2016 (8) TMI 644 - AT - Income Tax

Transfer pricing adjustment - capacity utilization adjustment - Held that - DRP in principle has accepted that adjustment on account of capacity utilization is to be allowed to assessee. However, in the absence of non-availability of item wise expenses, in the case of comparable companies, restricted the adjustment only to depreciation. In our opinion, this is not the correct approach because unutilized capacity has direct bearing on the operational profits of the company, because in initial years there is over-absorption of fixed costs leading to losses. The fixed cost is not limited to depreciation only but there are other elements of fixed costs also. Therefore, proper adjustment has to be allowed to assessee. We, therefore, restore this issue to the file of ld. AO/ TPO to compute the quantum of capacity adjustment. The assessee is directed to provide necessary details in this regard. In the result, this ground is allowed for statistical purposes. Working capital adjustment - Held that - It is now well settled that in order to arrive at correct comparability criteria, it is necessary that the working capital employed by comparables vis a vis working capital employed by tested party has to be examined and necessary working capital adjustment has to be made in order to arrive at level playing field. We, therefore, restore this matter to the file of ld. TPO to consider the working capital adjustment as claimed by assessee as per pages 313 to 315 of appeal set and allow the capital working adjustment, if so required. In the result, this ground is allowed for statistical purposes. Disallowance of service charges paid to AE - Held that - We are of the opinion that entire service charges paid to AE by assessee could not be disallowed. It is true that assessee is required to maintain the information and documents as per Rule 10D requirements but once assessee has furnished the information and documents as maintained by it, then ld. TPO has to consider the same and if he finds that same cannot be relied upon for determining the ALP, then he can resort to his own search process in order to find out the ALP of the transactions. We, therefore, restore this matter to the file of ld. TPO to find out local comparables which had undertaken similar service as the assessee. In the result, this ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the assessment order pursuant to DRP's directions.
2. Assessment of returned income.
3. Transfer Pricing adjustments.
4. Levy of interest under Section 234D and withdrawal of interest under Section 244A.
5. Initiation of penalty proceedings under Sections 271(1)(c), 271AA, and 271BA.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the assessment order passed by the AO, following the DRP’s directions, was flawed. The DRP allegedly failed to consider the appellant's submissions and erroneously confirmed the additions made by the AO/TPO to the appellant's income.

2. Assessment of Returned Income:
The AO assessed the appellant's returned income of ?22,87,383/- at ?2,71,84,416/-, following the DRP's directions. The appellant challenged this assessment, asserting that it was erroneous both in fact and in law.

3. Transfer Pricing Adjustments:
The primary issue revolved around the Transfer Pricing (TP) adjustments amounting to ?7,74,42,676/-. The appellant raised multiple grounds challenging the TP adjustments, including:
- Economic Analysis: The appellant argued that the TPO disregarded the economic analysis conducted to determine the Arm's Length Price (ALP) of international transactions, which was in compliance with Section 92D of the Act and Rule 10D of the Income-tax Rules.
- Multiple Year Data: The appellant contended that the TPO erred in rejecting the arm's length margin computed using multiple year data and instead used current year data for comparable companies.
- Comparable Companies: The appellant claimed that the TPO included certain companies in the final set of comparables that were not comparable in terms of functions performed, assets employed, and risks assumed.
- Profit Level Indicator (PLI): The TPO rejected the Operating Profit/Value Added Expenses (OP/VAE) as a valid PLI and selected OP/Sales as the PLI to determine the arm's length nature of transactions.
- Capacity Utilization Adjustment: The appellant argued that the TPO failed to provide suitable capacity utilization adjustment, particularly for the Chennai unit that had not commenced commercial production and was engaged in trial runs. The Tribunal restored this issue to the AO/TPO to compute the quantum of capacity adjustment.
- Working Capital Adjustment: The appellant contended that the DRP did not consider the working capital adjustment. The Tribunal restored this matter to the TPO to consider the working capital adjustment as claimed by the appellant.
- Markup on Fixed Assets: The appellant challenged the disallowance of a 4% markup charged by its AE on the procurement of fixed assets. The Tribunal restored this issue to the TPO to find local comparables for similar services.
- Proportionate Adjustment: The appellant raised an additional ground regarding the adjustment being made to the entire value of transactions instead of only the value of international transactions. The Tribunal admitted this ground and restored the matter to the TPO for de novo consideration.

4. Levy of Interest and Withdrawal of Interest:
The appellant contended that the AO erred in levying interest under Section 234D and withdrawing interest under Section 244A of the Act.

5. Initiation of Penalty Proceedings:
The appellant argued that the AO erred in initiating penalty proceedings under Sections 271(1)(c), 271AA, and 271BA of the Act.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, restoring several issues to the AO/TPO for reconsideration and computation. The Tribunal emphasized the need for proper adjustments and consideration of the appellant's submissions, particularly regarding capacity utilization, working capital adjustments, and the markup on fixed assets. The additional ground raised by the appellant was admitted and restored to the TPO for de novo consideration. The Tribunal did not address other grounds as no arguments were advanced in respect of them.