2020 (12) TMI 730 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee ought to have demonstrated difference in the rates of depreciation charged by it vis- -vis the comparables for seeking any adjustment on this score. The ld. AR submitted that such a data portraying difference in rates of depreciation can be compiled very easily and hence requested for granting one more opportunity for making out a case on the above lines before the authorities below. In view of the foregoing discussion and more specifically because of remand order in the first round of proceedings on this count, we are of the considered opinion that it would be in the interest of justice if the impugned order is set aside and the matter is restored to the file of AO/TPO for deciding this issue afresh in the light of new calculation sheet(s) which the assessee is contemplating to file depicting difference in the rates of depreciation by the assessee as well as comparables warranting adjustment, if any. It is made clear that the onus to prove the difference in rates of depreciation between the assessee and comparables will obviously be upon the assessee, who is claiming such an adjustment and also once this exercise is undertaken, it needs to be given a logical conclusion across the board notwithstanding that it may lead to having adverse impact in some comparables, where the rate of depreciation charged may be lower than that of the assessee. However, such an exercise should not put the assessee in more prejudicial position than in which it is before carrying out such an adjustment.

Issues Involved:

1. Adjustment towards higher depreciation claimed by the assessee.
2. Determination of Arm’s Length Price (ALP) under the Transactional Net Margin Method (TNMM).
3. Application of Rule 10B(1)(e) of the Income Tax Rules.
4. Remand of the case to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) for verification and adjustment.

Detailed Analysis:

Adjustment towards Higher Depreciation:

The primary issue raised by the assessee was the alleged improper adjustment towards higher depreciation. The assessee argued that its claim for higher depreciation was wrongly decided despite specific directions from the Tribunal in a previous order. The Tribunal had directed that if the assessee could establish a material difference in depreciation claims compared to its comparables, suitable adjustments should be made in the comparables' hands after verification by the AO/TPO. The TPO, however, did not address this aspect while giving effect to the Tribunal’s order.

Determination of Arm’s Length Price (ALP) under TNMM:

The assessee used the Transactional Net Margin Method (TNMM) to demonstrate that its international transactions were at arm’s length price (ALP). The Profit Level Indicator (PLI) adopted was Operating Profit before Depreciation, Interest, and Taxes (OPBDIT). The assessee contended that its higher depreciation rate should be considered for a fair comparison with the comparables. The Tribunal, however, emphasized that the ALP determination under TNMM should be based on the operating profit, which includes all operating costs, including depreciation. The Tribunal rejected the assessee’s plea to consider profit before depreciation as the numerator.

Application of Rule 10B(1)(e) of the Income Tax Rules:

Rule 10B(1)(e) governs the determination of ALP under TNMM. The rule mandates the comparison of net profit margins of the assessee and the comparables, adjusted for any material differences that could affect the net profit margin. The Tribunal highlighted that the rule requires consideration of the overall operating profit, not profit before certain operating costs like depreciation. The Tribunal explained that different business models might lead to varying operating costs, and considering the overall operating profit ensures a fair comparison.

Remand of the Case to AO/TPO:

The Tribunal’s earlier order directed the AO/TPO to verify and allow adjustments if the assessee could demonstrate a material difference in depreciation rates compared to the comparables. The Tribunal clarified that the adjustment should be based on differences in depreciation rates on similar assets, not merely on higher or lower depreciation amounts or ratios. The Tribunal remanded the case to the AO/TPO, allowing the assessee to present new calculations showing the difference in depreciation rates. The onus to prove the difference in depreciation rates lies with the assessee. The Tribunal also noted that the adjustment should not place the assessee in a more prejudicial position than before the adjustment.

Assessment Year 2008-09:

The facts and circumstances for the assessment year 2008-09 were similar to those of 2007-08. The Tribunal rejected the assessee’s contention of using PBDIT as the numerator and remanded the matter to the AO/TPO with similar directions as for the previous year. The assessee did not provide the required data on depreciation rate differences. Consequently, the Tribunal set aside the impugned order and remitted the matter for fresh consideration.

Conclusion:

The Tribunal allowed both appeals for statistical purposes, directing the AO/TPO to re-examine the issue of depreciation adjustment based on the rates of depreciation on similar assets. The assessee was granted an opportunity to present relevant data, and the AO/TPO was instructed to conclude the matter logically, ensuring no undue prejudice to the assessee. The order was pronounced on 17th December 2020.

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