2025 (1) TMI 1004 - AT - Income Tax

TP Adjustment - comparability - rejection of usage of multiple years data - AR seeks inclusion of M/s Automotive Stamping Assemblies Ltd. and M/s Majestic Ltd.- HELD THAT - These entities were initially selected as comparable entities. However the same could not pass product filter. TPO rejected the same since both these entities were loss making entities. During proceedings before Ld. DRP TPO reported that both these entities were not persistent loss making entities but these entities had incurred loss only in the current year. Since TNMM require broad comparability and these entities were initially selected as comparable entities and in view of the reporting made by TPO we direct AO / TPO to accept both these entities as comparable entities. The assessee is directed to provide the requisite data of these entities. Exclusion of M/s Spicer India Pvt. Ltd. on the ground that this entity has significant related party transactions and exclusion of M/s JBM Auto Ltd. on the ground that this entity is functionally not comparable - AR has placed on record product information as available in public domain. The same is not supported by any segmental data or financials of these entities. Therefore merely on the basis of product information as available in public domain such argument cannot be accepted. We are also of the opinion that TNMM require broad comparability only and therefore if business model is same these entities could be accepted. Therefore M/s Spicer India Pvt. Ltd. has rightly been included. The Ld. AR stated that segmental of M/s JBM Auto Ltd. is available and the assessee is in a position to provide the requisite details thereof. Considering the same the issue qua this entity is restored back to the file of AO/TPO with a direction to the assessee to provide segmental information. AO / Ld. TPO is directed to re-adjudicate the issue with respect to this entity. AR has stated that forex exchange loss would be nonoperating in nature. This argument could not be accepted since the assessee has carried out import transactions and forex loss has direct linkage with the international transactions as carried out by the assessee. Therefore forex losses / gains have to be considered as operating in nature. AR has sought various economic adjustments. However it was admitted position that these adjustments were not granted by Tribunal in earlier years. Therefore no indulgence is required on the same. Disallowance as per the provisions of Sec.43A - It could be seen that the assessee has failed to provide the requisite details of forex loss before lower authorities. AR has submitted that the impugned loss has two components i.e. ECB Loan which is capital in nature and second component is forex on Buyer s credit which is revenue in nature. Since adequate details thereof were not filed before lower authorities we restore this issue back to the file of Ld. AO for fresh adjudication with a direction to the assessee to substantiate its case. The corresponding grounds stand allowed for statistical purpose. Additional Depreciation not allowed by AO in the absence of revised return - HELD THAT - Assessee has claimed depreciation in subsequent years on WDV of the assets. The additional depreciation was neither provided in the books nor claimed in the return of income. In such a case the allowance of claim would disturb the working of depreciation in all the subsequent years which could not be permitted at this stage. Even otherwise also this claim would be revenue neutral since the assessee has claimed as well as allowed depreciation on WDV of the assets in subsequent years. This being so this claim cannot be accepted in this year. The corresponding grounds raised by the assessee stand dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

Whether the Transfer Pricing (TP) adjustments made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) were justified, including issues related to the rejection of the taxpayer's TP study, comparability analysis, and economic adjustments.
Whether the disallowance of foreign exchange losses under Section 43A of the Income Tax Act was valid.
Whether the claim for additional depreciation on new plant and machinery was correctly disallowed due to the absence of a revised return.
Whether the initiation of penalty proceedings under Section 271(1)(c) was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustment

Relevant legal framework and precedents: The legal framework involves Section 92C of the Income Tax Act, which governs the determination of the Arm's Length Price (ALP) for international transactions. The Tribunal also considered precedents related to the selection of comparable companies and adjustments for economic differences.
Court's interpretation and reasoning: The Tribunal noted that the TPO rejected the taxpayer's TP study and conducted an independent search, identifying four comparable companies with a mean margin of 5.5%. The Tribunal emphasized the requirement for broad functional comparability under the Transactional Net Margin Method (TNMM).
Key evidence and findings: The Tribunal found that the taxpayer's comparability arguments and economic adjustments were not adequately supported. It upheld the inclusion of certain comparable companies and directed the AO/TPO to reconsider others based on segmental data.
Application of law to facts: The Tribunal applied the principles of TNMM, requiring broad functional comparability, and found that the taxpayer's arguments for exclusion of certain comparables were not sufficiently substantiated.
Treatment of competing arguments: The Tribunal considered the taxpayer's arguments for excluding certain comparables and for economic adjustments but found them lacking in evidentiary support.
Conclusions: The Tribunal directed the AO/TPO to include certain companies as comparables and reconsider others with additional data. It upheld the treatment of forex losses as operating in nature.

Disallowance under Section 43A

Relevant legal framework and precedents: Section 43A of the Income Tax Act deals with adjustments to the cost of assets acquired from foreign countries due to changes in exchange rates.
Court's interpretation and reasoning: The Tribunal noted that the taxpayer failed to provide necessary details to substantiate the nature of forex losses. It emphasized the need for clear bifurcation of losses linked to specific loans.
Key evidence and findings: The Tribunal found that the taxpayer did not furnish adequate details to support the claim that certain forex losses were revenue in nature.
Application of law to facts: The Tribunal applied Section 43A to disallow unrealized forex losses, emphasizing the requirement for actual payment to adjust asset costs.
Treatment of competing arguments: The Tribunal considered the taxpayer's claim that certain forex losses were revenue in nature but found it unsupported by evidence.
Conclusions: The Tribunal restored the issue to the AO for fresh adjudication, directing the taxpayer to provide requisite details.

Claim of Additional Depreciation

Relevant legal framework and precedents: The claim for additional depreciation is governed by Section 32 of the Income Tax Act.
Court's interpretation and reasoning: The Tribunal noted that the taxpayer did not claim additional depreciation in the original return or books, and allowing it would disturb subsequent years' depreciation calculations.
Key evidence and findings: The Tribunal found that the taxpayer's claim was revenue neutral, as depreciation was claimed on the Written Down Value (WDV) in subsequent years.
Application of law to facts: The Tribunal applied the principles of depreciation calculation and found that the taxpayer's claim was not permissible at this stage.
Treatment of competing arguments: The Tribunal considered the taxpayer's arguments but found them unconvincing due to the lack of a revised return.
Conclusions: The Tribunal dismissed the taxpayer's claim for additional depreciation.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Under TNMM, strict product comparability was not necessity but broad functional comparability was the requirement."
Core principles established: The Tribunal emphasized the importance of broad functional comparability under TNMM and the requirement for clear evidence to support claims for economic adjustments and forex loss treatment.
Final determinations on each issue:
- The Tribunal directed the AO/TPO to reconsider certain comparables with additional data and upheld the treatment of forex losses as operating in nature.
- The Tribunal restored the issue of forex loss disallowance under Section 43A to the AO for fresh adjudication.
- The Tribunal dismissed the claim for additional depreciation due to the absence of a revised return and revenue neutrality.