TMI Blog2016 (5) TMI 714X X X X Extracts X X X X X X X X Extracts X X X X ..... is restored to the file of AO/TPO for re-deciding the ALP of the international transaction of job charges of the Pune unit under Cost plus method. It is made clear that we have not examined the comparability or otherwise of the companies chosen by the assessee as comparable. This aspect also needs to be decided at the TPO/AO’s end. Care should be taken to select comparables which are rendering job charges in the capacity of a contract manufacturer alone assuming minimal risks and not the fullfledged manufacturers purchasing raw materials and then selling similar finished goods at their own assuming all the manufacturing risks as well. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Addition in respect of amount written off under the head ‘Fixed assets written off’ - Held that:- As the loss on revaluation of fixed assets is in capital field, the same cannot be allowed as deduction. We, therefore, approve the impugned order on this score by dismissing the assessee’s ground. We are in agreement with the alternate prayer made by the assessee through the additional ground that such amount of ₹ 22.17 lac should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. Thus, there is failure on the part of the assessee to fulfill the condition of section 36(2) which is a pre-requisite for allowing deduction u/s 36(1)(vii). The next amount is a provision for advances written off. It is clear and also accepted by the ld. AR that it is the amount of advances and not the debts written off. Firstly, it is not a case of provision for bad debts as these are advances and not any debtors. Once it is so, there can be no question of compliance with the condition set out in section 36(2). The ld. AR’s contention for treating this amount as a `Business loss’, is again sans merit. Unlike bad debt, no amount can be allowed as a business loss on a mere write off. The assessee is required to expressly prove the occurrence of loss. Here is a case in which the amount due from Customs Department has been written off. No amount recoverable from the Government can under any circumstance be considered as loss. This amount in our considered opinion has been rightly disallowed. The assessee has tendered no explanation on the last amount written off by it. We, therefore, approve the action of the ld. CIT(A) in sustaining the disallowance of the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the facts of the case are that the assessee, an Indian company, is a part of Swarovski Group which is globally famous for crystal and crystal related products. It is a global leader in crystal jewellery and accessories, grinding and dressing tools, precision optical equipment and synthetic gemstones. The assessee was incorporated in 1996 with a different name, which was changed on 10.11.2001 to Swarovski India Pvt. Ltd. The assessee has two units, viz., one 100% EOU in Pune, set up for coating raw beads and the other in Delhi engaged in import and sale of crystal and crystal related products in India. The assessee filed its return reporting seven international transactions, out of which only three related to the Pune unit. One of such international transactions is Coating of raw beads with transacted value of ₹ 316,84,850/-, which is under dispute. The assessee used Cost plus method (CPM) as the most appropriate method to demonstrate that this international transaction was at arm s length price (ALP). The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for determining the ALP of the reported international transactions. The TPO took up the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue for coating raw beads. In this regard, he observed that the assessee during the course of proceedings submitted a list of 19 comparable companies engaged in similar business of diamonds and semi precious stones whose average net profit margin was worked out at 4.4% of the costs. Applying such margin as a benchmark, he determined the ALP of this international transaction as under:- Costs incurred in providing Job Work services Rs.38,402,078 Arm s Length Price (costs plus 4.4%) Rs.40,091,769 Amount Received Rs.31,684,853 Difference with ALP in Rs. And in % terms Rs.8,406,916 (21%) 5. That is how, he recommended a transfer pricing adjustment amounting to ₹ 84,06,916/-. The AO while finalizing the order u/s 143(3) made this addition. The assessee challenged two aspects of this addition before the ld. CIT(A), namely, application of TNMM by the TPO as the most appropriate method and determination of ALP of this international transaction. The ld. CIT(A) agreed with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee adopted three years data of comparables. Profit margin of 4.4% of comparables has been determined by considering three figures, namely, Total income, Total cost and Net profit. Due to non-availability of any Annual report of the 19 comparable companies for any of the years, the manner of computation of profit rate so given in the Table on page 274 of the paper book is not capable of verification. Below this Table, the assessee computed its own profit margin in the similar way by considering Total income at ₹ 3.25 crore, Total cost at ₹ 3.92 crore and Net loss at ₹ 0.67 crore and in percentage terms at (-) 17.09%. Figure of Total income of the assessee in this Table at ₹ 3.25 crore has been computed by taking total of Income side of its Profit Loss Account of the Pune unit at ₹ 3.32 crore as reduced by nonoperating income of ₹ 0.7 crore. This shows that the figure of ₹ 3.25 crore is gross operating revenue of the assessee. The second figure of Total cost at ₹ 3.92 crore has been determined by taking total of all the expenses appearing in the Profit Loss account at ₹ 3.99 crore as reduced by certain non-operating costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered with the `Gross profit always as numerator. Not only there is a difference in the numerator, being, gross profit in CPM and net profit in TNMM, the denominator is also different. Whereas in CPM the denominator is always direct and indirect costs, but, in TNMM when we take the base of costs incurred, it is the operating costs which are taken into account. Direct costs include cost of raw material and labour etc. and indirect costs include depreciation, repairs and maintenance, electricity, etc. for the production facilities. While all the direct costs can be ascertained from the Trading account alone, some of the indirect costs, like depreciation etc. are found from the Profit and loss account. On the other hand, `Operating costs include not only direct and indirect manufacturing costs as referred to in the CPM, but also certain other costs, such as, Selling and Administrative expenses, which can be found from the Profit and loss account. In other words, `Operating costs are equal to `Direct and indirect costs plus some other costs. Insofar as the numerator is concerned, here again we find that the term `net profit in TNMM does not literally mean the amount of net profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As the assessee has been admitted by the TPO himself as a `contract manufacturer , we fail to see as to how the CPM can not be considered as the most appropriate method in the given circumstances. No contrary view has been brought on record by the ld. DR holding CPM as not the most appropriate method in the case of receipt of job charges by a contract manufacturer. Even otherwise, we find that the CPM, like the CUP method, is a transaction specific method striving to determine ALP on a micro level thereby lending more credibility, rather than the TNMM having a non-transaction specific generalized approach aiming to compute profit on a macro level. In view of the foregoing reasons, we are of the considered opinion that the Cost plus method is the most appropriate method in the given circumstances. II. Computation of ALP under the most appropriate method 8.1. Having chosen the most appropriate method as CPM, the next vital question is the determination of ALP under this method. We find that the TPO applied TNMM for calculating the ALP of the international transaction and, as such, did not have any occasion to examine the calculation given under the CPM. The assessee has mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect and indirect costs as per Annexure-B have been taken at ₹ 2.48 crore. This is in contrast to total expenditure of ₹ 3.99 crore debited to the Profit Loss Account. The ld. AR could not state the exact amount of overheads debited to the Profit Loss Account included in such total cost of ₹ 3.99 crore which are not included in ₹ 2.48 crore, being the total direct and indirect processing costs. When confronted with the above variations, the ld. AR submitted that during the course of proceedings before the TPO, the assessee revised its calculation and also furnished a supporting certificate from a Chartered Accountant, a copy of which is placed on pages 465 to 483 of the paper book. He stated that that this certificate represents exact calculations. When we peruse page 466 of the paper book, which is a part of the certificate along with the subsequent pages, it comes out that total expenses have been allocated under four heads, namely, Coating of Raw Beads , `Trading , `Transfers and `Corporate . Whereas some of the expenses are particular to Coating of raw beads alone, while others have been bifurcated into other three heads also, namely, Trading, Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stly, we find that there is no Trading or any other activity and allocation of costs to such heads has been made with the ulterior motive of reducing the cost base of `Job work and, secondly, such allocation is absolutely on ad hoc basis without there being any parameter to justify the rationality of such allocation. In view of the above discussion, it is clear that the assessee s determination of ALP under CPM cannot be accepted on its face value. As the TPO proceeded to determine the ALP by applying TNMM, which has not been approved by us hereinabove, we are of the considered opinion that it will be just and fair if the impugned order is set aside and the matter is restored to the file of AO/TPO for re-deciding the ALP of the international transaction of job charges of the Pune unit under Cost plus method. It is made clear that we have not examined the comparability or otherwise of the companies chosen by the assessee as comparable. This aspect also needs to be decided at the TPO/AO s end. Care should be taken to select comparables which are rendering job charges in the capacity of a contract manufacturer alone assuming minimal risks and not the fullfledged manufacturers purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in addition to Furniture and fixture. The assessee purchased these assets individually at a value totaling ₹ 96.52 lac. The same were again revalued item-wise and the excess purchase price over and above the revalued figure amounting to ₹ 22.17 lac was written off, which is under dispute. The ld. AR submitted that the assessee was set up in November, 2000 and prior to that SPA Agencies was acting as Distributor of Swarovski Products. On being asked to produce a copy of agreement, if any, between the assessee and SPA Agencies Pvt. Ltd., for acquiring their business of distributorship, the ld. AR contended that no such agreement was entered into because the assessee did not acquire business of distributorship from SPA Agencies and simply purchased these items of assets plus some inventory etc. at the value as appearing in their books of account. The emphasis of the ld. AR was on the fact that it was a case of purchase of fixed assets for a separate consideration and not acquisition of any business as such coupled with all the liabilities etc. This shows that the assessee purchased the fixed assets from SPA Agencies Pvt. Ltd. and revalued the same which resulted into a lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll purchase price of such assets. We are in agreement with the alternate prayer made by the assessee through the additional ground that such amount of ₹ 22.17 lac should be added to the purchase price of fixed assets. It is so for the reason that once the amount written off is not deductible, it will naturally add to the cost of assets purchased so that the actual purchase price constitutes addition in the respective block of assets during the year thereby allowing depreciation on the full purchase price of the assets. Thus, the additional ground is allowed and the AO is directed to examine the facts on this score and restore the purchase price of such fixed assets in the block of fixed assets and allow depreciation accordingly. 10.1. The next issue raised in this appeal is against the sustenance of disallowance of amount claimed under the head Provisions for obsolete goods amounting to ₹ 99,95,581/-. Facts of this ground are that during the course of assessment proceedings, the assessee was required to file detail of valuation of closing stock as on 31.3.2002. From the detail so filed, it was observed that the assessee company made provision for obsolete items amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the resultant loss from obsolescence, the assessee furnished Manual of Swarovski Group laying down mechanism for the write off of crystal products. It is not the case of the Revenue that the valuation done by the assessee does not accord with the method of valuation given in such Manual or such a global policy is defective. It is observed that the assessee purchased en bloc stock from SPA Agencies Ltd., which consisted of both good and obsolete stocks. It was a package deal for purchase of stock. The Revenue has not doubted such purchase transaction of stock as a whole. Once the entire transaction of stock purchase from SPA Agencies has been accepted as genuine and it is found that some of the items out of such purchase were fully or partly obsolete, there cannot be any bar in writing off such obsolete stock in the books of account to bring the same at its market value. In our considered opinion, the loss suffered by the assessee on the valuation of closing stock has to be and is hereby allowed as deduction. This ground is thus allowed. 11.1. The next ground is against the confirmation of disallowance of `Provision of doubtful debts amounting to ₹ 2,89,475/- and `Provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of section 36(2) which is a pre-requisite for allowing deduction u/s 36(1)(vii). 11.3. The next amount of ₹ 5,10,254/- is a provision for advances written off. It is clear and also accepted by the ld. AR that it is the amount of advances and not the debts written off. Firstly, it is not a case of provision for bad debts as these are advances and not any debtors. Once it is so, there can be no question of compliance with the condition set out in section 36(2). The ld. AR s contention for treating this amount as a `Business loss , is again sans merit. Unlike bad debt, no amount can be allowed as a business loss on a mere write off. The assessee is required to expressly prove the occurrence of loss. Here is a case in which the amount due from Customs Department has been written off. No amount recoverable from the Government can under any circumstance be considered as loss. This amount in our considered opinion has been rightly disallowed. 11.4. The assessee has tendered no explanation on the last amount of ₹ 4,218/- written off by it. We, therefore, approve the action of the ld. CIT(A) in sustaining the disallowance of the above three amounts. 12.1. The last is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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