2020 (9) TMI 1286 - AT - Income Tax

Disallowances made on account of quality rejects, breakage leakage etc, expired inventory, stock of Genosys, stock difference in error - HELD THAT - Breakage, Leakage etc - Assessee in order to establish breakage leakage etc had filed a chart showing the ratio of the law is on such breakage to sales during the relevant years which is negligible as compared to huge turnover of assessee. We therefore direct assessee to file identical details for year under consideration to establish the claim in view of the observations made by this tribunal in immediately preceding years. AO is directed to verify the same and allow the claim of assessee is signed in accordance with the observations of this tribunal in assessee s own case for immediately preceding assessment years. Expired inventory - This Tribunal dealt with this disallowance, based observations in following decisions - Alpha level India Ltd 2003 (9) TMI 43 - BOMBAY HIGH COURT AND CIT vs Wolkem India Ltd 2009 (1) TMI 241 - RAJASTHAN HIGH COURT This Tribunal, based on ratio laid down in these decisions, observed that, ratio of such expired inventory to sale was only 0.12% on sales and 0.18% on cost of goods sold. Further it has not been disputed that, goods of assessee nearing expiry date have to be written off. We therefore, direct assessee to file requisite details in order to ascertain percentage of expired inventory on sales and on cost of goods sold. Ld.AO is directed to verify the same and allow the claim of assessee is signed in accordance with the observations of this Tribunal in assessee s own case for immediately preceding assessment years. Stock issued for Genesis production as consumables - We note that DRP while allowing claim of assessee, held that the substance and spirit of transaction is more important than the form and as income from production has been booked the cost of consumables also needs to be allowed to assessee. In the present facts also the DRP accepted assessee s contentions without verifying the same - Accordingly, respectfully following the view taken by this Tribunal in assessee s own case for preceding assessment years, we direct Ld.AO to verify contentions of assessee and if found correct no disallowance shall be made. Quality rejects - AO denied claim on assumption that, as assessee is in the business of high-quality organic and inorganic chemicals for a long time it should be meeting the quality standards which are usually known beforehand and also the process goes through different levels of checks before entering the market. We note that in preceding years assessee had filed charged highlighting the ratio of on sales and on cost of goods sold quality rejection. Assessee is directed to provide such details for year under consideration. Ld.AO is directed to verify the same and allow the claim of assessee in accordance with observations of this Tribunal in assessee s own case for immediately preceding assessment years. Grounds raised by revenue stands allowed for statistical purposes. Direction to Ld.AO to adopt profit before depreciation interest and taxes on cost as against profit before interest and taxes - We do not find any in infirmity in such observations of DRP as it is in consonance with the Transfer Pricing regulations for computing arm s length margin of international transaction. Accordingly these grounds raised by revenue stands dismissed. TP Adjustment - ITES segment - Comparable selection - exclusion of 2 comparables by DRP - HELD THAT - AO excluded Clinigene International Ltd., after verifying RPT being more than 25% which was in consonance with the directions of DRP. And in respect of cyber media research Ltd., has been excluded for being functionally different which has not been objected before us - Under such circumstances we do not find any infirmity in rejection of these 2 comparables by Ld.AO. Non-granting of under capacity utilisation for manufacturing segment and R D - We note that this Tribunal in case of M/s SKF Technologies India Pvt.Ltd 2019 (2) TMI 2023 - ITAT BANGALORE relying on observations, upheld adjustment towards differences level of capacity utilisation. This view has also been affirmed by Hon ble Karnataka High Court 2018 (6) TMI 1592 - KARNATAKA HIGH COURT . We understand that assessee has not filed details for examining in accordance with the observations made by Hon ble Delhi Tribunal in above in support of its claim which requires examination by Ld. AO/TPO. Accordingly, we remand this issue back to Ld.AO/TPO for examining the claim of assessee in light of observations made by Hon ble Delhi tribunal (supra). Exclusion and not considering depreciation as an operating expense for computing margin in case of comparables under R D segment - TPO selected 12 comparables for manufacturing segment is by applying the same filters adopted by assessee with certain modifications. Now at this stage before this Tribunal in assessee is alleging that companies with export income less than 25% needs to be excluded. Further we note from the records placed before us that assessee manufactures its products for its group entities on need basis. No ground has been raised before DRP in respect of this issue. Assessee has raised additional ground in respect of not applying export filter in manufacturing segment. As we note that this issue has not been dealt with by authorities below, in the interest of Justice we remand this issue back to Ld. AO/TPO in respect of comparables alleged by assessee here in. The Ld. AO/TPO shall verify applicability this filter and then consider alleged comparables accordingly. Considering depreciation as operating expense - We note that assessee had considered manufacturing and R D segment as composite unit, which was subsequently separated by Ld.TPO in transfer pricing proceedings. It has not been disputed by authorities below that both segments are interrelated to each other and that there will be overlapping of products/machineries/manpower being used under 2 segments. When DRP directed depreciation as an operating expense to manufacturing segment, R D segment cannot be looked contrary. We therefore direct Ld.AO/TPO to grant depreciation as operating expense while computing margins to determined the arm s length price under R D segment. Comparable Vimta Labs should be excluded from R D segment due to high turnover as compared to assessee - As submitted that this comparable is a contract research service provider and its research activities not as same as that of assessee. On perusal of orders passed by authorities below, we note that this aspect has not been verified by DRP/AO/TPO. Accordingly we remand this comparable to Ld. AO/TPO to verify contentions alleged by assessee in respect of this comparable. In the event the claim alleged by assessee is found to be correct, this comparable deserves to be excluded. ITES segment wherein assessee seeks exclusion of certain comparables - Nothing has been brought on record by revenue to establish any functional difference between assessee and e-4-e Business Solutions India Ltd 2016 (3) TMI 356 - ITAT BANGALORE In view of the above discussion by coordinate bench, we hold these comparables as not functionally similar to assessee. Exclusion of Lee Nee software (exports) Ltd, Calibre Point Business Solutions Ltd and RS Systems International Ltd. - TPO rejected these comparables for having different year ending - We note that in respect of Lee Nee Software (exports) Pvt.Ltd., there has been no finding in respect of whether this company is having functions that of ITES a software developer. Insofar as 2 comparables are concerned, reason for its exclusion by Ld.TPO is only because, they have a different year ending. Ld.TPO do not object functional dissimilarities with assessee. Therefore, In our view, in the event results could be extrapolated, these comparables needs to be included. We therefore remand these comparables back to Ld.AO/TPO to ascertain financial results by extrapolating from the annual accounts. Also in respect of Lee Nee Software, Ld.AO/TPO is directed to ascertain functions performed being whether ITES or software development company. In the event it is found to be having ITES segment, the same may be considered for purpose of comparability with assessee. Not allowing MAT Credit - AR submitted that details of MAT credit has been placed AND MAT credit in computing tax liability was claimed in its return dated 29/09/2009, however, Ld.AO while computing tax liability for year under consideration was not taken into account - Also submitted that MAT credit paid by it during earlier u/s.115JB is allowable to assessee, as it was assessed under normal provisions of the Act for year under consideration - HELD THAT - AO is directed to verify and allow the claim in accordance with law.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Corporate Tax Disallowances
3. Minimum Alternate Tax (MAT) Credit
4. Levy of Interest under Sections 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustments:

Assessee’s Appeal:
- Grounds 1-5 & 6.1: General in nature, no adjudication required.
- Grounds 6.2-6.6: Non-granting of under-capacity utilization for manufacturing and R&D segments. The assessee claimed adjustments for exclusion of depreciation on fixed costs due to only 20% capacity utilization. The Tribunal remanded the issue back to the AO/TPO for examination in light of observations made by the Hon’ble Delhi Tribunal in the case of DCIT vs. Claas India Pvt Ltd.
- Grounds 6.7-6.10: Comparables alleged for exclusion and not considering depreciation as an operating expense for computing margin in the R&D segment. The Tribunal remanded the issue back to the AO/TPO for verification of the applicability of the export filter and directed the AO/TPO to grant depreciation as an operating expense while computing margins for the R&D segment.
- Ground 6.10: Exclusion of Vimta Labs from the R&D segment due to high turnover and functional dissimilarity. The Tribunal remanded this issue to the AO/TPO for verification.
- Ground 7: ITES segment exclusion of certain comparables (Infosys BPO Ltd, Accentia Technologies Ltd, Cosmic Global Ltd, e-Eclerx Services Ltd) due to functional dissimilarities. The Tribunal directed the exclusion of these comparables based on precedents. The inclusion of certain comparables (Lee & Nee Software, Calibre Point Business Solutions Ltd, RS Systems International Ltd) was remanded to the AO/TPO for verification.
- Ground 9: Adjustment proposed by the AO/TPO on an entity level u/s.92.CA of the Act. The Tribunal remanded this issue to the AO/TPO for verification of documents filed by the assessee.
- Ground 11: Disallowance of stock write-off on account of physical difference and errors in receipt of stock amounting to Rs.6,89,875/-. The Tribunal remanded this issue to the AO for verification.

Revenue’s Appeal:
- Grounds 2-4: Disallowances made on account of quality rejects, breakage leakage, expired inventory, stock of Genosys, and stock difference in error. The Tribunal directed the AO to verify the claims of the assessee in light of the Tribunal's observations in the preceding assessment years.
- Ground 5: Direction to the AO to adopt profit before depreciation interest and taxes on cost as against profit before interest and taxes. The Tribunal upheld the DRP’s consideration of depreciation as an operating expense.
- Grounds 6-7: Exclusion of comparables (Clinigene International Ltd and Cyber Media Research Ltd) by the DRP. The Tribunal upheld the DRP’s directions for exclusion.

2. Corporate Tax Disallowances:

- Ground 11 (Assessee’s Appeal): Disallowance of stock write-off on account of physical difference and errors in receipt of stock amounting to Rs.6,89,875/-. The Tribunal remanded this issue to the AO for verification in accordance with law.
- Grounds 2-4 (Revenue’s Appeal): Disallowances made on account of quality rejects, breakage leakage, expired inventory, stock of Genosys, and stock difference in error. The Tribunal directed the AO to verify the claims of the assessee in light of the Tribunal's observations in the preceding assessment years.

3. Minimum Alternate Tax (MAT) Credit:

- Ground 12 (Assessee’s Appeal): Non-granting of MAT credit of Rs.1,310,861. The Tribunal directed the AO to verify and allow the claim in accordance with law.

4. Levy of Interest under Sections 234B and 234C:

- Grounds 13-14 (Assessee’s Appeal): Levy of interest under sections 234B and 234C. The Tribunal remanded these grounds to the AO for levy in accordance with law.

Conclusion:
The Tribunal has provided detailed directions on various issues, remanding several matters back to the AO/TPO for verification and reconsideration in light of specific observations and precedents. The Tribunal has emphasized the need for accurate adjustments and verification of claims based on established legal principles and previous judgments.