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Issues: (i) Whether internal TNMM or CUP was the most appropriate method for benchmarking the sale of finished goods to associated enterprises, and whether transfer pricing adjustments made on CUP basis were justified; (ii) whether the adjustment for availing sales promotion and marketing services from associated enterprises was sustainable; (iii) whether additional depreciation was allowable on replacement of spares and parts and on tanks; (iv) whether prior period expenses could be added back while computing book profit under section 115JB; (v) whether interest on capital work in progress could be capitalised in the absence of a proved nexus between borrowed funds and fixed assets; and (vi) whether weighted deduction under section 35(2AB) could be restricted merely because the DSIR Form 3CL did not quantify the expenditure.
Issue (i): Whether internal TNMM or CUP was the most appropriate method for benchmarking the sale of finished goods to associated enterprises, and whether transfer pricing adjustments made on CUP basis were justified.
Analysis: The transactions for the year were held to be identical to those in the assessee's earlier years, where the Tribunal had accepted internal TNMM and rejected CUP because the AE and non-AE transactions differed materially in contractual terms, economic circumstances, volumes, payment terms, functional profile, and related adjustments. The availability of internal comparables did not by itself make CUP reliable, and the principle of consistency required following the earlier binding view, which had also been affirmed in the assessee's case by the High Court.
Conclusion: Internal TNMM was correctly accepted as the most appropriate method, and the CUP-based transfer pricing adjustment was rightly deleted.
Issue (ii): Whether the adjustment for availing sales promotion and marketing services from associated enterprises was sustainable.
Analysis: The issue was covered by the Tribunal's earlier decisions in the assessee's own case, where the services were accepted as evidenced and the arm's length nature of the payment had been upheld. No distinguishing material for the year under appeal was shown, and the Revenue did not produce any contrary binding decision or demonstrate any infirmity in the earlier reasoning.
Conclusion: The deletion of the adjustment for sales promotion and marketing services was upheld.
Issue (iii): Whether additional depreciation was allowable on replacement of spares and parts and on tanks.
Analysis: Additional depreciation is available only on new plant and machinery acquired during the year. Replacement of spares and parts of existing machinery does not amount to acquisition of new plant and machinery, so the allowance granted on that basis was not justified. For the tanks, however, the materials showed that they formed part of the plant and machinery used for storage of hazardous materials, and the normal depreciation treatment supported their character as eligible machinery.
Conclusion: Additional depreciation on replacement of spares and parts was disallowed, but additional depreciation on tanks was allowed.
Issue (iv): Whether prior period expenses could be added back while computing book profit under section 115JB.
Analysis: Prior period expenses are not one of the permitted adjustments under the Explanation to section 115JB. In the absence of a statutory provision permitting such adjustment, the addition made while computing book profit was not sustainable.
Conclusion: The addition of prior period expenses while computing book profit under section 115JB was rightly deleted.
Issue (v): Whether interest on capital work in progress could be capitalised in the absence of a proved nexus between borrowed funds and fixed assets.
Analysis: The Assessing Officer proceeded on presumption that the ECB borrowings were used for capital purposes, but no nexus between the borrowed funds and the capital assets under construction was established. In the absence of such linkage, interest capitalisation could not be sustained.
Conclusion: The deletion of the interest capitalisation addition was upheld.
Issue (vi): Whether weighted deduction under section 35(2AB) could be restricted merely because the DSIR Form 3CL did not quantify the expenditure.
Analysis: For the relevant year, the statutory requirement of DSIR quantification had not yet been introduced as a condition for allowance of deduction. The disallowance was therefore made on an inapplicable basis.
Conclusion: The assessee's claim under section 35(2AB) was rightly allowed.
Final Conclusion: The Revenue succeeded only on the limited question of additional depreciation on replacement of spares and parts, while the transfer pricing deletions, the marketing services deletion, the book-profit adjustment, the interest-capitalisation deletion, the tanks-related depreciation, and the deduction under section 35(2AB) were sustained.
Ratio Decidendi: Where AE and non-AE transactions differ materially in economically relevant factors and reliable adjustments are not possible, internal TNMM may be the most appropriate method over CUP; and book-profit computation under section 115JB cannot include adjustments not expressly authorised by the statute.
Transfer pricing and depreciation principles: internal TNMM upheld, CUP rejected, and statutory book-profit adjustments limited by the text
Internal TNMM was accepted over CUP for benchmarking finished-goods sales to associated enterprises because the AE and non-AE transactions differed materially in contractual terms, economic circumstances, volumes, payment terms and functions; the CUP adjustment was deleted. Sales promotion and marketing services from AEs were held to be evidenced and at arm's length, so the adjustment was deleted. Additional depreciation was denied on replacement spares and parts because this was not acquisition of new plant and machinery, but allowed on tanks as part of eligible plant. Prior period expenses were not an authorised adjustment under section 115JB, so the book-profit addition was deleted. Interest on capital work in progress could not be capitalised without a proved nexus between borrowings and fixed assets. Weighted deduction under section 35(2AB) could not be restricted merely because Form 3CL did not quantify expenditure for that year.
Transfer pricing methodology for sale of finished goods to associated enterprises - Arm's length price of sales promotion and marketing services from associated enterprises - Additional depreciation on new plant and machinery - Book profit adjustment for prior period expenses - Capitalisation of interest on capital work in progress - Weighted deduction for in-house research and development expenditure TP Adjustment - Internal TNMM as most appropriate method - Rejection of CUP for internal comparables - Comparability adjustments for AE and non-AE sales - benchmarking sale of finished goods to associated enterprises, Internal TNMM v/s CUP as the most appropriate method - HELD THAT: - The Tribunal held that the controversy stood covered by the assessee's own cases for earlier years, where Internal TNMM had been consistently accepted and CUP rejected. It found no change in the nature of transactions, products, associated enterprises, or benchmarking approach. The determinative reasoning accepted was that, despite availability of internal uncontrolled transactions, CUP was not reliably workable because the AE and non-AE transactions were materially different in economic circumstances and contractual terms, and reliable adjustments for those differences were not shown to be possible. In the absence of any distinguishing feature or any material showing that the earlier decisions had been set aside or overruled, the principle of consistency applied and the deletion of the transfer pricing adjustment was upheld. By virtue of paragraph 29, the same conclusion governed A.Y. 2013-14 as well. [Paras 9, 10, 11, 12, 29] The Revenue's challenge to adoption of Internal TNMM and deletion of the adjustment on sale of finished goods to associated enterprises failed for both years. Sales promotion and marketing services from associated enterprises - TPO's jurisdiction in determining arm's length price - HELD THAT: - The Tribunal followed the assessee's own earlier years, in which the adjustment on the same transaction had already been deleted. It accepted that no distinguishing material had been brought by the Revenue. The earlier view, which the Tribunal applied, was that the assessee had produced material to substantiate the arrangement and that the TPO could not determine the arm's length price at nil by questioning the necessity of the services or by re-examining their requirement in the manner adopted. Since the impugned disallowance rested on the same grounds already rejected in the assessee's own case, the deletion was sustained. By virtue of paragraph 29, the same finding applied to A.Y. 2013-14. [Paras 13, 14, 15, 29] The deletion of the transfer pricing adjustment relating to sales promotion and marketing services from associated enterprises was upheld for both years. Additional depreciation on replacement of spares - New plant and machinery requirement - HELD THAT: - The Tribunal held that additional depreciation is admissible only on new machinery or plant acquired during the year and not on replacement of parts and spares of an existing plant. It found that the Assessing Officer had specifically held that the expenditure represented replacement and did not result in any new plant and machinery, and that this finding was not displaced by any contrary evidence from the assessee. The Commissioner (Appeals) was therefore in error in allowing the claim merely because the genuineness of the expenditure was not disputed. [Paras 19] The disallowance of additional depreciation on replacement of spares and parts in A.Y. 2012-13 was restored and the Revenue succeeded on this issue. Book profit u/s 115JB - Prior period expenses - Prior period expenses addition while computing book profit u/s 115JB - HELD THAT: - Following the co-ordinate bench decision of Gujarat Chemical Port Termianal Co. Ltd. [2022 (8) TMI 378 - ITAT AHMEDABAD] the Tribunal held that there is no provision in the computation mechanism of book profit permitting an adjustment on account of prior period expenses. The deletion directed by the Commissioner (Appeals) in relation to the book profit computation was therefore sustained. By virtue of paragraph 29, the same conclusion applied to A.Y. 2013-14 as well. [Paras 21, 22, 29] The Revenue's objection to deletion of the addition for prior period expenses in book profit computation u/s 115JB was rejected for both years. Capitalisation of interest on capital work in progress - Nexus between borrowed funds and capital assets - establishment of nexus between the borrowing and acquisition of fixed assets - HELD THAT: - The Tribunal accepted the finding that the Assessing Officer had proceeded merely on presumption in treating the ECB loan as utilised for acquisition of fixed assets. It noted the assessee's stand that its own funds were sufficient for the investment and further noted that no such disallowance had been made in earlier years. Since no nexus between the ECB loan and the capital work in progress was established, the basis for capitalisation of interest failed. [Paras 24, 29] The deletion of the disallowance made by capitalising interest to capital work in progress was upheld for both years. Disallowance u/s. 35(2AB) - Weighted deduction for in-house research and development - DSIR quantification before 01.04.2016 - HELD THAT: - The Tribunal held that the statutory requirement for DSIR quantification of eligible expenditure applied only after the amendment effective from 01.04.2016. For the years under consideration, there was no such requirement as a condition for the claim. The Assessing Officer was therefore not justified in curtailing the deduction solely by reference to the DSIR report. By virtue of paragraph 29, the same conclusion applied to A.Y. 2013-14. [Paras 26, 29] The Revenue's challenge to allowance of the deduction for in-house research and development expenditure was rejected for both years. Additional depreciation on storage tanks - Tanks as part of plant and machinery - depreciation allowable on newly constructed tanks used for storage of hazardous raw materials and finished products - HELD THAT: - The Tribunal held that the non-production of complete bills and vouchers could not justify disallowance of additional depreciation when the Assessing Officer had not disallowed normal depreciation on the tanks. On the facts found, the tanks were constructed for storage of hazardous raw materials and finished products and formed an integral part of the plant and machinery. Once the tanks were treated as plant and machinery for normal depreciation, there was no valid basis to deny additional depreciation on the new tanks constructed during the year. [Paras 31] The allowance of additional depreciation on tanks in A.Y. 2013-14 was upheld and the Revenue's ground was dismissed. Final Conclusion: Both Revenue appeals were partly allowed. The Tribunal upheld the Commissioner (Appeals) on the transfer pricing issues, book profit adjustment, interest capitalisation, and deduction for in-house research and development expenditure, but restored the disallowance of additional depreciation on replacement of spares for A.Y. 2012-13 while sustaining the allowance of additional depreciation on tanks for A.Y. 2013-14.