TMI Blog2016 (4) TMI 1125X X X X Extracts X X X X X X X X Extracts X X X X ..... correct because the same was part of business and hence, could not be excluded from the expenses. Even in the case of comparable companies i.e. M/s. ADF Foods Ltd., there was derivative loss of ₹ 18.28 lakhs and the same was considered as part of operating expenses, while working out the PLI on segmental profit. Exclusion of bad debts as sundry balances written off from the operating expenses on the ground that the same relates to domestic sales was also refused as the assessee had not furnished complete details in support of its claim. Direction to Assessing Officer / TPO to exclude derivative losses from the operating expenses of tested party i.e. the assessee before us and also from the operating expenses of comparable M/s. ADF Foods Ltd. while working out the PLI of both the concerns. Computation of PLI - Held that:- While computing the PLI of concern of costs, which are relatable to carrying on of the business are to be considered as part of operating margins / operating expenses. Only such items which are not relatable to carrying on of business are to be excluded while computing the operating margins / operating expenses of the assessee, in turn, working out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case in not granting the benefit of +/- 5 percent as per proviso to section 92C (2) of the Act. 6. The learned ACIT pursuant to the direction of Hon ble DRP erred on the facts and in circumstances of the case in allowing adjustment for underutilization of the capacity. 7. The learned ACIT pursuant to the direction of Hon ble DRP erred on the facts and in circumstances of the case in disallowing sundry balances written off. 8. The learned ACIT has erred on the facts and in law by levying interest under section 234B of the Act, on account of the unanticipated adjustments made by the learned Transfer Pricing Officer. 9. The learned ACIT erred on the facts and in law in proposing to initiate penalty proceedings under section 271(1)(c) read with section 274 of the Act, without considering the facts of the case. 10. Each one of the above grounds of appeal is without prejudice to the other 11. The appellant reserves the right to amend, alter or add to the grounds of appeal. 3. The assessee has filed amended ground of appeal No.6, which reads as under:- 1. The learned ACIT pursuant to the directions of Hon ble DRP has erred on facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 crores to its associate enterprises and had adopted TNMM method to benchmark its transactions with associate enterprises. The assessee had selected M/s. ADF Foods Ltd. as comparable company to benchmark its international transactions with associate enterprises. As per the assessee, its PBTD on cost during the year was 10.25%, whereas that of the comparable company M/s. ADF Foods Ltd. worked out to 8.10% considering the average of sales and cost for the financial years 2005-06 to 2007-08. The TPO issued show cause notice to the assessee on the ground that the assessee had not considered segmental results even though the same were available to benchmark the transactions in respect of finished goods. The TPO re-worked the Profit Level Indicator (PLI) of the assessee company as well as of M/s. ADF Foods Ltd. considering the segmental data as per the Annual Report for the financial year 2007-08 and noted that for ready to serve products, the PLI worked out to 4.53% and similarly for processed and preserved foods, excluding the segment of traded goods, the PLI of M/s. ADF Foods Ltd. was worked out to 16.55%. The assessee was asked to show cause as to why the aforesaid comparable with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to foreign countries. The assessee also submitted list of additional companies which were found and were in similar industry and the average PLI of the said additional comparables was worked out at 3.8%, which was lower than the PLI of assessee company. The TPO noted that the Dispute Resolution Panel (DRP), Pune vide order passed under section 144C(5) of the Act relating to assessment year 2007-08, dated 20.05.2011 had directed to exclude the import licence fees of ₹ 4.54 crores from the segmental profit and proportionate unallocated expenses shown for working out PLI of comparables. However, the figure of segmental revenue of ₹ 86.97 crores was taken from Annual Report of ADF Foods Ltd., which did not include the income from import of licence. After looking at the figures of M/s. ADF Foods Ltd., the TPO observed that the income from import of licence was not at all taken into account for working out the PLI and as such the assessee s request to calculate PLI was found to be not accepted. Further, the claim of the assessee to exclude derivative losses from operating losses was also held to be not correct because the same was part of business and hence, could not be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the assessee filed an application for rectification under section 154 of the Act, in which PLI of both the tested party and comparable was sought to be revised. The TPO passed an order under section 92CA(5) of the Act dated 14.12.2011 and accepted the mistake of adoption of figure of import licence income and the PLI of M/s. ADF Foods Ltd. was worked out at 12.88% as against PLI of the assessee at 4.53%. Accordingly, as per the TPO, the revised adjustment to be made to the arm's length price was ₹ 3.08 crores. Against this, the Assessing Officer passed a draft assessment order under section 143(3) r.w.s. 144C(3) of the Act proposing the addition on account of transfer pricing adjustment of ₹ 3.08 crores. The assessee filed its objections before the DRP, who in turn, gave certain directions. As per the first direction of the DRP, the Assessing Officer was directed to include Indo Nissin Foods as one of the comparables and the arithmetic mean of two comparables worked out to 11.78%. Further, the Assessing Officer was directed to revise the PLI after excluding the bad debts and sundry balances written off, whereas the derivative losses and depreciation was directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue on the other hand, pointed out that under the Harbour Rules, specific list of items not to be excluded, is provided. It was further pointed out by the learned Departmental Representative for the Revenue that the TPO has given a finding that the comparable M/s. ADF Foods Ltd. had also considered the derivative losses while computing its PLI. 15. We have heard the rival contentions and perused the record. The case of the assessee before us is that certain items claimed as expenses are not to be taken into account while computing operative expenses of the assessee i.e. while determining its PLI. The assessee claimed that the expenses of losses on derivative contracts were not relatable to international transactions of export of RTS foods segment and hence, the same is to be excluded. The aforesaid derivative loss had arisen from the derivative contract taken from the ICICI Bank Ltd. towards External Commercial Borrowings (ECB) and not for the export of goods to the related parties, was the plea raised. Further, the assessee on its own motion in the statement of total income filed along with return of income, had added back ₹ 1.20 crores to the total income and the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2006-07, order dated 29.04.2011 had laid down the proposition that where certain expenses have been suo moto disallowed by the assessee and were not claimed as operating expenses, while computing arm's length price, the same are required to be excluded from the operating cost and the profit margins should have been taken according to the income computed in the revised return. 16. In the facts of the present case, the perusal of manufacturing and other expenses under Schedule 13, schedule form part of the accounts for the year under consideration ending 31.03.2008 reflects that the assessee had claimed sum of ₹ 1,20,59,000/- on account of provision for loss on derivative contracts. In the Notes to Accounts, the assessee has explained that the company had taken ECB of ₹ 1.3 Millions from its associate enterprise for capacity expansion and modernization of existing manufacturing infrastructure. As per the terms of Lease Agreement, loan was repayable at any time after three anniversaries of date of first disbursement upon the written demand by the lendor. In the absence of any such demand, the assessee was to repay the principal sum in eight equal installments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g expenses of tested party i.e. the assessee before us and also from the operating expenses of comparable M/s. ADF Foods Ltd. while working out the PLI of both the concerns. The ground of appeal No.1 raised by the assessee is thus, allowed as indicated above. 18. Now, coming to the issue vide grounds of appeal No.2 and 3 i.e. calculation of PLI of the assessee company of ready to serve foods segment. 19. The issue raised vide grounds of appeal No.2 and 3 is whether the transfer pricing adjustment has to be made to the entire segment of RTS i.e. ready to serve foods or the same is to be restricted to the value of international transaction only. The assessee admittedly, was engaged in both domestic and export sales in the RTS segment and for benchmarking the international transaction of the assessee company with its associate enterprise, the TPO had adopted results of entire segment of RTS and not the segment relating to the international transaction. 20. We find that similar issue arose before the Tribunal in assessee s own case relating to assessment year 2007-08 and the Tribunal vide order dated 10.06.2015 in ITA No.1682/PN/2011 vide para 37, held as under:- 37. So f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be carried out, we remit this issue back to the file of Assessing Officer / TPO with a direction to re-compute the adjustment, if any, in line with directions given by the Tribunal in assessment year 2007-08. The Assessing Officer / TPO shall afford a reasonable opportunity of hearing to the assessee. The grounds of appeal No.2 and 3 raised by the assessee are thus, allowed for statistical purposes. 22. The issue raised vide ground of appeal No.4 is with regard to working of operating margins of comparable company M/s. ADF Foods Ltd. 23. The learned Authorized Representative for the assessee pointed out that the TPO in para 5 of its order notes that the margin of M/s. ADF Foods Ltd. is 12.88%, whereas the Assessing Officer in final order talks of margins of M/s. ADF Foods Ltd. at 16.55%. The learned Authorized Representative for the assessee pointed out that rectification of the said mistake apparent from the record needs to be carried out. In view of the issue raised by the assessee i.e. the adoption of correct margins of M/s. ADF Foods Ltd., we direct the Assessing Officer / TPO to look into the matter and after verifying the same, adopt the correct margins of M/s. AD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences and after having considered the relevant transfer pricing guidelines as well as transfer pricing regulations, it was held by the Ld. CIT(A) that various adjustments made by the assessee were reasonable and accurate. He also held that the said material difference were arbitrarily ignored by the TPO while disallowing the assessee's claim such for adjustments and there being no proper reasons assigned by him for ignoring the said difference, the transfer pricing exercise done by him in the report was entirely futile. At the time of hearing before us, the Id. D.R. has not been able to raise any material contention to rebut/controvert the observations/finding recorded by the Ld. CIT(A) in his impugned order to arrive at the said conclusion. He has simply relied on the report of the transfer pricing officer in support of the Revenue's case. However, as pointed out by the Ld. Counsel for the assessee from the copies of relevant reports, the TPO himself has allowed similar adjustments made by the assessee in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch an adjustment to the profit margin of the assessee is not permissible having regard to the provisions of rule 10B(1)(e) of the Rules. The method adopted by the assessee for benchmarking its international transaction is the TNM method and rule 10B(1)(e) of the Rules prescribes the manner in which the same is to be applied. As per the Revenue, in sub-clause (iii) adjustments to the net profit margin are permissible but it is only in relation to the net profit margins of the comparable uncontrolled transactions and not with respect to the margin of the tested party and thus the claim of the assessee cannot be allowed. In our considered opinion, in sub-clause (i) the net profit margin realized by a tested party from an international transaction is required to be ascertained having regard to the relevant base. In sub-clause (ii) the net profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction is to be ascertained having regard to the same base. Subclause (iii) permits adjustment with regard to the net profit margin referred to in sub-clause (ii) i.e. of the comparable uncontrolled transactions so as to take into account the difference, if any betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces (P.) Ltd. (supra) wherein one of us was a member of the Bench i.e. Accountant Member, an adjustment was allowed to the profit margin of the tested party with respect to the under capacity utilization, the unit being in the start-up phase. The decision of the Pune Bench of the Tribunal in the case of Skoda Auto India (supra) is also on similar lines. 12. The learned CIT(DR) has relied on the decision of the Tribunal in the case of Haworth (India) P. Ltd. (supra) for the proposition that adjustment to the profit margin of the tested party is not permissible. We have perused the said decision. In the case before the Delhi Bench of the Tribunal, assessee had computed its margin after claiming adjustment for capacity utilization. The assessee had adopted the TNM method for the purpose of computing its ALP. The assessee had claimed that capacity utilization of comparables was to the extent of 70%, which was an assumption made due to non-availability of the required details of the comparable cases. The TPO rejected the adjustment on the ground that assessee had not submitted any evidence for assuming the capacity utilization of the comparables and the data being relied upon by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect spring up only after the plea of the assessee is accepted in principle and the same was not so done by the authorities below. The learned counsel for the assessee pointed out to page 97 of the Paper Book wherein is placed the financial statement of a comparable concern, M/s Khaitan Electricals Limited for the financial year 2005-06 to point out that the information regarding the Installed capacity and Actual production carried out during the year is available, which would facilitate the comparison and also making of an adjustment to the profits margin of the assessee. It was pointed out that at-least for the said comparable the adjustment ought to have been allowed by the lower authorities. 14. In our considered opinion, in order to arrive at an appropriate adjustment, the entire factual matrix is required to be examined at the appropriate level. The TPO as well as the DRP did not accept the plea of the assessee in principle, while the same has been accepted by us. Therefore, in order to allow an appropriate adjustment, necessary verification on the basis of the material to be furnished by the assessee, deserves to be carried out by the Assessing Officer. Therefore, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the order of Assessing Officer / TPO. 30. We have heard the rival contentions and perused the record. While computing the PLI of concern of costs, which are relatable to carrying on of the business are to be considered as part of operating margins / operating expenses. Only such items which are not relatable to carrying on of business are to be excluded while computing the operating margins / operating expenses of the assessee, in turn, working out the PLI of the company. The assessee before us has claimed that the non-operating expenses of interest on finance cost needs to be excluded while calculating PLI of the assessee company. The perusal of Profit Loss Account of the assessee company shows that the major revenue is from business carried on by the assessee and some part of the income is shown as other income. We find no merit in the claim of the assessee that the interest on finance cost is to be excluded while calculating PLI of the assessee company being non-operating expenses. The assessee has failed to furnish the complete details in this regard and in the absence of the same, we reject the claim of the assessee. 31. Now, coming to the reliance placed upon by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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