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2016 (3) TMI 1305 - AT - Income TaxTPA - Non consideration of the Cost Accountants allocation of costs between AE and NON AE segments - TPO did not accept the same observing that the same was not audited - Held that - The cost allocation between AE and Non AE segments by the Cost Accountant has been audited and the same has also been reported by the statutory auditor. The segmental details furnished by the assessee are reproduced at para 4.10 of the DRP s order. A perusal of the same shows that a sum of 1069.80 lakhs has been shown as unallocated costs. According to the assessee this pertains to the unutilized capacity. The assessee has specifically stated so before the DRP. But DRP proceeded to allocate the unallocated expenditure between the AE and Non AE without specifically dealing with the contention of the assessee. Correct allocation of expenditure amongst various segments of the assessee s transactions has to be done to arrive at the correct PLI. In the case before us the revenue is seeking to interfere with the cost accountants report as the adjustment towards under utilization of the capacity has not been allowed both by the TPO as well as the DRP. Therefore this issue would depend on the decision taken on whether the adjustment for under utilization of the capacity is allowable or not. Denial of Capacity Utilization adjustment and depreciation adjustment respectively - TPO and the DRP have disallowed these adjustments on the ground that the assessee was a contract manufacturer and therefore the prices at which the goods were supplied to AE cannot go below the agreed price as stipulated in the agreement with its AE - Held that - the adjustments of under utilization of the capacity and the difference in the depreciation are the factors which are likely to materially affect the price or cost charged or paid or the profit arising from such transactions in the open market. Therefore we direct the AO/TPO to allow the adjustments on account of under-utilisation of capacity and also difference in depreciation method adopted by the assessee and the comparable companies. Since we have held that the adjustment for the under utilization of capacity is allowed the issue of apportionment of unallocated expenses also needs to be allowed. How much of the un allocated costs do really pertain to under utilization and nature of such costs unallocated were not examined either by the TPO or the DRP and neither are the details filed before us. Consequently TPO has to examine and consider to what extent the claim can be allowed. The AO/TPO are accordingly directed to re-compute the ALP after allowing the above adjustments after due verification. Disallowance of loss on account of the directions passed by the DRP - Held that - we find that Article 265 of the Constitution of India allows the Revenue to levy taxes but only in accordance with law. If during the course of assessment proceedings it is found that the assessee is eligible for deduction in excess of the sum claimed by it in the return of income it does not amount to a fresh claim. In our opinion the Assessing Officer has erred in holding it to be a fresh claim. Therefore we direct the AO to verify and allow the claim of the assessee in accordance with law. Ground No.3 is accordingly set aside to the file of the Assessing Officer and treated as allowed for statistical purposes. Short deduction of TDS - Held that - We remand this issue also to the file of the Assessing Officer with a direction to verify the claim of the assessee on this aspect and allow the same in accordance with law.
Issues Involved:
1. Transfer Pricing Adjustment 2. Non-consideration of Cost Accountant's Allocation of Costs 3. Denial of Capacity Utilization and Depreciation Adjustments 4. Disallowance of Loss on Account of Directions Passed by DRP 5. Short Deduction of TDS Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee, engaged in manufacturing and exporting pharmaceutical products, entered into transactions with its AE in Canada. The TPO determined the Arm's Length Price (ALP) of the international transaction relating to the sale of finished goods at Rs. 89.58 crores against Rs. 73.28 crores received by the assessee, proposing an adjustment of Rs. 16.30 crores. The DRP approved the draft assessment order, leading to a final assessment order against which the assessee appealed. 2. Non-consideration of Cost Accountant's Allocation of Costs: The TPO did not accept the cost allocation between AE and Non-AE segments provided by the assessee, as it was not audited. The DRP, however, noted that the cost allocation was certified by a Cost Accountant and referenced by the statutory auditor. Despite this, the DRP did not agree with the allocation of indirect costs and administrative overheads, reallocating unallocated costs of Rs. 1373.52 lakhs to the AE and Non-AE segments. The assessee contended that these unallocated costs pertained to unutilized capacity and should not have been reallocated. 3. Denial of Capacity Utilization and Depreciation Adjustments: The assessee argued that adjustments for capacity utilization (21% for the assessee vs. 64.51% for comparables) and depreciation (due to different methods) should be made. The TPO and DRP denied these adjustments, citing the assured return of 20% on cost as per the share purchase agreement, and considering depreciation as a fixed cost recoverable from the AE. The Tribunal directed the AO/TPO to allow adjustments for under-utilization of capacity and differences in depreciation methods, and to re-examine the unallocated costs. 4. Disallowance of Loss on Account of Directions Passed by DRP: The assessee's claim for additional loss due to CENVAT adjustments was not allowed by the AO, who deemed it a fresh claim not included in the original return. The Tribunal held that if the assessee is eligible for a deduction found during assessment proceedings, it does not amount to a fresh claim. Therefore, the AO was directed to verify and allow the claim in accordance with the law. 5. Short Deduction of TDS: The issue of short deduction of TDS amounting to Rs. 1,37,864 was remanded to the AO for verification and resolution in accordance with the law. Conclusion: The Tribunal remitted all issues back to the AO for redetermination of the ALP and other claims afresh, in light of the Tribunal's observations and after providing a reasonable opportunity for the assessee to be heard. The appeal was treated as allowed for statistical purposes.
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