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2015 (2) TMI 535 - AT - Income TaxRe-computation of the ALP - assessee seeked suitable reduction in the operating costs by the disallowed amount of depreciation and the resultant increase in its operating profit margin - reassessment was initiated on the ground that the assessee claimed excess depreciation against the Business income - Held that - A conjoint reading of the existing and the earlier provisions of sub-section (4) makes it overt that whereas the TPO s report determining the ALP was earlier not binding on the AO, who could change the computation of ALP as per his wisdom, but now with the substitution of sub-section (4), the AO has become functus officio as regards the ALP determined by the TPO. Now, the AO is obliged to compute the total income of the assessee in conformity with and not having regard to the ALP determined by the TPO. Now, the AO cannot tinker with such determination done by the TPO. As the instant assessment order has been passed by the AO u/s 143(3) read with section 147 on 28.12.2011, the case falls for consideration under the substituted provision presently existing on the statute, forbidding the AO fromaltering the TPO s determination of ALP in any manner. As such, we hold that the AO was incompetent to accept the assessee s claim for reducing the operating costs with the amount of depreciation for the purpose of calculating the ALP of its international transaction, in making the extant assessment u/s 147. The final conclusion drawn by the authorities below in this regard is, therefore, upheld. However, we make it clear that it is open to the assessee to seek any legal remedy, if available, as per law for getting the needful done in this regard. - Decided against assessee. Addition on account of transfer pricing adjustment - exclusion of transactions with branch office seeked by assessee - Held that - Merely because the assessee took an inadvertent appreciation of the transactions with self as international transactions, that cannot prevent it from claiming before the authorities that the correct legal position should prevail. In view of the fact that the assessee s office in Canada is its branch office, the transactions between the head office and the branch office, under the provisions of the Act, cannot be considered as international transactions. We, therefore, hold that the TPO was not justified in determining the ALP of the international transaction of Software Product Development/Software Consultancy Services by applying the average operating profit margin of the comparables to the cost base of transactions with its AE and also with the branch office in Canada. Such cost base is directed to be considered as exclusive of transactions with the Canada branch. We, therefore, set aside the impugned order on this issue and direct the AO/TPO to recompute the ALP in the light of our above directions. - Decided in favour of assessee. Disallowance of adjustment on account of idle capacity - PO used the TNMM as the most appropriate method for calculating the ALP - Held that - The assessee s contention that its operating costs should be reduced to the extent its employees remained idle is, ergo, incapable of acceptance. The adjustment, if any, could have been allowed, if the assessee had demonstrated that the comparable companies had more under-utilization of their labour force vis- -vis the assessee. The onus to prove such under-utilization of employees of the comparables, for claiming adjustment, squarely lies on the assessee. On a specific query, the ld. AR could not point out that the utilization of employees by the comparable companies was less than the assessee. Under such circumstances, we are of the considered opinion that no such adjustment can be granted. We, therefore, approve the view taken by the authorities on this issue. - Decided against assessee.
Issues Involved:
1. Exclusion of depreciation on building from operating expenses for transfer pricing adjustment (AY 2005-06). 2. Addition on account of notional interest on interest-free loan to AE in USA (AY 2006-07). 3. Transfer pricing adjustment for international transactions, including transactions with branch office in Canada and idle capacity adjustment (AY 2006-07). Issue-wise Detailed Analysis: 1. Exclusion of Depreciation on Building from Operating Expenses for Transfer Pricing Adjustment (AY 2005-06): The assessee's appeal contested the non-exclusion of depreciation on the building from operating expenses while making transfer pricing adjustments. The original assessment disallowed depreciation claimed against 'Business income' as the rental income from the building was offered under 'Income from house property'. The assessee admitted the error and requested recalculating the arm's length operating profit margin excluding the disallowed depreciation. The AO and CIT(A) rejected this claim, stating reassessment proceedings are for the benefit of the Revenue and do not allow new claims for deductions. The Tribunal upheld this view, noting reassessment under section 147 does not permit fresh claims for deductions unless these directly relate to the escaped income being reassessed. Despite the legal permissibility of reducing operating costs by disallowed depreciation, section 92CA(4) binds the AO to the TPO's determination of ALP, preventing any alteration. The appeal was dismissed, but the assessee was advised to seek other legal remedies if available. 2. Addition on Account of Notional Interest on Interest-Free Loan to AE in USA (AY 2006-07): The assessee's appeal against the addition of notional interest on an interest-free loan given to its AE in the USA was considered. Both parties agreed the facts were similar to earlier years. Following the Tribunal's directions for AYs 2002-03 and 2003-04, the matter was remitted to the AO/TPO for fresh adjudication. The Tribunal's consistent approach in similar cases warranted a re-evaluation of the notional interest addition. 3. Transfer Pricing Adjustment for International Transactions, Including Transactions with Branch Office in Canada and Idle Capacity Adjustment (AY 2006-07): The Tribunal examined the inclusion of transactions with the Canadian branch office in the ALP determination. The assessee argued these transactions should be excluded as they were with its branch, not a separate AE. The Tribunal agreed, noting the branch office is not a distinct entity and transactions with it do not qualify as 'international transactions' under section 92B. The TPO's inclusion of these transactions was incorrect, and the matter was remitted for recomputation of ALP excluding the Canadian branch transactions. Regarding the idle capacity adjustment, the assessee sought a reduction in operating costs due to 63% idle employees. The Tribunal clarified that under Rule 10B(1)(e), adjustments for differences are made to the comparable uncontrolled transactions' profit margins, not the assessee's. The assessee failed to demonstrate that comparable companies had similar under-utilization, and thus, the adjustment claim was rejected. Conclusion: For AY 2005-06, the appeal regarding depreciation exclusion was dismissed, affirming the reassessment order. For AY 2006-07, the appeal on notional interest was remitted for fresh adjudication, and the transfer pricing adjustment was partly allowed, directing exclusion of Canadian branch transactions from ALP computation. The idle capacity adjustment claim was rejected. The Tribunal's decisions emphasized adherence to statutory provisions and consistency with prior rulings.
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