2022 (3) TMI 649 - AT - Income Tax

Appeal partly allowed with directions for re-adjudication emphasizing legal precedents and natural justice

Nalco Water India Ltd. Versus Asstt. CIT, Cir. 2 Pune

The appeal was partly allowed for statistical purposes, with specific directions given for re-adjudication on certain issues. The Tribunal emphasized ... Depreciation on plant and machinery - AO pursuant to the directions of D.R.P. has disallowed depreciation on plant and machinery on the ground that the plant and machinery were installed at customer's premises and hence were not 'put to use' in the business of the assessee - HELD THAT:- The issue of depreciation on assets installed at customer's premises, was decided in favour of the assessee by the Kolkata Bench of Tribunal in assessee's own case for A.Y. 2008-09 [2017 (4) TMI 446 - ITAT KOLKATA] wherein as held installation of equipments in the client's premises of assessee's equipments was necessary and part and parcel of nature of business carried on by the assessee. It cannot therefore be said that the equipments in question had not been used for the purpose of the business of the assessee. The fact that the equipments were used in the business premises of the clients cannot be the basis to disallow the claim of the assessee for deduction on account of depreciation. - Decided in favour of assessee. TP adjustments should be restricted to the value of the international transactions only. See NALCO WATER INDIA LIMITED[2019 (9) TMI 609 - ITAT PUNE] Erroneous computation of transfer pricing adjustment in the manufacturing segment - Selection of comparable - HELD THAT:- Neither the assessee nor the T.P.O. applied any such filter at the time of the Transfer pricing study or the TP assessment. The selection of 18 comparables by the TPO is without any such filter. We appreciate that there is a marked difference in the profit earned from export and domestic sales of similar goods because of foreign market conditions and export incentives allowed by the Government of India. In such a scenario, some sort of export to sales filter is warranted. There is no foundation for the assessee seeking 15% filter of export sales to total sales of the segment. In fact, there is no statutory mandate of any specified percentage. Giving due importance to this filter in the facts and circumstances of the extant case, we are of the considered opinion that filter of 25% of export sales to sales of the segment will be in order. We order accordingly. Our view is fortified by the judicially accepted related party transactions (RPT) filter of 25% in several cases. Both the sides agreed to such a filter during the course of hearing. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO to undertake the selection of comparables afresh in the light of the above filter and re-adjudicate the issue as per law after complying with the principles of natural justice. Therefore, ground No. 4 is allowed for statistical purposes. Erroneous determination of A.L.P. of intra-group service fee as NIL - HELD THAT:- As decided in own case [2016 (3) TMI 639 - ITAT KOLKATA]We are of the view that the first ground for confirming disallowance by CIT (A) that no independent documentary evidence had been furnished by assessee to show that the fact of actual services having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence, has no leg to stand. Benefit of +/-3% range as per the proviso to sec. 92C(2) of the Act should be granted while calculating the transfer pricing adjustments, if any. Levy of interest u/s. 234A and 234B of the Act on account of unanticipated transfer pricing adjustment made by the TPO and disallowance made by the A.O - HELD THAT:- At the time of hearing, the learned counsel for the assessee fairly submitted that this issue may be remanded to the file of the A.O/TPO for verification and then re-adjudicate as per law. The learned D.R. conceded to the submissions of the assessee. Having heard the parties, in the interest of justice, we remand this issue to the file of the A.O/T.P.O. for re-adjudication as per law while complying with the principles of natural justice. Issues Involved:1. General objection to the order.2. Disallowance of depreciation on plant and machinery.3. Restriction of transfer pricing adjustment to international transactions.4. Transfer pricing adjustment in the manufacturing segment.5. Determination of arm's length price of intra-group service fee.6. Rejection of multiple year data of comparable companies.7. Application of +/- 3% range for transfer pricing adjustment.8. Levying of interest under Sections 234A and 234B.9. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. General Objection:The appellant's general objection to the order was noted but not adjudicated as it was deemed general in nature and not requiring specific adjudication.2. Disallowance of Depreciation on Plant and Machinery:The appellant contended that the AO, following the DRP's directions, erroneously disallowed depreciation of Rs. 1,75,34,827 on plant and machinery installed at customer premises. The appellant argued that the machinery was used for its business, referencing the Supreme Court ruling in ICDS Ltd. vs. CIT, which supports depreciation claims even if assets are used by lessees. The AO disallowed the claim citing consistency with previous years' decisions. The DRP upheld this disallowance. However, the Tribunal noted that in the appellant's own case for AY 2012-13, a similar issue was decided in favor of the appellant by the Kolkata Bench of the Tribunal, which allowed the depreciation claim. Respectfully following this precedent, the Tribunal allowed the appellant's claim for depreciation.3. Restriction of Transfer Pricing Adjustment:The appellant argued that transfer pricing adjustments should be restricted to the value of international transactions only. This issue was previously settled in favor of the appellant by the Supreme Court in CIT Vs. Hindustan Unilever Ltd. and the Bombay High Court in CIT Vs. Firestone International P. Ltd., which held that benchmarking should apply only to associated enterprises' transactions. The Tribunal directed the AO to restrict the transfer pricing adjustment accordingly.4. Transfer Pricing Adjustment in the Manufacturing Segment:The appellant challenged the erroneous computation of transfer pricing adjustment of Rs. 14,22,50,192 in the manufacturing segment, particularly disputing the selection of comparable companies. The DRP rejected the appellant's request for applying a forex earnings to sales filter. The Tribunal, however, found merit in applying some export to sales filter due to differences in profit from export and domestic sales. The Tribunal ordered a filter of 25% export sales to segment sales and remitted the matter to the AO/TPO for re-adjudication with this filter.5. Determination of Arm's Length Price of Intra-Group Service Fee:The appellant contested the determination of the arm's length price of intra-group service fee as NIL. The TPO and DRP held that the appellant failed to prove tangible benefits from the services received and that the documentation was generic. The Tribunal, referencing previous decisions including the appellant's own case for AY 2003-04 and AY 2004-05, held that the TPO's determination of NIL value without applying any prescribed methods was unsustainable. The Tribunal allowed the appellant's claim, noting that the appellant had provided substantial evidence of services received and benefits derived.6. Rejection of Multiple Year Data:The appellant's ground regarding the use of multiple year data was dismissed, following the precedent set in the appellant's own case for AY 2012-13, where the Tribunal had rejected this ground.7. Application of +/- 3% Range:The appellant requested the benefit of a +/- 3% range while calculating transfer pricing adjustments. This ground was also dismissed, following the Tribunal's decision in the appellant's case for AY 2012-13.8. Levying of Interest:The appellant contested the levy of interest under Sections 234A and 234B due to unanticipated transfer pricing adjustments. The Tribunal remanded this issue to the AO/TPO for verification and re-adjudication as per law, complying with principles of natural justice.9. Initiation of Penalty Proceedings:The appellant's ground regarding the initiation of penalty proceedings under Section 271(1)(c) was deemed premature and dismissed.Conclusion:The appeal was partly allowed for statistical purposes, with specific directions given for re-adjudication on certain issues. The Tribunal's decision emphasized adherence to legal precedents and principles of natural justice. The order was pronounced on March 2, 2022.