2014 (10) TMI 1010 - AT - Income Tax

TP Adjustment - computation of operating profit, the assessee did not take into account superannuation contribution as it pertained to an earlier year, and it pertained to payment for software which was put to use in a later year - HELD THAT - There is a categorical finding by the CIT(A) that superannuation contribution pertains to the assessment year 2000-01 and 2001-02. This finding remains uncontroverted. There cannot indeed be any rationale in taking into account this expenditure for computation of operating profits of the assessee for the current year. Similarly, there is a categorical finding that Catia software, in respect of which amount of ₹ 8,21,628 was excluded, was not used for the purpose of any work in the relevant previous year and it was only subsequent year that this software was actually used. This finding also remains uncontroverted. Clearly, therefore, this expense cannot be included in the computation of operating profit for the current year. As regards forex gain, the relief granted by the CIT(A) is only a natural corollary to the stand taken by the TPO to the effect that the forex losses are to be included in computation of operating income. When he does so, it cannot be open to him to take a stand that income from forex gain is to be treated as non operational income. In any event, forex gains cannot be considered in isolation of the revenues generated. It is in respect of such revenues that forex gains are received. As for the exclusion of bad debts, amortizations and provisions, in computation of the PLI of the comparables, we are unable to see any rationale in the same nor has it been justified before us. In view of these discussions, in our considered opinion, the stand taken by the CIT(A) does not merit any interference by us.

Summary

Issues:
- Correctness of Commissioner (Appeals) order under section 143(3) of the Income Tax Act, 1961 for the assessment year 2003-04.
- Treatment of superannuation fund amount as extraordinary expenditure.
- Depreciation on software as extraordinary expenditure.
- Classification of forex gain as operating income.
- Adjustment to operating income based on rejected comparables.
- Inclusion of bad debts, amortizations, and provisions in operating profit margins of comparables.

Analysis:
The Appellate Tribunal ITAT DELHI addressed the appeal challenging the correctness of the Commissioner (Appeals) order for the assessment year 2003-04 under the Income Tax Act, 1961. The Assessing Officer raised several grievances, including the treatment of the superannuation fund amount and software depreciation as extraordinary expenditures. The Commissioner (Appeals) had classified the forex gain as operating income, which was disputed. Additionally, adjustments to the operating income based on rejected comparables and the inclusion of certain costs in the operating profit margins of comparables were contested.

The Tribunal considered the material facts, noting that the appellant was a subsidiary of a German company engaged in engineering services for the automotive industry. The appellant reported international transactions, and the Transfer Pricing Officer (TPO) made adjustments to the operating profit, leading to an ALP adjustment. The Commissioner (Appeals) reversed the adjustments made by the TPO, leading to the current appeal.

Regarding the superannuation fund and software depreciation, the Tribunal upheld the Commissioner's findings that these expenses pertained to previous years and were not relevant for the current year's operating profit computation. The Tribunal also agreed with the Commissioner that forex gains should be considered in the operating income calculation, as they are linked to revenue realization. The exclusion of bad debts, amortizations, and provisions from the comparables' operating profit margins was deemed unjustified.

Ultimately, the Tribunal approved the Commissioner's conclusions and declined to interfere with the decision. The appeal was dismissed, affirming the Commissioner (Appeals) order. The judgment was pronounced on October 13, 2014, by Pramod Kumar, AM, and C. M. Garg, JM.