CPM accepted as best MAM; transfer prices at ALP; s.32(1)(iia) allows remaining 50% depreciation later; forex loss capitalized and depreciable

ITAT KOLKATA - AT held that CPM was the most appropriate MAM for the assessee's contract-manufacturing transactions and that the transfer prices were at ALP, dismissing the revenue's appeal on TP issues. On additional depreciation under s.32(1)(iia) the bench followed precedent and allowed the remaining 50% depreciation to be claimed in a subsequent year where assets were in use for less than 180 days. On foreign exchange loss, the AO's denial of immediate deduction was restored but the assessee was directed to capitalize the loss and claim depreciation thereon at the applicable rate.

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Issues Involved:
1. Deletion of arm's length price adjustment.
2. Consideration of Cost Plus Method (CPM) vs. Transactional Net Margin Method (TNMM).
3. Allowance of additional depreciation.
4. Disallowance of foreign currency loss.

Detailed Analysis:

1. Deletion of Arm's Length Price Adjustment:
The Revenue challenged the deletion of the arm's length price (ALP) adjustment of Rs. 12,06,40,000/- made by the Assessing Officer (AO)/Transfer Pricing Officer (TPO) on account of specified domestic transactions between the eligible unit and non-eligible unit of the assessee. The TPO had rejected the Cost Plus Method (CPM) followed by the assessee and adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for benchmarking. The TPO compared the net profit margin of the two units and proposed an ALP adjustment based on the profit margin variance.

2. Consideration of Cost Plus Method (CPM) vs. Transactional Net Margin Method (TNMM):
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the CPM as the MAM, noting that the TPO did not provide specific defects in the benchmarking exercise performed by the assessee. The CIT(A) observed that the goods supplied by the non-eligible unit to the eligible unit were semi-finished goods, and the valuation was in accordance with the Central Excise Valuation Rules, which was accepted as the arm's length price. The CIT(A) also noted that the units at Faridabad and Rudrapur were not comparable due to differences in technology, size of manufactured gears, and input costs. Consequently, the CIT(A) directed the deletion of the ALP adjustment and upheld the CPM as the MAM.

3. Allowance of Additional Depreciation:
The Revenue contested the CIT(A)'s decision to allow additional depreciation of Rs. 60,66,115/- under Section 32(1)(iia) of the Income Tax Act. The AO had disallowed the claim on the ground that the Finance Act, 2015, which allowed the remaining 50% of additional depreciation in the succeeding year, was effective from 01.04.2016 and not applicable for AY 2014-15. The CIT(A) allowed the claim, referencing the decision of the Coordinate Bench in M/s Birla Corporation Ltd. vs. DCIT, which held that the assessee is entitled to claim the remaining 50% of additional depreciation in the subsequent year if the asset was put to use for less than 180 days in the previous year.

4. Disallowance of Foreign Currency Loss:
The AO disallowed the foreign currency loss of Rs. 1,65,65,143/-, treating it as notional and contingent. The CIT(A) allowed the claim, stating that the loss was not due to direct forex exposure but was an arrangement by the bank, and thus not covered under Section 43A of the Act. The Tribunal, however, reversed the CIT(A)'s decision, concluding that the loss was indirectly incurred by the assessee and covered under Section 43A, which mandates capitalization of such losses. The Tribunal directed the AO to allow depreciation on the capitalized amount.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on the deletion of the ALP adjustment and the allowance of additional depreciation. However, it reversed the CIT(A)'s decision on the foreign currency loss, directing capitalization of the loss and allowance of depreciation. The appeals of the Revenue and cross-objections of the assessee were partly allowed for AY 2014-15, while the appeals for AY 2015-16 were dismissed.

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