2022 (5) TMI 1027 - AT - Income Tax

TP Adjustment - international transactions pertaining to manufacturing operations - concerning the PLI computation of the assessee - computation of the assessee s PLI of OP/OR - treatment of Provision written back and Balances written off as non-operating - HELD THAT - On a specific query, AR could not demonstrate item-wise correlation between the showing of these expenses/provisions as operating expenses in the current/preceding year and their reversal in the current year. It goes without saying that if a particular expenditure or provision has been allowed as deduction and taken as part of operating cost in preceding/current year and later on during the subsequent/current year it is realized that the provision earlier made was excessive or there was some adjustment in the actual expenditure leading to lowering of its incidence, then its reversal to that extent constitutes operating revenue. If, on the other hand, it is not proved that a particular amount reversed in the year under consideration and taken to the credit side of the Profit and loss account was treated as part of operating costs in the ALP determination of a preceding year, then obviously, such reversal would not qualify as an item of operating revenue. In view of the fact that the item-wise link between the 19 items reflected with the corresponding expenditure/provision taken as a part of the operating costs in this/earlier year has not been ingrained, we consider it expedient to set-aside the impugned order and remit the matter to the file of AO/TPO for undertaking this exercise in order to determine whether the amounts of reversal and credit to the Profit and loss account of Provision written back and Balances written off were earlier included in the operating costs base for the ALP determination of the year of their debit to the Profit and loss account. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in this regard. Miscellaneous income - The first amount is Recovery of Telephone deposit amounting to Rs.8,702. A deposit, when made, goes to the balance sheet under the head Current assets, loans and advances. Subsequently, when the deposit is received back, the asset earlier created is squared up. Recovery of a deposit, in our considered opinion, cannot be considered as a part of operating revenue. Though a feeble attempt was made by the ld. AR to claim that the payment of Telephone deposit was initially considered as part of Operating costs, but no evidence was placed on record in this regard. Going by the nature of the item, being, Recovery of deposit, we hold that the authorities below rightly took it as a part of non-operating revenue. Recovery of contribution to Provident Fund on behalf of employees - On being called upon to explain the nature of this item, the ld. AR submitted that the assessee paid the employees share of Provident Fund and later on recovered it from them. However, no detail of such payments or document showing them as a part of operating costs in the year of the payment, was brought on record. Such payment, when made on behalf of employees, is ordinarily shown as Advance recoverable from employees, which again goes to the balance sheet. Recovery of such an amount cannot be construed as a revenue receipt. As the assessee could not produce necessary details showing that the amount was taken as a part of the operating costs at the time of its payment, we hold that its recovery cannot be treated as a part of operating revenue. This contention also fails. Items of expenses which the assessee wants to be taken as non-operating as against operating taken by the TPO - Extraordinary one-time cost due to change in assumption for actuarial valuation quantified by the assessee - Actuarial valuation indicates the liability of the assessee that it will incur for that year. The amount quantified by actuary is nothing but the obligation of the company on this account for the year. It is impermissible to bifurcate such liability into two parts viz., the part relating to year under consideration and another artificial part showing the effect of the provision made in earlier years, which also does not get reflected even in the actuarial report. Since the actuary determined the amount of the provision to be created at the end of the year, the same became an operating cost without any need for reduction. We, therefore, do not find any force in the submission of the ld. AR that a part of the provision for approved gratuity etc. should be treated as non-operating when the full amount of such provision has been claimed as deduction for the year only. This contention is, therefore, repelled. Excess payment of non-cenvatable import duty - We approve the view of the authorities below on treating excess payment of non-cenvatable import duty as part of operating cost base. Treat additional effect of foreign exchange fluctuation as non-operating - Here again, the ld. AR fairly submitted that the Tribunal in Hyundai Construction Equipment India Private Ltd 2021 (7) TMI 711 - ITAT PUNE has decided this issue against the assessee by holding foreign exchange fluctuation as part of operating cost. This issue was also intended to be kept alive to be taken up before the Hon ble High Court. Following the view taken in Hyundai (supra), we approve the view point of the authorities. This contention of the assessee is, therefore, rejected. Exclusion of Subvention receipt from operating revenue base - Though there was Subvention receipt of Rs.5.01 crore but the assessee did not include it in the total income. Once the amount of Rs.5.01 crore is considered as not received for the purposes of taxation, it cannot crop up as a revenue receipt while determining the ALP. A claim dead for computation of total income cannot become alive for the ALP determination. If we accept the contention of the assessee, the situation will be akin to considering Subvention amount as having been received only for the purposes of ALP determination and not for taxation, which, by no logic, can be a correct proposition. As the assessee admittedly did not include Rs.5.01 crore in the total income, the sequitur is that such an amount cannot be included in the operating revenue base for the ALP determination. Comparable selection - Assessee is engaged in manufacturing of textile machines and is also providing installation and commissioning of machines sold by Rieter group in India in addition to trading in spare parts, thus companies functionally dissimilar with that of assessee need to be deselected. Not making transfer pricing adjustment on proportionate basis by restricting it only to the international transactions - Direction to rrestrict the transfer pricing adjustment only to the value of international transactions rather than entity level transactions. Nature of receipt - treatment of subsidy received by the assessee under Package Scheme of Incentives, 2007 introduced by the Government of Maharashtra - HELD THAT - What is essential for ascertaining the taxability or otherwise of subsidy is to see the purpose for which it was granted. In that view of the matter, the amount in question cannot be treated as a revenue receipt. It is vital to mention that we are concerned with the A.Y. 2014-15 and the Finance Act, 2015 has inserted clause (xviii) to section 2(24) w.e.f. 01-04-2016 providing that assistance in the form of subsidy or grant of cash incentives etc., other than the subsidy which has been taken into consideration in determining the actual cost of the asset in terms of Explanation 10 to section 43(1), shall be considered as an item of income chargeable to tax. Since the amended provision of section 2(24)(xviii) is not applicable to the year under consideration, the fortiori is that the subsidy received by the assessee cannot be included in its total income. We, therefore, overturn the impugned order and direct to treat the subsidy as an item of capital receipt not chargeable to tax.

Summary

Issues Involved:
1. P.L.I. Computation of Assessee
2. Inclusion or Exclusion of Comparables
3. Proportionate Adjustment of Transfer Pricing
4. Treatment of Subsidy Received under Package Scheme of Incentives, 2007

Issue-wise Detailed Analysis:

I. P.L.I. Computation of Assessee

6.1. Provision Written Back and Balances Written Off:
The assessee contended that `Provision written back` amounting to Rs.85.46 lakh and `Balances written off` amounting to Rs.134.88 lakh should be treated as non-operating. The TPO disagreed, treating them as non-operating since no details were submitted to prove that the balances written off pertained to the current year. The Tribunal remitted the matter to the AO/TPO for verification, emphasizing that if these amounts were previously included in operating costs, their reversal should be considered operating revenue.

7.1. Miscellaneous Income:
The assessee included `Miscellaneous income` of Rs.15.87 lakh as Operating revenue, which the TPO considered non-operating. The Tribunal upheld the TPO's decision, noting that items like `Recovery of Telephone deposit` and `Recovery of contribution to Provident Fund` do not qualify as operating revenue due to lack of evidence showing their inclusion in operating costs.

8.1. Extraordinary One-Time Cost:
The assessee argued that `Extraordinary one-time cost due to change in assumption for actuarial valuation` of Rs.1.37 crore should be non-operating. The Tribunal rejected this, stating that actuarial valuation is an annual exercise reflecting the liability for that year, thus making it an operating cost.

9. Excess Payment of Non-Cenvatable Import Duty:
The Tribunal followed its earlier decision in Hyundai Construction Equipment India Private Ltd., treating excess payment of non-cenvatable import duty as part of operating cost.

10. Foreign Exchange Fluctuation:
The Tribunal also followed its earlier decision in Hyundai Construction Equipment India Private Ltd., treating foreign exchange fluctuation as part of operating cost.

11.1. Subvention Receipt:
The TPO excluded the Subvention receipt of Rs.5.01 crore from operating revenue, a decision upheld by the Tribunal. The Tribunal noted that the assessee did not include this amount in total income for tax purposes, thus it cannot be considered operating revenue for ALP determination.

II. Inclusion or Exclusion of Comparables

Elgi Electric Industries Ltd.:
The Tribunal excluded this company from the list of comparables, noting that the TPO failed to demonstrate its functional similarity with the assessee. The Annual report indicated involvement in textile business rather than manufacturing textile machines.

Luwa India:
The Tribunal upheld the exclusion of this company, which was involved in manufacturing air engineering machinery for textiles and air treatment systems, making it functionally dissimilar to the assessee.

Yamuna Machine Works Ltd.:
The Tribunal included this company in the list of comparables, rejecting the TPO's exclusion based on improper disclosure of related party transactions. The Tribunal found that the company was functionally similar to the assessee with no significant related party transactions.

III. Proportionate Adjustment of Transfer Pricing

16.1. Proportionate Adjustment:
The Tribunal directed the AO/TPO to restrict the transfer pricing adjustment only to the value of international transactions, following the precedent set in the assessee's case for the previous assessment year 2013-14.

IV. Treatment of Subsidy Received under Package Scheme of Incentives, 2007

18.2. Subsidy as Capital Receipt:
The Tribunal overturned the AO's decision, treating the subsidy received under the Package Scheme of Incentives, 2007 as a capital receipt not chargeable to tax. The Tribunal emphasized that the subsidy was aimed at incentivizing industrial growth and was linked to fixed capital investment, thus qualifying as a capital receipt.

Conclusion:
The Tribunal partly allowed the appeal, remitting the matter to the AO/TPO for fresh determination of the ALP in accordance with the Tribunal's directions and treating the subsidy as a capital receipt not chargeable to tax.