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2023 (4) TMI 558 - AT - Income TaxTP Adjustment - Arm s Length Price (ALP) of the trading and manufacturing segments - HELD THAT - Facts on record further reveal that between January 2008 wherein the assessee entered into an agreement with MSIL for sale of ignition coils and the financial year relevant to assessment year under dispute there has been substantial appreciation in the price of Yen. Thus the assessee was put to foreign exchange fluctuation risk as the value of Rupee depreciated compared to Yen. Assessee had to pay more to the AE due to variation in foreign exchange rate. Whereas it was unable to fully recover the increased amount paid form MSIL. Assessee had to absorb loss on account of foreign exchange fluctuation. In its benchmarking under TNMM the assessee has claimed adjustment towards foreign exchange fluctuation. Both the TPO and Commissioner (A) have disallowed such adjustment. It is observed while considering identical nature of dispute in assessee s own case in assessment years 2009-10 learned DRP has directed the TPO to determine ALP after considering the margin computed by the assessee after making foreign exchange fluctuation adjustment. The decisions cited before us by learned counsel also express similar view. We direct the AO to allow adjustment for foreign exchange fluctuation rate while computing margin of the assessee and the comparables. Adjustment on account of difference in rates of depreciation as per Income-tax Act followed by the assessee and Companies Act in case of comparables - HELD THAT - As identical issue in assessee s case in assessment year 2012-13 2022 (2) TMI 1361 - ITAT DELHI we direct the Assessing Officer to allow depreciation adjustment while determining the ALP. Adjustment relating to manufacturing segment - On careful perusal of the orders of the Transfer Pricing Officer (TPO) and learned Commissioner (Appeals) we find though detailed submissions were made by the assessee in support of its claim however they have not at all been considered on merits and have been rejected on flimsy grounds. Even the ratio laid down in various judicial precedents have not been taken note of. Considering that this is the first year of commencement of manufacturing activity in case of assessee the submissions made by assessee require deeper examination. Restore this issue to the AO for fresh adjudication after considering the submissions of the assessee on merits through a well reasoned and speaking order. Further the Assessing Officer is directed to examine the decisions relied upon by the assessee and must consider applicability of the ratio laid down in the decisions to assessee s case - assessee must be provided reasonable opportunity of being heard before deciding the issue.
Issues Involved:
1. Transfer Pricing Adjustment in Trading Segment 2. Transfer Pricing Adjustment in Manufacturing Segment 3. Adjustment for Foreign Exchange Fluctuation 4. Adjustment for Depreciation Differences Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment in Trading Segment: The assessee, a subsidiary of a Japanese company, engaged in trading and manufacturing automotive ignition coils, faced a Transfer Pricing (TP) adjustment in the trading segment. The Transfer Pricing Officer (TPO) rejected the assessee's benchmarking using the Cost Plus Method (CPM) and insisted on using the Transactional Net Margin Method (TNMM) with the assessee as the tested party. The TPO disallowed adjustments for foreign exchange fluctuations and depreciation, resulting in a negative operating margin of (-)12.76% and proposed a downward adjustment to the purchase price paid to the Associated Enterprise (AE). 2. Transfer Pricing Adjustment in Manufacturing Segment: In the manufacturing segment, the TPO rejected the assessee's benchmarking under CPM for the purchase of raw materials from the AE and disallowed adjustments for differences in depreciation rates and capacity underutilization. This led to a negative margin of (-)37.18%, prompting an adjustment to the price paid to the AE. The assessee's appeal to the Commissioner (Appeals) was unsuccessful. 3. Adjustment for Foreign Exchange Fluctuation: The assessee argued that substantial appreciation in the Yen vis-à-vis the Rupee increased the import cost, adversely affecting profitability. The assessee sought adjustment for foreign exchange fluctuation, citing that comparable companies did not face such risks. The Tribunal noted that in the previous assessment year, the Dispute Resolution Panel (DRP) allowed such an adjustment. Consequently, the Tribunal directed the Assessing Officer to allow the adjustment for foreign exchange fluctuation while computing the margin of the assessee and the comparables. 4. Adjustment for Depreciation Differences: The assessee contended that higher depreciation rates under the Income Tax Act, compared to the Companies Act followed by comparables, affected profit margins. The Tribunal, referencing past decisions, agreed that adjustments should be made for differences in depreciation rates to ensure parity. The Tribunal directed the Assessing Officer to allow the depreciation adjustment while determining the Arm's Length Price (ALP). Conclusion: The Tribunal allowed the appeal partly, directing the Assessing Officer to: - Allow adjustment for foreign exchange fluctuation. - Allow depreciation adjustment while determining the ALP. - Re-examine the adjustments in the manufacturing segment, considering the assessee's submissions and relevant judicial precedents, and provide a well-reasoned order after giving the assessee a reasonable opportunity of being heard. Order Pronouncement: The order was pronounced in the open court on 19th January, 2023.
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