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2024 (1) TMI 1399 - AT - Income Tax


Issues Involved:

1. Upward Transfer Pricing Adjustment.
2. Economic Adjustments Related to Depreciation, Capacity Utilization, and Foreign Exchange Loss.
3. Penalty Proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Upward Transfer Pricing Adjustment:

The primary issue in the appeal was the upward transfer pricing adjustment of Rs. 8,59,31,291 made by the Transfer Pricing Officer (TPO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the TPO's computation was incorrect and that the correct adjustment should be Rs. 1,11,57,259. The assessee contended that the TPO failed to consider economic adjustments under Rule 10B(1)(e)(iii) of the Income Tax Rules. The tribunal noted that the TPO did not agree with the economic adjustments claimed by the assessee for excess depreciation, foreign exchange fluctuation, and underutilized capacity. The tribunal decided to restore the issue to the file of the Assessing Officer (AO) for reconsideration, taking into account the economic adjustments and correct computation provided by the assessee.

2. Economic Adjustments Related to Depreciation, Capacity Utilization, and Foreign Exchange Loss:

The assessee claimed economic adjustments for depreciation on a new tank, underutilization of capacity, and foreign exchange fluctuation loss. The TPO rejected these adjustments, arguing that the depreciation claim was not convincing and that the capacity utilization adjustment was based on estimates. The tribunal referred to judicial precedents, including decisions from the Bangalore and Hyderabad benches of the Income-tax Appellate Tribunal, which supported the need for economic adjustments. The tribunal emphasized the importance of adjusting the net profit margin of comparables to account for differences in capacity utilization and other factors under Rule 10B(1)(e)(iii). The tribunal instructed the AO to consider these adjustments afresh.

3. Penalty Proceedings under Section 271(1)(c):

The assessee appealed against the penalty of Rs. 2,90,26,451 levied under Section 271(1)(c) for furnishing inaccurate particulars of income. The assessee argued that the penalty was unjustified as the transfer pricing adjustment was merely a difference of opinion. The tribunal noted that the notice issued under Section 274 did not specify the limb under which the penalty was initiated, rendering the proceedings invalid. Citing the jurisdictional High Court's decision in Mohd. Farhan A. Shaikh Vs. DCIT, the tribunal held that a vague notice cannot sustain penalty proceedings. Consequently, the tribunal directed the AO to delete the penalty, as the notice was defective.

Conclusion:

The tribunal allowed the appeal concerning the upward transfer pricing adjustment for statistical purposes, directing the AO to reconsider the economic adjustments. The tribunal also allowed the appeal against the penalty, ordering its deletion due to the defective notice.

 

 

 

 

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