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2015 (12) TMI 1464 - ITAT BANGALORE

2015 (12) TMI 1464 - ITAT BANGALORE - TMI - Transfer pricing adjustments - Working capital adjustment to be made while working out the Profit Level Indicator (PLI) - Held that:- To bring the uncontrolled transaction comparable to the transactions of an assessee, it is required to eliminate the material differences which are likely to affect the price or cost or profits arising from the transactions. Assessee had given a detailed working capital study of the twelve comparables selected by it and .....

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g capital is made on the results of such comparables. Only then can the uncontrolled transaction become comparable to the international transactions of the assessee. In such a situation we are of the view that DRP was correct in giving the direction to the AO to carry out the necessary working capital adjustment in working out the average PLI of the comparables. We do not find any reason to interfere with the order of the DRP. - Decided against revenue

Exchange loss / gain - treated a .....

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transactions which were independent of the business revenue earning transaction of the assessee. The preponderance of probability will always weigh in favour of the assessee when its revenues are only from exports. In such a situation we cannot take a presumption that foreign exchange gain / loss were not having any nexus to the operations of the assessee - Decided against revenue

Adjustment for under utilisation of rated capacity not allowed while comparing its results with that of .....

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the comparable uncontrolled transactions which would materially affect the net material margin. However, assessee here was unable to establish that the comparables had claimed depreciation after considering their capacity utilisation. Further assessee also could not establish the existence of a linear relationship between its depreciation cost and machine utilisation. - Decided against assessee

Addition for the working capital adjustment - Held that:- Assessee has produced before us a .....

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comparables. Ordered accordingly. - Decided in favour of assessee for statistical purpose. - I.T(TP).A No.309/Bang/2015, I.T(TP).A No.193/Bang/2015 - Dated:- 10-11-2015 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER For The Assessee : Shri. C. J. Brito, CA For The Revenue : Shri. Sanjay Kumar, CIT-III ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : These are appeals filed by the assessee and Revenue respectively against an assessment order dt.25.02.2 .....

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Facts apropos are that the assessee, a subsidiary of one Brachot Hermant N. V. A, Belgium, was in the business of manufacturing and exporting cut and polished granite slabs. Its international transactions with AE were on account of export of granite slabs and the revenue earned therefrom was ₹ 15,55,02,752/-. For justifying the prices charged for exports to its AE, assessee had carried out a TP study using capitaline data base. From such database itself assessee had selected 14 comparable .....

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ustments, if carried out, would give a place of dominance to the financial activities rather than the operating business activities. 05. Aggrieved on not considering a working capital adjustment for working out the average PLI of the comparables, assessee preferred an application before the DRP. DRP agreed with the contentions of the assessee and directed the AO to compute the mean of the working capital adjustment for the selected comparables and allow appropriate adjustment. 06. Now before us, .....

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le working out the average PLI of the comparables. 07. Per contra, Ld. AR supported the orders of DRP. 08. We have perused the orders and heard the rival contentions. Revenue has not disputed the averment of the assessee that it was carrying no debtors and its supplies to the AEs were always funded by them through advances. Effectively what it would mean was that assessee did not need any working capital loan at all and was relying on its own resources. This definitely gave an advantage to the a .....

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ffects of such differences. Hence to bring the uncontrolled transaction comparable to the transactions of an assessee, it is required to eliminate the material differences which are likely to affect the price or cost or profits arising from the transactions. Assessee had given a detailed working capital study of the twelve comparables selected by it and worked-out the average working capital and the ratio of the average working capital to sales of such comparables. There is no case for the Reven .....

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ions of the assessee. In such a situation we are of the view that DRP was correct in giving the direction to the AO to carry out the necessary working capital adjustment in working out the average PLI of the comparables. We do not find any reason to interfere with the order of the DRP. Grounds 2 to 4 of the Revenue stand dismissed. 09. Vide its grounds 5 and 6, grievance raised by the Revenue is that DRP held the exchange loss / gain as operating in nature for working out the PLI of the assessee .....

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ent of the business revenue earning transaction of the assessee. The preponderance of probability will always weigh in favour of the assessee when its revenues are only from exports. In such a situation we cannot take a presumption that foreign exchange gain / loss were not having any nexus to the operations of the assessee. Coordinate bench in the case of Triology EBusiness Software India P. Ltd v. DCIT [[(2013) 140 ITD 540] had held as under at para 79 of its order (B) Treating foreign exchang .....

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t the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard. As far as provision for bad debts are concerned, the TPO has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manne .....

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sidered as part of operating cost of the Assessee. We hold accordingly and direct the AO to compute the operating cost of the Assessee. Accordingly we are of the opinion that DRP was justified in directing the AO / TPO to consider foreign exchange gain / loss as operational in nature. Grounds 5 and 6 of the Revenue stand dismissed. 11. Now we take up appeal of the assessee. Assessee in its appeal has taken four grounds of which ground 4 is general needing no adjudication. 12. Vide its ground 1 a .....

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. Assessee had in the above work-out added back the actual depreciation charged and deducted only 10% of such depreciation for arriving at the PLI. Because of this adjustment, operating loss of 2.70% became positive operating profit of 1.78%. For restricting the depreciation to 10% of the actual debit in the profit and loss account, argument of the assessee was that there was huge under utilisation of the installed capacity. According to the assessee, depreciation on fixed assets that was to be .....

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n lower utilisation of the capacity, leading to under absorption of fixed costs. As per the assessee, its capacity utilisation for the relevant previous year was only about 28,336 sq.mts of granite blocks though it installed capacity for 2,88,000 sq.mts. However TPO was not impressed. According to him, the reasons for under utilisation stated by the assessee applied equally for its competitors also. Comparables also suffered from the same business negativities. As per the TPO for the previous ye .....

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ee could not effectively prove any under utilisation. TPO after studying the 14 comparable companies selected by the assessee came to a conclusion that these comparable companies which were facing the same business contingencies, had increased their sales volumes from that of the preceding previous year. Thus as per the TPO assessee could not bring out a case for making any adjustment for the depreciation while working out its PLI. AO / TPO thereafter computed the adjustment required u/s.92CA of .....

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ns for under utilisation shown by assessee was adverse business environment, and this remained same for all similarly placed companies in this line of business. 17. Now before us, the Ld. AR strongly assailing the orders of authorities below submitted that its turnover had fell from ₹ 36.51 crores to 15.7 crores when compared to the preceding year. When the assessee was operating in a lower capacity it had to absorb the fixed cost on a lesser production. Ld. AR submitted that Rule 10B(3) r .....

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trongly supported the orders of authorities below. 19. We have perused the orders and heard the rival contentions. Case of the assessee is that it had a capacity for production of 1,22,233 sq.mts of granite but it had only produced 28,336 sq.mt during the year. As per the assessee, because of this its sales went down by more than 60%. This does indicate underutilisation of capacity and assets. Fixed cost remaining the same, irrespective of the actual utilisation, such cost had to be charged to t .....

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ll competitors who are selected as comparables. Assessee s contention is that its fixed assets were under utilised and therefore there should be an adjustment in depreciation. In our opinion it would only mean that wear and tear of the fixed assets were considered at a lower level than what it would have been if such assets were used without respite. Depreciation on fixed assets need not be directly proportional to utilisation of machinery. Assets can get depreciated by non usage as well. Hence .....

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