2018 (7) TMI 70 - HC - Income Tax

TPA - finding of facts arrived at by the ITAT based on the relevant material - comparable selection - ALP - substantial question of law or fact - adjustment sought by the assessee for under utilization of rated capacity - adjustments towards depreciation to make the operative profit positive - Held that - The claim of Depreciation does not have a direct linear or proportionate relationship with the capacity utilization. The Tribunal has rightly held that even without actual utilization of the Plant and Machinery Depreciation can still be claimed as a deduction from the Operating Profits. Not only the learned Tribunal has found similar situation in the case of two named comparables in the year but the reason assigned by the learned Tribunal itself in the quoted portion of the Order above cannot be said to be per se incorrect or a wrong statement of Accounting Principles. The Assessee Company could not have insisted upon a proportionate reduction of the claim of Depreciation in relation to the under-utilization of its capacity. The different comparables Entities may have different Depreciation Policies Accounting Methods and despite general economic conditions being common to all their Profit Margins and claim of Depreciation may differ. Neither the Transfer Pricing Officer(TPO) nor the Tribunal muchless this Court can undertake any such exercise of comparing the Operating Profit Margins down to the extent of a hair-splitting exercise. It is the broad comparison of the homogeneous comparables which is envisaged and is done under Section 92-CA of the Act. The findings or the premise taken by the Dispute Resolution Panel (DRP) in the subsequent year does not render the findings in the previous years per se illegal or unsustainable merely because the Dispute Resolution Panel (DRP) takes a different view in the subsequent years. As already held in M/S. SOFTBRANDS INDIA P. LTD. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT this entire exercise is in the realm of fact finding exercise and unless on the face of it the findings of the learned Tribunal or the Authorities below is found to be perverse and it can be said that the view taken by them is wholly unsustainable according to the legal provisions we do not find that any substantial question of law would arise in the matter.

Summary

Issues Involved:
1. Adjustment for under-utilization of rated capacity in Transfer Pricing (TP) analysis.
2. Addition for working capital adjustment in computing the adjusted average Profit Level Indicator (PLI).

Detailed Analysis:

1. Adjustment for Under-Utilization of Rated Capacity in TP Analysis:

The primary contention of the Assessee was regarding the adjustment for under-utilization of rated capacity while comparing its results with comparables in the Transfer Pricing (TP) study. The Assessee argued that due to severe adverse economic conditions, its business dipped significantly, resulting in a drastic reduction in production and sales. Consequently, the Assessee claimed that the depreciation should be proportionately reduced to reflect the actual utilization of installed capacity.

The Tribunal noted that the Assessee’s turnover had decreased by 60% compared to the preceding year, and only 10% of the installed capacity was utilized. Despite this, the Transfer Pricing Officer (TPO) rejected the Assessee’s claim for adjustment, arguing that the adverse conditions affected all comparables equally. The TPO observed that the Assessee could not substantiate its claim for adjustment of depreciation, as the comparables also faced similar business challenges but managed to increase their sales volumes.

The Tribunal upheld the TPO’s decision, stating that depreciation on fixed assets need not be directly proportional to the utilization of machinery. It emphasized that fixed assets could depreciate even without usage, and the Assessee failed to establish a linear relationship between depreciation cost and machine utilization. The Tribunal concluded that the Assessee’s attempt to reduce depreciation under the guise of under-utilization was not justified.

2. Addition for Working Capital Adjustment:

The Assessee contended that the Assessing Officer (AO), while giving effect to the Dispute Resolution Panel (DRP) directions, incorrectly made an addition for working capital adjustment instead of reducing it while calculating the adjusted average PLI. The Assessee presented a chart showing that the average working capital adjustment required was (-) 2.85%, but the TPO added 2.85% to the unadjusted average PLI of the comparables.

The Tribunal acknowledged this issue and directed the AO/TPO to re-examine and rework the adjusted PLI of the comparables if the working capital adjustment was indeed negative. This ground was allowed for statistical purposes.

Conclusion:

The High Court dismissed the appeal filed by the Assessee, agreeing with the Tribunal’s findings. It held that the Tribunal’s conclusion that depreciation need not be directly proportional to capacity utilization was correct and not perverse. The Court emphasized that the claim of depreciation does not depend solely on the extent of wear and tear of machinery and that different comparables may have varied depreciation policies and accounting methods.

The Court also noted that the findings of the Tribunal were based on relevant material and were binding unless an ex-facie perversity was established. It reiterated that mere dissatisfaction with the Tribunal’s factual findings does not warrant invoking Section 260-A of the Income Tax Act, 1961.

The appeal was dismissed with no order as to costs.