TMI Blog2012 (6) TMI 650X X X X Extracts X X X X X X X X Extracts X X X X ..... r odd was correct and we confirm the order to that extent. The AO disallowed depreciation for the reason that the same cannot be allowed to be set off of brought forward unabsorbed depreciation against current year's income from other sources. The ld. CIT(A) allowed the issue in favour of the assessee - brought forward unabsorbed depreciation can be allowed from the current year's income from other sources. - Decided in favor of assessee. - IT APPEAL NOS. 98 (JP.) OF 2010 & 724 (JP.) OF 2011 - - - Dated:- 16-9-2011 - R. K. Gupta And N. L. Kalra, JJ. Sunil Mathur for the Appellant. Nitin Narang and Abhishek Kaushik for the Respondent. ORDER R. K. Gupta, Judicial Member These are two appeals by department and assessee and cross objection by assessee relating to assessment year 2005-06. 2. Appeal in ITA No. 98/JP/2010 is by department and Cross Objection by assessee is against the order of ld. CIT(A) and appeal in ITA No. 724/JP/11 by assessee is against the order of ld. CIT(A) passed under section 154 filed by department. 3. In appeal of department, the following effective ground has been taken by the department : 1. That the ld. CIT(A) has er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctional net margin method known as TNMM as the most appropriate method with operating profit margin as the profit level indicator. While examining the documentation the TPO has noticed that the appellant company has incorrectly taken increase in stock at ₹ 86,70,387/- because it also included closing stock of ₹ 35.34 Lacs pertaining to trading goods which needs to be excluded from the stock increase and therefore, total operating cost has been considered at ₹ 57,31,82,354/- and accordingly, operating profit is also reduced by ₹ 35.34 Lac and in T.P. study the TPO has considered operating profit at ₹ 2,42,82,691/- as against such operating profit taken by the appellant company at ₹ 2,78,17,500/- and the AO has worked out the operating profit margin on opening revenue at 4.06%. In the TP, documentation the appellant company has considered 7 comparable companies but AO has rejected the comparables for Camax Intermediaries Ltd. Since, financial data for the year ending March, 2005 of the said company were not available. The TPO has also excluded the comparable companies of Atul Ltd. Since, the company was having 14.26% related party transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating revenue of the assessee ₹ 59,74,65,045/- Arm's Length profit of the assessee at PLI of 6.50% ₹ 59,74,65,045/- A ₹ 3,88,35,228/- Operating profit of the assessee B ₹ 2,42,82,691/- Difference (A-B) ₹ 1,45,52,537/- Amount paid by the assessee for import of raw materials and spares from AE (As per form 3CB) =Rs. 7,83,58,988/- Arm's length price of import = 78358988- 14552537= ₹ 6,38,06,451/- % of adjustment to ALP of import = 22.80% which is more than 5%, therefore, proviso to section 92C(2) is not attracted. The import price of raw material and spares from AE is accordingly adjusted by an amount of ₹ 1,45,52,537/- as operating profit has been calculated as a percentage of operating revenues. The ALP of the import of raw materials and spares is calculated at ₹ 6,38,06,451/-. 9. Detailed submissions were filed before ld. CIT(A) which has been discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating profit on trading activity has to be worked out from the given financials of the appellant company and that amount is required to be reduced from the total operating profits of the appellant company in order to work out operating profits of manufacturing activity which is considered in the aforesaid order passed u/s 92CA(3) of I.T. Act by the TPO. In absence of separate trading and P L A/c for trading activity the expenditure pertaining to trading activity has to be worked out on pro rata basis in absence of any other suitable basis because from the financials the figure of purchases, sales and closing stock of trading goods is available. It is noticed that total operating and other expenditure as per Schedule XVII were at ₹ 6,93,66,167/- on a total turnover of ₹ 69,66,49,458/- and therefore, on proportionate basis such operating and other expenditures pertaining to trading sales of ₹ 1,43,44,625/- is worked out at ₹ 1, 43,44,625 /-. After adopting this figure the operating profit relatable to trading activity is worked out as follows: Amount Amount (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in my considered view TPO was not justified in excluding the financial results as comparable for the study for Atul Ltd. and it has to be considered and included to work out that whether transactions of the appellant with A.E. is at Arm's Length or not. The another issue which has arisen from the submissions of AR of the company is that whether comparables for different period or average of multiple years should have been adopted by TPO. In this respect, as per rules 10B(4) of I.T. Rules the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the F.Y. in which the international transaction has been entered into and only exception to this rule is that the data relating to the, period not being more than 2 years prior to such F.Y. may also be considered if such data reveals fact which could have an influence on the determination of transfer prices in relation to the transactions being compared. The AR could not satisfy either before TPO or in the appellate proceedings that whether such data in respect of any comparable company for a period prior to current year were having an influence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rimarily in photocopiers and digital printers whereas the appellant products is having industrial application mainly in packaging industry. Further, the NIC code of 1998 and 2004 version put the printing ink which is of the appellant in code No. 24223 whereas even as per TPOs order ITDL is covered under code 24222. Further, the excise tariff code for Sakata is covered under Chapter - 32 whereas ITDL product are covered under Chapter - 37 of the tariff under imaging products. It is further seen that per unit realization for the toners and developers is at ₹ 557.70 per MT while in the case of printing ink and Polyurethane manufactured by the appellant company is at 150.93 per MT. With this discussion I am convinced that a toner manufacturing company cannot be compared to the appellant company and therefore, selection of Indian Toners and Developers Ltd., as comparables by the . TPO is hereby not approved and the same is required to be . excluded for the , purpose of working out mean operating profit margins of the comparables. With this discussion after including the Atul Ltd. for the reasons discussed in earlier part of this appellate order and after excluding Indian Toners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO. Method adopted is TNMM method. It was explained that ld. CIT(A) has deleted the addition mainly on the basis of earlier two years data whereas he should have considered the data of current year. Rule 10B(4) was explained. It was further submitted that rules are very clear. Arm lengths price will be applicable in case of international transactions even if the transactions are of ₹ 1. Attention of the Bench was drawn on page 8 of TPO's order. It was submitted that the decision in case of Sony India should not have been applied as in this case as the Tribunal has made certain observations only. In this order itself it has been observed that there is difference of price of 10 to 15% only, therefore, the Arm Length Price will not be applicable. The ld. CIT(A) was not justified in agreeing with the argument of ld. A/R on this account. It was further submitted that in case of M/s. Atul Ltd., products are not the same as they are separate, but ld. CIT(A) was not justified in accepting the argument of ld. A/R that in case of M/s. Atul Ltd. that facts are similar and dates of earlier two years have been considered by ld. CIT(A). 11.1 It was submitted that in respect to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation the details of only Indian Toners Developers Ltd. 13. In reply, the ld. CIT D/R invited attention of the Bench at page 8 of the order of TPO. It was further submitted that 14.26% transactions are for assessment years 2005-06 whereas ld. CIT(A) has mentioned that the transactions are of 2008. Therefore, findings of ld. CIT(A) are not correct. Attention of the Bench was drawn on page 19 of order of ld. CIT(A). It was also submitted that prices are also not the same as different items are produced. TPO has examined all the companies and then only Indian Toners Developers Ltd. was picked up. 14. In respect of ground raised in the cross objection, the ld. Counsel of the assessee stated that ground no. 1 is inter-linked with ground no. 1 of the department, therefore, the same arguments are advanced. 15. The ld. D/R has fairly accepted the contention of the ld. A/R. 16. Ground no. 2 relates to not disposing the ground relating to comparable companies identified by the department. Attention of the Bench was drawn on order of ld. CIT(A) where ground taken by assessee has been reproduced. By Ground No. 6.6 this issue was raised before ld. CIT(A). However, this ground ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking into consideration other material on which reliance has been placed by respective parties, we noted that TPO has made addition of ₹ 1,45,52,530/- by adopting mean profit @ 6.5% of total revenue receipts shown by assessee at ₹ 59.75 crores or odd. In this way the TPO deduced the profit of assessee at ₹ 3.88 crores or odd and after reducing operating profit shown by assessee at ₹ 2.42 crores or odd, the addition of ₹ 1.50 crores or odd as stated above was made. Thereafter, the AO passed assessment order in view of the finding of ld. TPO. The ld. TPO has taken the mean operating profit margin of 8 comparables i.e. M/s. Dynamic Industries Ltd., M/s. Jaysynth Impex Ltd., M/s. Lona Industries Ltd., M/s. Metrochem Industries Ltd., M/s. Organic Coating Ltd., M/s. Indian Toners Developers Ltd., M/s. Rainbow Ink Varnish Mfg. Co. Ltd. and M/s. DIC India Ltd. Before arriving at profit by applying Arm Length Price on international transactions on the basis of main profit of 8 above stated companies, the TPO found that M/s. Atul Ltd. was not comparable whereas assessee has shown it as comparable. In fact, as per the figures available with the assessee, M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a comparable case because there was vast difference in the product manufactured by assessee and manufactured by M/s. Indian Toners Developers Ltd. The ld. CIT(A) found that this is also incorrect to say that both the companies has same NIC Code i.e. 24222. It was found that assessee company's NIC Code is 24223 whereas M/s. Indian Toners Developers NIC Code is 24222. A list of NIC Code is placed on record and we find that NIC code of both the companies i.e. M/s. Indian Toners Developers Ltd. and assessee company are different. 22.1 The ld. CIT(A) has discussed in detail why M/s. Indian Toners Developers Ltd.2 is not comparable with the facts of the assessee's case and again the finding of ld. CIT(A) have been reproduced somewhere above in this order which, in our view, are findings of fact. If the findings of ld. CIT(A) are taken into consideration, which in our humble view remained uncontroverted, then the mean profit on the basis of 8 companies mentioned above are not applicable on the facts of the present case. Therefore, arm length price adopted by ld. TPO on international transactions were not correct. 22.2 However, on application under section 154, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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