2023 (3) TMI 706 - AT - Income Tax

TP Adjustment - not considering the losses on account of foreign exchange fluctuation as operating in nature and not allowing purchase price adjustment - HELD THAT - Admittedly, similar issue came for consideration before this Tribunal in assessee s own case 2022 (5) TMI 34 - ITAT BANGALORE as held TPO and the DRP have not properly analyzed the submissions of the Assessee. There is no analysis whether there was any adverse foreign exchange fluctuations during the relevant assessment year, which is abnormal in nature and what is its effect on the operating margin of the Assessee and the comparables - we are inclined to remit the issue to the file of TPO on similar directions. Non-allowing adjustment on account of custom duty and surcharge incurred by the assessee - Similar issue was considered by Bangalore bench in the case of Continental Automotive Components India Pvt. Ltd. 2021 (11) TMI 1059 - ITAT BANGALORE as held issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962 - thus we remit the issue to the file of AO/TPO for fresh consideration on similar lines. Depreciation adjustment - DRP not excluding depreciation while computing the operating margin of the Appellant and the comparable companies - HELD THAT - As decided in assessee own case 2022 (5) TMI 34 - ITAT BANGALORE we observe that there is no analysis with respect to depreciation policy of the assessee and comparable cases. Therefore, we are of the view that let this matter be reexamined by the TPO / AO afresh. The assessee should demonstrate whether there is any difference in depreciation policy of the assessee and the comparable companies and what is its impact on the computation of arm's length price. If the assessee is able to demonstrate the same, the TPO may allow reasonable depreciation adjustment while determining the ALP for the international transactions. Thus we remit the issue to the AO/TPO for fresh consideration. Capacity utilization adjustment - As we direct the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as Installed Capacity, Actual Production in Units,Break-up of Fixed Cost and Variable Cost, Segmental/ product wise information, if any. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized - we remit the issue to the file of AO/TPO on similar direction. Working capital adjustment - We of the opinion that similar issue came for consideration before this Tribunal in assessee s own case 2022 (5) TMI 34 - ITAT BANGALORE held keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Respectfully following the decision of the Coordinate Bench in the case of Huawei Technologies India (P)Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE we also hold that the working capital adjustment is to be allowed as per actual on the final set of comparables - Therefore the working capital adjustment as claimed by the Assessee should be allowed. thus we remit the issue to the file of AO/TPO on similar lines. Admission of additional grounds accepted - transfer pricing adjustment should be restricted only to the AE related transactions of the assessee - we remit this issue to the file of AO/TPO for fresh consideration.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of TP Documentation
3. Economic Analysis Disregard
4. Foreign Exchange Fluctuation Losses
5. Custom Duty and Surcharges Adjustment
6. Purchase Price Adjustment
7. Depreciation Exclusion
8. Capacity Utilization Adjustment
9. Working Capital Adjustment
10. Risk Difference Adjustment
11. Limitation of TP Adjustment to International Transactions

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal challenges a transfer pricing adjustment of INR 5,67,47,747/- under section 92CA of the Income-tax Act, 1961, related to international transactions for AY 13-14. The Tribunal noted that the Ld. DRP did not provide certain reliefs, leading to the adjustment by the TPO.

2. Rejection of TP Documentation:
The AO, TPO, and DRP erred in rejecting the TP documentation maintained by the appellant under sub-section (3) of 92C of the Act. The Tribunal did not specifically adjudicate this issue as it was deemed general in nature.

3. Economic Analysis Disregard:
The authorities disregarded the economic analysis performed by the appellant in the TP documentation. This issue was also considered general and did not require specific adjudication.

4. Foreign Exchange Fluctuation Losses:
The appellant argued that losses due to foreign exchange fluctuations should be treated as operating in nature if they are in the revenue field and non-operating if related to earlier years or reinstatement. The Tribunal remitted this issue to the TPO for reconsideration, referencing a similar decision in the appellant's case for AY 2012-13.

5. Custom Duty and Surcharges Adjustment:
The appellant sought adjustments for custom duty expenses, arguing that these were significantly higher compared to comparable companies. The Tribunal referred to the decision in Continental Automotive Components India Pvt. Ltd. and remitted the issue to the AO/TPO for fresh consideration, emphasizing the necessity of adjustments for custom duty to ensure proper comparability.

6. Purchase Price Adjustment:
The appellant sought adjustments for purchase price differences due to forex fluctuation. The Tribunal remitted the issue to the TPO for reconsideration, highlighting the need for a proper comparability analysis that factors in the import component and forex fluctuation.

7. Depreciation Exclusion:
The appellant contended that different depreciation rates adopted by companies should be considered, and depreciation should be excluded while computing operating margins. The Tribunal remitted the issue to the AO/TPO for fresh consideration, referencing a prior decision that emphasized the need for reasonable depreciation adjustments.

8. Capacity Utilization Adjustment:
The appellant argued for adjustments due to underutilization of capacity, being in its third year of operations. The Tribunal upheld the necessity of such adjustments, citing several precedents, and remitted the issue to the AO/TPO with directions to obtain relevant data from comparable companies under section 133(6) of the Act.

9. Working Capital Adjustment:
The appellant sought working capital adjustments. The Tribunal, referencing a decision in Huawei Technologies India (P.) Ltd., directed the AO/TPO to allow working capital adjustments based on actual data from the final set of comparables.

10. Risk Difference Adjustment:
The appellant argued for adjustments to account for differences in risks borne by the appellant and comparable companies. This issue was not specifically adjudicated as it was considered general in nature.

11. Limitation of TP Adjustment to International Transactions:
The appellant raised an additional ground that TP adjustments should be restricted to international transactions alone. The Tribunal admitted this ground and remitted the issue to the AO/TPO for fresh consideration, referencing a decision in Continental Automotive Components India Private Limited, which emphasized that TP adjustments should be limited to AE transactions.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, remitting several issues back to the AO/TPO for fresh consideration with specific directions to ensure proper comparability and adjustments in line with judicial precedents.