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2020 (5) TMI 157 - AT - Income TaxTP Adjustment - comparable selection - non-consideration of capacity utilization adjustment by the A.O./TPO while comparing the comparable companies - HELD THAT - We find merit in the arguments advanced by the ld. counsel for the assessee that when it is operating at 51.29% of its installed capacity as against 7% in the preceding assessment year and, as such, it could not achieve economics in utilizing fixed costs, therefore, the assessee should be granted capacity utilization adjustment. However, the same needs verification at the level of A.O./TPO - we deem it proper to restore the issue to the file of A.O./TPO with a direction to give an opportunity to the assessee to substantiate with evidence to his satisfaction regarding the capacity utilization adjustment that is necessary for the assessee for this particular assessment year. A.O./TPO shall decide the issue as per fact and law, after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee on account of transfer pricing adjustment are accordingly allowed for statistical purposes. Nature of expenditure - Disallowance of moulds as revenue expenditure - revenue or capital expenditure - HELD THAT - We find although the assessee filed a certificate from the Chartered Engineer to the effect that the life of moulds of cylinder liners does not exceed more than one year, the ld.CIT(A) rejected the same and upheld the action of the AO the reasons for which have already been reproduced in the preceding paragraphs. It is the submission that the assessee being the manufacturer of moulded automobile products, therefore, mould is a basic material. Such mould has been purchased and utilised in the process of production which has a very short life and needs to be replaced from time to time and, therefore, should be treated as revenue in nature. It is also his submission that the expenditure on mould is of recurring nature and, therefore, merely because it has some enduring benefit to the assessee, the same cannot be considered as capital in nature especially when the life of mould is less than one year and has to be replaced frequently. The various decisions relied on by the Ld. Counsel for the assessee also support his case to the proposition that expenditure incurred on moulds is revenue in nature. We, therefore, set aside the order of the CIT(A) on this issue and direct the AO to treat the expenditure on moulds as revenue expenditure. The grounds raised by the assessee on this issue are accordingly allowed.
Issues Involved:
1. Transfer Pricing Adjustment 2. Disallowance of Moulds as Revenue Expenditure 3. Penalty Proceedings Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee filed its return for the assessment year 2011-12, declaring a loss. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions. The TPO noted that the assessee had undertaken international transactions with its associated enterprises (AEs) and selected six comparables with an adjusted margin of (-) 6.53% after considering capacity utilization of 51.29%. However, the TPO retained four comparables and included two new ones, arriving at a profit margin of 8.18%, proposing an adjustment of ?92,05,523/-. The CIT(A) confirmed the TP adjustment, rejecting the assessee's argument for capacity utilization adjustment due to the non-availability of data for 50% of the comparables. The Tribunal, however, found merit in the assessee's argument for capacity utilization adjustment, noting that the assessee operated at 51.29% of its installed capacity. The Tribunal restored the issue to the AO/TPO for verification and directed them to grant capacity utilization adjustment after giving the assessee an opportunity to substantiate its claim. 2. Disallowance of Moulds as Revenue Expenditure: The assessee incurred an expenditure of ?97,36,932/- on moulds, treating it as revenue expenditure. The Assessing Officer, however, considered it as capital expenditure and allowed depreciation on the same, which was upheld by the CIT(A). The CIT(A) rejected the Chartered Engineer’s certificate provided by the assessee, stating that it was issued four years after the end of the financial year and did not certify the quality of the moulds during the relevant period. The Tribunal found merit in the assessee's argument that the expenditure on moulds is revenue in nature, as they have a short life and need to be replaced frequently. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT, which held that expenditure facilitating trading operations without adding to the fixed capital is revenue expenditure. The Tribunal also cited the Delhi High Court's decision in CIT vs. Sunbeam Auto Ltd., which allowed expenditure on replacing moulds and dies as revenue expenditure. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to treat the expenditure on moulds as revenue expenditure. 3. Penalty Proceedings: The Tribunal dismissed the ground of appeal regarding the initiation of penalty proceedings under section 271(1)(c) of the Act as premature at this juncture. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes, with the Tribunal restoring the issue of transfer pricing adjustment to the AO/TPO for verification and directing the AO to treat the expenditure on moulds as revenue expenditure. The decision was pronounced in the open court on 13.12.2019.
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