2013 (5) TMI 983 - AT - Income Tax

Summary

Issues Involved:
1. Adjustment on account of additional cost for development of new product.
2. Lower valuation of inventory of imported purchases.
3. Capacity utilization adjustment.
4. Exceptional replacement cost.
5. Overall correctness of the CIT(A) order.

Summary:

Issue 1: Adjustment on account of additional cost for development of new product

The revenue contested that the CIT(A) erred in allowing an adjustment of Rs. 10.73 crores for the development of a new product. The assessee argued that the additional cost was due to the import of components for a new type of shock absorber. The CIT(A) accepted this as an abnormal expenditure. However, the ITAT found that this was a normal business transaction and reversed the CIT(A) decision, restoring the TPO's original order, stating that the increased cost of production is a normal business risk. The appeal of the revenue on this ground was allowed.

Issue 2: Lower valuation of inventory of imported purchases

The CIT(A) allowed a reduction of Rs. 2.56 crores on account of the valuation of inventory for "Unicorn" products. The ITAT noted that the valuation method followed by the assessee was standard practice and inherent in any business. The ITAT set aside this issue to the TPO/AO for fresh consideration, as the complete facts and identification of each product's valuation were not clear. The appeal on this ground was allowed for statistical purposes.

Issue 3: Capacity utilization adjustment

The TPO had increased the operating profit margin of the comparable company, Gabriel India Ltd., from 4.71% to 6.69% due to differences in capacity utilization. The CIT(A) allowed the adjustment only concerning depreciation. The ITAT found no infirmity in the CIT(A)'s decision and dismissed the revenue's appeal on this ground.

Issue 4: Exceptional replacement cost

The revenue challenged the CIT(A)'s decision to allow an exceptional replacement cost of Rs. 10.72 crores, whereas the MOU with Honda Seil Cars Limited provided for Rs. 6.11 crores. The ITAT upheld the CIT(A)'s decision, recognizing the entire expenditure as an abnormal cost. The revenue's appeal on this ground was dismissed.

Issue 5: Overall correctness of the CIT(A) order

The ITAT addressed the overall correctness of the CIT(A) order, specifically regarding the inclusion of Renowned Auto Products Manufacturing Ltd. as a comparable company. The ITAT allowed the assessee's application under Rule 27 of the ITAT Rules, 1963, and set aside the issue to the AO/TPO for fresh consideration, directing to decide the comparability of this company afresh. The appeal of the revenue was partly allowed for statistical purposes.

Conclusion:

The ITAT partly allowed the revenue's appeal, reversing the CIT(A)'s decision on the additional cost for new product development and setting aside the inventory valuation issue for fresh consideration. The ITAT upheld the CIT(A)'s decisions on capacity utilization and exceptional replacement costs and allowed the inclusion of Renowned Auto Products Manufacturing Ltd. as a comparable company.