2022 (12) TMI 835 - AT - Income Tax

TP Adjustment - ALP determined in respect of the international transactions pertaining to the Manufacturing Segment and related activities - Working Capital Adjustment - HELD THAT - As relying on Mobis India Ltd. 2014 (2) TMI 36 - ITAT CHENNAI the issue is remanded back to the file of this AO/TPO with the directions to grant suitable Working Capital Adjustment. Claim for Ideal Capacity Adjustment Exclusion of Extra-Ordinary Expenses - DRP had rejected claim for Idle Capacity Adjustment and Exclusion of Extraordinary Expenses made by the Appellant on the ground that no such adjustments were made in the Transfer Pricing Study however the same were claimed by the Appellant only during the course of assessment proceedings - HELD THAT - From documentary evidence it is clear that the Appellant had shifted the manufacturing facility which resulted in incurring one-time extra ordinary expenditure and capacity under-utilization during the relevant previous year on account of shifting of manufacturing facility. Accordingly we direct the AO/TPO to recomputed operational margins of the Appellant after excluding the one-time extra ordinary expenditure after verification of the same. Further the AO/ TPO is also directed to grant suitable capacity under-utilization adjustment to the Appellant after necessary verification and after providing the Appellant an opportunity of being heard. Foreign Exchange Fluctuation Adjustment - We direct the Assessing Officer/TPO to provide suitable foreign exchange fluctuation adjustment after verification and after providing the Appellant opportunity of being heard. Comparable selection - Exclusion of Nitin Fiber Protection Industries Limited (NFPIL) from list of Comparables - HELD THAT - We note that the Tribunal has while deciding the appeal filed by the Appellant for immediately preceding Assessment Year 2012-2013 2017 (4) TMI 1552 - ITAT CHENNAI directed the AO to exclude NFPIL after coming to a conclusion that major income of NFPIL was from project related activities and therefore could not be compared to the Appellant. In view of the aforesaid we direct the AO to exclude NFPIL from the list of comparables. Selection of Comparables and Computation of Margins - HELD THAT - As the authorities below have failed to appreciate the correct facts and take into account the financial data as reflected in the annual accounts of the comparables placed on record by the Ld. Authorised Representative for the Appellant. We find merit in the contentions advanced on behalf of the Appellant in this regards - subject to the directions given by us hereinabove since there are a number of factual discrepancies leading to incorrect selection/rejection of comparables and computation of margins we deem it appropriate to remit all issues related to inclusion/exclusion of comparables and computation of the margins thereof back to the file of AO/TPO for fresh adjudication after giving appellant opportunity of being heard. Rejection of claim of carry forward of unabsorbed depreciation by setting off of the unabsorbed depreciation before allowing set off of the brought forward losses while computing taxable income of the relevant previous year - HELD THAT - As relying on SPEL Semi Conductors Ltd 2012 (12) TMI 81 - MADRAS HIGH COURT . we direct the Assessing Officer to allow the set off of the brought forward business loss with current year business income as claimed by the Appellant and allow carry forward of the unabsorbed depreciation. Accordingly Ground is allowed.

Summary

Issues Involved:
1. Rejection of claims for working capital adjustment, idle capacity adjustment, and foreign exchange fluctuation adjustment.
2. Non-exclusion of one-time/extraordinary expenses.
3. Selection and rejection of comparables for transfer pricing.
4. Rejection of claim for carry forward of unabsorbed depreciation.

Detailed Analysis:

Ground No. 1 to 5:
Working Capital Adjustment:
The DRP rejected the claim for Working Capital Adjustment due to the absence of data provided by the Appellant, referencing previous Tribunal decisions. However, the Tribunal noted that in the Appellant's case for AY 2012-13, the issue was remanded back to the AO for granting suitable adjustments. Following this precedent, the Tribunal directed the AO/TPO to grant suitable Working Capital Adjustment after verification.

Idle Capacity Adjustment & Exclusion of Extraordinary Expenses:
The DRP denied these claims as they were not made in the Transfer Pricing Study but during assessment proceedings. The Tribunal acknowledged the Appellant's evidence of shifting the manufacturing facility, which led to one-time extraordinary expenses and capacity under-utilization. The Tribunal directed the AO/TPO to recompute operational margins after excluding these extraordinary expenses and to grant suitable capacity under-utilization adjustment after verification.

Foreign Exchange Fluctuation Adjustment:
This claim was also rejected on procedural grounds. However, referencing the Tribunal's decision in the Appellant's case for AY 2012-13, the Tribunal directed the AO/TPO to provide suitable foreign exchange fluctuation adjustment after verification.

Ground No. 6 to 8:
Exclusion of Nitin Fiber Protection Industries Limited (NFPIL) from Comparables:
The DRP upheld the inclusion of NFPIL, as the Appellant had initially selected it as a comparable. However, the Tribunal noted that for AY 2012-13, NFPIL was excluded due to its project-related revenues. The Tribunal directed the AO to exclude NFPIL from the list of comparables.

Selection of Comparables and Computation of Margins:
The Tribunal found merit in the Appellant's contentions regarding factual discrepancies in the selection/rejection of comparables and computation of margins. It remitted the issues back to the AO/TPO for fresh adjudication, allowing the Revenue to examine the claims made by the Appellant.

Ground No. 9:
Rejection of Claim for Carry Forward of Unabsorbed Depreciation:
The AO disallowed the carry forward of unabsorbed depreciation, arguing it should be set off against the current year's income before business losses. The Tribunal referenced the Madras High Court's decision in SPEL Semi Conductors Ltd., which clarified that unabsorbed depreciation could be set off against income from other sources after setting off business losses. The Tribunal directed the AO to allow the set-off as claimed by the Appellant and to carry forward the unabsorbed depreciation.

Ground No. 10:
This ground was general in nature and did not require adjudication.

Conclusion:
The appeal was partly allowed, with directions for the AO/TPO to reconsider several adjustments and comparables, and to allow the carry forward of unabsorbed depreciation as claimed by the Appellant.