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2021 (5) TMI 748 - AT - Income TaxTP Adjustment - upward adjustment under the provisions of section 92 - ALP determination - profit level indicators for working out the ALP - PBIT or PBDIT - - whether PBIT or PBDIT should be taken as profit level indicators for working out the ALP with respect to the transactions carried out by the assessee with its associated enterprise? - HELD THAT:- The purpose of transfer pricing provisions is to ensure that the companies which are connected with each other and operating internationally, such companies should not divert their income to another country. In other words, the price charged by one company from its associated enterprises should not be influenced by their connections between them. Such price should have been at the arm length price, meaning thereby the price/service or the cost should be at a value which is agreeable to the independent/unrelated parties under uncontrolled situations/circumstances. How to determine the ALP with respect to the transactions carried out between two associated enterprises ? - adjustments in the depreciation - The price or the margin of one company (tested party), depending upon facts and circumstances, should be compared with the companies which are comparable in terms of functions, capital employed, debt equity ratio, turnover, risk, contractual terms, assets employed etc. If any of the item such as capital employed, turnover is not comparable to the tested party for any reason, then the necessary adjustments are required to be made. The amount of depreciation claimed by the assessee in the ratio of turnover stands at 9.366% whereas average ratio of depreciation of the comparable companies claimed to their turnover stands at 2.086%. Thus it is inferred that the adjustments in the depreciation is required to be made. Now, the issue arises how to make the adjustments. In this regard we find that there is no guidelines or the provisions of law providing the mechanism for making the adjustments with respect to the depreciation. Furthermore, it also appears that there cannot be any guidelines or formula for making such adjustments, rather it depends upon various factors and circumstances. However, we find that none of the authorities below has made such adjustments while determining the PLI for working out the ALP despite such contention was raised by the assessee before the learned CIT (A). See ERHARDT+LEIMER (INDIA) PRIVATE LIMITED VERSUS ASST. COMMISSIONER OF INCOME TAX [2016 (12) TMI 1792 - ITAT AHMEDABAD] CIT (A) has equated the amount of depreciation with the repair and maintenance expenses. As per the learned CIT (A) if the assessee is claiming higher depreciation than the comparable companies, it implies that the assessee must be claiming less repair and maintenance expenses than the comparable companies. Accordingly, the learned CIT (A) rejected the contention of the assessee for making the adjustments with respect to the depreciation. In this connection, we find that the repairs and maintenance expenses cannot be equated/compared with the depreciation. These are two independent items of expenses. There is no guarantee that if the depreciation is higher then, the repair and maintenance expenses will be lower or vice versa. Accordingly we are not convinced with the reasoning of the learned CIT (A). In view of the above and in the interest of justice we hold that the AO should have taken the PBDIT as the profit level indicator while working out the arm length price with respect to the international transactions carried out by the assessee with its AE. - Decided in favour of assessee.
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