid - clause (f) of Section 43B is not valid and, therefore, disallowance made by the AO on the basis of clause (f) of Section 43B cannot be sustained the disallowance made is to be set aside Decided in favour of assessee.

Issues Involved:
1. Addition to total income based on Chapter X of the Income Tax Act, 1961.
2. Non-acceptance of comparables selected by the assessee.
3. Rejection of updated search performed by the assessee.
4. Rejection of multiple year data for computing operating margin.
5. Non-allowance of 5% variation under the second proviso to Section 92C(2).
6. Non-provision of calculation for revised upward adjustment.
7. Adjustment to profitability on account of depreciation for "like to like" comparison.
8. Disallowance of depreciation on instruments placed at customers' sites.
9. Disallowance of provision for sick leave under Section 43B.

Issue-wise Detailed Analysis:

1. Addition to Total Income Based on Chapter X of the Income Tax Act, 1961:
The assessee contended that the addition of Rs. 18,763,625 to its total income was erroneous. However, no submissions were made by the assessee's representative during the hearing, leading to dismissal of this ground for want of prosecution.

2. Non-acceptance of Comparables Selected by the Assessee:
The assessee argued that the comparables Casil Health Products Ltd and Monozyme India Ltd were functionally comparable in the earlier assessment year. However, no submissions were made during the hearing, resulting in dismissal of this ground for want of prosecution.

3. Rejection of Updated Search Performed by the Assessee:
The assessee claimed that the updated search for comparables during the assessment proceedings should have been accepted. This ground was also dismissed due to lack of prosecution.

4. Rejection of Multiple Year Data for Computing Operating Margin:
The assessee argued against the rejection of multiple year data for computing the operating margin of comparable companies. No submissions were made during the hearing, leading to dismissal of this ground for want of prosecution.

5. Non-allowance of 5% Variation Under the Second Proviso to Section 92C(2):
The assessee contended that it was entitled to a 5% variation benefit under the second proviso to Section 92C(2). This ground was dismissed for want of prosecution as no submissions were made.

6. Non-provision of Calculation for Revised Upward Adjustment:
The assessee argued that the calculation for the revised upward adjustment was not provided. This ground was dismissed due to lack of prosecution.

7. Adjustment to Profitability on Account of Depreciation for "Like to Like" Comparison:
The assessee followed two business models for its distribution function, one involving outright sales and the other involving leasing of instruments, leading to higher depreciation costs. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) rejected the exclusion of depreciation for computing net margins, emphasizing that depreciation is a cost incurred in generating revenue and must be included in the Profit Level Indicator (PLI). The Tribunal, however, directed the TPO to verify the claim regarding the difference in depreciation methods and make suitable adjustments if necessary, referencing decisions from other cases that supported excluding depreciation for a fair comparison.

8. Disallowance of Depreciation on Instruments Placed at Customers' Sites:
The Assessing Officer disallowed the depreciation claimed on machinery placed at customers' sites, stating it was not used for business purposes. The DRP and Tribunal directed the AO to follow the decision of higher appellate authorities, which had previously remanded the issue back for examination of agreements between the assessee and its customers to determine the nature of the transaction.

9. Disallowance of Provision for Sick Leave Under Section 43B:
The AO disallowed the provision for sick leave, citing Section 43B(f), which mandates actual payment for deduction. The DRP directed verification of actual payments in subsequent years. The Tribunal referenced previous decisions, including Exide Industries Limited & Anr. v. Union of India & Ors., which held that Section 43B(f) is not valid for provision of leave encashment, and deleted the disallowance.

Additional Grounds:
The assessee raised additional grounds regarding the restriction of adjustments to controlled transactions and considering overall Gross Profit Margin for benchmarking. These were dismissed for want of prosecution as no submissions were made.

Conclusion:
The appeal was partly allowed, with specific directions for re-examination and adjustment of depreciation claims and deletion of disallowance for sick leave provision. Other grounds were dismissed for want of prosecution.

← Previous Next →