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2015 (4) TMI 502 - AT - Income TaxTransfer pricing adjustment - most appropriate method - CUP method OR TNMM - Held that:- assessee chose CUP as the most appropriate method in respect of twelve international transactions, but, the TPO simply brushed aside the assessee's choice of the most appropriate method and proceeded to determine the arm's length price of all the fourteen transactions under the TNMM, without giving any reason whatsoever, much less any cogent and rational reasons, for discarding the assessee's choice of method. Such a course of action adopted by the TPO is unknown to the law. Without expressly rejecting the assessee's contention about the applicability of the CUP as the most appropriate method in respect of twelve international transactions, the TPO could not have proceeded to determine the ALP of these twelve international transactions also under the TNMM. Under such circumstances, we have no option but to set aside the impugned order and remit the matter to the file of AO/TPO for determining the ALP of the twelve international transactions, firstly, under the CUP method as was substantively chosen by the assessee as the most appropriate method. Determination of the operating profit margin of the assessee - not allowing of deduction for the abnormal operating costs for the three months period of strike - Held that:- the net operating profit margin realized by the assessee from its international transaction is to be computed as such, without adjusting it on account of differences between its international transactions and the comparable uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margin of the comparables, and that too, by demonstrating some difference between international transaction of the assessee and comparable uncontrolled transactions. The assessee in the instant case has failed to bring on record any material to show that the profit of the comparable companies was not hit by any untoward incident. Such southwards adjustment in the assessee's own operating costs and the resultant northwards movement in its own profit rate, is impermissible under the law. In view of the foregoing reasons, we uphold the view taken by the TPO in rejecting the claim of the assessee for reduction of the so-called abnormal operating costs from the total operating costs. Adjustment to the operating profits of the assessee by the amount of depreciation - Held that:- The amount of depreciation of the comparable companies on their assets shall be recomputed under straight line method alone as per the rates at which the assessee has provided depreciation. To clarify, if the comparables have charged depreciation at a higher rate in comparison with the assessee on some of its assets, then suitable reduction should be made in the amount of their depreciation. The TPO should not equally hesitate to make adverse adjustment, if warranted, which means that if the comparable companies have charged depreciation at a lower rate in comparison with the assessee, then suitable increase should be made to their amount of depreciation. In doing so, the TPO should see if he can correctly deduce the amount of depreciation on the above lines. If due to one reason or the other, such precise calculation is not possible or the assessee fails to place it before him, then no adjustment should be carried out in the calculation of the operating profits of the comparable companies. We, therefore, sum up our conclusion on this aspect of the matter by holding that if the assessee as well as the comparable companies are using the SLM and there is some difference in the rates of depreciation charged by them vis-à-vis the assessee, then suitable adjustment should be made to the profits of the comparables. Selection of comparables - Held that:- The assessee itself treated Bajaj Auto Ltd., as comparable for the preceding year and the contention about the predominant sale of this company in the three wheeler segment has turned out to be incorrect, we see no justifiable reasons in overruling the view taken by the TPO in considering Bajaj Auto Ltd. as comparable, which is hereby affirmed. This contention of the ld. AR on this aspect is repelled. International transaction of Purchase of fixed asset - Held that:- International transaction of purchase of fixed assets is required to be benchmarked as per the most appropriate method. The application of the ALP, if required, will give rise to the recomputation of the revised value of the purchase of fixed assets. Such an increase in the value of the fixed assets, being a capital transaction in itself, will not give rise to any addition towards transfer pricing adjustment, but the depreciation on such assets, being a revenue offshoot of the capital transaction, will be required to be recomputed on such revised value. Ergo, we set aside the addition made by the TPO due to the determination of the ALP of the international transaction of purchase of fixed assets and direct that the depreciation on such fixed assets be computed on the adjusted value, if permissible, as per the relevant provisions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Depreciation on Moulds used in plastic goods factory - Held that:- AO reduced the depreciation rate on plastic moulds by following the view taken by him in the preceding years. Neither the ld. AR nor the ld. DR could specifically point out the fate of such addition in the earlier years, inasmuch as whether the assessee accepted such addition or if assailed, then the final view taken by the Tribunal in the preceding years on this issue. As such, we set aside the impugned order on this issue and remit the matter to the file of AO for deciding it in conformity with the final view taken in the earlier year. - Appeal decided in favour of assessee for statistical purposes.
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