TPO directed to exclude two steel comparables due to depreciation differences and accept new comparables for transfer pricing analysis

The ITAT Kolkata directed the TPO/AO to remove two comparables (Stelco Limited and Tata Steel BSL Limited) due to significant depreciation differences and functional dissimilarities with the newly set-up assessee company. The assessee's depreciation was 16.92% of revenue compared to 1.09% and 11.19% for the rejected comparables. The tribunal accepted two new comparables (Vallabh Steel Limited and Uttam Galva Steels Ltd) and directed fresh comparable search. Following precedent in Epcos Ferrites Ltd, the tribunal ruled that depreciation should be excluded from net profit margin calculations under TNMM, favoring cash PLI method for transfer pricing adjustment computation.

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Issues:
1. Transfer pricing adjustment
2. Penalty proceedings under Section 270A of the Act

Analysis:
1. Transfer Pricing Adjustment:
The judgment pertains to appeals filed by the assessee against the final assessment order passed by the National e-Assessment Centre under the Income Tax Act for the assessment years 2017-18 and 2018-19. The main issue raised by the assessee was regarding the adjustment made by the Transfer Pricing Officer (TPO) in relation to international transactions with associated enterprises (AEs). The TPO rejected the cash profit level indicator (PLI) of the appellant and comparable companies for benchmarking purposes. The assessee argued that depreciation should be excluded from the calculation of net profit margin and cash PLI should be considered. The Dispute Resolution Panel (DRP) accepted the assessee's plea, but the TPO did not consider it. The Appellate Tribunal directed the TPO to remove certain comparables, consider new comparables proposed by the assessee, and reevaluate the transfer pricing adjustment by excluding depreciation and using cash PLI for the calculation of net profit margin.

2. Penalty Proceedings under Section 270A of the Act:
The assessee also challenged the proposal to initiate penalty proceedings under Section 270A of the Act. The Appellate Tribunal found that the initiation of penalty proceedings was not justified and held it to be bad in law. The Tribunal allowed both appeals filed by the assessee for statistical purposes, indicating that the issues raised by the assessee were valid and the penalty proceedings were unwarranted. The judgment emphasized the importance of proper consideration of transfer pricing adjustments and the exclusion of depreciation for accurate benchmarking in international transactions. The decision provided detailed reasoning based on legal precedents and directed the TPO to reevaluate the transfer pricing adjustment in line with the Tribunal's directions.

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