2017 (1) TMI 110 - AT - Income Tax

Transfer pricing adjustment - TPO rejected the internal TNMM method adopted by the assessee for the bench marking transactions with AE since the volume of transactions with a non AE is not significant- Held that - We notice that the sales to the non AE is insignificant and is amounting to only Rs. 34 crores whereas the sales to AE is around 235 crores. For a proper bench marking of ALP there should be adequate sales turnover for the assessee with the non AE and AE s. In the instant case since the sales turnover of the assessee with the non AE is insignificant compared to the overall export turnover of this division the internal TNMM adopted by the assessee according to us has been rightly rejected by the TPO. Non adjustment to the working capital - Held that - We notice that the assessee in its TP study has not given adequate details for grant of working capital adjustments. Moreover the comparables selected by the assessee has not been granted the working capital adjustment. Hence the TPO has rightly rejected the claim of the assessee to grant working capital adjustment. Receipts from sale of scrap and export entitlement should be included in the operating profits - Held that - The scrap is the bi-product of the direct manufacturing and prima facie we are of the view that the same ought to have been reduced from the raw-material cost. If the receipts on account of sale of scarp goes to reduce cost of raw materials needless to say it is part of operating profits. Similarly the export entitlements is also nothing but realization of export sales and is closely linked to the export. The assessee has produced the TPO s order for the asst year 2013-14 wherein the TPO had accepted assessee s TP study including the receipt on account of sale of scrap and export entitlement as part of operating profits. Therefore we are of the view that this matter needs fresh examination by the TPO and accordingly we remit this issue to the TPO for de-nova consideration. The TPO shall dispose of the issue as expeditiously as possible after affording a reasonable opportunity of hearing to the assessee. Upward revision of Tooling division - as argued by the assessee that the TPO disregarded the lower capacity utilization of the assessee s plant - Held that - We notice that the Tooling Division of the assessee has been in operation for more than ten years. There is no specific reasons given by the assessee as to why the capacity utilization is only at 40% and it should be given adjustments. Normally adjustment is given for underutilization of capacity when the unit is in its infancy lockout due to workers unrest power cuts etc. In the instant case the assessee has not stated any specific reason for underutilization of its capacity. Moreover the assessee has not furnished any details with regard to the capacity utilization of the comparables. Since there is no adequate information as regard to the capacity utilization of the comparables; we deem it appropriate that no adjustment needs to be granted for underutilization of assessee s plant in the tooling division. Upward transfer pricing adjustment of patent cost - Held that - We notice that for the assessment year 2012-13 the assessee had returned back this amount of patent cost as no more payable and has offered it for taxation. Hence the assessee has accepted the decision of the TPO since the patent cost was no more payable by the assessee. If at all what has been returned in the assessment year 2012-13 is to be deleted the assessee has to move a rectification petition for AY 2012-13 and no direction can be given by us. Grant of additional depreciation - Held that - The eligibility for deduction of additional depreciation stands admitted since 50 per cent thereof had already been allowed by the AO in the the immediately preceding assessment year. Therefore obviously the balance 50 per cent of the deduction is to be allowed in the current year thus we direct the Assessing Officer to grant additional depreciation of balance 10% for the current assessment year namely asst.year 2011-12. It is ordered accordingly. Addition made u/s 14A r.w.r 8D - Held that - It is an admitted fact that there were common administration expenses for all business activities including the investment activities of the assessee. The assessee incurred routine expenses to maintain its establishment and towards administration. Necessarily a portion of said expenditure has to be attributed for managerial and directors remuneration. Managerial staff and directors are involved in making decisions on investments. Such being the case a portion of this managerial remuneration and director s remuneration should be attributable towards investment the return on which is exempt being dividend income. Therefore the Assessing Officer has rightly invoked the provisions of section 14A r.w.r 8D(iii) of I T Rules and disallowed Rs. 13, 65, 688/-.

Summary

Issues Involved:
1. Upward Transfer Pricing Adjustment in Connector Division
2. Upward Transfer Pricing Adjustment in Tooling Division
3. Upward Transfer Pricing Adjustment of Patent Cost
4. Additional Depreciation Allowance
5. Disallowance under Section 14A read with Rule 8D

Detailed Analysis:

1. Upward Transfer Pricing Adjustment in Connector Division:
The TPO made an upward adjustment of Rs. 26,07,24,126 due to mismatches in export and local sales figures and inadequate transaction volumes for internal TNMM. The assessee argued that the TPO compared non-comparable companies, did not make working capital adjustments, and excluded receipts from sale of scrap and export entitlements from operating income. The Tribunal upheld the TPO's rejection of internal TNMM due to insignificant sales to non-AEs (Rs. 34 crores vs. Rs. 235 crores to AEs). The Tribunal also upheld the TPO's decision to not grant working capital adjustments due to inadequate details from the assessee. However, the Tribunal remitted the issue of including receipts from sale of scrap and export entitlements in operating profits back to the TPO for fresh consideration.

2. Upward Transfer Pricing Adjustment in Tooling Division:
The TPO made an upward adjustment of Rs. 5,07,58,397 due to a negative PLI of 37.83%. The assessee argued for adjustments due to lower capacity utilization (40%). The Tribunal rejected this claim, noting the assessee failed to provide specific reasons for underutilization or comparable data, and thus, no adjustment was warranted.

3. Upward Transfer Pricing Adjustment of Patent Cost:
The TPO disallowed Rs. 75,53,314 for patent costs, as the Tooling Division did not pay this cost before demerger. The DRP confirmed this, noting the assessee had offered this amount for taxation in AY 2012-13. The Tribunal upheld the TPO's decision, advising the assessee to seek rectification for AY 2012-13 if necessary.

4. Additional Depreciation Allowance:
The assessee claimed additional depreciation of Rs. 94,05,185 for the balance 10% of plant and machinery acquired in AY 2010-11. The Tribunal allowed this claim, referencing the Cochin Bench's decision in Apollo Tyres Ltd., which permits the balance 10% depreciation in the subsequent year if the machinery was used for less than 180 days in the initial year.

5. Disallowance under Section 14A read with Rule 8D:
The assessee received dividend income of Rs. 1,38,62,144 and claimed it as exempt without showing expenses. The AO disallowed Rs. 13,65,688 under Section 14A r.w.r 8D(iii). The Tribunal upheld this disallowance, noting that common administrative expenses, including managerial and directors' remuneration, should be attributed to investment activities.

Conclusion:
The appeal was partly allowed, with remand instructions for certain issues, while the Stay Petition was dismissed as infructuous. The Tribunal upheld the TPO's and DRP's decisions on several points but allowed additional depreciation and remanded the issue of including receipts from sale of scrap and export entitlements in operating profits for fresh consideration.