2021 (2) TMI 1146 - AT - Income Tax

TP Adjustment in the Manufacturing activities - Depreciation adjustment - first disputed item of operating costs is a claim for adjustment on account of depreciation - DRP ruled in this regard directing the AO/TPO that depreciation adjustment should be worked out in the hands of the comparables and not for the assessee. Giving effect to such a direction, the TPO computed the mean PLI of comparables at 6.74% as against originally computed at 6.70% in the consequential order - HELD THAT - Depreciation cost in the case of the assessee forming part of its operating costs base gets neutralized with the rent cost in the cost base of the comparables. Having taken the figure of operating profit as numerator, both in the case of the assessee and the comparables, one cannot again go back to the individual items of operating expenses/incomes culminating into the overall operating profit for claiming that adjustment on account of individual particular higher or lower expense/income should be granted. The same rationale of different items of expenses, such as depreciation and rent in the above illustration, not impacting the overall operating profits for comparison, applies to the composition of individual items of expenses also, such as depreciation in our case. Thus the contention of the ld. AR seeking depreciation adjustment on the ground that some of the items of assets possessed by the assessee did not appear in the schedule of assets of the comparables, is sans merit. Depreciation claim includes depreciation on certain Intangible assets - Claim of the assessee is that depreciation on the Intangible Assets, listed on page 372 of the paper book, should be ignored, as it is alien to the Manufacturing activity and hence do not qualify under sub-clause (i) of Rule 10B(1)(e). A list of six Intangible assets has been given, out of which the dispute is only w.r.t. five items, viz., Goodwill, Computer software, Noncompete fees, Technical knowhow and Customer relationships. It is evident and also admitted on behalf of the assessee that the first three intangible assets, namely, Goodwill Computer software and Non-compete fees are common to both the Manufacturing and Trading activities of the assessee. As such, depreciation on these three items of intangible assets is liable to be considered under sub-clause (i) of Rule 10B(1)(e). The fourth item of Intangible assets is Technical knowhow. There cannot be any dispute that Technical know-how can be used only for manufacturing and not trading activity. When we are determining the ALP of the international transactions of the Manufacturing activity , the same is also liable to be considered even if some of the goods manufactured are sold in domestic market to unrelated enterprises. It is another matter that the transfer pricing addition will have to be restricted only to the international transactions. Intangible asset is Customer relationships - AR could not precisely provide us the nature of this intangible asset or its manner of user. If it was utilized only for Trading segment, then depreciation on the same will require exclusion under rule 10B(1)(e)(i). In case, it was used either exclusively or jointly for the Manufacturing activity, which international transaction has been benchmarked by the TPO, then depreciation on the same will warrant inclusion in the operating costs. The impugned order on this issue is set aside. The AO/TPO is directed to verify this aspect and then decide accordingly. Prior period expenses - AR stated that the assessee incurred Administrative expenses of earlier years amounting to ₹ 4.18 crore which were booked in the year under consideration and hence, the same should be excluded from the determination of the operating cost base of the international transaction under the Manufacturing activity - We are confronted with a situation in which the TPO as well as the DRP categorically required the assessee to prove that ₹ 4.18 crore related to prior years. However, no such evidence could be filed. Unfortunately, the situation continues to remain the same before the Tribunal as well. In such a scenario, it is difficult to accept the assessee s contention for the exclusion of ₹ 4.18 crore from the operating cost base since the very foundation for such a claim, being, the expenditure pertaining to earlier years, could not be proved. We, therefore, uphold the impugned order on this score. Tooling provision reversal, Testing provision reversal and Sales tax refund - assessee computed its PLI by including Tooling provision reversal, Testing provision reversal and Sales tax refund as part of operating revenue - TPO held that these three items were not liable to be considered as operating income by relying on Rule 10TA, giving mechanism for the determination of the operating profit under clause (k) - what is relevant in this context is to find out the treatment given to them at the time of the creation of provision for Tooling expenses or Testing expenses on one hand or the payment of Sales tax on the other. In case these three items, at the time of their creation/payment - whether in this year or in any preceding year - were taken as part of operating costs, then the sequitur is that their reversal in the year under consideration would also draw the same colour, namely, that of operating nature and would constitute operating income and vice versa. The ld. AR did not readily have the relevant data to demonstrate their nature at the time of their creation/payment. Under these circumstances, we set aside the impugned order and remit the matter to the file of AO/TPO for seeing if the provisions of Tooling and Testing, at the time of their creation, were taken as part of the operating cost. In case, the answer is found to be in affirmative, then naturally, their reversal in the year under consideration would also lead to operating revenue. Similarly, if the amount of sales tax was taken as operating cost at the time of payment, then receipt of its refund in the year in question would also give rise of the operating revenue and vice-versa. Foreign exchange fluctuation gain - assessee treated this amount as operating revenue - TPO, again relying on the definition of operating revenue under Rule 10TA, did not accept the assessee s contention - HELD THAT - We have held above that Rule 10TA is not applicable and as such the determination of the character of foreign exchange gain will have to be guided by the normal business understanding and commercial principles. It is fairly settled that foreign exchange gain/loss arising from business transactions is operating revenue/cost. Several benches of the Tribunal including a recent decision of the Pune Benches in Delval Flow Controls Pvt. Ltd. Vs. DCIT 2021 (2) TMI 938 - ITAT PUNE have laid down to this extent. We, therefore, direct to take foreign exchange gain as part of operating revenue. Whether transfer pricing adjustment should have been confined only to the international transactions and not the entity level transaction? - Section 92 is the first section of the Chapter-X containing special provisions relating to avoidance of tax. Sub-section (1) of section 92 provides that Any income arising from an international transaction shall be computed having regard to the arm s length price . Thus it is graphically clear that the ALP and the consequential transfer pricing adjustment is contemplated only in respect of the international transactions and not the entity level transactions. It is seen from the TPO s order that he computed the transfer pricing adjustment under the Manufacturing activity in respect of entity level transactions. It is, therefore, directed that the transfer pricing adjustment should be restricted to the international transaction alone. The impugned order is set-aside pro tanto for giving effect to this direction. Working capital adjustment - As fairly submitted that no such issue was taken up before the TPO. It was only before the DRP for the first time that the assessee sought such an adjustment. Relevant discussion has been made in para 5.2 of the direction in which the claim of the assessee has been rejected only on the ground that the data of comparables for this purpose was not available. This was countered by the ld. AR, who submitted that the relevant data was produced. In such circumstances, we set-aside the impugned order to this extent and remit the matter to the file of AO/TPO for allowing the working capital adjustment afresh as per law after giving reasonable opportunity of hearing to the assessee. Comparable selection - non-inclusion of two companies, namely, G.K.N. Driveline (India) Private Limited and Exedy India Limited - These two companies were directed to be not considered as these were not part of the assessee s TP study report . By now, it is fairly settled through several precedents that an assessee can make out a fresh case before the higher authorities for inclusion or otherwise of a company in the list of comparables, even though it was not before the authorities below. In view of the fact that the DRP has brushed aside the assessee s claim for inclusion of the above referred two companies only on the ground that these were not part of the assessee s TP study report, we cannot countenance the same. The impugned order is set-aside and the matter is restored to the file of AO/TPO for examining the assessee s contention and then decide their inclusion or otherwise as per law after allowing an opportunity of hearing to the assessee. Transfer pricing addition made by the AO in the international transaction of Intra group Sales, General and Administration services - TPO determined Nil ALP primarily on the ground that the assessee could not adduce any evidence for receipt of services and also that no benefit was derived from such services - HELD THAT - There is no rationale in applying the benefit test while determining the ALP of intra-group services. Once a particular expenditure is incurred for which services are received, it does not matter whether or not such services resulted into any benefit to the assessee. This reasoning of the authorities below is jettisoned. Assessee could not lead any evidence to support the receipt of services - Considering the difference in the figures of revenue on one hand and inter-group services on the other for the current year vis-a-vis the preceding year, ex facie , the transaction cannot be declared at ALP, unless a detailed examination is carried out. As the TPO has determined Nil ALP on the preliminary premise that there was no evidence of receipt of services and we have noticed above the fact of receipt of services, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for determining the ALP of the international transaction of Intra-group Sales, General and Administrative services afresh as per law after allowing reasonable opportunity of hearing to the assessee. Disallowance on account of late deposit of the employees contribution to Provident Fund - AO invoked the provisions of section 36(1)(va) and made the disallowance u/s.43B - HELD THAT - The Hon ble Delhi High Court in the case of CIT v. Aimil Limited 2009 (12) TMI 38 - DELHI HIGH COURT has allowed deduction in respect of employees share when the amount was paid before the due date. When we consider these two judgments, it is manifested that both the employer s and employees contribution are allowable as deduction if these are deposited albeit belatedly under the respective Acts, but before the due date of filing of return u/s 139(1) of the Act. Similar view has been taken by the Hon ble Bombay High Court in CIT Vs. Ghatge Patil Transports Ltd. 2014 (10) TMI 402 - BOMBAY HIGH COURT . It is seen as an admitted position that the assessee deposited the employees contribution towards EPF and ESIC before the due date u/s 139(1) of the Act. Respectfully following the aforenoted precedents, we order for the deletion of the addition. Disallowance towards contribution to the employees gratuity fund and contribution to superannuation fund - AO invoked the provisions of section 40A(7) for disallowing the claim made by the assessee on the premise of non-approval of the funds from the Commissioner of Income-tax - HELD THAT - Considering the provisions of section 40A(7) of the Act, it is apparent that the deduction can be allowed only if the Gratuity and Superannuation Funds are duly approved by the Commissioner of Income-tax. As the requisite funds are still pending approval from the ld. Commissioner of Income-tax, we are constrained to directly grant any deduction in this regard. It is expected that the ld. CIT will shortly pass an order on the assessee s applications. The matter is sent back to the AO, who will decide the matter in conformity with such order of the ld. CIT.

Summary

Issues Involved:
1. Transfer Pricing Addition in Manufacturing Activities
2. Transfer Pricing Addition in Intra-Group Costs
3. Disallowance on Account of Late Deposit of Employees' Contribution to Provident Fund
4. Disallowance Towards Contribution to Employees' Gratuity Fund and Superannuation Fund

Detailed Analysis:

I. Transfer Pricing Addition in Manufacturing Activities

Condonation of Delay:
The appeal was admitted despite being time-barred by 38 days, as the reasons for the delay were found satisfactory.

Transfer Pricing Addition:
The AO made a transfer pricing addition of ?22,60,76,000 in the 'Manufacturing activities'. The assessee, a subsidiary of Dana Corporation, USA, applied the Transactional Net Marginal Method (TNMM) for determining the Arm’s Length Price (ALP). The TPO adjusted the assessee’s operating profit by applying Rule 10TA, which was contested.

Depreciation Adjustment:
The assessee's request for depreciation adjustment due to higher rates charged was rejected. The DRP directed that depreciation adjustment should be worked out for comparables, not the assessee. The Tribunal upheld this direction.

Prior Period Expenses:
The assessee's claim for excluding ?4.18 crore as prior period expenses was rejected due to lack of evidence.

Tooling Provision Reversal, Testing Provision Reversal, and Sales Tax Refund:
The inclusion of these items as operating revenue was contested. The Tribunal remitted the matter to the AO/TPO to verify if these items were part of operating costs when created.

Foreign Exchange Fluctuation Gain:
The Tribunal held that foreign exchange gain should be considered as operating revenue.

Entity Level vs. International Transactions:
The Tribunal directed that transfer pricing adjustments should be confined to international transactions, not entity-level transactions.

Working Capital Adjustment:
The Tribunal remitted the matter for fresh examination of the working capital adjustment.

Inclusion of Comparables:
The Tribunal remitted the matter for examining the inclusion of G.K.N. Driveline (India) Private Limited and Exedy India Limited as comparables.

II. Transfer Pricing Addition in Intra-Group Costs

Intra-Group Services:
The AO made a transfer pricing addition of ?11,71,80,583 for intra-group services. The TPO determined Nil ALP due to lack of evidence of receipt of services and benefits derived. The Tribunal rejected the 'benefit test' and remitted the matter for fresh determination of ALP, considering the evidence of services rendered.

III. Disallowance on Account of Late Deposit of Employees' Contribution to Provident Fund

Disallowance:
The AO disallowed ?2,81,104 due to late deposit of employees’ contribution to Provident Fund. The Tribunal, following precedents, ordered the deletion of the addition as the payment was made before the due date of filing the return.

IV. Disallowance Towards Contribution to Employees' Gratuity Fund and Superannuation Fund

Disallowance:
The AO disallowed ?27,98,305 towards the gratuity fund and ?42,44,970 towards the superannuation fund due to non-approval from the Commissioner of Income-tax. The Tribunal remitted the matter back to the AO to decide in conformity with the Commissioner's order once it is passed.

Conclusion:
The appeal was partly allowed, with several issues remitted back for fresh examination and determination. The Tribunal provided detailed guidance on the application of transfer pricing rules and the treatment of specific expenses and revenues.