Majority upholds most transfer pricing adjustments, remits TP issues for de novo reconsideration; persistent-loss entity invalid comparable; verify s.40(a)

ITAT BANGALORE largely upheld the transfer-pricing adjustments but remitted multiple issues to the AO/TPO for de novo consideration. The bench held a persistent-loss entity is not a valid comparable and sustained lower authorities' view. Remittals: operating-margin computation (specific non-operating items), customs-duty and Thai-flood extra-cost adjustments, royalty/section-40(a) verification, price-reduction relief sequencing, capacity-underutilization and supporting data, and certain working-capital, cash-PLI/depreciation and employee-benefit provision matters. TP adjustments were confined to related-party transactions; no separate royalty adjustment where TNMM applied at entity level. Miscellaneous expenses partly allowed (30%); ensure no double benefit for depreciation.

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Issues Involved:
1. Transfer Pricing Adjustments
2. Computation of Arm's Length Price (ALP)
3. Royalty Adjustments
4. Corporate Tax Adjustments
5. Miscellaneous Expenses
6. Interest Levied under Section 234B and 234D

Detailed Analysis:

1. Transfer Pricing Adjustments:

- Ground No.4a - Rejection of Hindustan Motors Ltd:
The Tribunal considered whether Hindustan Motors Ltd. should be included as a comparable company. The assessee argued that Hindustan Motors Ltd. manufactures various cars similar to the assessee's products and should not be excluded solely because it is a loss-making company. The Tribunal found that Hindustan Motors Ltd. is functionally comparable but noted its persistent losses and declining net worth, ultimately upholding its exclusion as a comparable.

- Ground No.4b - Margin Computation of the Appellant:
The Tribunal addressed the inclusion/exclusion of specific income and expenses in the operating margin computation. It directed the AO to reconsider the treatment of interest received, liabilities/provisions written back, claims received from insurance companies, miscellaneous income, and interest paid, based on precedents and the nature of these items.

- Ground No.5 - Custom Duty Adjustment:
The Tribunal remitted the issue of custom duty adjustment back to the AO/TPO, directing them to ascertain whether the custom duty rates paid by the assessee were higher than those paid by comparable companies. If proven, the adjustment should be granted.

- Ground No.6 - Adjustments for Abnormal Expenditure and Working Capital:
The Tribunal remitted the issue of abnormal expenditure due to Thai floods back to the TPO for fresh consideration, directing the assessee to provide necessary documentation. It also upheld the entitlement to working capital adjustments, directing the AO/TPO to grant them based on detailed submissions.

- Ground No.7 - Cash PLI/Depreciation Adjustment:
The Tribunal directed the AO/TPO to compute adjustments in line with previous decisions, allowing depreciation adjustments or cash PLI as appropriate.

- Ground No.8 - TP Adjustment Restriction to AE Transactions:
The Tribunal upheld that TP adjustments should be restricted to AE transactions, following precedents in the assessee's own case and other judicial pronouncements.

2. Computation of Arm's Length Price (ALP):

- The Tribunal addressed various aspects of ALP computation, including the selection of comparables, the treatment of specific income and expenses, and the application of adjustments for custom duty, abnormal expenditures, and working capital. It directed the AO/TPO to follow detailed guidelines and precedents to ensure accurate and fair ALP computation.

3. Royalty Adjustments:

- Grounds No.8 to 15 - Royalty Adjustment:
The Tribunal found that once the net profit margin is tested and found at arm's length, separate adjustments for royalty payments are not required. It directed the AO/TPO to delete adjustments proposed for royalty as a separate international transaction, following precedents in the assessee's own case and other relevant decisions.

4. Corporate Tax Adjustments:

- Ground No.16 - Provision for Employee Long Term Service Benefit:
The Tribunal remitted the issue back to the AO to verify the scientific basis of the provision for employee long-term service benefits, directing the assessee to provide necessary documentation.

- Ground No.17 - Excess Depreciation:
The Tribunal upheld the disallowance of excess depreciation claimed on provisional assets, noting the lack of clear ownership transfer and the absence of a scientific method for creating provisions.

- Ground No.18 - Double Disallowance of Royalty:
The Tribunal remitted the issue back to the AO for verification, directing the assessee to produce the ITAT order for AY 2011-12 to substantiate the claim that no separate adjustment for royalty was made under section 92CA.

5. Miscellaneous Expenses:

- Ground No.19 - Price Reduction of Purchases:
The Tribunal upheld the addition made by the AO, noting that the income from price reduction was certain and should have been recognized in the relevant assessment year. It directed the AO to ensure no double taxation occurs.

6. Interest Levied under Section 234B and 234D:

- The Tribunal noted that interest levied under sections 234B and 234D is consequential in nature and directed the AO to recompute interest based on the revised assessments.

Conclusion:
The Tribunal provided detailed directions on various transfer pricing and corporate tax issues, remitting several matters back to the AO/TPO for fresh consideration and verification. It emphasized the need for accurate and fair adjustments based on reliable data and judicial precedents. The appeals were partly allowed for statistical purposes, with specific directions to ensure compliance with established legal principles.

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