Capitalised expenses shouldn’t be used in the proportionate TP adjustment calculation
Fact and issue of the case
This appeal by assessee is directed against final assessment order passed by AO/NFAC dated 28.4.202 1 u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act,1961 [‘the Act’ for short] for the assessment year 2016-17
The assessee has raised following grounds of appeal
The grounds mentioned herein below are independent and without prejudice to the other grounds preferred by the Appellant
That on facts and circumstances of the case and in law, the order passed by the Learned AO, pursuant to the directions of the Hon ‘ble Dispute Resolution Panel — 2, Bangalore (‘Panel’), and the order of the Learned Deputy Commissioner of Income-tax, Transfer Pricing- Circle (2)(2)(2), Bangalore (Learned TPO’) to the extent prejudicial to the Appellant, is bad in law and facts and liable to be quashed
That on the facts and in the circumstances of the case, the Learned AO erred in making a TP adjustment in connection with the Appellant’s international transactions by INR 422,124,000
That the learned AO in pursuance of the directions issued by the Hon ‘ble Panel erred in proposing a TP adjustment by not appreciating that the Appellant has incurred significant losses during AY 2016-17 due to business reasons
That, on the facts and circumstances of the case, the Learned AO in pursuance of the directions issued by the Hon ‘ble Panel erred in rejecting the TP documentation maintained by tile Appellant under Section, 92D of the Act.
That the Learned AO in pursuance of the directions issued by the Hon’ble Panel erred in law and facts by rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act and the Income-tax Rules, 1962 (`the Rules’), thereby arbitrarily rejecting the economic analysis undertaken by the Appellant and in conducting fresh economic analysis
That the Learned AO in pursuance of the directions issued by the Hon’ble Panel, erred in rejecting the choice of tested party as Toyota Industries Corporation (`TIC0′) in connection with the international transaction of purchase of raw materials and in conducting a fresh economic analysis by considering TIEI as tested party with respect to all the international transactions entered into by the Appellant during AY 2016-1 7
That the Learned AO in pursuance of the directions issued by the Hon’ble Panel, erred in rejecting the transaction-by-transaction benchmarking approach adopted by the Appellant and following aggregation approach to benchmark all the international transactions entered during AY 2016-1 7
That the Learned AO in pursuance of the directions issued by the Hon’ble Panel, erred in the methodology adopted for computation of related party transactions (`RPT’) / sales filter
That the Learned AO in pursuance of the directions issued by the Hon’ble Panel, erred in the selection of following comparable companies which do not satisfy the test of comparability:
Kalyani Forge Ltd
Dana India Pvt. Ltd
Endurance Technologies Ltd
JMT Auto Ltd
Vanaz Engineers Ltd
EMI Transmission Ltd
That the Learned AO in pursuance of the directions issued by the Hon ‘ble Panel erred in considering income / loss pertaining to foreign exchange fluctuations as operating in nature in computing the operating margin earned by the Appellant as well as the comparable companies
That the Learned AO in pursuance of the directions issued by the Hon’ble Panel erred in not providing the benefit of adjustment for working capital to the appellant
That the Learned AO in pursuance of the directions issued by the Hon’ble Panel erred in not providing the adjustment for depreciation, failing to appreciate that the ratio of depreciation to sales .of the Appellant is higher as compared to comparable companies and requires a suitable comparability adjustment. Further, the differences in accounting treatment for depreciation warrants suitable adjustment for comparability purposes
That the Learned AO in pursuance of the directions issued by the Hon ‘ble Panel erred in not granting capacity utilization adjustment to the Appellant by not appreciating that proportionate overheads incurred for unutilized capacity cannot be treated as operating expense while computation of operating margin of the Assessee
That the Hon’ble Panel erred in law and on facts in disregarding the application of the most appropriate profit level indicator for the purpose of benchmarking the international transactions of the Appellant
That the Learned AO erred in computation of proportionate adjustment by including the following international transactions which are capital in nature: Payment of professional and consultancy charges Purchase of fixed assets
That the Learned AO erred in the computation of TP adjustment contrary to the directions issued by the Hon ‘ble Panel by treating the CSR expenditure as operating in nature in the computation of margins earned by the Appellant
Based on the facts and circumstances of the present case and in law, the order passed by the Learned AO being not in conformity with the mandatory directions issued by the Hon’ble Panel under section 144C(5) of the Act, is bad in law and void
The assessee has filed an additional ground along with petition as follows
The Learned AO/Learned TPO erred in non-consideration of gross profit/sales as the PLI, with respect to the international transaction of purchase of raw materials
The ld. A.R. submitted that this ground was inadvertently not raised on earlier occasion due to oversight and requested to admit the ground
Observation of the court
We have heard the submissions regarding admission of this additional ground. The assessee failed to raise this ground earlier due to oversight and there is no malafideness in not raising this ground on earlier occasion and there is no necessity of investigation of any fresh facts so as to adjudicate this ground. Accordingly, by placing reliance on the judgement of Hon’ble Supreme Court in the case of NTPC Vs. CIT 229 ITR 383 (SC) we inclined to admit this additional ground for the purpose of adjudication as there was no investigation of any fresh facts otherwise on record and the action of the assessee is bonafide
At the time of hearing, the assessee has not pressed any grounds other than ground Nos.15 & 18 in the memorandum of appeals. Hence, all the grounds other than ground Nos. 15 & 18 are dismissed as not pressed
Ground No.15:-
That the Learned AO erred in computation of proportionate adjustment by including the following international transactions which are capital in nature
Payment of professional and consultancy charges
Purchase of fixed assets
The ld. A.R. submitted that before the ld. DRP, assessee has contended that the transfer pricing adjustment with respect to the manufacturing of textile machinery/auto component segment should be restricted to the amount of international transaction pertaining to textile machinery/auto component segment. Accordingly, the ld. DRP has directed the TPO to recompute and reverify the computation of TP adjustment only with reference to the value of international transactions and not the entire revenue/cost of the assessee company. According to the ld. A.R., the AO/TPO while passing the final assessment order has included these payments i.e. payment of professional and consultation charges and purchase of fixed assets for the purpose of determining the TP adjustment. According to the ld. A.R., these expenditures are capitalized in the books of accounts of the assessee as these expenditures are capital in nature and it should not be considered for determining the ALP while making TP adjustments. Thus, he submitted that these two expenditures are to be excluded for the purpose of TP adjustment
The ld. D.R. submitted that this issue may be remitted back to the file of AO not to consider these two expenditures, while making TP adjustment, if it is capitalized by the assessee in its books of accounts
After hearing both the parties, we are inclined to remit this issue to the file of AO/TPO to examine whether these two expenditures namely payment of professional and consultation charges & purchase of fixed assets are capitalized in the books of accounts of assessee. If it is so, these expenditures cannot be considered for computation of proportionate TP adjustment and the AO/TPO has to decide the issue after giving opportunity of hearing to the assessee. Ordered accordingly
Ground No.18
The Learned AO/Learned TPO erred in non-consideration of gross profit/sales as the PLI, with respect to the international transaction of purchase of raw materials
After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case in ITA No.2585/Bang/2019 for the assessment year 2015-16 vide order dated 3.3.2023 wherein the Tribunal has held as under
After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee ’s own case in IT(TP)A No.485/Bang/2015 for the assessment year 2010-1 1 dated 18.52016, wherein the Tribunal held as under
In principle; we are in agreement with the contentions raised by assessee, as GP over sales can eliminate the difference in claim of depreciation due to age of machinery, rate at which it was claimed and method of claims like straight line on written down value. We accordingly direct the AO/TPO to adopt the comparison of profitability ratios adopting GP over sales, Since the details of capacity utilization of the comparable companies and rate of depreciation could not be analysed as commented by DRP, it would be better if GP analysis was undertaken taking sales less cost of raw material as basis (excluding other cost including Depreciation, interest etc) so that auto components; profitability could be analysed so as to consider whether the import of raw material from AE has effected the profitability of assessee under the TP provisions. Accordingly, we set aside the impugned orders of the Revenue authorities on this issue and restore the matter to the file of AO/TPO to carry out the exercise as stated above. Assessee should be given due opportunity. However, we make it clear that if any adjustment is required to be made, the same is to be restricted, as directed by DRP in para 3.1.3 (Ground No.2) above. The matters which have attained finality are not intended to be reopened. AO/TPO is directed accordingly. Ground No. 3 is allowed for statistical purposes
In view of the above order of this Tribunal in assessee’s own case, we allow this ground of assessee
In view of the above decision of the Tribunal, we allow this ground taken up by the assessee
In the result, the assessee’s appeal is partly allowed for statistical purposes
Order pronounced in the open court on 4th May, 2023
Conclusion
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
