Appeal partially allowed, directing TPO/AO to restore depreciation, re-examine comparables, compute working capital, allow R&D cess.

The Tribunal partly allowed the appeal, directing the TPO/AO to restore depreciation adjustments, re-examine comparables for functional comparability, correctly compute working capital adjustments, and allow R&D cess as an admissible expense. The Tribunal emphasized adherence to legal precedents and principles of natural justice in its directives.

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Issues Involved:
1. Depreciation adjustment.
2. Inclusion and exclusion of comparables.
3. Working capital adjustment.
4. Allowability of R&D cess as an admissible expense.

Detailed Analysis:

1. Depreciation Adjustment:
The assessee challenged the Dispute Resolution Panel (DRP) for rejecting depreciation adjustment which was initially allowed by the Transfer Pricing Officer (TPO). The assessee argued that Diamond Japan, the parent company, had different depreciation rates compared to Indian comparables. The TPO allowed depreciation adjustment but disallowed working capital adjustment due to lack of data. The DRP had previously allowed similar adjustments for AY 2013-14. The Tribunal reviewed precedents including Honda Motorcycle & Scooters India (P) Ltd. vs. ACIT and DCIT vs. Sumi Motherson Innovative Engineering Ltd., which supported depreciation adjustments where there were differences in depreciation rates. The Tribunal directed the TPO/AO to restore the depreciation adjustments on assets, reversing the DRP's findings.

2. Inclusion and Exclusion of Comparables:
The assessee contested the inclusion of Uniklinger Ltd. and Talbros Automotive Components Ltd. as comparables. Uniklinger Ltd. was argued to be functionally different as it did not deal in auto parts but in fluid control products. Talbros Automotive Components Ltd. was involved in diversified activities including IT services and was impacted by a joint venture, making it incomparable. The Tribunal agreed with the assessee, directing the exclusion of these companies from the comparables.

Regarding the exclusion of KMA Auto Components P. Ltd. and ANU Industries Ltd., the TPO had excluded these due to unavailability of annual reports. The DRP rejected them based on functional non-comparability. The Tribunal directed the TPO to re-examine these comparables with available data and decide afresh, ensuring functional comparability.

3. Working Capital Adjustment:
The assessee argued that the TPO/AO did not properly implement the DRP's directions for working capital adjustment and did not share the computation details. The Tribunal directed the TPO to provide the computation details to the assessee and ensure correct working capital adjustments, adhering to the principles of natural justice.

4. Allowability of R&D Cess as an Admissible Expense:
The assessee claimed R&D cess as an admissible expense, which was initially rejected by the AO. The DRP held that the cess on royalty is not penal and is admissible. The Tribunal directed the AO to follow the DRP's directions and allow the R&D cess as an admissible expense while computing the income.

Conclusion:
The appeal was partly allowed with specific directions to the TPO/AO to restore depreciation adjustments, re-examine comparables, correctly compute working capital adjustments, and allow R&D cess as an admissible expense. The Tribunal ensured adherence to legal precedents and principles of natural justice in its directives.

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