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2018 (6) TMI 1771 - AT - Income TaxTP Adjustment - Comparable selection - exclude M/s. Acropetal Technologies Ltd. - HELD THAT - The average operating margin of M/s. Acropetal Technologies Ltd., is 57.66 which is significantly high and not consistent with the other comparables. Therefore we find merit in the submission of the Ld.AR that the statement of accounts of M/s. Acropetal Technologies Ltd., during the relevant assessment year cannot be relied upon and even if it is relied upon the profit of the company is abnormally high during the relevant assessment year. Hence, we are of the considered view that for the relevant assessment year M/s. Acropetal Technologies Ltd., cannot be adopted as a comparable company. Therefore we hereby direct the Ld.AO to exclude M/s. Acropetal Technologies Ltd., while determining the ALP of the assessee. Disallowance of Research Development Expenditure - nature of expenditure - HELD THAT - AR submitted before us that the assessee had rendered Research Development services to its related party against which the assessee has earned revenue income. AR further pleaded that the matter may be remitted back to the file of Ld.AO for fresh examination of the facts. DR strongly objected to the submission of the Ld.AR. After hearing both the parties, considering the strong arguments advanced by the Ld.AR, we are of the considered view that in the interest of justice, the entire issue has to be examined afresh. Therefore this ground raised by the assessee is remitted back to the file of Ld.AO for de-nova consideration.
Issues:
1. Upward adjustment made by Ld.AO / TPO / DRP based on selection of comparable company. 2. Disallowance of Research & Development expenditure as capital expenditure. Issue 1: Upward adjustment based on selection of comparable company The appellant challenged the upward adjustment of &8377; 2,00,98,068/- by the Ld.AO, TPO, and DRP, contending that M/s. Acropetal Technologies Ltd., chosen as a comparable company, had abnormally high profits during the relevant assessment year. The appellant argued that there were allegations of window dressing in the company's financial statements and reports in newspapers, making its data unreliable. The appellant proposed excluding M/s. Acropetal Technologies Ltd. or using the average profits of the previous three years if considered. The Tribunal observed that the mean margin of M/s. Acropetal Technologies Ltd. at 57.66 was significantly higher than other comparables, indicating inconsistency. Consequently, the Tribunal directed the Ld.AO to exclude M/s. Acropetal Technologies Ltd. while determining the Arm's Length Price (ALP). Issue 2: Disallowance of Research & Development expenditure The Ld.AO disallowed &8377; 1,99,60,831/- of Research & Development expenditure, categorizing it as capital expenditure, a decision upheld by the DRP. The appellant argued that the expenditure was for services rendered to a related party, generating revenue income. The appellant requested a fresh examination by the Ld.AO, which the Ld.DR opposed. The Tribunal, acknowledging the strong arguments of the appellant, remitted the issue back to the Ld.AO for a fresh assessment in the interest of justice. Consequently, the appeal was partly allowed for statistical purposes, with the Tribunal's order pronounced on June 20, 2018, in Chennai.
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