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2022 (12) TMI 831 - ITAT VISAKHAPATNAMTP Adjustment - ALP determination - calculation of Profit Level Indicator (PLI) including the depreciation as operating cost - first contention of the Ld. AR is the depreciation should not form part of the operating cost since the assessee has incurred huge capital additions and the depreciation should be considered as an extraordinary item and cannot form part of the computation in the determination of ALP - HELD THAT:- CIT(A) in his order observed that the addition to the assets were made to the assessee’s export unit at Bhogapuram and the depreciation claimed was relating to that unit only. The Bhogapuram unit is exclusively used for the software development and is a self-contained unit. Admitted facts are that the assessee has not rejected the comparables adopted by the TPO but only objected to the inclusion of the depreciation in the operating cost. Rule 10B of the IT Rules, 1962 specifies that the comparability of international transaction in an uncontrolled transactions shall be adjusted with the functions performed taking into account the assets employed or to be employed and there is assumption by the respective parties to the transactions. Hence, as rightly pointed by the Ld. CIT(A) that the unit situated at was exclusively engaged in the export activities and only reported export transactions relating to the services to Associated Enterprises (AEs). Therefore, the assets deployed in Bhogapuram Unit for the provision of such services to the AE and their corresponding cost therefore would be an important component of the operating cost for the services rendered. The assessee has also claimed depreciation while computing the total income in the relevant assessment year. We are also of the considered view that since the assets are used by the assessee with respect to the services provided to AE and hence the depreciation of such assets of Bhogapuram Unit should necessarily form part of the operating cost and should be considered in the computation of ALP of the assessee. CIT(A) has rightly considered the extraordinary depreciation and has recomputed the PLI of the assessee - In view of the above, we find no infirmity in the order of the Ld. CIT(A) and Ground No.2 raised by the assessee is dismissed. Working capital adjustment made in the ALP margin - We find from the observations of the Ld. CIT(A) that the Ld. CIT(A) has rejected the working capital adjustment of (-)2.07% arrived by the Ld. TPO but has not considered any working capital adjustments as submitted by the Ld. AR before the Ld. CIT(A). The Ld. CIT(A) has also not rejected the working capital adjustment of (+)3.76% arrived at by the assessee. AR therefore pleaded that when the negative working capital adjustment was added back to the PLI a similar treatment should also be given for the positive working capital adjustment while arriving at the computation of ALP. We find merit in the argument of the AR and direct the AO to give effect to the positive working capital adjustment of (+)3.76% after verifying the same while arriving at the ALP margin of the assessee.
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