2022 (8) TMI 1590 - AT - Income Tax

Remand to TPO for proper comparable selection, include customs duty in ELI, recalculate working-capital adjustments, AO to consider depreciation

M/s. Iljin Automotive Private Limited Versus The Deputy Commissioner of Income Tax (OSD), Corporate Circle -2 (2), Chennai

M/s. Iljin Automotive Private Limited Versus The Deputy Commissioner of Income Tax (OSD), Corporate Circle -2 (2), Chennai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Transfer Pricing Officer's use of multiple-year data (versus application of current-year data only under the applicable Rule) for determination of Arm's Length Price (ALP) is permissible. 2. Whether the set of comparables selected by the Transfer Pricing Officer are functionally and statistically comparable to the assessee for application of the Transactional Net Margin Method (TNMM), including challenges based on high Relative Profit Deviation (RPD) and inconsistent application of the Value-Added Expenditure (VAE) and entity-level filters. 3. Whether working capital adjustments and treatment of foreign exchange (forex) loss (operating expense versus non-operating) ought to be allowed for adjustment in the transfer pricing computation. 4. Whether customs duty adjustments should be made to eliminate distortion in profit margins between the assessee and comparables. 5. Whether additional depreciation not claimed in the return should be considered in the corporate tax computation by the assessing authority. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality of using multiple-year data instead of current-year data for determining ALP Legal framework: The relevant Tax Rules (Rule 10B(4) as applied by the authorities) set out methodology and data considerations for determining ALP under TNMM; the TPO relied on an approach requiring current-year data. Precedent treatment: The Tribunal has considered consistency with governing rules and has in coordinates bench orders remitted matters when procedural or methodological departures required further verification. Interpretation and reasoning: The Tribunal noted the TPO's contention that the assessee had not demonstrated that earlier years' data would influence transfer pricing determination. The Tribunal, however, did not uphold a blanket prohibition on consideration of non-current-year data; rather, it remitted the matter to the TPO for further adjudication and verification where additional evidence was available in the paper-book. The Tribunal directed the TPO to reassess using appropriate filters and verifications, implicitly recognising that multi-year data may be relevant if justified and documented. Ratio vs. Obiter: Ratio - remittal establishes that adherence to the Rule requires evidentiary assessment; use of multiple years is not per se impermissible where proper justification exists and verification is possible. Conclusion: Matter remitted to the TPO for further adjudication and verification regarding data-year selection and appropriate application of rules and filters; current-year data requirement needs to be applied consistent with evidence and the governing Rule. Issue 2: Acceptability of selected comparables (functional comparability, RPD, VAE/entity filters) Legal framework: TNMM requires functional comparability and appropriate application of filters (including VAE and entity-level filters); comparables with significant functional or product differences and high RPD may be excluded. Precedent treatment: The Tribunal referred to coordinate-bench guidance directing remand where comparability filters and entity-level adjustments were not applied or documented sufficiently; jurisdictional bench precedents have been followed where comparable selection lacked fit with assessee's functions. Interpretation and reasoning: The assessee challenged several comparables on grounds of functional mismatch (product mix, revenue contribution patterns) and high RPD (e.g., one company showing RPD ~24%). The Tribunal acknowledged the assessee's contentions about inconsistent application of filters (VAE, entity-level) and the need for comparables to be fit for the assessee's style of work. The Tribunal directed remand to the TPO to apply proper entity-level filters, re-examine working capital and other adjustments, and verify documentation. The Tribunal also noted that some comparables had been consistently selected previously, but inconsistencies in approach across years required rectification by the TPO. Ratio vs. Obiter: Ratio - where comparables are challenged on functional grounds and statistical outliers (high RPD), the TPO must re-apply appropriate filters and adjustments, with findings supported by verification; selection must be consistent and fit for the assessee's functional profile. Conclusion: The Tribunal set aside comparable-related findings and remitted the issue to the TPO for fresh consideration, application of proper filters (including VAE/entity-level), verification of documentation, and recalculation as necessary. Issue 3: Working capital adjustment and classification of foreign exchange loss Legal framework: Transfer pricing adjustments may include working capital adjustments to align profitability of comparables and tested party; classification of forex loss (operating v. non-operating) affects whether such amounts enter operating expenses for margin computation. Precedent treatment: Coordinate bench decisions have remitted working capital issues for detailed verification and allowed adjustments where indices and documentary support justify them; treatment of forex loss requires ascertainment of nature and utilization documentation. Interpretation and reasoning: The assessee claimed working capital and forex loss adjustments, submitting workings and documentation in the paper-book. The DRP rejected the forex loss claim for lack of documentary support as to nature and utilization. The Tribunal found it was unable on record to verify working capital adjustments or classify forex loss conclusively and therefore remitted both to the TPO for proper verification, application of indices proposed by the assessee, and adjudication on documentary evidence. Ratio vs. Obiter: Ratio - working capital and forex loss claims cannot be denied without proper verification; the TPO must examine indices and documentary evidence and make reasoned findings on classification and adjustment applicability. Conclusion: Remand to the TPO to verify documents, consider the assessee's indices for working capital adjustment, and determine whether forex loss is operating in nature for transfer pricing computation. Issue 4: Customs duty adjustment in computation of profit margins Legal framework: Adjustments for customs duty may be made to eliminate the impact of differential duty incidence between the tested party and comparables when assessing ALP under TNMM, subject to justification and evidence. Precedent treatment: Jurisdictional Tribunal precedent had rejected customs-duty adjustments in particular factual settings; however, Tribunal practice supports allowing such adjustments if supported by proper verification. Interpretation and reasoning: The TPO had rejected the assessee's customs duty adjustment, relying on a jurisdictional bench decision and on the finding that the assessee's gross profit indicated absorption of material costs (including BCD) in sale price and that increased imports were not shown to arise from extraordinary circumstances. The Tribunal, after hearing rival submissions, directed the TPO to adjust customs duty during computation of estimated arm's length indicator (ELI), but only subject to proper verification of documents. Ratio vs. Obiter: Ratio - customs duty adjustment can be allowed where documentary verification supports its impact on comparability; mere reliance on precedent rejecting such adjustments is not conclusive if supporting documentation exists. Conclusion: Directed adjustment of customs duty in computation of ELI, contingent on the TPO's verification of supporting documents and factual justification. Issue 5: Allowability of additional depreciation not claimed in return (corporate tax computation) Legal framework: Tax computation adjustments (e.g., additional depreciation) depend on claims made in return and on evidence before the assessing authority; assessing officer's reassessment/review must consider claim and supporting documents. Precedent treatment: The Tribunal routinely requires that claims not properly presented before the assessing authority be considered on remand where arguable and supported by evidence. Interpretation and reasoning: The assessee raised the allowability of additional depreciation which was not claimed in the return; the Tribunal observed that the issue was not properly agitated before the Bench and therefore remitted the matter to the Assessing Officer for consideration. Ratio vs. Obiter: Ratio - where a substantive deduction was not claimed in the return and not fully agitated before the Tribunal, the matter should be sent back to the Assessing Officer for consideration with opportunity to examine supporting material. Conclusion: Matter remitted to the Assessing Officer for consideration of additional depreciation in the corporate tax computation. Overall Disposition The Tribunal allowed the appeals for statistical purposes in part by setting aside transfer pricing and related findings and remanding issues (comparables selection, multi-year data use, working capital and forex loss adjustments, customs duty adjustment, and additional depreciation) to the TPO/Assessing Officer for verification and fresh adjudication consistent with the directions above.