Transfer pricing issues remitted for fresh AO/TPO determination: s.133(6) data, customs/air-freight/FX adjustments, goodwill allowed, warranty, comparables, licence-fee

ITAT Bangalore remitted multiple transfer-pricing issues to the AO/TPO for fresh determination: capacity-utilisation adjustments (direct the AO/TPO to obtain comparable companies' data under s.133(6) if not publicly available), elimination of customs duty, air-freight and foreign-exchange fluctuation adjustments to determine ALP. Amortisation of goodwill was held non-operating and decided for the assessee. TP adjustments were limited to international/AE transactions only. Two software product companies were excluded from comparables and specific other comparables were accepted subject to AO/TPO verification. Provision for warranty upheld on a scientific basis to be allowed proportionately using prior five years' data. Annual licence-fee treatment was remanded with directions to admit DRP-filed evidence. Appeal partly allowed.

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Issues Involved:
1. Adjustment for underutilization of capacity in the manufacturing segment.
2. Adjustment towards customs duty expenses.
3. Adjustment for foreign exchange fluctuations.
4. Treatment of amortization of goodwill as operating expenditure.
5. Restriction of transfer pricing adjustment to international transactions.
6. Exclusion and inclusion of certain comparables in the software segment.
7. Disallowance of provision for warranty.
8. Disallowance of annual license fee.

Detailed Analysis:

1. Adjustment for Underutilization of Capacity in the Manufacturing Segment:
The assessee argued that due to industry slowdown, it operated at 40.39% of its installed capacity, whereas comparable companies operated at an average of 77.42%. The Tribunal noted that the TPO did not grant an adjustment for capacity utilization, stating that such adjustments should be made to comparable companies, not the tested party. The Tribunal directed the AO/TPO to obtain exact details of capacity utilization of comparable companies under section 133(6) of the Act and decide the issue afresh.

2. Adjustment Towards Customs Duty Expenses:
The assessee incurred significant customs duty charges, which were proportionately higher than those of comparable companies. The Tribunal observed that the TPO rejected the adjustment on the grounds that the decision to import was a conscious commercial decision. The Tribunal remitted the issue to the AO/TPO for fresh consideration, directing them to eliminate customs duty from the comparable price to arrive at the correct PLI.

3. Adjustment for Foreign Exchange Fluctuations:
The assessee sought an adjustment for foreign exchange fluctuations embedded in the raw material import cost. The Tribunal noted that the TPO considered foreign exchange fluctuation as non-operating for both the assessee and comparables, thus taking care of the differences. Following the decision in Gates Unitta India Company (P.) Ltd., the Tribunal remitted the issue to the AO/TPO for fresh consideration.

4. Treatment of Amortization of Goodwill as Operating Expenditure:
The assessee argued that amortization of goodwill, resulting from the purchase of a business, should not be considered as operating expenses. The Tribunal, following the decision in ST Ericsson India Pvt Ltd v. DCIT, held that amortization of goodwill is an extraordinary item and non-operating in nature. This issue was decided in favor of the assessee.

5. Restriction of Transfer Pricing Adjustment to International Transactions:
The assessee contended that the transfer pricing adjustment should be restricted to international transactions only. The Tribunal, following the decision in CIT v. Hindustan Unilever Ltd., held that benchmarking has to be done only on Associated Enterprises transactions and not for the entire turnover. This ground was allowed in favor of the assessee.

6. Exclusion and Inclusion of Certain Comparables in the Software Segment:
The Tribunal directed the exclusion of Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. from the list of comparables, following the decision in CGI Information Systems & Management Consultants (P.) Ltd. v. ACIT. The Tribunal also directed the AO/TPO to consider Akshay Software Technologies Ltd. and Evoke Technologies Ltd. as comparables and remitted the issue of Technosoft Engineering Projects Ltd. to the AO/TPO for fresh consideration.

7. Disallowance of Provision for Warranty:
The assessee created a provision for warranty based on past experience. The Tribunal, following the decision in Rotork Controls India (P.) Ltd. v. CIT, directed the AO to examine the assessee’s past record and allow the provision for warranty in the same proportion as compared to the sales in earlier years.

8. Disallowance of Annual License Fee:
The Tribunal noted that similar issues were remanded for fresh consideration in earlier years. The Tribunal remitted the issue to the AO with directions to examine the details and evidence provided by the assessee and decide the matter afresh. The claims under sections 35(1)(iv) and 32 of the Act became infructuous in view of the remand.

Conclusion:
The Tribunal allowed the appeal of the assessee partly for statistical purposes, directing the AO/TPO to re-examine several issues and provide fresh decisions based on detailed analysis and additional evidence.

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