2020 (1) TMI 1008 - AT - Income Tax

ITAT Orders Fresh Review: Focus on Benchmarking, ALP Adjustments, and Section 10B Deduction for Chennai Unit.

M/s. Tyco Valves & Controls (I) P. Ltd. Versus The DCIT, Circle-4, Baroda

M/s. Tyco Valves & Controls (I) P. Ltd. Versus The DCIT, Circle-4, Baroda - TMI Issues Involved:1. Adjustment in relation to Arm's Length Price (ALP) for international transactions.2. Deduction under section 10B of the Act.3. Addition of fully depreciated assets costing less than Rs. 5,000.4. Exclusion of management fee while computing margins of Baroda unit.Detailed Analysis:1. Adjustment in Relation to ALP for International Transactions:1.1 Manufacturing of Valves:- The assessee contested the ALP adjustment of Rs. 2,20,69,862 for manufacturing valves transactions with its AE.- The TPO rejected the assessee's comparables and conducted a fresh search, determining a higher PLI for the Baroda and Chennai units.- The DRP upheld the TPO's approach but excluded Asco Pneumatics from the comparables, directing recomputation of the adjustment.- The ITAT remitted the issue to the AO for fresh adjudication, considering the inclusion of KAR Mobiles as a comparable and allowing proportionate adjustment for management expenses.1.2 Engineering Design Services:- The assessee provided engineering design services to its AE without markup but declared a markup of 11.15% on cost.- The TPO proposed a higher PLI of 23.18% using different comparables, leading to an addition of Rs. 1,96,07,699.- The DRP excluded Power Soft Global Solution from comparables but upheld the inclusion of Rolta India Ltd.- The ITAT directed the TPO to recompute the margin for Ace Software and excluded Rolta India Ltd. from comparables due to consolidated financial statements, rejecting the inclusion of Geometric Software Solution.1.3 Reimbursement of Management Fee Expenses:- The TPO disallowed Rs. 1,25,56,602 for lack of invoices and Rs. 10,40,197 for earlier year invoices, and made an ad hoc disallowance of Rs. 64,76,711.- The DRP upheld the TPO's disallowance.- The ITAT confirmed the disallowance for lack of invoices but deleted the ad hoc disallowance, stating the TPO has no power to make ad hoc disallowances.1.4 Denial of +/- 5% Range Benefit:- The AO denied the benefit under proviso to Section 92C(2) as the price claimed by the assessee was above the 5% range.- The DRP upheld the AO's decision, and the ITAT found no reason to interfere, dismissing the assessee's ground.2. Deduction Under Section 10B:2.1 Chennai Unit's Manufacturing Activity:- The AO denied the deduction under section 10B, claiming the Chennai unit used more than 20% old machinery and had an outright purchase of machinery, not a lease.- The DRP upheld the AO's decision.- The ITAT referred to its previous decision allowing the deduction, confirming the Chennai unit's eligibility and directing the AO to allow the deduction.3. Addition of Fully Depreciated Assets Costing Less Than Rs. 5,000:3.1 Depreciation Claim:- The AO disallowed Rs. 79,684 for claiming full depreciation on assets costing less than Rs. 5,000.- The DRP directed the AO to verify and allow the claim if the assets were capitalized and depreciated as per law.- The ITAT upheld the DRP's direction for necessary verification, dismissing the assessee's ground.4. Exclusion of Management Fee While Computing Margins of Baroda Unit:4.1 Double Taxation of Management Fee:- The assessee raised an additional ground to exclude the management fee from the profit level indicator of the Baroda unit to avoid double taxation.- The ITAT directed the TPO/AO to decide the issue in light of the above discussion and as per the provisions of law.Conclusion:The ITAT provided detailed directions for fresh adjudication on several issues, emphasizing the need for proper benchmarking and verification of claims, while upholding certain disallowances and deductions based on established legal principles and previous rulings.