2009 (6) TMI 125 - ITAT DELHI

TP adjustment u/s 92C(4) -Transactions of sale and purchase with its AEs - International transactions - TNMM Method - Profit level indicator (PLI) for ratio between the net operating profit margin and the net sales - Whether cash profit/sales ratio was correct PLI for determining the ALP - actual value of the purchase transactions exceeds the tolerable band - Whether depreciation could be disregarded in the TP analysis both in the case of the taxpayer and the comparables - HELD THAT:- In the present appeal, ALP of transactions carried was to be determined by comparing net profit of the taxpayer (tested party) with mean net profit of comparables, Only receipts and expenditure, having connection with international transactions, were required to be taken into account. "Net profit" used in r. 10B can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the learned CIT(A). But depreciation in such profit on commercial principles has to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company.

In the case in hand. Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing [2003 (1) TMI 89 - BOMBAY HIGH COURT] are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons.

The AO, after looking into details of financial results of comparable enterprises, excluded all companies except the three, although two of companies selected, namely Coventry Coil-O-Matic (Haryana) Ltd. and Roto Pumps Ltd. percentage of depreciation to total cost had differences of more than 2 per cent as shown above, which, in our opinion, is quite substantial. The learned CIT(A) is right in holding that working of mean profit of the TPO on the basis of three selected companies was not correct. But then the learned CIT(A) also failed to give due regard to the nature, type and age of the machinery employed by comparables or size of the companies leading to material differences. Without considering obvious material differences, the contention of the taxpayer to take profit without depreciation was rejected. We feel this rejection is not sound in law.

The taxpayer has also furnished similar working taking cash profit/TC (excluding depreciation) and has claimed that if benefit of proviso to s. 92(2) is allowed, there is no case for making any adjustments in the two years. on figures and methodology adopted by learned CIT(A), with the exclusion of depreciation, we see that there is no case for making any adjustment. However, it is not clear from record whether above figures were verified by the Revenue authorities. Both the parties agreed that above figures and computations can be verified by the AO/TPO. We are also of the view that it would be appropriate to get above claim verified by the AO/TPO. Accordingly, we set aside the impugned orders of Revenue authorities including TPO and restore the matter to the file of the AO to carry above exercise.

In case either on cash profit/sale basis or on cash profit/total cost of comparables finalized by the learned CIT(A), it is found that arm's length principles are satisfied in international transactions, no adjustment is to be made. Otherwise, fresh orders be passed in accordance with law in the light of above discussion. We, however, make it clear that matters which have already attained finality are not intended to be reopened.

It was claimed that TP analysis was carried in these cases, aggregating all the international transactions of various nature. In the taxpayer's report only segmental profit of international transaction was to be taken for comparison. Accordingly, the taxpayer proved that it should be permitted to file a fresh TP report and the entire case from that point onwards should be examined afresh after remand. Request was opposed by the ld DR.

In the present case, Revenue authorities carried TP analysis, mainly on the basis of information furnished by the taxpayer. Both the parties accepted some enterprises as suitable comparables and carried comparative analysis. It is neither permissible nor desirable at this stage of second appeal to permit a somersault and accept that taxpayer's report was not correct and a fresh report should be permitted to be filed and thereafter fresh TP analysis be carried. No such argument was raised or taken by the taxpayer or made in impugned orders. We see no good reason to permit the taxpayer to make a totally new case which will knock off earlier assessments and require to carry fresh analysis from the first stage. The taxpayer has not placed any material on record to show that alleged segmental profit in its case or in the case of comparables is available in public domain and would give different results. As is clear from discussion, both the parties proceeded to accept material on record as relevant material and carried TP analysis which has been thoroughly discussed above. Hence, the request of the taxpayer to permit to raise additional grounds and to lead fresh material has no substance and is rejected.

Thus, both the appeals of the taxpayer are allowed for statistical purposes in terms stated above.