2015 (4) TMI 176 - AT - Income Tax

Transfer pricing adjustment - Dis-allowance of foreign exchange gain - said amount was not claimed as deduction while making the computation as a result the loss of the year was lesser to that extent - Held that - The Hon ble Bombay High Court in the case of CIT v. Pruthvi Brokers s length principle envisaged under the Act - Held that - Under-utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. In view of the above we deem it appropriate to remit this issue back to the Assessing Officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The assessee is also directed to produce relevant documents in comparable units for the necessary analysis. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of foreign exchange gain.
2. Adjustment of Transfer Pricing.

Disallowance of foreign exchange gain:
The appeal was filed against the assessment order for the Assessment Year 2008-09 under the Income Tax Act, 1961. The assessee, a subsidiary of a Korean company, had international transactions and claimed a deduction of Rs. 3,14,10,819 on account of foreign exchange gain during the assessment proceedings. The claim was rejected by the Assessing Officer as it was not made by filing a revised return. The issue was whether the deduction could be allowed without a revised return. The Tribunal referred to the Supreme Court's decision in Goetze India Ltd. v. CIT and held that the Assessing Officer cannot entertain a claim for deduction if not made in the original or revised return. However, the Tribunal, citing the Bombay High Court's decision in CIT v. Pruthvi Brokers & Shareholders, remitted the issue back to the Assessing Officer to consider the claim in the interest of justice.

Adjustment of Transfer Pricing:
Regarding the Transfer Pricing adjustment of Rs. 7,59,39,334, the assessee argued that the under-utilization of production capacity in the initial years led to higher overhead fixed costs, resulting in a loss. The Transfer Pricing Officer (TPO) did not consider this factor and made adjustments without issuing a show cause notice. The Tribunal noted that in the initial years of production, overhead costs are higher due to under-utilization of resources. The TPO's objection about units of expression for capacity utilization was also considered. The Tribunal remitted the issue back to the Assessing Officer to allow for idle capacity adjustment during the relevant period while determining the Arm's Length Price (ALP) and directed the assessee to provide relevant documents in comparable units for analysis. The appeal was allowed for statistical purposes.

The judgment highlighted the importance of following proper procedures for claiming deductions and considering relevant factors like production capacity utilization in Transfer Pricing adjustments. The Tribunal emphasized the need for a fair assessment process and directed a reconsideration of the issues raised by the assessee.