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2016 (4) TMI 1125

that:- 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 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. .....

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of the Appellant. 2. The learned ACIT pursuant to the direction of Honble DRP erred in law and on the facts and in circumstances of the case in considering the entire ready to serve foods ("RT'S"') segment for calculation of PLI of the Appellant. 3. The learned ACTT pursuant to the direction of Hon'ble DRP erred in law and on the facts and in circumstances of the case in making an adjustment to the entire segment of RTS and not restricting it to the value of international transactions only. 4. The learned ACIT pursuant to the direction of Hon'ble DRP erred on the facts and in circumstances of the case in considering the incorrect operating margin of the comparable company i.e. ADF Foods Limited. 5. The learned ACIT pursuant to the directions of Hon'ble DRP has erred in law and on the facts and in circumstances of 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 t .....

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g unit of the assessee company is at Village Bhandgaon, Taluka Daund, District Pune. For the year under consideration, the assessee had filed the return of income declaring total income at ₹ 38,30,670/-. The assessee company was part of Preferred Brands International LLC, USA. The assessee had entered into international transactions with its associate enterprises at USA and also with Preferred Brands Australia Pty Ltd., Australia. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under section 92CA(2) of the Act. The assessee had entered into various international transactions with its associate enterprises and had applied different methods in respect of different international transactions. The assessee had sold goods worth ₹ 26.27 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 .....

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ment was on account of depreciation and it was pleaded that the same should not be included as part of operating cost to arrive at PLI of both the companies due to difference in capacity utilization and asset base of the companies. As per the assessee, after making the above said adjustment, the PLI of the assessee arrives at 14.28% and PLI of comparable M/s. ADF Foods Ltd. was arrived at 1.88% and therefore, the international transaction with associate enterprises was claimed to be at arm's length price. It was further pointed out by the assessee that the associate enterprise had incurred loss or minor profits during the financial year 2007-08, whereas the assessee had earned profit of 8.5% and hence, it was pleaded that there was no shifting of profit from India 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 ha .....

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report on the ground that these were not functionally similar and hence, not comparable, hence, the selection process of the assessee was found to be not justified. The TPO noted that all the above said companies were rejected earlier on functional difference since none of the companies freshly selected were found to be comparable. The TPO noted that only comparable remained was M/s. ADF Foods Ltd., therefore, the segmental results were considered for benchmarking the arm's length price of international transaction, which was also done in the financial year 2007-08. In view thereof, the OP/TC of the assessee worked out at 4.53% was compared with the PLI of M/s. ADF Foods Ltd. at 16.55% and adjustment to the extent of ₹ 4.16 crores was proposed. Therefore, 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 .....

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edule 11 was in relation to the operations of the assessee i.e. goods sold and hence, part of the operating profits. Our attention was drawn to the page 136 of the Paper Book and was pointed out that both the forward contracts gain and currency provision were taken into account. The learned Authorized Representative for the assessee pointed out that under the provisions of section 43(A), the same requires to be capitalized. In this regard, the learned Authorized Representative for the assessee placed reliance on series of decisions of various Benches of Tribunal and stressed that since the said loss was non-operative loss, the same is not to be considered while computing the PLI of the assessee company. 14. The learned Departmental Representative for the 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 asse .....

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ss was attributable to non-associate enterprise transactions and furthermore, a portion of said foreign exchange loss pertain to advances which were non-operating in nature, then the matter was remitted back to the TPO with a direction that only foreign exchange loss attributable to associate enterprise transactions should be considered and only that portion of loss which is operative in nature was to be included in the PLI calculations. Further, similar proposition was laid down in M/s. CISCO Systems (India) Pvt. Ltd. Vs. DCIT in S.P.No.130/Bang/2014 and IT(TP)A No.271/Bang/2014, relating to assessment year 2009-10, order dated 14.08.2014. The Delhi Bench of Tribunal in Haworth (India) Pvt. Ltd. Vs. DCIT in ITA No.5341/Del/2010, relating to assessment 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 .....

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ee before us, the assessee has not claimed the said provision of derivative losses in the final computation of income. In other words, has rejected the said losses. Once such a treatment is given by the assessee, then the same cannot form the part of operating expenses while computing PLI of the assessee company. In case, the same is excluded in the hands of tested party, the same also should be excluded in the hands of comparable picked up by the assessee itself in order to bring both the companies at par. In this regard, we find support from the ratio laid down by Delhi Bench of Tribunal in Haworth (India) Pvt. Ltd. Vs. DCIT (supra). Accordingly, we direct the 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. 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 .....

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recompute the adjustment, if any, on the basis of material provided by the assessee. The Assessing Officer shall decide the issue afresh after affording reasonable opportunity of being heard to the assessee. We hold and direct accordingly. Grounds of appeal No. 3 by the assessee is accordingly allowed for statistical purposes. 21. The issue arising vide grounds of appeal No.2 and 3 is identical to the issue before the Tribunal in assessment year 2007-08 vide ground of appeal No.3 and following the same parity of reasoning, we hold that transfer pricing adjustment has to be made with respect to international transaction only and not on the entire sales of RTS segment. However, since a verification exercise is required 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 .....

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is observed in this context that a detailed submission was made on behalf of the assessee before the Id. CIT(A) explaining each and every adjustment sought to be made by it. The gist of the said submission has already been extracted by us in the foregoing portion of this order and a perusal of the same shows that each and every adjustment made by the assessee company was duly explained by it by furnishing the relevant facts and figures as well as by producing the supporting evidence wherever required. As rightly held by the Ld. CIT(A), the said submission made by the assessee is sufficient to demonstrate that there was a material difference in the facts of the assessee's case and that 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' .....

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years ago. In our considered opinion, the case made out by the assessee is based on economic and commercial reasons. The assessee is a unit which has been set-up during the year and its capacity utilization is only 21%, which has resulted in losses, while its profit margins have been compared with entities established over the years. Ostensibly, such a comparability analysis does not provide a level playing field. In our view, the aforesaid factor is required to be adjusted so as to facilitate a meaningful comparability analysis between the international transactions of the assessee and the comparable uncontrolled transactions. 11. However, as per the Revenue, such 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 .....

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ustment sought to be made in the profit margin of the tested party are based on cogent and sufficient reasons and seeks to make the comparability analysis with comparable uncontrolled transactions more meaningful. In-fact, Pune Bench of the Tribunal in the case of Egain Communication (P.) Ltd. (supra) in para 36 of the order opined that depending on the facts and circumstances of a case, it may be appropriate to adjust the operating profit of the tested party as well as of the comparable parties. To the similar effect is the decision of the Mumbai Bench of the Tribunal in the case of M/s Fiat India Pvt. Ltd. (supra). In fact, in the case of Amdocs Business Services (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 .....

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sorbed fixed operating costs incurred in the initial year. The aforesaid factors, in our view, warrant an appropriate adjustment to the operating margins of the assessee to facilitate a meaningful comparison with the comparable uncontrolled transactions. 13. At the time of hearing, the learned CIT(DR) pointed out that TPO has also observed that appropriate details in respect of low utilization of capacity in the case of comparables etc. were not available. It was submitted that the plea of the assessee was rejected at the threshold, and therefore, the lower authorities had no occasion to examine the plea of the assessee on merits. No doubt, the aforesaid 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 adjus .....

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of PLI i.e. operating margins / operating expenses of the assessee with the submission that non-operating expenses i.e. interest on finance cost should be excluded while computing PLI. 28. The learned Authorized Representative for the assessee pointed out that the facts in this regard were before both the TPO and DRP and such an adjustment was asked for. However, the same has not been allowed to the assessee. The learned Authorized Representative for the assessee pointed out that similar exercise should be carried out in PLI of concern selected as comparable. 29. The learned Departmental Representative for the Revenue relied on 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 finan .....

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