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2016 (4) TMI 377 - ITAT BANGALORE

2016 (4) TMI 377 - ITAT BANGALORE - TMI - Transfer pricing adjustment - selection of most appropriate method - Held that:- There is no contract between the assessee and its AEs regarding the remuneration and mark up in respect of the value added by the assessee in the manufacturing process and further when the assessee is using the raw material of its own and not supplied by the AE for job work or contract manufacturing. Further, we find that there are variations of cost components in respect of .....

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orders of the authorities below on this issue in rejecting the CPM as MAM and adopting the TNMM as MAM for determination of ALP. - Decided against assessee

Rejection of the Multi Year Data adopted by the assessee while computing the margins of the comparables and considering the current year data by the TPO for the purpose of determining the ALP - Held that:- 3 Rule 10D(4) further states that the information and documents specified under sub-rules (1) and (2), should, as far as possi .....

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dered if such data reveals the fact which have an influence on the determination of transfer pricing. In the case on hand, the assessee has not brought on record any fact to show that the current year data are not reflecting the correct uncontrolled comparable price. Therefore, this ground of the assessee's appeal is dismissed.

Adjustment for difference in accounting policies, depreciation adjustment, etc.- Held that:- In order to provide any adjustment on account of differential depr .....

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out in the ratio of turnover to the cost of depreciation and other expenditure for use of the asset/machinery. Accordingly, in the facts and circumstances of the case when this issue has not been decided either by the TPO or by the CIT (Appeals), we set aside the same to the record of the TPO/A.O for working out the comparative analysis of the cost of depreciation/use of machinery in the ratio of turnover of the assessee as well as the comparable companies and then grant an appropriate adjustme .....

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plied to avoid distorted results then the TPO is not permitted to apply different PLI an international transactions which are similar except that in mass segment manufacturing of optical plastic lenses are on standard basis without a specific personal requirements and in the case of reference lenses are prepared as per the specific personal requirements. Therefore, the material as well as process in both the segments is not significantly different except the powering of the lenses which is as pe .....

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the case of mass production segment as well as in the Assessment Year 2008-09. - I.T.(T.P.) A. Nos.1019 & 1020/Bang/2014, I.T.(T.P.) A. No.974/Bang/2014 - Dated:- 24-2-2016 - SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Assessee : Shri Sampath Raghunathan, Advocate. For The Revenue : Mrs. Neera Malhotra & Ms.S. Praveena. ORDER Per Shri Vijay Pal Rao, J.M. : These are cross appeals for the Assessment Year 2008-09 and appeal by the assessee for the A .....

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[ the CIT(A) ] under section 250 of the Act are bad in law and on facts. Without prejudice to the to the generality of the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Essilor Manufacturing India Private Limited ( the Appellant or the Company ), a show cause notice as per proviso to section 92C(3) of the Income-tax Act, 1961 [ the Act ]. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The AO erred in law in making a reference t .....

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ellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. d) The order issued by the AO, is bad on facts and in law and is in violation of the principles of natural justice. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. e) The order passed by the AO is without juris .....

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92D of the Act read with Rule 10D of the Income-tax Rules, 1962 [ the Rules ] without considering the functional and risk profile of the Company. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The AO/ TPO erred on facts and in law in rejecting one method [ Cost Plus Method ] and selecting another method [ Transactional Net Margin Method ] as the most appropriate method without providing cogent reasons to the Appellant for rejecting the method adopted by the Appellant. The Ld. C .....

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for FY 2007-08. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. 3 Erroneous data used by the AO/TPO a) The AO/TPO erred in law and the Ld. CIT(A) further erred in confirming use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law and the Ld. CIT(A) further erred in confirming non-application of multiple-year data while computing the margin of allege .....

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of the AO/ TPO. b) The Ld. CIT(A) erred in rejecting capacity adjustment citing reasons that the working capital adjustment has been allowed to the Company. Further, the Ld. CIT(A) erred in incorrectly observing that the Appellant had not provided workings for capacity underutilisation adjustment in relation to comparable companies identified by the TPO in his order. 5 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the variation as per the proviso to Section 92C .....

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elevant AY in consideration. The Ld. CIT(A) erred in not adjudicating the above ground. 7 Initiation of penalty proceedings The Appellant submits that based on the facts and circumstances of the case, there was no basis for the AO to propose to initiate proceedings under section 271(1)(c) of the Act. 8 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or .....

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Ground No.1. 4.1 Ground No.2 is regarding rejection of the Transfer Pricing analysis as well as Cost Plus Method (in short CPM ) and adopting another method being TNMM as Most Appropriate Method (in short MAM ) by the Transfer Pricing Officer (TPO). The assessee, Essilor Manufacturing India Pvt. Ltd. (EMIL) is engaged in the business of manufacture of plastic-opthalmic lenses. The assessee is a wholly owned subsidiary of Essilor International S.A., France. The assessee is manufacturing lenses an .....

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ar under consideration as under :- Nature of Services Receipts (Rs.) Payment (Rs.) Purchase of raw material, spares, consumables. 4,17,15,955 - Sale of finished goods. - 14,84,15,357 Purchase of plant & machinery 16,98,775 Recovery of expenses. 37,46,231 To Benchmark its international transactions, the assessee adopted CPM as MAM and compared the average gross margins of the comparables at 34.83% with that of the assessee at 45.42%. Thus the assessee claimed that its international transactio .....

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refore the transaction with AEs are claimed to be at arms length. The TPO observed that certain portions of the expenses have been retained as unapportionable and these expenses pertains to the business of the assessee and needs to be apportioned according to the AE and non-AE sales. Thus the TPO has reworked out the operating margin of the assessee at 4.38% in respect of the international transactions. The TPO rejected the TP analysis of the assessee as well as the CPM as Most Appropriate Metho .....

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hat only two of them namely GKB Opthalmics Ltd. and Techtran Polylenses Ltd. are functionally similar as they are in the business of manufacturing of lenses and 3 others are in the business of manufacturing of glass for commercial purpose. Accordingly the TPO rejected the three of the comparables selected by the assessee as under : 1. Jai Mata Glass Co. Ltd. 2. La Opala RG Ltd. 3. Triveni Glass Ltd. The TPO thereafter carried out a fresh search and selected two more comparables apart from two se .....

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ctions. The assessee challenged the action of the TPO/A.O. before the CIT (Appeals) but could not succeed qua the issue of the rejection of the CPM by the TPO and adopting TNMM as MAM. 4.2 Before us, the learned Authorised Representative of the assessee has submitted that the assessee is not in full fledged manufacturing activity but more into process activity which involves the process of casting and coating of plastic ophthalmic lenses. The learned Authorised Representative has further submitt .....

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Pvt. Ltd. Vs. DCIT 61 Taxmann.com 109 and submitted that the Tribunal while dealing with an identical issue has made a reference to the UN Practical Transfer Pricing Manual and Guidelines for use of CPM. Thus the CPM is typically applied in costs involving the inter-company sale of tangible property where the Related Party manufacturer perform limited manufacture functions or in the case of intra group provisions of services. The method usually assume the incurrence of low risk of cost will then .....

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and allow the CPM as MAM for determination of ALP in view of the international transactions. 4.3 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below and submitted that the TPO has specifically pointed out that the assessee has categorized certain portions of the expenses as unapportionable whereas these expenses pertains to the assessee and were required to be apportioned between AE and non-AE sales. Further, the assessee is not a contract m .....

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er doing the manufacturing work and then selling the product to its AEs and other group companies. Even otherwise when the business activities of the assessee as well as the comparables are not having the identical component of cost then the CPM cannot be applied for the purpose of determining the ALP. Thus the learned Departmental Representative has supported the orders of authorities below. 4.4 We have heard the rival submissions as well as considered the relevant material on record. The main .....

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ssee as to why TNMM is the most appropriate method to be adopted for determining ALP in the case of the Assessee. The arguments advanced on behalf of the Assessee have already been set out in the earlier part of this order and are not being repeated. The arguments proceed on purely theoretical basis without citing as to how the required data of direct and indirect costs of production of the property in the case of the comparable companies chosen by the TPO are not available. No specific instance .....

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omparable companies chosen by the TPO. 50. One of the pleas raised by the Assessee was that functional similarity is to be first seen before choosing an appropriate method and that the TPO in choosing CPM has given weightage to product similarity rather than functional similarity. The Assessee had further pointed out that the comparable chosen by the TPO were manufacturing medical consumables viz., disposal syringes, disposable sutures, disposable needles etc., and that the same cannot be compar .....

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may not be the right method. The conclusions of the CIT(A) in this regard are found to be correct in the present case. The TPO in the present case has given due weightage to functional similarity also. The argument on behalf of the Assessee by placing reliance on para 1.41 of the OECD guidelines which provides that comparability even where products are different can be undertaken but the functions undertaken should be similar is not applicable in the present case as the TPO has considered both .....

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bunal was of the view that for the purpose of TNMM the comparable companies selected should also perform a function performed by the contract manufacturer. Thus the basic reason for not accepting the TNMM as MAM by the Tribunal was that the assessee was a contract manufacturer and comparables selected by the TPO were not functionally similar to the assessee and were also in manufacturing the medical consumables. In the case on hand undisputedly the assessee has not undertaken the job work or a c .....

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act manufacturing. Further, we find that there are variations of cost components in respect of the manufacturing activity of the assessee as well as the other comparables selected either by the assessee or by the TPO. The assessee is also seeking adjustment on account of variation of depreciation method applied by the assessee in comparison to the comparables which itself shows that the cost components of the assessee are in variations with that of the comparables and therefore in our considered .....

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e time of hearing, the learned Authorised Representative of the assessee has not advanced any argument on this ground. However, it is settled proposition of law as well as the mandate of the provisions of transfer pricing that so far as it is possible the current year data of the comparables are to be used for the purpose of determination of ALP. It is provided under Rule 10B(4) of the I.T. Rules that the data to be used in analyzing the comparability of the uncontrolled transaction shall be the .....

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mporaneous and should exist latest by the specified date. Therefore, it is revealed by the provisions of transfer pricing that unless and until the current year data does not gives a true and correct picture of the uncontrolled comparable price more than one year data are not required to be considered. Only in the case when the current year data does not give a true and correct picture and more than one year data not being more than two years prior to the financial year can be considered if such .....

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of the assessee has submitted that the grievance of the assessee is confined only to the adjustment on account of depreciation rates and method adopted by the assessee in comparison to the comparables. Thus the hearing on this ground was limited only on the issue of depreciation adjustment and the other claims have not been pressed by the assessee. The learned Authorised Representative of the assessee has pointed out that the assessee is following a straight line method of depreciation in compar .....

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ereas the assessee's depreciation expenses to total cost excluding depreciation is 22.85% which shows that the depreciation calculated on straight line method is higher than the comparable companies and accordingly a suitable adjustment is required to be made for the purpose of determination of ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of ACI Worldwide Solutions Pvt. Ltd. Vs. DCIT in IT(TP)A No.652/Bang/2012 as we .....

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bjection raised by the assessee. Thus the learned Departmental Representative has submitted that in the absence of examination of this claim by the TPO, it cannot be entertained at this level. 6.4 We have heard the rival submissions as well as considered the relevant material on record. The assessee has claimed that the depreciation expenditure of the assessee is much higher than the comparable companies selected by the TPO for the purpose of determining the ALP under TNMM method. The assessee h .....

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(Rs.) 1. GKB Opthalmics Ltd. 187,700,000 170,807,000 7,676,107 163,130,893 2. General Optics (Asia) Ltd. 91,422,000 78,629,000 8,867,000 69,762,000 3. Techtran Polylenses Ltd. 244,900,000 210,295,630 20,250,000 190,045,630 4. GKB Vision Ltd. 294,600,000 240,010,620 5,479,514 234,531,106 Average Essilor India (without capacity adj.) 152,298,000 146,123,570 27,174,508 33,348,938 Sl. No. Name of the Comparables Cash Profits (Rs.) Cash Profits/Sales Dep./Expenses excl. dep. 1. GKB Opthalmics Ltd. 24 .....

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but all other related expenses like lease rental if any paid by the comparable companies on the leased assets instead of using its own assets as well as maintenance cost of the assets. It is pertinent to note that there is a direct but opposite relation between the depreciation cost and maintenance cost of the asset. When the assets are new the cost of depreciation is more and cost of maintenance is less whereas when the assets/machinery becomes old, the depreciation cost may be less or static b .....

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reduce the other direct expenses like cost of salary/wages. Therefore the comparison of the cost of depreciation has to be worked out in the ratio of turnover to the cost of depreciation and other expenditure for use of the asset/machinery. Accordingly, in the facts and circumstances of the case when this issue has not been decided either by the TPO or by the CIT (Appeals), we set aside the same to the record of the TPO/A.O for working out the comparative analysis of the cost of depreciation/use .....

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en mean margin and assessee's margin on the international transactions price is within the tolerance range then benefit of the said proviso is available to the assessee. Accordingly, we direct the Assessing Officer / TPO to consider the same depending upon the outcome of the re-determination of the ALP. 7. Ground No.6 is regarding the prior period expenses. Neither this ground has been argued by the learned Authorised Representative nor it was pressed during the hearing. Therefore, in the ab .....

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as well as considered the relevant material on record. The learned Authorised Representative has submitted that the TPO has selected two new comparables including General Optics (Asia) Ltd. which is not functionally comparable with the assessee. He has further submitted that this company serves the industrial consumers and he has not indicated any personal care segment. The learned Authorised Representative has submitted that this company has been manufacturing and exporting precision optical s .....

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-assemblies, etc. which is not similar to the business activity of the assessee. He has referred the decision of the Delhi Bench of the Tribunal in the case of Actis Advisers Pvt. Ltd. Vs. DCIT wherein the Tribunal has held that this company serves the different line of business and not into the sector of business like personal care but it was engaged into the industrial usage including Defense Products, Night Vision Equipment Products, Thermal & IR Imaging Products, Optical Test Setups Prod .....

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onent, this company also used mills for the finished products. Thus the learned Authorised Representative has submitted that this company cannot be considered as functionally comparable with that of the assessee and the same may be excluded by admitting the additional ground of the assessee. 8.3 On the other hand, the learned Departmental Representative has submitted that the assessee has raised this objection only as additional ground and functional comparability has not been examined by the au .....

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iting the objections of the assessee on the point of functional comparability of this company. Thus it appears that the TPO has considered this company without discussing the relevant facts regarding the functional comparability of this company. The assessee has brought before us the relevant facts regarding the nature of the business activity of this company as well as the products manufactured by this company. From the Schedule 16 of the profit and loss account, the product description given i .....

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the additional ground raised by the assessee and set aside the issue of functional comparability of this company to the record of the Assessing Officer/TPO for proper examination and verification of the issue and decide after considering the relevant facts as well as the objections of the assessee. 9. For the Assessment Year 2008-09, the only issue raised in the revenue s grounds is regarding the directions of the CIT (Appeals) in allowing the working capital and risk adjustment. 10.1 We have he .....

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hen the assessee has not brought on record the requisite details and quantification for adjustment on account of working capital and risk under Rule 10B then the said claim of the assessee cannot be accepted. 10.2 On the other hand, the learned Authorised Representative has submitted that it is the duty of the TPO to grant the eligible adjustment on account of working capital and risk when the TPO has rejected the T.P. Study of the assessee and adopted different method for determination of ALP. .....

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MAM. The TPO has applied TNMM for determining ALP and therefore the assessee was entitled to raise the objections as well as the other claims under the provisions of transfer pricing including the working capital adjustment. We find that the TPO has not discussed anything in the impugned order in respect of the working capital adjustment and therefore this issue has not been examined by the TPO. The CIT (Appeals) has considered the claim of the assessee and directed the TPO to grant the working .....

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in his transfer pricing study, has not made any working capital adjustment or risk adjustment. The Assessing Officer has, in fact, granted working capital adjustment. When the assessee is confronted with the possible transfer pricing adjustment due to change of some comparables and addition of certain other comparables by the TPO, this claim of risk adjustment is made by the assessee. Though, in principle, on the facts and circumstances of the case, as the assessee has not worked out the risk a .....

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nch of this Tribunal in the case of Exxon Mobil Company India P. Ltd. Vs. DCIT 15 ITR (Trib) 353. Accordingly, we do not find any error or illegality in the order of the CIT (Appeals) in directing the A.O/TPO to grant working capital adjustment. However, we clarify that the assessee should furnish the relevant details and quantification for working capital adjustment to be arrived by the TPO. For the Assessment Year 2009-10. 11. The assessee has raised the following grounds : 1. Assessment and r .....

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ilor Manufacturing India Private Limited ( the Appellant or the Company ), a show cause notice as per proviso to section 92C(3) of the Income-tax Act, 1961 [ the Act ]. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The AO erred in law in making a reference to the Additional Commissioner of Income- tax (Transfer Pricing) - I [ TPO ], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The .....

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rder passed by the AO is without jurisdiction, inter alia, insofar as it purports to give effect to an invalid order of the TPO. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. 2 Comparability analysis adopted by the AO/TPO for determination of the arm s length price is bad in law a) On the facts and in the circumstances of the case and in law, the AO/ TPO erred in disregarding the benchmarking analysis and comparable companies selected by the Appellant in the transfer pricing stud .....

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adopted by the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/TPO. c) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant s analysis with fresh benchmarking analysis on his own conjectures and surmises and introducing new comparable companies, without providing an opportunity to the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. d) The AO/TPO erred in selecting .....

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ppellant. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. g) The AO/ TPO erred in application of incorrect Profit Level Indicator in case of Rx segment. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. 3 Erroneous data used by the AO/TPO a) The AO/TPO erred in law and the Ld. CIT(A) further erred in confirming use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant .....

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ment and (d) capacity under-utilisation adjustment between the Appellant and the comparable companies. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The CIT(A) erred in rejecting capacity adjustment citing reasons that the working capital adjustment has been allowed to the Appellant. Further, the Ld. CIT(A) erred in incorrectly observing that the Appellant had not provided workings for capacity under-utilisation adjustment in relation to comparable companies. 5 Variation of 5% .....

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the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the AO / TPO and upheld by the Ld. CIT(A) is bad in law and liable to be deleted. 11.1 The grounds raised for the Assessment Year 2009-10 are common to th .....

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es in respect of the mass production segment but applied operating profit/operating cost as Profit Level Indicator (PLI) in the reference segment. The grievance of the assessee is that the TPO cannot apply a different PLI in respect of different segments of activity of the assessee when the same are the transactions with AEs of the assessee. It is pointed out that though this issue/ground was not raised before the CIT (Appeals) however, it is an apparent defect in the order of the TPO in applyin .....

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o specific ground was raised however, the assessee has raised this plea before the CIT (Appeals) but it was not adjudicated by the CIT (Appeals). 11.4 Having considered the rival submissions as well as the relevant material on record we note that though the TPO has computed both PLI i.e. the operating margin to operating cost as well as operating margin to sales in respect of both the segments, however, while computing the ALP and making the adjustments the TPO has applied different PLI in respe .....

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