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2022 (5) TMI 323 - AT - Income TaxTP Adjustment - adjustment for under utilization capacity for manufacturing segment - HELD THAT - We notice that the capacity utilisation achieved by the assessee in the year relevant to the assessment year 2004-05 was 42%, while the capacity achieved by the comparables was around 70%. During the year under consideration, the Ld. A.R. submitted that the assessee has achieved capacity utilisation of 41% only. Though the Ld. A.R. did not mention about the capacity utilisation achieved by the comparable companies, yet following the decision rendered by the coordinate bench in assessment year 2004-05, we are of the view that the assessee should be allowed capacity utilisation adjustment. Accordingly, we restore this issue to the file of AO/TPO for examining the claim of the assessee. Transfer pricing adjustment in manufacturing segment relates to the error in computing net margin on cost of comparable companies - A.R. submitted that the TPO has computed net margin on cost of comparables as 8.16% while the actual margin works out to 9.10%. The ld. A.R. submitted that the assessee has raised this issue before Ld. DRP but the DRP did not adjudicate the same - HELD THAT - We heard Ld. D.R. on this issue. Since this claim of the assessee requires verification, we restore this issue to the file of AO/TPO to examine this claim of the assessee. Transfer pricing adjustment made in manufacturing segment relates to claim for working capital adjustment - HELD THAT - There should not be any dispute that the working capital adjustment should be allowed if the working capital levels of comparable companies differ from that of the assessee. The claim of the assessee gets support from the decision rendered by the co-ordinate bench in the case of Huawei Technologies India P Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE . Accordingly, we restore this issue to the file of the AO/TPO with the direction to allow working capital adjustment on actual basis. TP adjustment made in manufacturing segment relates to the action of TPO in not restricting the transfer pricing adjustment to the sales made to Associated Enterprises - HELD THAT - There should not be any doubt that the object of Transfer pricing study is to determine Arms Length price of international transactions. Under TNMM method the Profit level indicator may be determined at entity level, but the Transfer pricing adjustment is required to be restricted to only international transactions only. We find support for this proposition from the decision rendered by the co-ordinate bench in the case of IKA India (P) Ltd 2018 (10) TMI 923 - ITAT BANGALORE Accordingly, we restore this issue to the file of AO/TPO with the direction to restrict the TP adjustment to international transactions entered with AEs only. TP adjustment made in manufacturing segment relates to error in treating Forex gain as Forex loss and including the same as part of cost - HELD THAT - The mistake pointed out by Ld. A.R. is a computational mistake, which requires to be corrected in order to arrive at correct margin. We notice that the Ld. DRP has already directed the TPO to verify the claim of the assessee and correct the mistakes. It is unfortunate that the TPO has not followed the directions so given by Ld. DRP. In any case, the claim of the assessee requires verification at the end of the TPO, so that the mistake could be corrected. Accordingly, we restore this issue to his file for examining the claim of the assessee and to take appropriate corrective measures. TP adjustment made in respect of intra-group services - HELD THAT - As in the assessee s own case 2016 (5) TMI 277 - ITAT BANGALORE has been considered by the Tribunal and the issue was restored to the file of AO/TPO with a direction to examine this issue afresh by considering the evidences that may be produced by the assessee to prove the receipt of benefit from AEs in respect of payment made. It was also held that the assessee is duty bound to bench mark such services by comparing it with uncontrolled transaction by independent enterprises where similar services are received. TPA - amount disallowed by the AO, viz., Product development expenses, provision for customer claims should be excluded from the cost while computing margin of the assessee - HELD THAT - Entire exercise of determination of ALP and consequent transfer pricing adjustment are the result of legal fiction enacted in Income tax Act. There should not be any doubt that it is altogether a different exercise unconnected with the provisions relating to allowance or disallowance of expenses. Net margins of the assessee as well as comparable companies are computed under TNM method on the basis of book results without making any adjustment as prescribed in sec.28 to 44 of the Act (both in the hands of the assessee as well as in the hands of comparable companies.) Hence these contentions of the assessee are untenable and hence liable to be rejected. Adjustment for customs duty due to difference in the quantum of imported goods purchased by assessee vis- -vis comparable companies - HELD THAT - We find merit in the contentions of the Ld A.R. We notice that the AO has only assumed that these expenses would give rise to creation of any patent or know-how and accordingly took the view that these expenses are capital in nature, i.e., there is no material with the AO to show that these expenses have resulted in creation of any patent or know how as assumed by him. Hence, we are of the view that the AO has disallowed this claim of the assessee on surmises and conjectures only. Accordingly, we direct the AO to delete this disallowance. Disallowance of provision for customer claims - HELD THAT - It is unfortunate that the AO did not follow the directions given by Ld DRP. Accordingly, we restore this issue to the file of the AO with the direction to examine the claim of the assessee in accordance with the principles laid down by Hon'ble Supreme Court in the case of Rotork Controls India case. 2009 (5) TMI 16 - SUPREME COURT Disallowance of bad debts claim - Before Ld DRP, the assessee submitted that the above said difference represents amount of bad debt actually written off by the assessee accordingly, the Ld DRP directed the AO to re-examine this issue with reference to the books of account - HELD THAT - We deprecate the careless approach of the AO in not complying with the directions of Ld DRP, since the AO is required to mandatorily pass assessment order in conformity with the directions given by Ld DRP. Accordingly, we restore this issue to the file of AO with the direction to strictly follow the directions given by Ld DRP.
Issues Involved:
1. Transfer Pricing Adjustment 2. Disallowance of Product Development Expenditure 3. Disallowance of Provision for Customer Claims 4. Disallowance of Bad Debts Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee, engaged in the manufacture and sale of oil seals, challenged the transfer pricing adjustments made by the TPO for the assessment year 2009-10. The TPO accepted the international transactions related to trading activity but made a transfer pricing adjustment of Rs.7,28,39,511/- for the manufacturing activity and Rs.3.63 crores for intra-group services. The Ld. DRP upheld these adjustments. Underutilization of Capacity: The assessee sought an adjustment for underutilization of capacity, arguing that it utilized only 41% of its installed capacity. The Tribunal, referencing its own decision in the assessee's case for the assessment year 2004-05, found merit in the prayer and remitted the issue to the TPO for examination. Net Margin on Cost of Comparable Companies: The assessee claimed that the TPO incorrectly computed the net margin on cost of comparables. The Tribunal restored this issue to the TPO for verification. Working Capital Adjustment: The assessee contended that the TPO did not allow a working capital adjustment. The Tribunal directed the TPO to allow the adjustment on an actual basis, following the decision in Huawei Technologies India P Ltd. Restriction of TP Adjustment to Sales Made to AEs: The assessee argued that the TP adjustment should be restricted to international transactions. The Tribunal agreed, directing the TPO to restrict the adjustment to transactions with AEs only. Forex Gain Treated as Forex Loss: The assessee pointed out a computational mistake where forex gain was treated as forex loss. The Tribunal directed the TPO to verify and correct this mistake. Intra-group Services: The Tribunal noted that similar adjustments in previous years were remitted to the TPO for fresh examination. The Tribunal restored the issue to the TPO, directing consideration of evidence for receipt of benefits and benchmarking such services. Aggregation of Transactions: The assessee argued that group IT/group services fees should be aggregated with primary activities. The Tribunal restored this issue to the TPO for fresh examination. Exclusion from Operating Expenditure: The assessee contended that if the ALP of intra-group services is NIL, it should be excluded from operating expenditure. The Tribunal directed the TPO to examine this claim. Adjustment for Customs Duty: The assessee claimed an adjustment for customs duty due to differences in imported goods. The Tribunal rejected this claim due to lack of relevant details. 2. Disallowance of Product Development Expenditure: The AO disallowed Rs.41,57,479/- of product development expenses, treating them as capital in nature. The Tribunal found that the AO's disallowance was based on assumptions without evidence of creating any patent or know-how. The Tribunal directed the AO to delete this disallowance. 3. Disallowance of Provision for Customer Claims: The AO disallowed Rs.12,87,871/- for provision for customer claims, considering it a contingent liability. The Ld. DRP directed the AO to examine the claim based on the principles laid down in Rotork Controls India. The Tribunal restored this issue to the AO for re-examination. 4. Disallowance of Bad Debts: The AO disallowed Rs.1,87,357/- for bad debts, noting a discrepancy in the amount claimed. The Ld. DRP directed the AO to re-examine this issue. The Tribunal restored this issue to the AO, emphasizing the need to follow the Ld. DRP's directions. Conclusion: The appeal was partly allowed for statistical purposes, with several issues remitted to the AO/TPO for re-examination and verification. The Tribunal emphasized the need for the AO to comply with the directions given by the Ld. DRP.
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