ITAT Mumbai Rules on Transfer Pricing, Depreciation & Provisions in Owens-Corning (India) Private Limited Vs ACIT

The Mumbai Bench of the Income Tax Appellate Tribunal in Owens-Corning (India) Private Limited Vs ACIT dealt with multiple core income-tax issues arising in a scrutiny assessment involving Section 143(3) read with Section 144C(13) of the Income Tax Act 1961.

The decision spans:

  • Transfer pricing adjustment in the manufacturing segment
  • Treatment of fixed assets written off while computing operating margins
  • Amortisation of leasehold land premium
  • Depreciation linked to earlier year additions to fixed assets
  • Rate of depreciation on computer software
  • Allowability of provisions for expenses under Section 37(1)

The appeal was partly allowed, with significant relief granted on the transfer pricing and software depreciation issues, while certain other disallowances were sustained.

Background of the Case

Owens-Corning (India) Private Limited, a company incorporated under the Companies Act 1956, is engaged in the business of manufacturing and trading fibre glass products. For the relevant assessment year, the assessee filed its return declaring total income of Rs. 41,61,49,410.

Pursuant to a scrutiny assessment under Section 143(3) read with Section 144C(13), the Assessing Officer (AO) enhanced the assessed income to Rs. 62,89,21,060, mainly due to transfer pricing adjustments and certain disallowances. The assessee carried the matter to the DRP and thereafter to the Tribunal.

Key international transactions under the manufacturing segment were benchmarked using the Transactional Net Margin Method (TNMM), with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI).

Transfer Pricing Adjustment in Manufacturing Segment

Nature of the Dispute

The core controversy related to a transfer pricing adjustment of Rs. 19,21,38,016 in respect of the assessee’s manufacturing segment.

  • The TPO determined the arm’s length price (ALP) of international transactions by comparing the assessee’s OP/OC margin with that of comparable companies.
  • The assessee had aggregated a number of international transactions within the manufacturing segment and adopted TNMM, a methodology which was accepted by the TPO.
  • The TPO, however, computed the arithmetic mean margin of four comparables at 8.07% using current year data alone and determined the assessee’s margin at 2.62%.

A crucial element in computing the assessee’s margin was an amount of Rs. 9,06,80,292 debited as “fixed assets written off”. The TPO treated this as part of operating costs, reducing the assessee’s margin and resulting in the impugned adjustment.

Computation Adopted by the TPO

**Comparables selected and margins (OP/OC)😗*

  • Asahi India Glass Ltd. – 1.01%
  • Gujarat Guardian Ltd. – 24.65%
  • Hindusthan National Glass & Ind. Ltd. – (-) 2.27%
  • U P Twiga Fiberglass Ltd. – 8.88%

Arithmetic Mean Margin of Comparables: 8.07%

Assessee’s margin as per TPO:

  • Operating Revenue: Rs. 361,44,01,311
  • Operating Cost (including fixed assets written off): Rs. 352,22,90,485
  • Operating Profit: Rs. 9,21,10,826
  • Margin (OP/OC): 2.62%

As the assessee’s 2.62% was found to be outside the permissible range compared with 8.07%, the TPO proposed an upward adjustment of Rs. 19,21,38,016, which the AO carried into the draft as well as final assessment order.

Treatment of Fixed Assets Written Off as Operating Cost

Assessee’s Additional Objection before DRP

Before the DRP, the assessee raised an additional objection stating that Rs. 9,06,80,292 being fixed assets written off:

  • Was a non-operating item, and
  • Had already been added back in the computation of income for tax purposes.

The assessee argued that: