Transfer pricing comparables and depreciation allocation rules clarified for regulated entities and common assets in mixed-unit operations.

An ITAT Ahmedabad discussion on transfer pricing held that a Government undertaking with regulated pricing, abnormally high profits and related party transactions above the permissible threshold may be excluded from comparables; on that basis, the transfer pricing adjustment was deleted because the remaining comparables fell within the assessee's margin range. On depreciation, the note states that plant and machinery must be treated unit-wise, while common assets used by both units, including office equipment, furniture, vehicles and related software, may be apportioned on a turnover basis. Separate asset registers alone do not prevent such allocation where the assets serve both units.

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Issues: (i) Whether Certification Engineers International Ltd. was a valid comparable for transfer pricing benchmarking and whether the addition made on account of transfer pricing adjustment was liable to be deleted; (ii) whether depreciation relating to common assets of two units, one eligible for exemption under section 10A, was to be allocated on the basis of turnover.

Issue (i): Whether Certification Engineers International Ltd. was a valid comparable for transfer pricing benchmarking and whether the addition made on account of transfer pricing adjustment was liable to be deleted.

Analysis: The comparable had abnormally high profit, was a Government undertaking with regulated pricing, and had related party transactions exceeding the permissible threshold. These factors affected comparability and supported exclusion from the set of comparables. Once excluded, the average margin of comparables came within the assessee's margin range.

Conclusion: The comparable was rightly excluded and the transfer pricing adjustment was correctly deleted in favour of the assessee.

Issue (ii): Whether depreciation relating to common assets of two units, one eligible for exemption under section 10A, was to be allocated on the basis of turnover.

Analysis: Depreciation on plant and machinery was to be considered unit-wise, but common assets such as office equipment, furniture, vehicles, and related computer software used for both units could be allocated on a turnover basis. Separate asset registers did not by themselves displace such allocation where the assets served both units.

Conclusion: The depreciation allocation was upheld in part, with unit-wise treatment for plant and machinery and turnover-based allocation for common assets.

Final Conclusion: The transfer pricing addition was deleted, and the depreciation issue was remitted for reworking in accordance with the stated allocation principles, leaving the assessee substantially successful overall.

Ratio Decidendi: A company with abnormally high profits, regulated pricing, and substantial related party transactions may be excluded as a comparable in transfer pricing analysis; common assets used by multiple units may be apportioned on a reasonable basis such as turnover, while directly identifiable plant and machinery must be treated unit-wise.

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