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2015 (9) TMI 178 - ITAT DELHI

2015 (9) TMI 178 - ITAT DELHI - TMI - Computation of Profit Level Indicator (PLI), being, the Operating Profit/Total Cost (OP/TC) of the assessee - Advances written off treated as non-operating in the calculation of its OP/TC by assessee - TPO held it to be an operating cost - Held that:- On a pertinent query, it was admitted by the ld. AR that the Advances so written off were given in relation to trading items. Like debts becoming bad from the sale of goods assuming the character of operating c .....

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se of fixed assets is capital expenditure. As such, the amount of fixed assets when written off, otherwise than by depreciation, falls for consideration as an item of non-operating cost. We, therefore, accept the assessee’s contention for treating this sum of ₹ 3,84,196/- as non-operating.

Loss on foreign exchange - Held that:- The amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of t .....

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of the assessee from international transactions having regard to the arm’s length price, there is no scope for computing income from non-international transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of ‘total costs’, also inclusive of costs relevant for transactions with non-AEs, we vacate the impugned order on this issue and restore the matter to the file of the TPO/AO .....

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rables. The Mumbai bench of the tribunal in Gharda Chemicals Ltd. vs. DCIT (2009 (11) TMI 653 - ITAT MUMBAI ) has held that internal comparables should be preferred over the external comparables. Since this issue was not taken up before the TPO and the DRP has not given any finding on specific objection taken before it in this regard, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is restored to the .....

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he assessee’s claim in this regard by relying on an earlier order passed by the Tribunal in the assessee’s own case for the AY 2007-08. This ground is, therefore, allowed in favour of the assessee - ITA No.3883/Del/2010 - Dated:- 12-8-2015 - SHRI R.S. SYAL AND SHRI A.T. VARKEY, JJ. For The Assessee : Shri S.P. Singh, CA, Shri Manomeet Dalal, Advocate & Shri Vishnu Goel, Advocate For The Department : Shri Amrendra Kumar, CIT, DR & Ms Y. Kakkar, Sr.DR ORDER PER R.S. SYAL, AM: This appeal b .....

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ng to the computation of the Profit Level Indicator (PLI), being, the Operating Profit/Total Cost (OP/TC) of the assessee. 4. Briefly stated, the facts of the case are that the assessee was established as an Indian company in 1990 as a wholly owned subsidiary of a Claas KGaA mbH, Germany. Until 31.8.2002, the assessee was known as Escorts Claas Ltd., with 60:40 joint venture between Escorts India Ltd., and Claas, Germany. Thereafter, the entire shareholding was acquired by Claas, Germany. The as .....

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of cost. To demonstrate that its international transactions were at arm s length price (ALP), the assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC). All the international transactions were aggregated and a combined OP/TC was computed. The first dispute is against the Advances written off, Fixed assets written off and Loss on foreign exchange, treated by the TPO as operating cost .....

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he ld. AR that the Advances so written off were given in relation to trading items. Like debts becoming bad from the sale of goods assuming the character of operating cost, the advances given in relation to trading items, becoming non-recoverable, also cannot be considered as anything other than an item of operating cost. In our considered opinion, such amount has rightly been considered as an operating cost. 6. In so far as the Fixed assets written off are concerned, we find that the amount of .....

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item is loss on foreign exchange amounting to ₹ 31,22,119/-. On a pertinent query, it was admitted by the ld. AR that this loss relates to trading transactions. 8. We find merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has been admitted by the ld. AR that the same .....

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from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports. In fact, it is only the translation of invoice value from the foreign currency to the .....

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the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down t .....

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ransfer pricing adjustment in respect of transaction with Associated Enterprises (AEs) and non-AEs. Computation of the arm s length price (ALP) by the TPO on the penultimate page of his order divulges that he took total costs at ₹ 54,72,86,629/-. By applying arithmetic mean of the comparables at 12.25%, he proposed a transfer pricing adjustment of ₹ 3,12,57,833/-. The ld. AR contended that no transfer pricing adjustment is possible in respect of transactions with non-AEs. 12. It is u .....

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profit margin of the assessee and then the average adjusted operating profit margin of comparable cases. Such adjusted profit margin of the comparables constitutes benchmark margin, which is then compared with the operating profit margin from the assessee s international transactions with its AE. It is not permissible to make transfer pricing adjustment, by applying the average operating profit margin of the comparables, on the assessee s universal transactions entered into with both the AEs and .....

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ate the impugned order on this issue and restore the matter to the file of the TPO/AO for recalculating the amount of addition of transfer pricing adjustment by taking into consideration the international transactions only under this segment, to the exclusion of transactions with non-AEs. Needless to say the assessee will be allowed a reasonable opportunity of being heard. 13. The third component of this ground is against not considering operating profit margin from internal comparables in compu .....

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om an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comp .....

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it is discernible that what is to be compared under this method is the profit from a comparable uncontrolled transaction. The word comparable may encompass internal comparable as well as external comparable. There is a signal in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis external comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise .....

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tation of the ALP of an international transaction is to find out the profit which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself realized from a third party, it is advisable to have recourse to an internally comparable uncontrolled transaction. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost et .....

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