TMI Blog2015 (4) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... CUP method as was substantively chosen by the assessee as the most appropriate method. Determination of the operating profit margin of the assessee - not allowing of deduction for the abnormal operating costs for the three months period of strike - Held that:- the net operating profit margin realized by the assessee from its international transaction is to be computed as such, without adjusting it on account of differences between its international transactions and the comparable uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margin of the comparables, and that too, by demonstrating some difference between international transaction of the assessee and comparable uncontrolled transactions. The assessee in the instant case has failed to bring on record any material to show that the profit of the comparable companies was not hit by any untoward incident. Such southwards adjustment in the assessee's own operating costs and the resultant northwards movement in its own profit rate, is impermissible under the law. In view of the foregoing reasons, we uphold the view taken by the TPO in rejecting the claim of the assessee for reduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds transfer pricing adjustment, but the depreciation on such assets, being a revenue offshoot of the capital transaction, will be required to be recomputed on such revised value. Ergo, we set aside the addition made by the TPO due to the determination of the ALP of the international transaction of purchase of fixed assets and direct that the depreciation on such fixed assets be computed on the adjusted value, if permissible, as per the relevant provisions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Depreciation on Moulds used in plastic goods factory - Held that:- AO reduced the depreciation rate on plastic moulds by following the view taken by him in the preceding years. Neither the ld. AR nor the ld. DR could specifically point out the fate of such addition in the earlier years, inasmuch as whether the assessee accepted such addition or if assailed, then the final view taken by the Tribunal in the preceding years on this issue. As such, we set aside the impugned order on this issue and remit the matter to the file of AO for deciding it in conformity with the final view taken in the earlier year. - Appeal d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of export commission CUP/ TNMM --- 7,44,24,255 5. Payment of royalty CUP/ TNMM --- 57,26,60,430 6. Payment of technical know-how fee CUP/ TNMM --- 18,88,50,000 7. Payment of technical assistance fee CUP/ TNMM --- 2,42,24,247/- 8. Authorised test support fee CUP/ TNMM --- 9,39,717/- 9. Service fee CUP/ TNMM --- 28,87,498 10. Owner's manual charges CUP/ TNMM --- 34,13,309 11. Prototypic Development CUP/ TNMM ---- 69,05,820 12. Reimbursement of expenses C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g overheads for three months from the total operating costs by treating them as non-operating, on the premise that there was strike in its factory during this period. 6. The Transfer Pricing Officer (TPO) rejected Kinetic Motor Company Ltd., LML Ltd. and Kinetic Engineering Ltd. from the list of comparables because of non-availability of their relevant data for the year ending 31.03.2006. Apart from retaining the other two companies, namely, TVS Motor Company Ltd. and Majestic Auto Ltd., the TPO expanded the list of comparables by also including Bajaj Auto Ltd. This company was included in the list of comparables for the reason that the assessee itself treated this company as comparable in the immediately preceding year, but chose to ignore the same for the year in question. Average of the Profit Level Indicator (PLI) of these three companies, being, the rate of Operating profit/Operating Revenue, was computed at 7.44%. In computing the assessee's percentage of Operating profit/Operating revenue, the TPO rejected the assessee's point of view of reducing total operating costs by the proportionate operating costs incurred for three-months strike period. That is how, he com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP of twelve international transactions was not determined by him as per the CUP method, which was considered and applied by the assessee as the most appropriate method. The primary question which falls for our consideration and determination is as to whether the approach adopted by the TPO in determining the ALP of all the fourteen international transactions under the TNMM on a combined level is correct, when the assessee applied the CUP as the most appropriate method on twelve international transactions. 7.2 Section 92(1) of the Act provides that: 'Any income arising from an international transaction shall be computed having regard to the arm's length price.' The procedure for computation of arm's length price has been set out in section 92C. Sub-section (1) of section 92C provides that: 'The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe'. Five specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is the most appropriate method having regard to the nature of transaction or class of transaction or functions performed, etc. It is impermissible to combine all the international transactions for determining their ALP in a unified manner when such transactions are diverse in nature. 7.3 Adverting to the facts of the instant case, we find from the nature of international transactions reproduced above that these include Purchase of spare parts; Export of scooters and scooter parts; Purchase of fixed assets; Payment of export commission; Payment of royalty, technical knowhow fee, technical assistance fees; Payment of Authorized test support fee; and Reimbursement expenses, etc. By no standard, the above fourteen international transactions can be considered as closely related to each other, so as to fall for consideration as a single international transaction. It can be noticed from the assessee's Transfer Pricing study report and also Audit report in Form No. 3CEB that it claimed twelve out of the total international transactions at ALP by using the CUP as the most appropriate method. The TPO, without assigning any reason as to why the CUP method could not be applied, went ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate method in respect of twelve international transactions, but, the TPO simply brushed aside the assessee's choice of the most appropriate method and proceeded to determine the arm's length price of all the fourteen transactions under the TNMM, without giving any reason whatsoever, much less any cogent and rational reasons, for discarding the assessee's choice of method. Such a course of action adopted by the TPO is unknown to the law. Without expressly rejecting the assessee's contention about the applicability of the CUP as the most appropriate method in respect of twelve international transactions, the TPO could not have proceeded to determine the ALP of these twelve international transactions also under the TNMM. Under such circumstances, we have no option but to set aside the impugned order and remit the matter to the file of AO/TPO for determining the ALP of the twelve international transactions, firstly, under the CUP method as was substantively chosen by the assessee as the most appropriate method. It is only if the TPO comes to the conclusion that either the CUP method is not appropriate to such international transactions or that the data provided by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months period of June to August, 2005 crippled the functioning in the factory and, as such, it was essential to reduce the operating costs with the proportionate decline in the turnover during this period. Au contraire, the ld. DR. strongly supported the impugned order. 10.2 We are not inclined to accept the contention urged on behalf of the assessee. On a specific query from the Bench, it was stated that the strike commenced on 27.6.2005 and came to an end on 1.8.2005. This shows that the assessee's action in proportionately reducing the operating costs for the three months period is wholly inappropriate because the so-called strike continued only for a period of one month and five days. It is further discernible that the assessee computed the amount of abnormal fixed costs at ₹ 23.91 crore by applying 56% to the total operating costs incurred during this period of three months. This 56% was determined by considering the ratio of actual sales during these three months to the normal sales during such period. Prima facie, going by the assessee's own version, it should have been in the ratio loss of sale to the normal sales and not actual sales to normal sales. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 10.4 Sub-clause (i) in the determination of ALP under TNMM is the computation of net operating profit margin realized by the assessee from an international transaction. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. Sub-clause (iii) provides that the net profit margin realised by a comparable company, determined as per sub-clause (ii) above, 'is adjusted to take into ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margin of the comparables, and that too, by demonstrating some difference between international transaction of the assessee and comparable uncontrolled transactions. The assessee in the instant case has failed to bring on record any material to show that the profit of the comparable companies was not hit by any untoward incident. Such southwards adjustment in the assessee's own operating costs and the resultant northwards movement in its own profit rate, is impermissible under the law. In view of the foregoing reasons, we uphold the view taken by the TPO in rejecting the claim of the assessee for reduction of the so-called abnormal operating costs from the total operating costs. 11.1 Now, we take up the second issue of adjustment to the operating profits of the assessee by the amount of depreciation. The ld. DR submitted that depreciation ought not to have been allowed to the assessee. We fail to appreciate this contention for the reason that depreciation is an integral part of the operating costs. Even though the assessee initially did not consider the amount of depreciation al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng profit margin. One company may have taken a building on rent for carrying on its business, in which case, it will pay rent which will find its place in the operating costs. For the purposes of making comparison, one cannot contend that the payment of rent by one enterprise in comparison with a non-payment of rent by another, should be neutralized by giving proper adjustment from the operating profit of the comparable. The manifest reason is that the other enterprise may have its own office premises and in that case, the amount of depreciation on such premises will also form part of its operating cost. When we consider the operating profit of the first enterprise which is paying rent and then compare it with the second enterprise which is not paying any rent but is claiming depreciation on its own premises, the overall effect of rent in one case gets counterbalanced with depreciation on premises of the other. Similar is the position of a company having purchased new assets charging higher amount of depreciation allowance in its books of accounts vis-a-vis another comparable company using old assets with lower amount of depreciation. No adjustment on account of difference in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the operating profit of company B with everything same including the value of assets at ₹ 50, but with rate of depreciation 30%, will be ₹ 95. It shows that the comparability is jeopardized due to higher rate of depreciation charged by company B at 30% in comparison with lower rate of depreciation charged by company A at 20%. In such a situation, although both the companies use similar type of assets and everything else is also equal, but their respective operating profit percentages undergo change due to higher or lower rate of depreciation, thereby distorting their comparability. It is this difference in the amounts of depreciation due to different rates of depreciation and not due to different quantum of depreciation simiplicitor, which calls for bringing both the companies at par. 11.6 Reverting to the facts of the extant case, we find that the TPO did not have any occasion to consider this issue, because such an argument has been advanced before us for the first time. In our considered opinion, the ends of justice would meet adequately, if we set aside the impugned order to this extent also and send the matter back to the file of the TPO for allowing adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data of these three companies was not given for the year ending 31.3.2006. Whereas the data for Kinetic Motor Company Ltd. and Kinetic Engineering Ltd. was given for the year ending 30.9.2005, the assessee provided data of LML Ltd. for preceding year ending 31.3.2005. It is obvious that in the absence of the relevant data for the year ending 31.3.2006, these companies were liable to be excluded. Primarily, we are in agreement with the TPO in so far as the rejection of the data other than the relevant financial year is concerned. The Special Bench of the Tribunal in the case of Aztec Software and Technology Service Ltd. (2007) 107 ITD 141 (Bang) (SB) has held that the current year's data should be preferred over the multiple years' data. Rule 10B(4) read with Rule 10D(4) also supports this proposition. As such, we approve the view taken by the TPO in using only the current year's data. 12.3 The ld. Counsel for the assessee contended that though at the material time the relevant data for the current year of these three companies was not available, but, now the assessee can produce the relevant data. We find from the TPO's order that he has excluded these three com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod. As such, there can be no argument on the inapplicability of the TNMM on these transactions because the TPO also did not deny the application of TNMM as the most appropriate method. As such, we direct the TPO to determine ALP of the first transaction of the Purchase of motorcycles and scooter parts, etc. in the light of the operating profit margin of the assessee and that of comparables as determined in the light of our above directions. If the difference between two margins breaches the safe harbor rule, then, the addition on account of TP adjustment should be made. 15.1 Coming to the international transaction of Purchase of fixed asset, it is seen that the assessee recorded it at ₹ 21.37 crore and showed it as ALP under the TNMM. We have laid down the mechanism for computation of ALP of such transaction under the TNMM by directing the way in which the profit margin of the comparables and the assessee should be computed. The TPO should apply the recalculated profit margin of the assessee and comparables to the value of this international transaction. If the result crosses the permissible percentage, then the additional amount would go to affect the value of fixed ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be some existing income chargeable to tax, which is sought to be recomputed having regard to its ALP. If there is an international transaction which in itself gives rise to income that is chargeable to tax, then its ALP shall constitute a basis for making of addition on account of difference between the assigned value and ALP of such international transaction as per the relevant provisions. But if there is an international transaction in the capital field, which does not otherwise give rise to any income in itself, then even though its ALP may be computed in consonance with the provisions, but no adjustment can be made for the difference between the declared value and the ALP of such international transaction. At the same time, it does not mean that the computation of the ALP of such an international transaction in the capital field is just a ritual and should not be embarked upon. In fact, such a computation is necessary because of the impact of such a transaction of capital nature on the transactions of its revenue offshoots. In our present context, the international transaction of purchase of fixed assets is required to be benchmarked as per the most appropriate method. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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