High Court emphasizes functional similarity over high turnover in transfer pricing; allows additional depreciation claim

The High Court set aside the order regarding the exclusion of two comparables in transfer pricing, emphasizing that functional similarity should be the determining factor, not just high turnover. The Court allowed the additional depreciation claim, stating that unless a clear disconnect between purchased items and their use in manufacturing is established, they qualify as plant equipment. The appeal was partly allowed, remitting the matter for re-consideration by the ITAT specifically on the exclusion of comparables in the transfer pricing analysis.

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Issues:
1. Exclusion of two comparables in transfer pricing.
2. Ground of additional depreciation amounting to Rs. 19,45,902.

Analysis:

Issue 1: Exclusion of comparables in transfer pricing
The Revenue raised concerns regarding the exclusion of two comparables, M/s Bharat Earth Movers Ltd. and M/s Telco Construction Equipment Co., in the transfer pricing analysis. The ITAT had excluded these companies due to their unusually high turnover. However, the High Court found the ITAT's reasoning untenable based on the precedent set in Chryscapital Investment Advisors (India) Pvt. Ltd. vs. Deputy Commissioner of Income Tax. The Court emphasized that high turnover alone cannot justify exclusion; instead, functional similarity should be the determining factor. Consequently, the Court set aside the impugned order on this issue, stating that the matter requires further examination.

Issue 2: Additional depreciation claim
Regarding the ground of additional depreciation amounting to Rs. 19,45,902, the Revenue contended that the items purchased did not qualify as equipment. The ITAT, relying on a previous order, granted the depreciation claim, considering the assessee's involvement in manufacturing equipment for the construction industry. The Court noted that unless a clear disconnect between the purchased items and their use in manufacturing activities is established, the Revenue cannot dispute their classification as plant equipment. Consequently, the Court held that no legal question arises on this aspect.

In conclusion, the appeal was partly allowed, and the matter was remitted for re-consideration by the ITAT specifically on the issue of excluding comparables in the transfer pricing analysis. The Court clarified that the decision does not impact the pending miscellaneous application seeking rectification regarding working capital adjustment, which will be independently addressed by the ITAT.

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