TNMM Margin Comparison Must Apply Depreciation Consistently: ITAT Kolkata

Manaksia Steels Limited Vs DCIT (ITAT Kolkata)

Different Depreciation Treatment for Assessee and Comparables Distorts TNMM: ITAT Deletes ₹1.14-Crore Transfer-Pricing Adjustment

Summary: The Kolkata Bench of the Income Tax Appellate Tribunal has deleted a transfer-pricing adjustment of ₹1,13,83,297, holding that the Transfer Pricing Officer adopted an inconsistent treatment of depreciation while computing the Profit Level Indicator of the assessee and the comparable companies.

The Tribunal found that depreciation was included in the assessee’s operating cost but excluded while computing the operating margins of the comparables. Such an inconsistent methodology resulted in an anomalous and fallacious comparison. When depreciation was excluded from the assessee’s operating cost on the same basis as the comparables, the assessee’s margin increased from 3.36% to 5.94%, which was higher than the comparable margin of 4.59%. The international transactions were, therefore, at arm’s length.

Facts of the case

Manaksia Steels Limited was engaged in the manufacture of iron and steel products. For Assessment Year 2016-17, it filed its return declaring a total income of ₹10,55,26,530.

The case was selected for scrutiny under CASS on account of transfer-pricing risk parameters, as the assessee had entered into international transactions with its foreign associated enterprises.

The matter was referred to the Transfer Pricing Officer for determining the arm’s length price of transactions involving the sale of finished goods and purchase of raw materials from associated enterprises.