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2014 (1) TMI 1023 - AT - Income TaxApplicability of Transfer Pricing adjustments at entity level - Held that - Following Thyssen Krupp Industries India Pvt. Ltd. Vs. ACIT 2012 (12) TMI 71 - ITAT Mumbai - Determination of arms length price should be restricted only to international transaction of the assessee with its AE - Decided in favour of assessee. Whether interest to be considered as operational expenses - Held that - If the interest has been considered to be operational expenses in the case of the assessee, then the same should also be considered as operational expenses in the cases of comparables - The issue has been restored for fresh adjudication at AO level. Benefit of safe harbor of 5% - Held that - If after computing the arms length price as per directions given above, the difference between margin taken for arms length price and margin shown by the assessee is less than 5%, then appropriate relief should be granted to the assessee.
Issues Involved
1. TP Adjustment of Rs. 1,13,50,821/- 2. Levy of penalty under Section 271(1)(c) 3. Treatment of brought forward unabsorbed depreciation and business loss 4. Acceptance of taxable income as declared by the assessee Detailed Analysis 1. TP Adjustment of Rs. 1,13,50,821/- The assessee challenged the TP adjustment on multiple grounds, including the use of single-year data instead of multiple-year data, rejection of functionally comparable companies due to losses, and selection of four comparables based on cherry-picking rather than functional analysis. The TPO's choice of Net Cost Plus Mark-up (NCP) over Net Profit Margin (NPM) and the adjustment applied to the total turnover instead of only the international transactions were also disputed. The assessee argued for the application of the +/-5% safe harbor rule and consideration of segmental profitability. The Tribunal held that the TP adjustment should be restricted to international transactions with the AE, referencing the decision in Thyssen Krupp Industries India Pvt. Ltd. vs. ACIT. It was directed that the AO should only consider international transactions for determining the arm's length price. Additionally, the Tribunal agreed that interest should be treated consistently as operational expenses for both the assessee and comparables. The benefit of the 5% safe harbor rule was also to be granted if the difference in margins was within this range. 2. Levy of Penalty under Section 271(1)(c) The assessee contended that the initiation of penalty proceedings under Section 271(1)(c) was premature. The Tribunal dismissed this ground, agreeing with the assessee's submission that the penalty issue was not ripe for adjudication at this stage. 3. Treatment of Brought Forward Unabsorbed Depreciation and Business Loss The assessee argued that the AO erred in treating brought forward unabsorbed depreciation as current year's depreciation and setting it off against the income before adjusting the brought forward business loss, contrary to Section 72(2) of the Act. The Tribunal restored this issue to the AO for re-adjudication in light of the decisions in CIT vs. Premier Automobiles Ltd. and CIT vs. Gujarat State Warehousing Corporation, which prioritize the set-off of current depreciation first, followed by business loss, and then unabsorbed depreciation. 4. Acceptance of Taxable Income as Declared by the Assessee The assessee's general grievances regarding the non-acceptance of the declared taxable income were dismissed as they were not separately adjudicated. The Tribunal focused on the specific issues raised during the hearing. Conclusion The appeal was partly allowed for statistical purposes. The Tribunal directed the AO to: - Restrict TP adjustments to international transactions with AE. - Treat interest consistently as operational expenses for both the assessee and comparables. - Apply the 5% safe harbor rule if applicable. - Re-adjudicate the priority of set-off between brought forward unabsorbed depreciation and business loss as per relevant case law and legal provisions. The Tribunal dismissed the grounds related to penalty initiation and general grievances about the declared taxable income. The order was pronounced on January 7, 2014.
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