2018 (11) TMI 481 - AT - Income Tax

Adjustment on account of international transactions - adjustment on account of capacity utilization - DRP confirmed the action of the AO except the fact that it restricted the adjustment to international transaction only as against the adjustment made by the TPO at enterprise level - Held that - Merely because consequent to such adjustment downward adjustment is required and such adjustment cannot be rejected. The adjustment can be rejected only on its merit after consideration of facts and not on the ground that it will lead to downward adjustment. In fact, it is the case of the assessee that downward adjustment is required in the facts of the case. As regards the documentation required for considering such adjustment, we are not in agreement with the contention of the Ld. DR that assessee is required to produce even that data which is not in public domain. We set aside this issue to the TPO and direct the TPO to examine the data placed by the assessee before it. The TPO shall also call for the information from the comparables by issue of notice under Section 133(6). While carrying out this exercise the TPO shall also examine the unit in which such capacity utilization is to be measured. The TPO shall also examine the capacity utilization of the assessee company and will ensure that the capacity utilization of the assessee company i.e. the tested party and that of the comparables is on the same parameters which will include assets turnover ratio. After carrying out such exercise the TPO shall compute appropriate adjustment, if any, on account of capacity utilization. The TPO shall share the details so obtained with the assessee and decide the issue afresh after giving adequate opportunity to the assessee. Allowing the benefit of ( /-) 5% in terms of proviso to Section 92C(2)- Held that - This ground is consequential to ground above. Since we have restored the issue of adjustment on account of arm s length price to the TPO, this issue of allowing benefit of /- 5% will be considered appropriately by the TPO as per the proviso to Section 92C(2) of the Act while computing the adjustment if any required to be made on account of arm s length price. Additional depreciation under Section 32(1)(iia) in respect of the new plant and machinery added by the assessee during the year - Held that - It is not the case of the Revenue that any of the items added during the year is hit by this proviso. If that be so, we see no reason to deny the benefit of additional depreciation. Accordingly, we direct the AO to allow the additional depreciation in respect of these items. Accordingly, Ground no. 2.1 is allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax Adjustment

Detailed Analysis:

1. Transfer Pricing Adjustment:

1.1-1.3. Adjustment on Account of International Transactions:
The assessee incurred a loss of 3.93% at the net level, attributing this to low capacity utilization and high establishment costs compared to comparable companies. The assessee adjusted the Transactional Net Margin Method (TNMM) using the Asset Turnover Ratio (ATR), resulting in an arithmetic mean of 20.29% for comparables. The Transfer Pricing Officer (TPO) rejected this adjustment, arguing that ATR is inaccurate and unreliable for capacity utilization adjustments, and stated that the necessary data for such adjustments was not available. The Dispute Resolution Panel (DRP) upheld the TPO's decision but restricted the adjustment to international transactions only.

The Tribunal observed that the TPO's rejection of the assessee's adjustment without proper examination was inappropriate. The Tribunal directed the TPO to re-examine the data provided by the assessee and, if necessary, use its powers under Section 133(6) to gather additional information from comparables. The Tribunal emphasized that adjustments should not be rejected solely because they result in downward adjustments and that the TPO should ensure comparability on the same parameters, including ATR.

1.4. Benefit of (+/-) 5%:
This ground was not pressed by the assessee and was dismissed.

1.5. Allowing Benefit of (+/-) 5%:
This issue is consequential to the adjustment on account of the arm’s length price. The Tribunal directed that this issue be considered by the TPO while computing any required adjustments.

2. Corporate Tax Adjustment:

2.1. Additional Depreciation:
The assessee claimed additional depreciation under Section 32(1)(iia) for new plant and machinery. The Assessing Officer (AO) denied this claim, arguing that the additions were routine and not directly engaged in manufacturing. The DRP confirmed this view. The Tribunal, however, held that the language of Section 32(1)(iia) does not distinguish between main and routine additions to plant and machinery. The Tribunal cited judgments from the Calcutta and Gujarat High Courts, which interpreted "plant" broadly. The Tribunal directed the AO to allow additional depreciation for the items in question, as they fall within the meaning of plant and machinery.

2.2. Disallowance of Interest Expenditure:
This ground was dismissed as not pressed due to the small amount involved.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal directed the TPO to re-examine the capacity utilization adjustment and allowed the additional depreciation claim. The benefit of (+/-) 5% and disallowance of interest expenditure were dismissed.