2022 (2) TMI 1361 - AT - Income Tax

TP Adjustment - depreciation adjustment was rejected by the DRP - HELD THAT - In the case of the Honda Motor Cycle and Scooter India Pvt. Ltd. 2015 (4) TMI 502 - ITAT DELHI it was held that where there was difference in rates of depreciation charged by comparables viz-a-viz assessee suitable adjustment was to be made to profits of comparables. As relying on EXL SERVICE. COM (INDIA) PVT. LTD. 2014 (12) TMI 894 - ITAT DELHI and M/S SUMI MOTHERSON INNOVATIVE ENGINEERING LTD. 2014 (2) TMI 652 - ITAT DELHI TPO has rightly allowed the adjustment for depreciation on assets. Thus, we reverse the findings of the DRP on this issue and direct the TPO/AO to restore the depreciation adjustments on assets which was earlier allowed while passing the order u/s 92CA. Comparable selection - TPO included Uniklinger Ltd. and Talbros Automotive Components Ltd. as comparables - Uniklinger Ltd. - As in the segment reporting the company stated that it is in the business of manufacturing and sale of fluid control products and fluid seeling products. Therefore, it is abundantly clear from the annual report of this company that this company namely Uniklinger is not engaged in the automotive industry and has a completely different product profile. Therefore, we are of the view that this company is functionally not comparable to the assessee and, therefore, we direct the TPO to exclude this company from comparables. Talbros Automobile Ltd. - Comparable company entering into joint venture agreement and also transferring its assets to the JV Company it can be viewed that there is an extraordinary event has taken place. Further there are no segmental accounts available to establish separately the profitability from manufacturing of auto components and rendering of IT Services. In the circumstances this company cannot be considered as comparable company and accordingly, we direct the TPO to exclude this company from the comparables. TPO excluded KMA Auto Components P. Ltd. and ANU Industries Ltd. from the list of comparable companies for the reason that annual reports/P L Accounts are not available - TPO should re-examine these two comparables viz-a-viz the annual reports and give a fresh look into these comparables and decide afresh as to whether these two comparables selected by the assessee can be considered as comparable companies. Thus, we restore these grounds to the file of the TPO. Working capital adjustment - We direct the TPO to examine the contentions of the assessee and to provide the details of working capital computations and after giving adequate opportunity to the assessee to carry out the directions of the DRP for granting working capital adjustment. We order accordingly. Grounds are allowed for statistical purpose. Allowability of R D Cess as an admissible expense - We direct the AO to carry out the DRP directions and allow R D cess as an admissible expense and compute the income accordingly. This ground is allowed for statistical purpose.

Summary

Issues Involved:
1. Depreciation adjustment.
2. Inclusion and exclusion of comparables.
3. Working capital adjustment.
4. Allowability of R&D cess as an admissible expense.

Detailed Analysis:

1. Depreciation Adjustment:
The assessee challenged the Dispute Resolution Panel (DRP) for rejecting depreciation adjustment which was initially allowed by the Transfer Pricing Officer (TPO). The assessee argued that Diamond Japan, the parent company, had different depreciation rates compared to Indian comparables. The TPO allowed depreciation adjustment but disallowed working capital adjustment due to lack of data. The DRP had previously allowed similar adjustments for AY 2013-14. The Tribunal reviewed precedents including Honda Motorcycle & Scooters India (P) Ltd. vs. ACIT and DCIT vs. Sumi Motherson Innovative Engineering Ltd., which supported depreciation adjustments where there were differences in depreciation rates. The Tribunal directed the TPO/AO to restore the depreciation adjustments on assets, reversing the DRP's findings.

2. Inclusion and Exclusion of Comparables:
The assessee contested the inclusion of Uniklinger Ltd. and Talbros Automotive Components Ltd. as comparables. Uniklinger Ltd. was argued to be functionally different as it did not deal in auto parts but in fluid control products. Talbros Automotive Components Ltd. was involved in diversified activities including IT services and was impacted by a joint venture, making it incomparable. The Tribunal agreed with the assessee, directing the exclusion of these companies from the comparables.

Regarding the exclusion of KMA Auto Components P. Ltd. and ANU Industries Ltd., the TPO had excluded these due to unavailability of annual reports. The DRP rejected them based on functional non-comparability. The Tribunal directed the TPO to re-examine these comparables with available data and decide afresh, ensuring functional comparability.

3. Working Capital Adjustment:
The assessee argued that the TPO/AO did not properly implement the DRP's directions for working capital adjustment and did not share the computation details. The Tribunal directed the TPO to provide the computation details to the assessee and ensure correct working capital adjustments, adhering to the principles of natural justice.

4. Allowability of R&D Cess as an Admissible Expense:
The assessee claimed R&D cess as an admissible expense, which was initially rejected by the AO. The DRP held that the cess on royalty is not penal and is admissible. The Tribunal directed the AO to follow the DRP's directions and allow the R&D cess as an admissible expense while computing the income.

Conclusion:
The appeal was partly allowed with specific directions to the TPO/AO to restore depreciation adjustments, re-examine comparables, correctly compute working capital adjustments, and allow R&D cess as an admissible expense. The Tribunal ensured adherence to legal precedents and principles of natural justice in its directives.