2021 (11) TMI 1059 - AT - Income Tax

TP Adjustment - comparable selection - Filters applied by assessee in its TP study - Capacity utilization - HELD THAT - In this case, the exact details of capacity utilisation of comparable companies was not made available to the TPO. It was alleged that the TPO should obtained it by exercising his powers u/s. 133(6) of the Act so as to compare the capacity utilisation of the comparables with the assessee company. In our opinion, it is appropriate to remit the issue relating to adjustment on account of capacity utilisation of the assessee to the file of the AO/TPO for deciding the same afresh keeping in view the OECD guidelines. If the exact details of capacity utilisation of comparable companies are not available in the public domain, the AO/TPO is directed to obtain the same directly from the comparable companies and decide the issue afresh, after affording opportunity of being heard to the assessee Customs Duty Adjustment - So as to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration. Adjustment for foreign exchange fluctuations - Higher Import Content of the assessee vis- -vis comparable companies - This issue was also considered by the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd 2017 (4) TMI 1585 - ITAT CHENNAI direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment. Treatment of amortisation of goodwill as operating expenditure - HELD THAT - As relying on ST-ERICSSON INDIA PVT. LTD. VERSUS DCIT, CIRCLE 24 (2) , NEW DELHI AND VICE-VERSA 2018 (7) TMI 1903 - ITAT DELHI as held mortization of goodwill is an extra ordinary item and is not pertaining to the regular operation of the assessee, and hence non-operating in nature - issue decided in favour of assessee. Adjustment, if any, should be restricted to proportionate value of international transaction of the assessee - HELD THAT - This issue was considered by the Hon ble Supreme Court in the case of CIT v. Hindustan Unilever Ltd. 2018 (10) TMI 1611 - SC ORDER wherein it was held that while determining the ALP of international transactions, benchmarking has to be done only on Associated Enterprises transactions and not for the entire turnover. In view of this, we find force in the argument of the ld. AR that the TP adjustment should be restricted only to international transactions pertaining to purchase of raw materials from AEs and other related transactions only. With these observations, we allow this ground of the assessee. Comparable for software section - erroneous computation of margin - L T and Persistent were considered as not comparable in the case of CGI Information Systems Management Consultants (P.) Ltd. 2018 (4) TMI 1755 - ITAT BANGALORE on the ground that these company was a software product company and segmental information on SWD services was not available - thus we direct exclusion of these two companies from the final list of comparables. Consider Akshay Software Technologies Ltd. as a comparable. Technosoft Engineering - As the allegation of the ld. DR is that the complete financials are not made available to the AO/TPO. In our opinion, if the data is not in the public domain, the AO can exercise his powers u/s. 133(6) of the Act to obtain the financials of this company and decide the issue accordingly. Hence this issue is remitted to the AO/TPO. Evoke Technologies Ltd. is a comparable company. Accordingly, we remit the issue to the AO/TPO with a direction to go through the financials of this company and decide the issue accordingly. Disallowance of provision for warranty - AO disallowed the provision for warranty contending the same to be contingent liability/ created on estimate basis - HELD THAT - As difference between the provision amount and the utilization amount is not the benchmark that is required to be considered. What needs to be seen is whether the provision created is on scientific basis. It is submitted that the amount of provision is a factual outcome of the methodology followed in creating provision and utilization would be the actual expenditure incurred against the warranty claims. In the present case, the assessee has followed the scientific methodology based on which provision amount is arrived at. The assessee follows the specific methodology of creating provision for warranty consistently over the years. The said methodology has been submitted before the AO during the course of assessment proceedings. It creates provision for warranty on a scientific basis. We direct the AO to examine the assessee s past record and allow the provision for warranty in the same proportion as compared to the sales as in the earlier assessment years.For this purpose, the AO may consider the data of the immediate past five assessment years and decide the issue accordingly. Disallowance of annual licence fee - AO disallowed the same contending it to be capital in nature and also that it is not a genuine expenditure while passing the draft order, on the contention that no evidences were submitted supporting the same - HELD THAT - The claim of the assessee regarding the expenses being for annual licence fees has not been examined at all and that the details / evidences submitted by the assessee before the DRP has not been admitted for consideration, we deem it appropriate to follow the order of the Co-ordinate Bench of this Tribunal in the assessee's own case for Assessment Year 2009-10 2019 (4) TMI 1929 - ITAT BANGALORE admit the details filed by assessee before DRP and remand this issue back to the file of the AO with the same directions as contained in the Tribunal order for Assessment Year 2009-10. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Adjustment for underutilization of capacity in the manufacturing segment.
2. Adjustment towards customs duty expenses.
3. Adjustment for foreign exchange fluctuations.
4. Treatment of amortization of goodwill as operating expenditure.
5. Restriction of transfer pricing adjustment to international transactions.
6. Exclusion and inclusion of certain comparables in the software segment.
7. Disallowance of provision for warranty.
8. Disallowance of annual license fee.

Detailed Analysis:

1. Adjustment for Underutilization of Capacity in the Manufacturing Segment:
The assessee argued that due to industry slowdown, it operated at 40.39% of its installed capacity, whereas comparable companies operated at an average of 77.42%. The Tribunal noted that the TPO did not grant an adjustment for capacity utilization, stating that such adjustments should be made to comparable companies, not the tested party. The Tribunal directed the AO/TPO to obtain exact details of capacity utilization of comparable companies under section 133(6) of the Act and decide the issue afresh.

2. Adjustment Towards Customs Duty Expenses:
The assessee incurred significant customs duty charges, which were proportionately higher than those of comparable companies. The Tribunal observed that the TPO rejected the adjustment on the grounds that the decision to import was a conscious commercial decision. The Tribunal remitted the issue to the AO/TPO for fresh consideration, directing them to eliminate customs duty from the comparable price to arrive at the correct PLI.

3. Adjustment for Foreign Exchange Fluctuations:
The assessee sought an adjustment for foreign exchange fluctuations embedded in the raw material import cost. The Tribunal noted that the TPO considered foreign exchange fluctuation as non-operating for both the assessee and comparables, thus taking care of the differences. Following the decision in Gates Unitta India Company (P.) Ltd., the Tribunal remitted the issue to the AO/TPO for fresh consideration.

4. Treatment of Amortization of Goodwill as Operating Expenditure:
The assessee argued that amortization of goodwill, resulting from the purchase of a business, should not be considered as operating expenses. The Tribunal, following the decision in ST Ericsson India Pvt Ltd v. DCIT, held that amortization of goodwill is an extraordinary item and non-operating in nature. This issue was decided in favor of the assessee.

5. Restriction of Transfer Pricing Adjustment to International Transactions:
The assessee contended that the transfer pricing adjustment should be restricted to international transactions only. The Tribunal, following the decision in CIT v. Hindustan Unilever Ltd., held that benchmarking has to be done only on Associated Enterprises transactions and not for the entire turnover. This ground was allowed in favor of the assessee.

6. Exclusion and Inclusion of Certain Comparables in the Software Segment:
The Tribunal directed the exclusion of Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. from the list of comparables, following the decision in CGI Information Systems & Management Consultants (P.) Ltd. v. ACIT. The Tribunal also directed the AO/TPO to consider Akshay Software Technologies Ltd. and Evoke Technologies Ltd. as comparables and remitted the issue of Technosoft Engineering Projects Ltd. to the AO/TPO for fresh consideration.

7. Disallowance of Provision for Warranty:
The assessee created a provision for warranty based on past experience. The Tribunal, following the decision in Rotork Controls India (P.) Ltd. v. CIT, directed the AO to examine the assessee’s past record and allow the provision for warranty in the same proportion as compared to the sales in earlier years.

8. Disallowance of Annual License Fee:
The Tribunal noted that similar issues were remanded for fresh consideration in earlier years. The Tribunal remitted the issue to the AO with directions to examine the details and evidence provided by the assessee and decide the matter afresh. The claims under sections 35(1)(iv) and 32 of the Act became infructuous in view of the remand.

Conclusion:
The Tribunal allowed the appeal of the assessee partly for statistical purposes, directing the AO/TPO to re-examine several issues and provide fresh decisions based on detailed analysis and additional evidence.