ITAT directs re-examination on ALP and adherence to natural justice principles

The ITAT partly allowed the appeal, directing a re-examination and factual verification on several issues. The ITAT emphasized adherence to principles of natural justice and proper benchmarking methods for determining the ALP of international transactions. The matter was remanded to the DRP for fresh determination of the ALP regarding the adjustment on account of capital goods purchased from AE, emphasizing the lack of opportunity given to the assessee and the absence of evidence. The AO was instructed to re-examine the allowability and relevant year of liquidated damages and to verify the factual basis for disallowance of interest on a foreign term loan. The ITAT also directed the submission of a reconciliation statement to address a revenue discrepancy in Form 26AS and rectification of the oversight in considering the order under section 154 reducing the TP addition.

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Issues Involved:
1. Adjustment on account of capital goods purchased from AE.
2. Disallowance of liquidated damages.
3. Disallowance of interest on foreign term loan.
4. Addition based on revenue discrepancy in Form 26AS.
5. Consideration of order u/s 154 reducing TP addition.

Detailed Analysis:

1. Adjustment on Account of Capital Goods Purchased from AE:
The primary issue raised by the assessee pertains to the adjustment made by the AO regarding the purchase of capital goods from AE, amounting to Rs. 48,01,62,130/-. The AO disallowed Rs. 3,84,12,970/- being the 8% markup on the capital goods and also disallowed depreciation of Rs. 57,61,945/-, totaling an adjustment of Rs. 4,41,74,915/-. The assessee argued that the purchase of capital goods cannot be benchmarked separately and that the depreciation forms a component of operating cost. The DRP upheld the AO's decision, stating that the purchase of capital goods constitutes a separate international transaction and needs to be benchmarked separately. The DRP noted the absence of evidence from the assessee to substantiate the purchases and the markup. The ITAT, referencing the case of Honda Motorcycle & Scooters India Pvt. Ltd., held that each international transaction can be benchmarked separately. Due to the lack of opportunity given to the assessee and the absence of evidence, the matter was remanded to the DRP for a fresh determination of the ALP after giving the assessee an opportunity to present its case.

2. Disallowance of Liquidated Damages:
The AO disallowed liquidated damages incurred by the assessee due to breach of contractual arrangements. The DRP confirmed the disallowance on the grounds that the liquidated damages did not pertain to the relevant year. The ITAT referred to its decision in the assessee's own case for AY 2014-15, where similar issues were remanded for fresh examination. Consequently, the AO was directed to re-examine the allowability and the relevant year of the expenses.

3. Disallowance of Interest on Foreign Term Loan:
The AO disallowed Rs. 13,57,00,000/- as interest on foreign term loan due to non-deduction of TDS by the assessee. The assessee contended that only Rs. 5,06,995/- had accrued. The DRP referred the matter to the AO for factual verification. The ITAT declined to interfere with the DRP's order, emphasizing the need for factual verification.

4. Addition Based on Revenue Discrepancy in Form 26AS:
The AO added Rs. 3,33,65,030/- to the income of the assessee due to a discrepancy between the revenue as per the books of accounts (Rs. 2,39,74,386/-) and Form 26AS (Rs. 5,73,39,416/-). The ITAT directed the assessee to submit a reconciliation statement and the accounting principles used to address the discrepancy.

5. Consideration of Order u/s 154 Reducing TP Addition:
The AO failed to consider the order u/s 154 passed by the TPO on 26.03.2021, which reduced the TP addition. The ITAT directed the AO to rectify this oversight.

Conclusion:
The appeal of the assessee was partly allowed, with specific directions for re-examination and factual verification on various issues. The ITAT emphasized adherence to principles of natural justice and proper benchmarking methods for determining the ALP of international transactions.

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