Tribunal upholds transfer pricing adjustments, disallows patent costs, remands receipt inclusion issue

The Tribunal partly allowed the appeal, upholding the TPO's and DRP's decisions on several issues, including transfer pricing adjustments in the Connector and Tooling Divisions, and disallowance of patent costs. The Tribunal allowed additional depreciation but remanded the issue of including certain receipts in operating profits for fresh consideration. The Stay Petition was dismissed as infructuous.

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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.

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