2024 (6) TMI 1216 - AT - Income Tax

TP Adjustment - comparable selection - calculation of profit margin - grievance of the assessee is to consider the depreciation during calculation of fair net profit under TNMM by the TPO - HELD THAT - The assessee is newly set-up company and yielding huge depreciation in respect of comparable M/s Stelco Limited and M/s Tata Steel BSL Limited who are incorporated in 1995 and 1983 respectively. In comparison of depreciation percentage of revenue was @1.09% for Stelco Limited and 11.19% for Tata Steel BSL Limited whereas the assessee has @16.92%. The assessee prayed to reject both the comparable as functionally different. We accordingly direct the TPO /AO to remove both the comparable during calculation of fairnet profit for ALP. Assessee has requested for acceptance of two comparable M/s Vallabh Steel Limited, for which rectification application u/s 154 has been filed before the TPO and is pending for disposal and M/s Uttam Galva Steels Ltd - We direct the TPO /AO to accept both the comparable M/s Vallabh Steel Limited and M/s Uttam Galva Steels Ltd after considering the function and activity of the two companies and direct to dispose the rectification petition filed U/s 154. The TPO/AO is directed to allow the fresh search in relation to comparable of the assessee. Remove the depreciation during the calculation of profit margin and requested for cash PLI in TNMM - In cash PLI the average of comparable 10.44% which is similar for assessee. The assessee stated that considering depreciation as a part of the total cost would not be appropriate for the purpose of benchmarking since the depreciation in the year under consideration was 16.92% of its revenue, vis-a-vis depreciation of 4.85% of seven comparable companies as taken by the TPO which in most cases as average depreciation as a percentage of revenue. The assessee has relied on the order of M/s Epcos Ferrites Ltd 2019 (3) TMI 554 - ITAT KOLKATA We also relied on the same. In our considered view the depreciation should be removed for calculation of net profit margin and cash PLI is justified method. Accordingly, we remit back the matter to the file of TPO/AO for further calculation of TP adjustment by considering the direction of the Bench.

Summary

Issues:
1. Transfer pricing adjustment
2. Penalty proceedings under Section 270A of the Act

Analysis:
1. Transfer Pricing Adjustment:
The judgment pertains to appeals filed by the assessee against the final assessment order passed by the National e-Assessment Centre under the Income Tax Act for the assessment years 2017-18 and 2018-19. The main issue raised by the assessee was regarding the adjustment made by the Transfer Pricing Officer (TPO) in relation to international transactions with associated enterprises (AEs). The TPO rejected the cash profit level indicator (PLI) of the appellant and comparable companies for benchmarking purposes. The assessee argued that depreciation should be excluded from the calculation of net profit margin and cash PLI should be considered. The Dispute Resolution Panel (DRP) accepted the assessee's plea, but the TPO did not consider it. The Appellate Tribunal directed the TPO to remove certain comparables, consider new comparables proposed by the assessee, and reevaluate the transfer pricing adjustment by excluding depreciation and using cash PLI for the calculation of net profit margin.

2. Penalty Proceedings under Section 270A of the Act:
The assessee also challenged the proposal to initiate penalty proceedings under Section 270A of the Act. The Appellate Tribunal found that the initiation of penalty proceedings was not justified and held it to be bad in law. The Tribunal allowed both appeals filed by the assessee for statistical purposes, indicating that the issues raised by the assessee were valid and the penalty proceedings were unwarranted. The judgment emphasized the importance of proper consideration of transfer pricing adjustments and the exclusion of depreciation for accurate benchmarking in international transactions. The decision provided detailed reasoning based on legal precedents and directed the TPO to reevaluate the transfer pricing adjustment in line with the Tribunal's directions.