2016 (5) TMI 1595 - AT - Income Tax

TP Adjustment - DRP directed the AO to restrict the adjustment to the cost relating to import of raw material from AE , which was 33% of material cost and 16% of total operating cost - As argued this direction was not implemented by AO - HELD THAT - As, seen from the draft order, the TP adjustment proposed was Rs. 8,98,90,000/-whereas the final adjustment made was Rs. 8,80,08,000/- It seems AO has implemented only other direction of adopting average OP/sales Of comparable companies at 8.23% as against 8.51% proposed as directed - The direction of DRP in para 3.1.3 has not been implemented. To that extent, AO's order is not in compliance with the directions of DRP. AO is directed to modify the adjustment as per the direction of the DRP on the issue. Ground No. 2 of assessee is accordingly allowed Adjustment for capacity utilisation - Assessee capacity utilization was at 78% of total capacity there by cost of overheads is more, has not been considered - HELD THAT - In principle we are in agreement with the contentions raised by assessee, as GP over sales can eliminate the difference in claim of depreciation due to age of machinery rate at which it was claimed and method of claims like straight line or written down value. We accordingly direct the AO/TBO to adopt the comparison of profitability ratios adopting GP over sales. Since the details of capacity utilization of the comparable companies and rate of depreciation could not be analysed as commented by DRP, it would be better if GP analysis was undertaken taking sales less cost of raw material as basis (excluding other cost including Depreciation, interest etc) so that auto components profitability could be analysed so as to consider whether the import of raw material from AE has effected the profitability of assessee under the TP provisions. Accordingly, we set aside the impugned orders of the Revenue authorities on this issue and restore the matter to the file of AO/TOP to carry out the exercise as stated above. Assessee should be given due opportunity. However, we make it clear that if any adjustment is required' to be made the same is to be restricted, as directed by DRP above. The matters which have attained finality are not be reopened. AO/TPO is directed accordingly. Ground No. 3 is allowed for statistical purposes. MAT credit objected to by assessee was not adjudicated by the DRP even though AO in the draft assessment order has determined the tax liability without giving appropriate MAT credit and so assessee is aggrieved - HELD THAT - AO is directed to give MAT credit as per the provision and facts on record. Assessee is directed To furnish necessary details to the AO. Ground is allowed. Interest u/s. 234BC and 234C are consequential In nature and does not require separate adjudication. However, AO is directed to furnish the working of calculation of 'interest in the order so that assessee can object if there are any omissions/commissions in the levy.

Issues Involved:
1. Transfer Pricing Adjustment for Auto Components Manufacturing Segment
2. Economic Analysis and TP Documentation
3. Use of Non-Contemporaneous Data
4. Capacity Utilization and Overheads Allocation
5. MAT Credit Entitlement
6. Levy of Interest Under Sections 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustment for Auto Components Manufacturing Segment
The assessee contested the AO's failure to restrict the TP adjustment to the cost of raw materials imported from associated enterprises (AEs), as directed by the DRP. The DRP had directed that the adjustment should be limited to 33% of material cost and 16% of total operating cost. The AO did not implement this direction, leading to the assessee's grievance. The Tribunal found the assessee's contention valid and directed the AO to modify the adjustment as per the DRP's directions, allowing Ground No. 2 of the assessee.

2. Economic Analysis and TP Documentation
The assessee argued that the economic analysis in its TP documentation was bona fide and prepared in good faith, complying with the Income-tax Act and Rules. The AO and TPO rejected this analysis, leading to a revised adjustment. The Tribunal noted that the DRP had considered the issue and found that the TP adjustment should be restricted to the cost of material imported from AEs. The Tribunal upheld the DRP's direction, emphasizing the need for adjustments to be proportionate to international transactions.

3. Use of Non-Contemporaneous Data
The assessee objected to the use of non-contemporaneous data by the AO and TPO, which was not available in the public domain at the time of the TP study. The Tribunal did not specifically address this issue in its final ruling but focused on the overall compliance with the DRP's directions.

4. Capacity Utilization and Overheads Allocation
The assessee argued that its capacity utilization was only 78%, leading to higher overhead costs. It contended that the comparability should be based on GP over sales, excluding depreciation and other costs. The Tribunal agreed in principle with the assessee, directing the AO/TPO to adopt GP over sales for profitability analysis. The matter was remanded to the AO/TPO for further analysis, with instructions to restrict any adjustments as per the DRP's directions.

5. MAT Credit Entitlement
The assessee claimed that the AO did not grant MAT credit amounting to Rs 1,76,09,577/-. The Tribunal directed the AO to give MAT credit as per the provisions and facts on record, instructing the assessee to furnish necessary details. Ground No. 4 was allowed.

6. Levy of Interest Under Sections 234B and 234C
The assessee contested the levy of interest under sections 234B and 234C. The Tribunal noted that these interests are consequential in nature and do not require separate adjudication. However, the AO was directed to provide the working of the interest calculation to allow the assessee to object if there were any errors.

Conclusion:
The appeal was considered allowed for statistical purposes, with specific directions given to the AO/TPO to adhere to the DRP's directions and re-evaluate certain aspects of the TP adjustments and MAT credit entitlement. The Tribunal emphasized the need for accurate and proportionate adjustments in line with the DRP's findings.

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