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2023 (3) TMI 1092 - AT - Income TaxTP Adjustment - disallowance of depreciation on the alleged excess amount paid by the assessee to its associated enterprises towards the purchase of second-hand machinery - In order to justify the amount paid to the associated enterprises for the purchase of the second-hand machinery, the assessee in its transfer pricing report has placed reliance upon the valuation certificate obtained from Chartered Engineer in Italy - TPO rejected the benchmarking analysis conducted by the assessee on the basis that such a certificate was not furnished by the assessee and accordingly proceeded to adopt the WDV of the machinery in the books of the associated enterprise as the arm s length value. HELD THAT - We find merit in the submission of the assessee that the AO/TPO/learned DRP always had the power to call for the valuation report to determine the arm s length price of the machinery purchased by the assessee from its associated enterprises - As find from the record that neither such exercise was carried out by the TPO nor by the learned DRP. Even in the remand proceedings, TPO apart from finding deficiencies in the valuation report submitted by the assessee made no efforts to seek any expert opinion on the valuation of machinery purchased by the assessee, and rather the TPO justified the adoption of WDV as the arm s length value of the machinery. When the DRP had agreed with the findings of the TPO in its remand report then the expert opinion on the valuation should have been sought - when the DRP chose not to call for such a report and even the TPO neither in the first round nor in the remand proceedings sought such a report, partial rejection of the second valuation report submitted by the assessee is not justified. We do not agree that the Revenue had no other option and therefore proceeded to accept the valuation report submitted by the assessee in cases where the WDV is Nil. We completely reject the cherry-picking basis of considering the valuation report adopted by the lower authorities while computing the arm s length price of the impugned international transaction. In such peculiar circumstances of the present facts, the second valuation report submitted by the assessee from the government-approved valuer merits acceptance. Benchmarking of the transaction on an aggregate basis - When each of the machinery purchased by the assessee from its associated enterprise is connected for the purpose of operation of the assessee, the same cannot be treated as the independent transaction requiring separate benchmarking merely because invoices have been raised separately, or valuation by the valuer has been done separately. We find that the coordinate bench of the Tribunal in Boskalis International Dredging International vs DDIT, 2014 (7) TMI 866 - ITAT MUMBAI held that when the transactions are influenced by each other and particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions. It was further held that such aggregation can be vis- -vis each associated enterprise separately and not by clubbing the transactions with all the associated enterprises. We direct the TPO/AO to compute the arm s length price of the international transaction pertaining to the purchase of capital goods by considering the second valuation report submitted by the assessee - further directed that the transaction with each associated enterprise be benchmarked on an aggregate basis. Grounds raised in assessee s appeal are allowed for statistical purposes.
Issues Involved:
1. Reduction of depreciation claim by Rs. 57,81,935. 2. Adjustment for excess depreciation on the alleged excess amount paid for capital assets. 3. Partial acceptance and rejection of the valuation report determining the arm's length price. 4. Appropriateness of Written Down Value (WDV) as comparable price. 5. Inclusion of freight and insurance costs in the purchase cost of fixed assets. Detailed Analysis: 1. Reduction of Depreciation Claim by Rs. 57,81,935: The assessee challenged the reduction of its depreciation claim by Rs. 57,81,935, arguing that the DRP/AO erred in making this adjustment based on the alleged excess amount paid for capital assets. The Tribunal noted that the AO had disallowed the depreciation based on the TPO's adjustment, which was upheld by the DRP. The Tribunal directed the TPO/AO to recompute the arm's length price considering the second valuation report submitted by the assessee and to benchmark the transaction on an aggregate basis. 2. Adjustment for Excess Depreciation: The DRP/AO made an adjustment for excess depreciation on the alleged excess amount of Rs. 4,89,58,707 paid by the assessee for purchasing capital assets from its Associated Enterprises. The Tribunal observed that the TPO had adopted the WDV in the books of the associated enterprise as the arm's length price, which was partially accepted by the DRP. The Tribunal rejected the cherry-picking approach and directed the TPO/AO to consider the second valuation report submitted by the assessee for determining the arm's length price. 3. Partial Acceptance and Rejection of Valuation Report: The assessee contended that the DRP/AO erred in accepting only part of the valuation report, which was the basis for determining the arm's length price. The Tribunal found that the DRP had accepted the current asset value determined by the second valuer for certain machinery but upheld the TPO's approach for others. The Tribunal held that the partial rejection of the second valuation report was not justified and directed the TPO/AO to accept the second valuation report submitted by the assessee. 4. Appropriateness of Written Down Value (WDV): The DRP/AO considered the WDV in the books of the associated enterprise as the most appropriate comparable price. The Tribunal noted that the DRP had accepted the current asset value determined by the second valuer for machinery with NIL WDV but upheld the TPO's approach for others. The Tribunal held that the DRP should have sought an expert opinion on the valuation and directed the TPO/AO to consider the second valuation report for determining the arm's length price. 5. Inclusion of Freight and Insurance Costs: The assessee argued that the freight and insurance costs incurred by the associated enterprise should be excluded from the purchase cost of the fixed assets. The Tribunal agreed with the assessee and directed the TPO/AO to exclude the freight and insurance costs while benchmarking the transaction. Conclusion: The Tribunal allowed the appeal for statistical purposes, directing the TPO/AO to recompute the arm's length price of the international transaction pertaining to the purchase of capital goods by considering the second valuation report submitted by the assessee and to benchmark the transaction on an aggregate basis. The Tribunal also directed the exclusion of freight and insurance costs from the purchase cost of the fixed assets. Order Pronounced: The order was pronounced in the open Court on 12/12/2022.
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