2019 (10) TMI 2 - AT - Income Tax

Transfer pricing adjustment made with respect to exports to associated enterprises - MAM selection - TPO separated few transactions out of total turnover and applied CUP method as most appropriate method - HELD THAT - As decided in M/S. AMPHENOL INTERCONNECT INDIA P. LTD. 2018 (3) TMI 536 - BOMBAY HIGH COURT after analyzing the issues at length has held that CUP method would not be the most appropriate method in view of various adjustments, which would have to be made due to differences in FAR, in order to arrive at the arm's length price of finished goods. The Hon ble High Court notes that the Tribunal had taken into account the fact that for overwhelming majority of exports to associated enterprises, the TPO has accepted the TNMM method for arriving at the arm's length price and hence, there was no reason why for balance of export of finished goods, TNMM method should not be applied. Similar direction was also given in respect of imports of finished goods, which were sold to third parties and the associated enterprises and by applying FAR analysis, it was held that where the finished goods were customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences were there, then CUP method would not be the most appropriate method to determine arm's length price. The TNMM method was held to be most appropriate method. In the totality of the above said facts and circumstances, where the issue stands covered by the order of jurisdictional High Court in the case of assessee itself, there is no merit in the orders of authorities below in making aforesaid transfer pricing adjustment in the hands of assessee both with respect to exports to associated enterprises and with respect to imports from associated enterprises. Majority of transactions have been accepted to be at arm's length price by the TPO by applying TNMM method, only in respect of few transactions, the TPO had applied CUP method. There is no merit in the order of TPO in this regard and reversing the final order passed by Assessing Officer, we allow the claim of assessee and direct the Assessing Officer to delete the transfer pricing adjustment made in the hands of assessee. The grounds of appeal No.2 and 3 are thus, allowed. Non allowance of additional depreciation on tools purchased by the assessee - HELD THAT - CIT(A) has considered the scheme of the Act and has pointed out that as far as Finance Act, 2002 was concerned, then the scope of additional depreciation was where capacity of the unit has been increased by minimum 25% and if the assessee fulfills such requirement, then additional depreciation was to be allowed. However, the said conditions have been withdrawn by the Finance Act, 2005 and the relevant Explanatory Note has been referred by the CIT(A) while deciding the appeal in assessment year 2011-12. The aim under the Finance Act, 2005 while allowing the additional depreciation under section 32(1)(iia) of the Act was extended to new industrial undertaking on additional investments. Once the earlier basis of allowing additional depreciation for the units where the capacity had to be increased for about 25% is no more and now additional depreciation is to be allowed on additional investments and where the plant includes tools, the assessee is entitled to the claim of additional depreciation under section 32(1)(iia) of the Act on the aforesaid tools purchased by assessee. Consequently, we direct the Assessing Officer to allow the claim of assessee of additional depreciation under section 32(1)(iia) - Decided in favour of assessee

Issues Involved:
1. Re-computation of transfer price for international transactions related to exports and imports.
2. Adoption of Comparable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP).
3. Adjustment of prices for differences in volume, timing, geographical, and business risks.
4. Disallowance of additional depreciation under section 32(1)(iia) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Re-computation of Transfer Price for International Transactions
The assessee contested the re-computation of the transfer price for international transactions relating to exports and imports of goods, arguing that none of the conditions prescribed in Section 92C(3) of the Income Tax Act, 1961, had been violated. The assessee pointed out that the Transfer Pricing Officer (TPO) had made an addition of ?2,97,46,406/- under section 92C based on the order dated 18.01.2016.

Issue 2: Adoption of CUP Method for Determining ALP
The assessee challenged the adjustment of ?2,96,64,875/- by the TPO, who adopted the CUP method for determining the ALP for certain international transactions related to the export of finished goods. The assessee argued that the TPO erred in holding that the CUP method was the most appropriate method merely because data for similar transactions with third parties were available. The assessee emphasized that various differences in functional, transactional, geographical, volume, timing, and business risks were not considered, making the CUP method inappropriate. The assessee argued that the Transactional Net Margin Method (TNMM) was the most appropriate method, as their net profit margin was comparable to that of similar companies.

Issue 3: Adjustment of Prices for Differences
The assessee submitted that if the CUP method were to be adopted, suitable adjustments should be made for differences in volume, timing, geographical, and business risks. The TPO had also made an adjustment of ?81,531/- for imports using the CUP method. The assessee argued that similar differences existed for imports, and the TNMM method should be applied instead. The assessee also highlighted that in earlier years, the ITAT had rejected the CUP method for similar transactions.

Issue 4: Disallowance of Additional Depreciation
The assessee contested the disallowance of ?33,67,695/- claimed as additional depreciation under section 32(1)(iia) on tooling. The assessee argued that tooling was an integral part of 'Plant & Machinery' and should be eligible for additional depreciation. The assessee pointed out that similar claims had been allowed in earlier years by the CIT(A), and the disallowance was not justified.

Judgment:
The Tribunal noted that the TPO had selectively applied the CUP method for certain transactions while accepting the TNMM method for others. The Tribunal referred to earlier decisions, including those by the Hon’ble Bombay High Court, which had held that the CUP method was not appropriate due to various differences in transactions. The Tribunal concluded that the TNMM method should be applied consistently for both exports and imports, as it provided a more accurate reflection of the arm's length price.

Regarding the additional depreciation on tooling, the Tribunal referred to the CIT(A)'s detailed analysis and previous decisions, which had allowed such claims. The Tribunal directed the Assessing Officer to allow the claim of additional depreciation under section 32(1)(iia) for tooling, as it was considered part of 'Plant & Machinery.'

Conclusion:
The appeal was allowed in favor of the assessee, with the Tribunal directing the deletion of the transfer pricing adjustments and allowing the claim for additional depreciation. The grounds of appeal related to the transfer pricing adjustments were allowed, making the related consequential grounds academic and dismissed. The claim for additional depreciation was also allowed, reversing the Assessing Officer's decision.

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