2019 (7) TMI 668 - HC - Income Tax

TP Adjustment - exclusion of two comparables in the transfer pricing - two comparables i.e. M/s Bharat Earth Movers Ltd. and M/s Telco Construction Equipment Co. excluded by ITAT on the ground that both these companies have reported unusually high turnover - HELD THAT - This Court is of the opinion that the ITAT s opinion is ex facie untenable. This Court in Chryscapital Investment Advisors (India) pvt. Ltd. vs. Deputy Commissioner of Income Tax 2015 (4) TMI 949 - DELHI HIGH COURT , had held that unusually high turnover per se cannot be a ground for exclusion and that the AO has to probe into the matter further. The Court also held that it is functional similarity which should be considered rather than the turnover. As a consequence, the impugned order cannot be sustained, on the first question, and is hereby set aside. Additional depreciation - Revenue urges that the items bought and for which said relief was claimed, cannot be termed as equipment - HELD THAT - ITAT had relied upon its previous order granting the same relief. Moreover, the assessee engages itself in manufacturing of equipments for construction and building industry. In the circumstances, unless the connection of the items purchased and claimed to be equipment is shown to be remote, the Revenue cannot dictate and say that the said equipment is not plant, and not connected with the manufacturing activities.No question of law arises on this aspect.

Summary

Issues:
1. Exclusion of two comparables in transfer pricing.
2. Ground of additional depreciation amounting to ?19,45,902.

Analysis:

Issue 1: Exclusion of comparables in transfer pricing
The Revenue raised concerns regarding the exclusion of two comparables, M/s Bharat Earth Movers Ltd. and M/s Telco Construction Equipment Co., in the transfer pricing analysis. The ITAT had excluded these companies due to their unusually high turnover. However, the High Court found the ITAT's reasoning untenable based on the precedent set in Chryscapital Investment Advisors (India) Pvt. Ltd. vs. Deputy Commissioner of Income Tax. The Court emphasized that high turnover alone cannot justify exclusion; instead, functional similarity should be the determining factor. Consequently, the Court set aside the impugned order on this issue, stating that the matter requires further examination.

Issue 2: Additional depreciation claim
Regarding the ground of additional depreciation amounting to ?19,45,902, the Revenue contended that the items purchased did not qualify as equipment. The ITAT, relying on a previous order, granted the depreciation claim, considering the assessee's involvement in manufacturing equipment for the construction industry. The Court noted that unless a clear disconnect between the purchased items and their use in manufacturing activities is established, the Revenue cannot dispute their classification as plant equipment. Consequently, the Court held that no legal question arises on this aspect.

In conclusion, the appeal was partly allowed, and the matter was remitted for re-consideration by the ITAT specifically on the issue of excluding comparables in the transfer pricing analysis. The Court clarified that the decision does not impact the pending miscellaneous application seeking rectification regarding working capital adjustment, which will be independently addressed by the ITAT.