2023 (7) TMI 997 - HC - Income Tax

TP adjustment to the manufacturing income - assessee had benchmarked its transactions using two segments namely manufacturing and indenting but during the TP proceedings, it separated the losses from solar test, arbitrarily to present better margins under manufacturing segment - HELD THAT - As held in Apollo Tyres Ltd 2002 (5) TMI 5 - SUPREME COURT A.O. has to accept the authenticity of the accounts. It is not a case of the A.O. that the accounts of assessee have not been scrutinized or certified by statutory auditors or approved by the company in general meeting or has not been filed before the ROC. In fact, Appellant stated that the company should also accept these accounts as much as the A.O. has accepted the accounts of assessee. The Directors note in the Annual Accounts specifically refers to solar trial test and how the activity undertaken did not take off and how having regard to the principles of accounting standard of impairment of assets (AS 28) assessee has made the provisions in respect of such impairment. The auditors have accepted it. The accounts have been approved by the company in general meeting and has also been filed by the Registrar of Companies. Therefore, the ITAT was correct in not interfering with the order of the DRP with regard to computation of PLI. The DRP has correctly held that the ST activity was an extraordinary item and was not part of the regular business of assessee and there was impairment of asset. Set off of brought forward unabsorbed depreciation i.e. for the period prior to amendment in sub section (2) of Section 32 of the Act w.e.f. 1/4/2002 - HELD THAT - The issue would be covered by the order in the case of Petrofills Co-operative Ltd. 2021 (3) TMI 1092 - SC ORDER which upheld the order passed by Hindustan Unilever Ltd 2016 (7) TMI 1245 - BOMBAY HIGH COURT has taken the same view that depreciation should be allowed to be carried forward.

Summary

Issues involved:
The judgment involves three substantial questions of law:
1. Whether the ITAT was justified in deleting the adjustment to manufacturing income without considering the segmental accounting and solar test losses?
2. Whether the ITAT was justified in allowing set off of unabsorbed depreciation against incomes of different assessment years?
3. Whether the ITAT was right in allowing set off of unabsorbed depreciation for the period prior to the amendment in Section 32 of the Act?

Issue 1: Adjustment to Manufacturing Income
The appeal challenged an ITAT order for Assessment Year 2010-11 regarding Transfer Pricing adjustments. The assessee, engaged in glass trading and manufacturing, disputed the adjustments proposed by the TPO. The TPO determined a Profit Link Indicator of 25.83% and proposed a substantial adjustment in the manufacturing segment. The assessee argued that solar testing costs should be excluded from PLI computation due to being extraordinary and resulting in losses. The DRP directed to exclude these losses, considering them exceptional and not part of the regular business, a decision upheld by the ITAT. The ITAT rightly considered the authenticity of accounts, as per the principles of accounting standards.

Issue 2 and 3: Set Off of Unabsorbed Depreciation
The issue of allowing set off of unabsorbed depreciation against incomes of different assessment years was raised. Referring to relevant case laws, it was acknowledged that depreciation should be allowed to be carried forward. Consequently, the appeal was dismissed based on the precedents and legal principles cited in the judgment.