2023 (2) TMI 1106 - AT - Income Tax

TP Adjustment - comparable selection - exclusion of persistent loss company - HELD THAT - A similar case has been decided in the case of Commissioner of Income-tax v. Future First Info Services (P.) Ltd. 2022 (7) TMI 748 - DELHI HIGH COURT has held that the persistent loss company cannot be considered as a good comparable. We further noted from the judgement relied by the Ld DR in which it has also been held that the persistent loss company cannot be considered as a comparable company with the assessee company. The facts of the case on hand are also similar and, therefore, the decisions quoted (supra) are squarely applicable. Respectfully following we dismiss the grounds taken by the assessee that M/s. Hindustan Motors Ltd. is not a good comparable company and accordingly we uphold the orders of the lower authorities. In the result the ground raised by the assessee is dismissed. Inappropriate computation of margins by the AO/TPO/DRP by not considering the income and expenses which is as i) Interest received, ii) Claims received from Insurance Companies, iii) Liabilities/Provisions written back, iv)Miscellaneous income and v) Interest paid as non-operating in nature - HELD THAT - We noted that the ld.AR of the assessee wanted to include/exclude the above 5 types of income/expenditure for calculating operating margin of the assessee. A similar issue has been decided by the coordinate bench of the Delhi Tribunal in the case of Bucher Hydraulics (P.) Ltd. 2020 (10) TMI 1147 - ITAT DELHI - We remit this issue to the AO for de-novo consideration and the assessee is directed to produce necessary documents for substantiating his case. Custom Duty Adjustment - assessee has paid custom duty for which he sought to be excluded for the computation of operating margin - HELD THAT - Given the fact that the assessee imported more raw materials for manufacturing, it is but natural that the corresponding sale price would also have been on higher side, thereby nullifying the effect of higher payment of Customs duty, forming a part of the Operating cost based on the overall basis. The situation would have been different if the assessee had paid Customs duty at a rate higher than that paid by its comparables, which would have called for adjustment to have a level playing. Instantly, we are confronted with a case in which the assessee is claiming exclusion of extra custom duty on the strength of its higher quantum and not the higher rate of Customs duty. In case of comparable companies, there are various costs which also fluctuate so as to have disadvantageous position viz., to the taxpayer. These differences would not have material effect on net margins that s why the TNMM method is adopted as a MAM. As during the course of hearing, AR could not substantiate that there is a variation in the rate of custom duty paid by the assessee in the imported goods for consumption of raw materials, the quantum of imported materials of the assessee company as well as the comparable companies are immaterial - we direct the assessee for providing rates of custom duties paid by the assessee company as well as the comparable company to the AO/TPO and if the assessee could prove that the custom duty of assessee is higher than the comparable company s custom duty rate for the import of goods, then the assessee would be eligible for claiming adjustment. Accordingly, this ground is remitted for fresh consideration by the AO/TPO for ascertaining the custom duty adjustment. Not providing adjustment for abnormal expenditure incurred due to Thai floods - AR submitted that during the Thai flood, the cost of imported raw material was increased high - AR requested that the matter may be remitted back to the AO for a fresh consideration and he has sufficient material to prove that there was a substantial increase in the price, therefore, the assessee has to incur extra cost - HELD THAT - After considering the rival submissions and perusing the order of the authorities, we accept the prayer of the assessee for remitting this ground to the file of TPO for de-novo consideration. Considering the findings recorded by the ld.DRP. The assessee is directed to produce necessary documents for early disposal of the issue. Not providing working capital adjustment - HELD THAT - The working capital adjustment is an accepted adjustment and this issue has also been decided by various High Courts in favour of the assessee. A similar issue has been decided by the coordinate bench of the Tribunal in assessee s own case 2021 (9) TMI 12 - ITAT BANGALORE . Thus allow this issue and the assessee is directed to provide requisite details for computation of working capital adjustments. Cash PLI and alternatively depreciation adjustment - HELD THAT - We noted that the assessee has sought for cash PLI and depreciation adjustments and submitted that being involved in manufacturing segment, which require huge capital outlay for setting up of plant and machinery. We also noted that in the financial years 2010-11 and 2011-12, the assessee has enhanced its production capacity and new Plant No.2 was also utilized by the assessee. The assessee is also involved in manufacturing segment before the AY 2003-04. In assessment year 2003-04, the assessee had sought for adjustment of cash PLI which has been rejected by the coordinate bench of the Tribunal in the assessee s own case in 2013 (1) TMI 86 - ITAT BANGALORE - Thus following the above judgment, AO/TPO is directed to compute the adjustment in accordance with the above view taken by the coordinate bench in assessee s own case. TP adjustment to be restricted only to AEs transactions only - HELD THAT - Considering the submissions from both sides, we observed that a similar issue has been decided by us in assessee s own case for the assessment year 2013-14 2021 (9) TMI 12 - ITAT BANGALORE wherein as accepted that TP adjustment has to be restricted to AEs transactions alone. Thus we hold that the CIT(A) has correctly directed the AO / TPO to restrict the TP adjustment to the AEs transaction. Relating to royalty adjustments - AR submitted the assessee adopted TNMM at the entity level, in which process the royalty has been considered as a closely linked transaction as a part of operating cost - separate adjustment for royalty is not required - HELD THAT - We observe from the order of the TPO, he has calculated the ALP in regard to royalty payment determined under TNMM of Rs.154.54 crores however, no separate adjustment of royalty has been proposed by the TPO since the TNMM was adopted at NTT level which includes royalty also. DRP also expressed his opinion that the TPO has not proposed any adjustment towards royalty payment. Considering the above observations and arguments, we uphold the order of the DRP and no separate adjustment is required for the payment of royalty if the TNMM approach has been adopted at entity level as decided by the coordinate bench of the Tribunal in the assessee s own case noted supra, therefore ground Nos.8 to 15 become academic in nature, accordingly, we allow ground nos.8 to 15. Provision for Employees Long Term Benefit - HELD THAT - As provision was made as per accounting standard 15 towards future liability accruing to other employees, who are in service for 10 years. The provision was based on the actuarial valuation and the assessee is adopting mercantile system of accounting and he further submitted that similar issue has been decided in assessee s own case by the coordinate bench of the Tribunal 2021 (9) TMI 12 - ITAT BANGALORE and the matter has been remitted back to the AO. Excess claim of depreciation - assessee submitted that it was only because of the price negotiations with the vendors was not finalized, therefore the assessee claimed depreciation on the basis of liability, which has neither been quantified nor crystallized - HELD THAT - During the impugned assessment year, the assessee has submitted that the assets were put to use by the assessee but from the documents available it is not clear whether the ownership of the assets were transferred to the assessee because there was no price fixed by the suppliers as stated of the assessee. The assessee has not satisfied both the conditions, therefore, the assessee is not eligible for claiming depreciation on provisional basis. We also notice that from the above table the provision was made in the books of accounts for Rs.48.35 crores and even after expiry of 2 years the price was finalized only of Rs.6.44 crores and the assessee has reversed the provisions only. We also noted it from the order of the AO vide his letter dated 25/02/2016. Accordingly, we uphold the order of the lower authorities. The assessee admitted that there was excess claim of depreciation on the provisions created, which has been reversed subsequently. Considering the totality of the facts and circumstances of the case, we uphold the order of the revenue authorities. Accordingly, this ground is dismissed. Deduction u/s 40(a) - assessee has debited an expenditure towards payment of royalty - addition made u/s 92CA - revenue authorities noted that the disallowance was adjustment u/s 92CA towards the royalty payment, accordingly it was disallowed - HELD THAT - DRP observed that the disallowance of Rs.57.53, which was a part of the disallowance made u/s 92CA in the previous assessment year, therefore, it cannot be allowed/disallowed as per sec.40(a)/37(1) - addition made u/s 92CA cannot be correlated with the disallowance u/s 40(a)/37(1) - no substance on the submissions of the ld. AR. The case law relied by the ld. AR is not applicable on the present facts of the case. AR submitted that the ITAT has decided this issue in favour of the assessee for the AY 2011-12 wherein it has been held that if the assessee has applied TNMM at entity level then no separate adjustment can be made for Royalty payments u/s 92CA, but no copy of the order was produced before us for the AY 2011-12 on this issue. Therefore, the assessee is directed to produce the order of the ITAT for the AY 2011-12 on this issue and if there is no separate adjustment for royalty u/s 92CA, no addition can be made during the year because the assessee has complied the provisions of section 40(a) - we are remitting this issue to the AO for verification. This ground is allowed for statistical purposes. Price reduction of purchase which was offered to tax in subsequent AY - HELD THAT - The computational provisions cannot enlarge or restrict the contents of taxable income. Accordingly, the range of taxable income or ambit of taxation is to be determined in accordance with the charging provisions. Even where an assessee is following the mercantile system of accounting, it is only accrual of real income which is chargeable to tax; that accrual is a matter to be decided on commercial belief, having regard to the nature of business of the assessee and character of the transaction. Accordingly, for the purpose of determining whether there has been accrual of real income or not, recourse is to be made to the business character of the transaction. No doubt, the Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipts but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though the book keeping entry is made about hypothetical income which does not materialize. In the case on hand, the right to receive income was certain and merely the assessee had adopted its books of accounts in the annual general meeting which is prior to the receipt of information from Denso Kirloskar Industries Pvt. Ltd. Therefore, the facts of the case law relied by the ld.AR are different from the assessee s case. Accordingly, the judgment relied on by the ld.AR is not acceptable in the present facts of the case. Accordingly we uphold the order of the AO and dismissed the ground raised by the assessee. The AO is also directed to give benefit for the subsequent assessment year. The AO has to keep in mind that while giving tax effect that it should not be taxed twice and necessary effect should be given to the assessee. TP Adjustment - RPT Filter as contested by the AR of the assessee as per his written synopsis - HELD THAT - We direct the AO/TPO to calculate RPT ratio in above terms as per assessee s own case in the assessment year 2013-14 2021 (9) TMI 12 - ITAT BANGALORE considering the direction of the CIT (A), accordingly, this issue is allowed for statistical purposes. Not Providing Capacity Underutilization Adjustment - HELD THAT - The appellant claims that the average industry utilization is 52.20% during the year whereas its own capacity utilization is 49.56%. However, in absence of data of capacity utilization in respect of comparables the revenue authorities have not granted capacity utilization adjustment. A similar case has been decided by the coordinate bench of Tribunal in the case of IKEA India Pvt. Ltd. 2018 (10) TMI 49 - ITAT BANGALORE we direct the TPO to exercise powers u/s 133(6) of the Act to call for information on capacity utilization of the comparable companies such as Installed Capacity,Actual Production in Units,Break-up of Fixed Cost and Variable Cost, Segmental/ product wise information, if any. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Miscellaneous Expenses - HELD THAT - We also allow 30% of the total expenditure incurred by the assessee. Accordingly, this ground is partly allowed. Capacity utilization adjustment and providing Cash PLI/Depreciation adjustment - HELD THAT - As we note that while calculating these two adjustments the depreciation expenses has major role, therefore we direct to the lower authorities while calculating these adjustments (if granted to both) the assessee should not get double benefit of depreciation expenses adjustment.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Computation of Arm's Length Price (ALP)
3. Royalty Adjustments
4. Corporate Tax Adjustments
5. Miscellaneous Expenses
6. Interest Levied under Section 234B and 234D

Detailed Analysis:

1. Transfer Pricing Adjustments:

- Ground No.4a - Rejection of Hindustan Motors Ltd:
The Tribunal considered whether Hindustan Motors Ltd. should be included as a comparable company. The assessee argued that Hindustan Motors Ltd. manufactures various cars similar to the assessee's products and should not be excluded solely because it is a loss-making company. The Tribunal found that Hindustan Motors Ltd. is functionally comparable but noted its persistent losses and declining net worth, ultimately upholding its exclusion as a comparable.

- Ground No.4b - Margin Computation of the Appellant:
The Tribunal addressed the inclusion/exclusion of specific income and expenses in the operating margin computation. It directed the AO to reconsider the treatment of interest received, liabilities/provisions written back, claims received from insurance companies, miscellaneous income, and interest paid, based on precedents and the nature of these items.

- Ground No.5 - Custom Duty Adjustment:
The Tribunal remitted the issue of custom duty adjustment back to the AO/TPO, directing them to ascertain whether the custom duty rates paid by the assessee were higher than those paid by comparable companies. If proven, the adjustment should be granted.

- Ground No.6 - Adjustments for Abnormal Expenditure and Working Capital:
The Tribunal remitted the issue of abnormal expenditure due to Thai floods back to the TPO for fresh consideration, directing the assessee to provide necessary documentation. It also upheld the entitlement to working capital adjustments, directing the AO/TPO to grant them based on detailed submissions.

- Ground No.7 - Cash PLI/Depreciation Adjustment:
The Tribunal directed the AO/TPO to compute adjustments in line with previous decisions, allowing depreciation adjustments or cash PLI as appropriate.

- Ground No.8 - TP Adjustment Restriction to AE Transactions:
The Tribunal upheld that TP adjustments should be restricted to AE transactions, following precedents in the assessee's own case and other judicial pronouncements.

2. Computation of Arm's Length Price (ALP):

- The Tribunal addressed various aspects of ALP computation, including the selection of comparables, the treatment of specific income and expenses, and the application of adjustments for custom duty, abnormal expenditures, and working capital. It directed the AO/TPO to follow detailed guidelines and precedents to ensure accurate and fair ALP computation.

3. Royalty Adjustments:

- Grounds No.8 to 15 - Royalty Adjustment:
The Tribunal found that once the net profit margin is tested and found at arm's length, separate adjustments for royalty payments are not required. It directed the AO/TPO to delete adjustments proposed for royalty as a separate international transaction, following precedents in the assessee's own case and other relevant decisions.

4. Corporate Tax Adjustments:

- Ground No.16 - Provision for Employee Long Term Service Benefit:
The Tribunal remitted the issue back to the AO to verify the scientific basis of the provision for employee long-term service benefits, directing the assessee to provide necessary documentation.

- Ground No.17 - Excess Depreciation:
The Tribunal upheld the disallowance of excess depreciation claimed on provisional assets, noting the lack of clear ownership transfer and the absence of a scientific method for creating provisions.

- Ground No.18 - Double Disallowance of Royalty:
The Tribunal remitted the issue back to the AO for verification, directing the assessee to produce the ITAT order for AY 2011-12 to substantiate the claim that no separate adjustment for royalty was made under section 92CA.

5. Miscellaneous Expenses:

- Ground No.19 - Price Reduction of Purchases:
The Tribunal upheld the addition made by the AO, noting that the income from price reduction was certain and should have been recognized in the relevant assessment year. It directed the AO to ensure no double taxation occurs.

6. Interest Levied under Section 234B and 234D:

- The Tribunal noted that interest levied under sections 234B and 234D is consequential in nature and directed the AO to recompute interest based on the revised assessments.

Conclusion:
The Tribunal provided detailed directions on various transfer pricing and corporate tax issues, remitting several matters back to the AO/TPO for fresh consideration and verification. It emphasized the need for accurate and fair adjustments based on reliable data and judicial precedents. The appeals were partly allowed for statistical purposes, with specific directions to ensure compliance with established legal principles.