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2019 (6) TMI 1486 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Proportionate adjustment is to be made only on the value of international transactions and not for the entire transactions at entity level. The total value of international transactions of Rasai unit in respect of import of raw materials was only ₹ 65 crores. TPO considered the entire total operating expenditure (and not restricting only the import transaction of ₹ 65 crores) of the AE segment of Rasal unit while computing the adjustment. This is now well settled by the decision in the case of PCIT vs Sandvik Asia Pvt. Ltd 2018 (5) TMI 262 - BOMBAY HIGH COURT states the adjustment should be restricted only to the international transactions not all the other third party transactions. Economic adjustments - Stock Write Down - This volatility in market conditions and steep increase in the cost of raw materials were duly accepted and allowed by the ld TPO for Non-AE segment but denied for AE segment. It is elementary that for the purpose of comparison, both the tested party and the comparable is to be evaluated under same conditions. We hold that the ld TPO having allowed the same in Non-AE segment to the tune of ₹ 363 lacs, ought not to have taken a divergent stand in respect of AE segment in the sum of ₹ 846 lacs. Accordingly, we direct the ld TPO to allow the same as an economic adjustment while computing the margins of the AE segment for the purpose of comparability. Capacity Underutilization (Rasai Plant) and Shutdown Cost (Rasai Plant) - It is not in dispute that the Rasai plant was closed down for a period of 4 months from November 2008 to February 2009 due to lack of demand and pile up of excess inventories. This fact is evident from the Excise Register placed on record. This is evident from the manufacturing details provided by the assessee for the financial yea₹ 2007-08 and 2008-09 enclosed in page 253 of the paper book. This resulted in underutilization of capacity in Rasai plant to 42% during the year and consequent shutdown cost. This is part of operational cost and hence allowance should be granted to the assessee as an economic adjustment. Professional charges for search of new MD - This is a non-recurring item and extra-ordinary in nature. It is not that a new MD is appointed in normal course of business every year. During the year, the assessee company had paid this fees to recruitment agency in search of MD and claimed the same as an extraordinary economic adjustment. Accordingly, we direct the ld TPO to consider the amount spent on professional charges for search of new MD to be allowed as an economic adjustment while computing the margins of AE segment for the purpose of comparability. Addition on account of capital expenditure on scientific research centre - only grievance of the revenue is that since the assessee had not obtained renewed its approval from DSIR, the assessee is not entitled for deduction - HELD THAT - The benefit of s. 35 (1)(iv) can be availed by the assessee in respect of expenditure of a capital nature on scientific research if that research is related to the business carried on by the assessee. The approval of the authority prescribed under s. 35(2B) is not an essential prerequisite for claiming the allowance unde₹ 35(1)(iv) if it is found that a part of the claim falls within the ambit of s. 35(1)(iv). The mere fact of a claim not having been found admissible under s. 35(2B) will not constitute a bar to allowing an expenditure under s. 35(1)(iv) if that expenditure is capital expenditure and falls squarely within the ambit of s. 35(1)(iv). Capital expenditure incurred on the acquisition of land or construction of building which is excluded by the very terms of s. 35(2B) can be claimed under s. 35(1)(iv) - we hold that the assessee is entitled for deduction u/s 35(1)(iv) of the Act. Accordingly, the Ground No. 2 raised by the revenue is dismissed.
Issues Involved:
1. Adoption of Transactional Net Margin Method (TNMM) and benchmarking of international transactions. 2. Rejection of segmental profitability by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP). 3. Economic adjustments claimed by the assessee. 4. Adjustment computation on the value of international transactions. 5. Claim of depreciation on goodwill arising from amalgamation. 6. Disallowance of expenditure under section 14A while computing book profits under section 115JB. 7. Deduction of capital expenditure on scientific research under section 35(1)(iv). Detailed Analysis: 1. Adoption of Transactional Net Margin Method (TNMM) and Benchmarking of International Transactions: The assessee adopted TNMM for benchmarking its international transactions, splitting them into manufacturing and R&D segments. The TPO, however, rejected this segmentation and conducted an entity-level benchmarking. The TPO identified 68 comparables and computed an OP/OI margin of 6.69%, leading to an adjustment of ?4578.73 lacs. The DRP later accepted the audited segmental accounts and directed the TPO to benchmark the AE segment of each unit with the Non-AE segment, except for the Rasai unit. 2. Rejection of Segmental Profitability by TPO and DRP: The TPO initially rejected the segmental profitability due to the lack of audit. However, the DRP accepted the audited segmental accounts submitted later. The DRP directed the TPO to use internal TNMM for benchmarking, but the TPO disagreed with the DRP's method of comparing AE segment margin of Rasai unit with total margin of other units, stating it was conceptually incorrect. 3. Economic Adjustments Claimed by the Assessee: The assessee claimed economic adjustments for stock write-down, capacity underutilization, shutdown costs, abnormal forex loss, and professional charges for a new MD search. The TPO allowed some adjustments partially but rejected others. The Tribunal directed the TPO to allow these adjustments, stating they should be uniformly applied to both AE and Non-AE segments. 4. Adjustment Computation on the Value of International Transactions: The Tribunal held that adjustments should be restricted to the value of international transactions, not the entire entity level, citing the Bombay High Court's decision in PCIT vs. Sandvik Asia Pvt. Ltd. The total value of international transactions for the Rasai unit was ?65 crores, and adjustments should be computed accordingly. 5. Claim of Depreciation on Goodwill Arising from Amalgamation: The assessee claimed depreciation on goodwill arising from an amalgamation, which was not initially claimed in the return of income. The Tribunal remanded the matter back to the AO for fresh adjudication, following its earlier decisions in the assessee's own case for previous years. 6. Disallowance of Expenditure under Section 14A While Computing Book Profits under Section 115JB: The assessee raised additional grounds regarding the disallowance of expenditure under section 14A while computing book profits under section 115JB. However, during the hearing, the assessee did not press these grounds, and they were dismissed as not pressed. 7. Deduction of Capital Expenditure on Scientific Research under Section 35(1)(iv): The assessee claimed a deduction for capital expenditure on scientific research, which was disallowed by the AO due to the lack of DSIR approval. The Tribunal held that DSIR approval is not a prerequisite for claiming deduction under section 35(1)(iv) and allowed the deduction, citing various judicial precedents. Conclusion: The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the revenue was dismissed. The Tribunal directed the TPO to consider the audited segmental profitability for benchmarking and allowed the economic adjustments claimed by the assessee. The Tribunal also allowed the claim for depreciation on goodwill and the deduction for capital expenditure on scientific research.
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