2013 (6) TMI 184 - AT - Income Tax

ITAT Adjusts Exchange Rate Fluctuations, Allows 60% Depreciation on Computer Peripherals, Dismisses Interest Challenge.

The ITAT partially allowed the appeal, directing adjustments for exchange rate fluctuations and permitting 60% depreciation on computer peripherals, ... Transfer pricing Adjustment - international transaction of import of parts and capital goods by disregarding the transfer pricing methodology adopted by the appellant for benchmarking its international transactions – average exchange rate of Thai Bhat - Held that:- As decided in UCB India (P) Ltd. vs ACIT [2009 (2) TMI 237 - ITAT BOMBAY-L] under transfer pricing regulations, comparison is to made of the profitability of the international transactions on a stand alone basis and entity level comparison is to be resorted to, only when such stand alone comparison is otherwise not feasible and justified. In the case in hand, admittedly, the average exchange rate of Thai Bhat during October, 2005 to March 2006 was 100 Thai Bhat equivalent to INR 110 and after consideration of said average exchange rate, price of sale of goods had to be agreed upon with the customers. DR has not disputed the point that during April 2006 to September 2006 at the time of purchase, the exchange rate of Thai Bhat was substantially increased and the average exchange rate of Thai Bhatt was increased to 100 Thai Bhat = INR 119. Accordingly, we can not rule out and ignore this factual matrix emerged from the fluctuation of foreign exchange rates that while prices of purchases and import made by the appellant have increased, the sale price of exported goods remained on the lower side which is an important element to materially affect the price in the open market. In this situation, we are inclined to hold that the authorities below should have considered the said difference due to foreign exchange rate fluctuation in favour of Thai Bhat and against the INR and the said difference has to be removed and the margin thereon has to be adjusted for arriving at the credible comparable through the requisite adjustments. We observe that the authorities below have not considered the element of abnormal and huge fluctuation in the foreign exchange favouring Thai Bhat and against the Indian currency. Accordingly, in view of the observations made hereinabove, ground no. 2.7 and 2.8 are allowed with a direction to the Assessing Officer that necessary adjustments pertaining to the huge and abnormal fluctuation in the foreign exchange may be allowed to the assessee in determining the ALP of the international transaction undertaken by the appellant. Depreciation on computer peripherals at 15% as against 60% claimed by the appellant – Held that:- The issue of depreciation of computer peripherals has been settled in the case of CIT vs BSES Rajdhani Bench Ltd.[2010 (8) TMI 58 - DELHI HIGH COURT] and accordingly allowed in favour of the assessee. Levying of interest u/s 234B and 234C - assessee submitted that since the assessee was a non-resident company and entire tax was to be deducted at source on payment made by the payee to the assessee and there was no question of advance tax by the assessee, therefore, AO erred on facts and law in levying interest u/s 234B and 234C Held that:- In the judgment of Jacabs Civil Incorporated/Mitsubishi Corpn. [2010 (8) TMI 37 - DELHI HIGH COURT] the order of ITAT Delhi Bench in favour of the assessee and dismissing the revenue’s appeal, it has been held that once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and therefore can take action against the payer under the provisions of Section 201 of the Income Tax Act and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of Section 191 of the Act along with Section 209 (1) (d) of the Act. For this reason, it would not be permissible for the Revenue to charge any interest under Section 234B of the Act. Issues Involved:1. Adjustment to income on account of international transactions.2. Rejection of Resale Price Method and application of TNMM.3. Selection of tested party and comparables.4. Adjustment for exchange rate fluctuation.5. Depreciation on computer peripherals.6. Levying interest under Sections 234B and 234C.7. Initiation of penalty proceedings under Section 271(1)(c).Issue-wise Detailed Analysis:1. Adjustment to Income on Account of International Transactions:The assessee contested the adjustment of Rs. 4,30,47,427 made by the Assessing Officer (AO) to its income for the international transactions of import of parts and capital goods. The AO had aggregated these transactions and benchmarked them at the entity level using the Transactional Net Margin Method (TNMM), rejecting the Resale Price Method (RPM) applied by the assessee.2. Rejection of Resale Price Method and Application of TNMM:The AO and Dispute Resolution Panel (DRP) rejected the RPM applied by the assessee for benchmarking the international transaction of export of parts, opting instead for the TNMM at the entity level. The Tribunal noted that the benchmarking analysis should ideally be done on a transaction-to-transaction basis, as held in UCB India (P) Ltd. vs ACIT, and not at the entity level unless necessary.3. Selection of Tested Party and Comparables:The AO/DRP rejected the associated enterprise of the appellant as the tested party and also rejected Orbit Industries Ltd. as a comparable due to persistent losses. The Tribunal upheld the rejection of Orbit Industries, agreeing with the DRP that the financial analysis should be based on functional, asset, and risk (FAR) analysis.4. Adjustment for Exchange Rate Fluctuation:The assessee argued that it incurred losses due to sudden fluctuations in the exchange rate of INR against Thai Baht. The Tribunal agreed that the authorities should have considered the impact of such fluctuations, as per Rule 10B(3) of the Income Tax Rules, which allows for adjustments to eliminate material effects of differences. The Tribunal directed the AO to allow necessary adjustments for the exchange rate fluctuation when determining the ALP of the international transactions.5. Depreciation on Computer Peripherals:The AO restricted the depreciation on computer peripherals to 15% instead of the 60% claimed by the assessee. The Tribunal, following the Delhi High Court's decision in Commissioner of Income Tax vs BSES Rajdhani Power Ltd., held that computer peripherals should be allowed depreciation at 60%, as they are integral to the computer system.6. Levying Interest Under Sections 234B and 234C:The assessee argued that as a non-resident company, it was not liable to pay advance tax, and thus, the AO erred in levying interest under Sections 234B and 234C. The Tribunal, citing the Delhi High Court's decision in DIT vs Jacabs Civil Incorporated/Mitsubishi Corpn., held that the assessee was not liable for such interest, as the entire tax was to be deducted at source by the payer.7. Initiation of Penalty Proceedings Under Section 271(1)(c):The Tribunal found that the initiation of penalty proceedings under Section 271(1)(c) was not appealable at this stage, deeming the ground premature and dismissing it.Conclusion:The Tribunal partly allowed the appeal, particularly on the grounds related to the adjustment for exchange rate fluctuation and depreciation on computer peripherals, while dismissing other grounds as either not pressed or premature.