TMI Blog2014 (12) TMI 892X X X X Extracts X X X X X X X X Extracts X X X X ..... harged in the case of M/s. Span Diagnostics Limited is on Straight-line method, hence for comparing Transaction Net Margin Method of the two companies, adjustment in respect of depreciation is must – thus, the matter is to be remitted back to the Transfer Pricing Officer for proper verification of the claim of the assessee regarding huge difference in the amount of depreciation between the assessee company and the chosen comparable case and also the difference in the method of providing of depreciation in the two companies - if the methods of depreciation adopted by the two companies are different, then the net margins arrived at are not strictly comparable unless suitable adjustment is made in the amount of depreciation so as to adopt depreciation under the same method in the two cases – thus, the TPO is directed to take into consideration the difference in the method of providing depreciation in the case of the assessee and the chosen comparable case and if the methods are different, then to make suitable adjustment for the same as per law – Decided in favour of assessee. Claim of depreciation in respect of instruments placed at customers’ site and capitalized in the books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irming the action of the learned TPO in not accepting the two comparables selected by the Appellant i.e. Casil Health Products Ltd and Monozyme India Ltd on the premise of functional comparability , without appreciating the fact that the same were considered as functionally comparable in earlier assessment year (AY) i.e. AY 2007-08. 3. On the facts and in the circumstances of the case and in law, the learned AO/TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO in not accepting the comparables selected by the Appellant based on updated search performed by the Appellant during the course of assessment proceedings before the TPO, on the basis that the international transactions of the Appellant ought to be benchmarked separately, without appreciating the fact that the said international transactions are closely linked and cannot be separated. 5. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO in rejecting the use of multiple year data for computing the operating margin of the comparable companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Span Diagnostics Ltd. Depreciation Cost 63,502,982 14,465,868 Total Operating Cost 792,291,108 549,724,372 Depreciation as % of Total Operating Cost 8.02% 2.63% Thus, from the aforesaid analysis, it is evident that ratio of depreciation cost to total cost ratio is almost three times higher in the case of the assessee as compared to Span Diagnostics Ltd. Hence, for the purpose of like to like comparison an adjustment in respect of depreciation cost while computing margin of the assessee and comparable companies is claimed. Accordingly, the assessee has computed the operating margins of the assessee and the comparable companies without considering depreciation cost. Based on above, operating margin of the assessee and Span Diagnostics Ltd works out to as follows. Particulars Span Diagnostics Ltd. The Assessee NPM 13.28 percent 13.30 per cent Hence, the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alculations for the benchmarking of simple trading transactions, on the basis of the facts so presented. However, since the assessee has benchmarked all its transaction! at an entity level, if the proposal for taking out depreciation from PLI is accepted, it will tantamount to taking out all the transactions, representing purchase of capital goods from the AE and capitalized in the books of account, from the purview of the benchmarking exercise. This is so because the effect of the international transactions, representing asset purchase from AE, on the margin is only through depreciation. Therefore since the entity level margin is considered by the assessee, the depreciation is to 'be included necessarily to find out the correct benchmarking for the international transactions representing purchase of capital goods. Thus this contention is not accepted. 7. On appeal before the Dispute Resolution Panel, the assessee submitted as follows: Any receipt or expenditure having no bearing on price or margin of profit can be ignored. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Span Diagnostics follows WDV. Since both these methods adjustment is warranted to bring Span Diagnostics in line with Assessee. (Refer relevant extracts of Annual Report of Spam and Assessee HD8 and 9)). Therefore, our plea is to either exclude depreciation or adjust the comparable s depreciation to the Assessee s level of depreciation. More so, considering that there is only one company that the TPO is comparing, it is important to make this truly comparable on all parameters. Alternatively, if fresh comparables are added to Span, the average margin would not be heavily dependent on one comparable and may better represent the arm s length scenario. The Assessee s plea is on principle grounds that if there are differences in its own facts vis- -vis facts of comparable then adjustment is warranted. Adjustment can be made by excluding depreciation or adjusting the level of depreciation. 10. In support of the above submission, the Authorized Representative of the assessee quoted following judgments: 1. Schefenacker Motherson Ltd. v. ITO (2009) 123 TTJ 509 (Del) 2. DCIT v. Reuters India Pvt. Ltd. (2013) 24 ITR (Trib) 231 (Mum) 3. Pentair Water India Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two different methods of providing depreciation employed in the two cases. In the opinion of the Transfer Pricing Officer, depreciation is must for arriving at net margin and therefore depreciation cannot be excluded. 12. On appeal before the Dispute Resolution Panel, the assessee reiterated its submissions made before the Transfer Pricing Officer. 13. The Dispute Resolution Panel has also not recorded any finding in respect of the claim of the assessee about the difference in the amount of depreciation as well as in respect of difference in the method of providing depreciation employed in the case of the assessee vis- -vis the method employed in the case of M/s. Span Diagnostics Limited. The Dispute Resolution Panel without recording any finding on this issue confirmed the action of the Transfer Pricing Officer. We find that the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. vs. ITO Anr. (2009) 123 TTJ 509 (Del) has held as under: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation is permitted depending upon nature of plant/machinery and year of use. In 5th or 6th year of commencement, depreciation can be 25 to 30 per cent of amount allowed in first year to an enterprise. In these appeals, the TPO had excluded certain comparables after noting differences in their year of start of operations. Thus, age of plant/machinery and other related information is available on record and, therefore, contention of the taxpayer on differences in claim of depreciation is fully established on record. Obviously there are differences between the machinery employed by the taxpayer and other comparable concerns which is reflected in amount and percentage of depreciation claimed. How this variation and difference could be ignored under TP Regulations is neither shown nor explained. The taxpayer has debited high amount/ratio of depreciation as per rules as it was first or second year of commencement of its business. Other enterprises nave claimed depreciation at much lower amounts. It is more than 5 and 15 times of the taxpayer. Size of the assets besides the age of the assets of comparables was leading to difference in the profit margins and in mean margin. On the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of the taxpayer was quite comparable to the mean margin of comparables similarly computed. This demonstratively showed that deduction of depreciations was making huge difference and required suitable adjustment. This claim has not been challenged. It is clear that the best way to adjust difference on account of depreciation was to ignore depreciation both in case of the party and the comparables. After all TP adjustments are to be made of differences in price charged or for international transactions and not of difference in the claim of depreciation as has been done in this Such adjustments also matched the requirement of the context (TP principles). The basic issue was whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profit are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Reuters India (P.) Ltd. as has been relied on by the ld. AR. We noted that the Tribunal in this case has adopted the cash profit/operating cost as the correct profit level indicator under the TNMM method. If the net operating profit ratio is computed in respect of the CDR unit before depreciation, it will be as under: Particulars Total Revenue from CDR Operations 109,449,682 Notional revenue 1,629,003 Total 111,078,685 Total Operating Cost 97,289,193 Less: Adjustment for Excess Depreciation provided 13,565,825 Adjusted Operating Cost 83,723,368 Operating Profits 27,355,317 Net Operating Profit/Operating Cost 32.67% 15. In the above facts and circumstances, in our considered view, it shall be fair and in the interest of justice to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to disallow depreciation claimed on the instruments placed at customers place on the plea that same are not used for the purpose of our business. In that respect first of all we wish to inform you that you have taken incorrect figures of additions as well as depreciation. The addition in respect of instruments placed at customers place and used for more than 180 days is ₹ 6,51,66,908/- and balance ₹ 3,800/- is addition towards mobile instruments. The addition of instruments used for less than 180 days is ₹ 4,32,27,079/- and balance ₹ 8,20,802/- is towards other installations not related to instruments placed at customers place. Accordingly, the correct figure of depreciation is ₹ 97,75,036/- (for 180 days or more) and ₹ 32,42,031/- (for less than 180 days) totalling to ₹ 1,30,17,067/-. . The submission of the assessee has been perused and duly considered. The assessee has reiterated its arguments as argued in earlier years. Since, the department is in appeal on this issue, the plea of assessee is not sustainable. Therefore, a sum of ₹ 1,30,17,067/- being depreciation claimed on machinery placed with customers is disallowed and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining these agreements. Further we make it clear that if the Id. AO arrives at a conclusion that the ownership of the asset is not transferred to customers of the assessee, then the assessee is entitled to claim the benefit of the depreciation under section 32 of the Act and the ld. Assessing Officer shall pass orders accordingly. Thus, this ground raised by the Revenue is remitted back to the file of the ld. Assessing Officer to pass appropriate order as indicated hereinabove. As the facts in the present year of appeal are also the same, therefore we set aside the orders of the lower authorities and remand the matter back to the file of the Assessing Officer to adjudicate the issue afresh in the line of the directions given by the Tribunal in Assessment Year 2005-06 as quoted above. Thus, these grounds of appeal are allowed for statistical purpose. 23. Ground nos. 11 12 are directed against the order of Dispute Resolution Panel confirming the order of the Assessing Officer disallowing the claim of ₹ 4,12,609/- on provision of sick leave u/s. 43B. 24. The Assessing Officer observed as under: During the year under consideration, the assessee has debited an amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claim may be allowed this year if the same has not been allowed in the year of payment. However, if it is found that no such payments were actually made even in the next two or three years, then no deduction needs to be allowed for the provisions made for the future contingent liabilities. On verification of records, it is found that no detail has been submitted by the assessee which shows that the alleged amount has been actually paid in the subsequent year also. Therefore, no deduction has been allowed to the assessee in view of the provisions of section 43B of the Act and provision of ₹ 4,12,609/- on account of sick leave is disallowed and added back to the total income of the assessee. 25. On appeal, the Dispute Resolution Panel held as under: The assessee made provision for sick leave to the tune of ₹ 4,12,609/- based on valuation report. The assessee further argued that the same is in accordance with and to comply with Accounting Standard-15 Employee Benefits . The valuation is claimed to be based on scientific basis and by the Actuary, who is expert in the field. The TPO disallowed the same under section 43B. We direct the TPO to verify whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of Hon ble Calcutta High Court rendered in the case of Exide Industries Ltd. and Another Vs. UOI and Others as reported in 292 ITR 470 (Cal.), disallowance of leave encashment is not justified. He submitted that in the first case, it was held by the Hon ble Apex Court that leave encashment is not a contingent liability if the provision is made on some scientific basis. He also submitted that in the second case, Hon ble Calcutta High Court has duly considered the provisions of clause (f) of Section 43B and it was held that the amendment as per which this clause (f) was inserted by the Finance Act 2001 w.e.f. 01.04.2002 is held to be as arbitrary by Hon ble Calcutta High Court and, therefore, the same was struck down by Hon ble Calcutta High Court being arbitrary, unconscionable and dehors the Hon ble Supreme Court s decision. He submitted that in view of this judgment of Hon ble Calcutta High Court, disallowance made by the A.O. is not justified. Ld. D.R. supported the orders of authorities below. 3.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgment of Hon ble Calcutta High ..... 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