Huntsman International (India) Pvt Ltd Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that transfer pricing adjustment should be restricted only in respect of turnover of assessee-company relating to international transactions. In nut-shell, transfer pricing addition should be restricted only qua international transaction and not entity level transactions.
Facts- The issue for consideration here is that whether the transfer pricing adjustment should be restricted to international transactions by the assessee with its associated enterprise or whether the adjustment is required to be computed at entity level.
Another issue involved here is disallowance of contribution of Rs. 11,04,588/- made by the assessee to “ Baroda Textile Effects Pvt. Ltd. Employees Gratuity Assurance Scheme” (Gratuity Scheme).
Conclusion- In the case of KHS Machinery (P.) Ltd. [2023] 151 taxmann.com 122, the Ahmedabad ITAT held that adjustment of PLI of comparables ought to be made at transaction level and not entity level. In the case of Kemrock Industries & Exports Ltd [2022] 141 taxmann.com 130 (Ahmedabad – Trib.), the Ahmedabad ITAT held that transfer pricing adjustment should be restricted only in respect of turnover of assessee-company relating to international transactions, sale of resins to its associated enterprises, and same should not be done in relation to all transactions. In the case of Bekaert Industries (P.) Ltd. [2022] 136 taxmann.com 355 (Pune – Trib.), the Pune ITAT held that Transfer pricing addition should be restricted only qua international transaction and not entity level transactions.
Held that where assessee had filed application to competent authority for approving gratuity scheme and it had duly complied with conditions laid down for approval under section 36(1 )(v), Assessing Officer ought not to have disallowed assessee’s claim for deduction under section 36(l)(v) merely because Commissioner had not granted approval to Gratuity Scheme.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the assessee against the order of the ld. Dy. Commissioner of Income Tax, Circle-1(1)(1) Vadodara, in proceeding u/s. 143(3) r.w.s. 144C(13) vide order dated 23/02/2015 passed for the assessment year 2009-10.
2. The assessee has taken the following grounds of appeal:-
“Ground No. 1: Addition on account of Transfer Pricing
1.1. The learned AO/Transfer Pricing Officer (‘TPO’)/DRP erred in upholding the transfer pricing adjustment to the extent of Rs. 38,41,90,287 in determination of Arm’s Length Price (‘ALP’) by failing to consider the facts of the case, including the submissions made by the Appellant and the evidences produced with reference to the transactions reported in Form No. 3CEB filed by the Appellant.
GROUND NO. 2: Capacity utilization and extraordinary expenses adjustment
2.1. The learned AO/DRP erred in not appreciating the adjustment carried out by the Appellant for unutilized capacity of Appellant vis-a-vis comparable companies.
2.2. The learned AO/DRP erred in holding that the capacity utilization adjustment has to be carried out on the margin of the comparable companies instead of Appellant.
2.3. The AO/TPO/DRP erred in not allowing the extraordinary costs, in respect of repairs & maintenance, store and power & electricity expenses, incurred by the Appellant due to shutdown of the plant while computing the operating. Net Cost Plus (“NCP”) mark-up earned by the Appellant.
2.4 The AO/TPO/DRP erred in computing the correct operating NCP mark-up of the Appellant.
GROUND NO. 3: Direction of the DRP not followed by AO/TPO
3.1. The learned AO/TPO erred in not following the DRP direction in respect of allowing tolling expense amounting Rs. 32,66,607 (Total tolling expenses less allowed by the TPO) as an abnormal/ extraordinary expense in nature while computing the adjusted NCP mark-up earned by the Appellant.
3.2. The learned AO/TPO erred in not following the directions of the DRP while classifying the various expenses as fixed or variable in allowing the capacity utilization adjustment calculation of the comparable companies. Further, the learned AO/TPO erred in not following the consistent approach while classifying the various expenses into fixed or variable while computing the NCP mark-up earned by the comparable companies.
GROUND NO. 4: Erroneous computation of NCP Plus mark-up of comparable companies by AO/TPO
4.1. The learned AO/TPO erred in not following the DRP direction in respect of considering the expenses as an operating & non-operating expenses while computing the NCP mark-up earned by the following comparable companies:
