2017 (5) TMI 1166 - AT - Income Tax

Adjustment towards Risk Profile of the Appellant compared with that of Comparable Companies - Held that - As pointed out by the D.R, there is no thumb rule for risk adjustments in each and every cases, whenever the assessee claimed any risk adjustment in accordance with Rule 10C(2)(e). While arriving the ALP, the assessee has to identify and quantify the level of risk involved between the assessee and the comparables while undertaking for analyses in the transfer pricing documents. The risk adjustments could be given only to company to company basis considering levelof risk involved between the assessee and the comparable companies. It is primary duty of the assessee to provide requisite information pertained to the claim. Since the assessee did not discharge its initial onus and in the absence of information to compute the reliable accurate risk adjustments, it is not possible to grant risk adjustments claimed by the assessee. However, considering high degree of risk involved with the comparables, we are inclined to grant risk adjustments at 2% on adhoc basis. Accordingly, this ground is partly allowed. Adjustment towards Abnormal Expenses incurred by the Appellant during the year - Held that - The assessee is a contract-manufacturer and having mark-up raised from 5% to 9.5% on the goods procured by it, later it was revised to 7%, so that the wastage suffered by the assessee taken care of by mark-up prices and manufactured goods. Once the price was marked up, there cannot be any loss to the assessee and the entire wastage is taken care by marked up price of sale price. Hence, we do not find any merit in the plea of the assessee with regard to claim of abnormal wastage. Abnormal depreciation as discussed in earlier, the assessee s pricing pattern is marking up of 7% on the cost of goods manufactured. Being so, the increase in depreciation cost has also taken care of by mark up of sales price. Accordingly, the assessee cannot seek any further adjustments towards additional depreciation cost. This ground of appeal by assessee is also rejected. Reject the claim of deduction u/s.10B - Held that - There was a business loss in the assessment year 2000-01 and the assessee has not claimed deduction u/s.10B and made a note in the statement of income that the company is claiming exemption u/s.10B from this assessment year onwards. There was no claim of deduction u/s.10B and also the Revenue is not allowed any claim u/s.10B of the Act in the relevant to assessment year 2000-01, as such it is to be noted that assessment year 2000-01 cannot be considered as first year of claim of deduction u/s.10B of the Act. From the assessment year 2001-02, deduction u/s.10B of the Act was to construed as first year of claim of deduction u/s.10B of the Act. Accordingly, it is to be allowed for ten consecutive years commencing from the assessment year 2001-02 ending on assessment year 2010-11. Accordingly, we direct the AO go grant deduction u/s.10B of the Act. This ground of the assessee is allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Adjustment towards Abnormal Expenses
3. Claim of Deduction under Section 10B

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:
The first issue concerns the addition of ?4,01,18,602/- towards upward adjustment in the ALP of Transfer Pricing adjustments. The assessee argued that the lower authorities erred by making an adjustment to the transfer price and failed to consider the abnormal year of operations due to the expansion of its manufacturing facility. The assessee also contended that the authorities used single-year financial data instead of multiple-year data and did not grant economic, commercial, and working capital adjustments. The assessee emphasized that it operates on a cost-plus model and applied the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM), with a margin of 1.92%. The authorities, however, did not accept the risk adjustments proposed by the assessee. The Tribunal concluded that the assessee did not discharge its initial onus to provide requisite information for risk adjustments. Nonetheless, considering the high degree of risk involved with comparables, the Tribunal granted a risk adjustment at 2% on an ad-hoc basis, partly allowing this ground.

2. Adjustment towards Abnormal Expenses:
The second issue relates to adjustments for abnormal expenses, specifically abnormal wastage of materials and excess depreciation. The assessee argued that these abnormal costs should be excluded while determining the ALP. The Tribunal noted that the assessee, being a contract manufacturer, operates on a cost-plus model. The Tribunal found that the mark-up prices on goods procured by the assessee should have taken care of the wastage and depreciation costs. Therefore, the Tribunal rejected the assessee's plea for adjustments towards abnormal wastage and additional depreciation costs.

3. Claim of Deduction under Section 10B:
The third issue pertains to the rejection of the claim of deduction under Section 10B of the Act. The assessee claimed that it is entitled to the deduction for the assessment year 2010-11, as it commenced production in the assessment year 2001-02. The authorities, however, considered the assessment year 2000-01 as the initial year based on the date mentioned in Form 56G, which was the date of the trial run. The Tribunal noted that the assessee did not claim deduction under Section 10B for the assessment year 2000-01 due to a business loss and that the commercial production commenced only after obtaining necessary approvals. The Tribunal relied on the judgment in the case of Dy CIT Vs. Bhansali Trading Co., which held that the deduction period starts from the year of positive income. Therefore, the Tribunal concluded that the assessment year 2001-02 should be considered as the first year for claiming deduction under Section 10B, allowing the deduction for the assessment year 2010-11.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal granting a 2% risk adjustment on an ad-hoc basis and directing the AO to grant the deduction under Section 10B for the assessment year 2010-11. The Tribunal rejected the plea for adjustments towards abnormal wastage and additional depreciation costs.