Tribunal directs AO to verify transfer pricing, treat mould expenditure as revenue. Decision on 13.12.2019.

The Tribunal partly allowed the appeal, directing the AO/TPO to verify the transfer pricing adjustment issue and treat the expenditure on moulds as revenue expenditure. The decision was pronounced on 13.12.2019.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Moulds as Revenue Expenditure
3. Penalty Proceedings

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee filed its return for the assessment year 2011-12, declaring a loss. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions. The TPO noted that the assessee had undertaken international transactions with its associated enterprises (AEs) and selected six comparables with an adjusted margin of (-) 6.53% after considering capacity utilization of 51.29%. However, the TPO retained four comparables and included two new ones, arriving at a profit margin of 8.18%, proposing an adjustment of Rs. 92,05,523/-.

The CIT(A) confirmed the TP adjustment, rejecting the assessee's argument for capacity utilization adjustment due to the non-availability of data for 50% of the comparables. The Tribunal, however, found merit in the assessee's argument for capacity utilization adjustment, noting that the assessee operated at 51.29% of its installed capacity. The Tribunal restored the issue to the AO/TPO for verification and directed them to grant capacity utilization adjustment after giving the assessee an opportunity to substantiate its claim.

2. Disallowance of Moulds as Revenue Expenditure:
The assessee incurred an expenditure of Rs. 97,36,932/- on moulds, treating it as revenue expenditure. The Assessing Officer, however, considered it as capital expenditure and allowed depreciation on the same, which was upheld by the CIT(A). The CIT(A) rejected the Chartered Engineer’s certificate provided by the assessee, stating that it was issued four years after the end of the financial year and did not certify the quality of the moulds during the relevant period.

The Tribunal found merit in the assessee's argument that the expenditure on moulds is revenue in nature, as they have a short life and need to be replaced frequently. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT, which held that expenditure facilitating trading operations without adding to the fixed capital is revenue expenditure. The Tribunal also cited the Delhi High Court's decision in CIT vs. Sunbeam Auto Ltd., which allowed expenditure on replacing moulds and dies as revenue expenditure. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to treat the expenditure on moulds as revenue expenditure.

3. Penalty Proceedings:
The Tribunal dismissed the ground of appeal regarding the initiation of penalty proceedings under section 271(1)(c) of the Act as premature at this juncture.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with the Tribunal restoring the issue of transfer pricing adjustment to the AO/TPO for verification and directing the AO to treat the expenditure on moulds as revenue expenditure. The decision was pronounced in the open court on 13.12.2019.

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