2018 (9) TMI 138 - AT - Income Tax

Transfer pricing adjustment - adjustment for startup phase of operation - adjustment for abnormal expenses - Held that - Subject to verification of the claim of the assessee, in our view, adjustment sought by the assessee should be considered on its merits. The assessee has also claimed deduction towards start up phase adjustment. However we notice that the assessee could not substantiate the said claim with any credible material. TPO has observed that the assessee company has stated its operation in the year 2006 and accordingly, it has got about four years of experience in this field. The assessee could not provide any material to show that it is continue to face the difficulties peculiar to the start up phase. There should not be any doubt that the responsibility to substantiate the claim put forth lies upon of the assessee. Accordingly we are of the view that the tax authorities are justified in rejecting this claim of the assessee. With regard to adjustment claimed towards abnormal items, we have already held that the same is required to be considered on merits. Accordingly this claim of the assessee requires examination at the end of the Assessing Officer/TPO. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer/TPO to examine the said claim of the assessee. In the set aside proceedings, the Assessing Officer/TPO should also consider the mistakes pointed out by the assessee with regard to computation made by the TPO.

Summary

Issues:
1. Delay in filing appeal
2. Transfer pricing adjustment
3. Adjustments requested by the assessee
4. Non-adjudication of certain grounds
5. Charging of interest under section 234B

Detailed Analysis:
1. Delay in filing appeal:
The appeal filed by the assessee was initially barred by a six-day limitation. The assessee requested the Bench to condone the delay, citing that the documents were given to a firm of Chartered Accountants for filing the appeal, and the delay was due to intervening holidays. The Bench, after hearing the submissions, condoned the delay and admitted the appeal for hearing.

2. Transfer pricing adjustment:
The assessee contested a transfer pricing adjustment of &8377; 896.91 lakhs made by the Transfer Pricing Officer (TPO) and confirmed by the CIT(A). The TPO proposed the adjustment based on operating profit/operating cost as the profit level indicator, while the assessee followed the cost plus method for manufacturing transactions and resale price method for trading transactions. The assessee argued that there was a computational error in the TPO's working, which would reduce the adjustment to &8377; 780.18 lakhs. The Tribunal found that the adjustment sought by the assessee should be considered on its merits, subject to verification.

3. Adjustments requested by the assessee:
The assessee requested adjustments for abnormal expenses and startup phase of operation. The Tribunal held that Rule 10B(1)(b) and Rule 10B(1)(c) of the Income Tax Act allow for adjustments to take into account functional and other differences, including abnormal items. The Tribunal directed the Assessing Officer/TPO to examine the claims of the assessee regarding abnormal items and set aside the order to consider the mistakes pointed out in the TPO's computation.

4. Non-adjudication of certain grounds:
The Tribunal noted that certain grounds, such as non-adjustment of brought forward business loss of earlier years, required examination by the Assessing Officer/TPO. Therefore, these issues were restored to the file for proper examination in accordance with the law.

5. Charging of interest under section 234B:
The ground related to charging interest under section 234B of the Act was considered consequential and did not require adjudication. The Tribunal, in the result, treated the appeal filed by the assessee as partly allowed, with specific directions for further examination and consideration of certain issues by the tax authorities.