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2016 (7) TMI 811 - ITAT BANGALORE

2016 (7) TMI 811 - ITAT BANGALORE - TMI - TPA - selection of comparable - Exclusion of HMT Bearings Ltd - Held that:- It is undisputed fact that this company is a public sector undertaking company. Its operations are based on policy requirements of the Government and it is a preferred company of the Govt. of India for entrusting of work and therefore, it totally operates in a controlled environment. Hence, this company cannot be compared with that of the assessee-company, which is a private comp .....

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. Thus we hold that this company cannot be compared with the assessee-company whose export earnings are less than 4% as the assessee-company exports constitutes 100% of the sales. - Gains made on account of foreign exchange earnings as part of operating income included. - Exclusion of preliminary expenditure and preoperating expenditure from operating cost - Held that:- As this expenditure have nothing to do with operations of the company. We hold that this should not be included as par .....

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Appellant : Shri Padamchand Khincha,CA For The Respondent : Shri P.Chandrashekar, CIT(DR) ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee-company directed against the order of the CIT(A)-IV, Bangalore, dated 31/10/2013 for the assessment year 2006-07. 2. Briefly, facts of the case are that assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture of miniature ball bearings. Its parent company is F .....

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ocessing the return of income under the provisions of sec.143(1) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short], the case was selected for scrutiny by issuing statutory notice u/s 143(2) of the Act. The assessee-company reported the following international transactions: • Import of components, machinery tools etc from Dynacrart Inc: 6.13 crores • Export of miniature ball bearings to FMC sales: 7.69 crores • Purchase of machinery from Dynacrart .....

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s. The TPO, vide order dated 20/03/2006 passed u/s 92CA of the Act, computed the transfer pricing adjustment at ₹ 69,74,195/-. The TPO rejected the transfer pricing study report of the assessee-company and also rejected CUP as most appropriate method. The TPO proposed the cost plus method as most appropriate method. The assesseecompany objected to the adoption of Cost Plus Method [CPM] on the ground that manufacturing process was not identical and gross margins were calculated without taki .....

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activity was shown as Manufacture of Ball bearings were taken. ii) The entities whose turnover is more than ₹ 30 crores and less than ₹ 1 crore were excluded. iii) The entities making consistent losses were also excluded. iv) The entities whose manufacture sales are less than 60% of total sales were excluded. v) Only current year data was used. Applying the above filters, the TPO finally selected the following comparables: • Austin Engineering Co. Ltd. • SNL Bearing Ltd. &b .....

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Arms length margin Rs.74,64,837/- Margin earned Rs.4,90,642/- Adjustment u/s 92CA ₹ 69,74,195/- 4. The AO passed order u/s 143(3) dated 27/03/2006 incorporating the above adjustments. The AO also made addition of unabsorbed depreciation of ₹ 4,19,853/- to the book profits for the purpose of computing tax liability under section 115JB of the Act. 5. Being aggrieved, an appeal was preferred before the CIT(A). It was contended before the CIT(A) inter alia that the very reference made by .....

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ised the following grounds of appeal: 1.1 The order passed by the learned CIT(A)-IV, Bangalore to the extent prejudicial to the appellant is bad in law and liable to be quashed. 2.1 The learned ITO, Ward 11(2) and the learned Addl. Director of Income-tax (Transfer Pricing)-I have erred in passing the orders at the fag end of the limitation period, in a hurried manner and without affording a proper opportunity of being heard to the appellant. The orders having been passed in violation of the prin .....

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e bad in law. 4.1 The learned ITO, Ward 11(2) and Addl. Director of Income-tax (Transfer Pricing)-I, have erred in not appreciating that Chapter X only provides for computation of income and there is however no amendment to the definition of the term "income" to include the amounts computed under Chapter X. The order passed by the learned income tax authorities is therefore bad in law. 5.1 On the facts and in the circumstances of the case and on the basis of the prevalent law, the meth .....

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aving admitted that the product manufactured by the appellant has no market in India, and nobody else in India manufactures such products (para 4.1 and 4.2 of the order under section 92CA), erred in not appreciating that in the light of such conclusions the cases of companies adopted as comparable would be unsuitable and also incorrect. 5.3 The learned ITO, Ward 11(2) and Addl. Director of Income tax (Transfer Pricing)-I, have erred in not appreciating that the appellant during the year was invo .....

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g)-I, have erred in initially proposing to analyse the transaction on the basis of the cost plus method, but, ultimately adopting the Transaction Net Margin method without any justifiable reasons. The learned ITO, Ward 11(2) and Addl. Director of Income tax (Transfer Pricing)-I, have erred in changing the method when it dawned upon them that the comparability analysis in the basis of the method originally proposed would have justified the price charged by the appellant in the international trans .....

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the Income Tax Act. On the facts and circumstances of the case interest under section 234B & 234D is not leviable. The appellant denies its liability to pay interest under section 234B & 234D. 8.1 In view of the above and other grounds to be adduced at the time of hearing the appellant prays that: (a)the order under section 92CA by the Transfer Pricing Officer, assessment order passed by the assessing officer and the order passed by the learned CIT(A) to the extent prejudicial to the ap .....

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s erred in confirming the action of the lower authorities in: 1. Selecting operating profit to operating cost as the profit level indicator (PLI) in computing the ALP, without appreciating the facts and circumstances of the case. 2. Not appreciating in the facts and circumstances of the case, appropriate PLI to arrive at ALP would be gross profit to value added expenses . 3. Not appreciating that SNL Bearings is engaged in predominantly domestic activity and therefore cannot be adopted as a comp .....

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extraordinary expenditure like VRS compensation. Just because the company is incurring extra expenditure on account of VRS compensation, it does not render incomparable. 8.1 On the comparable company SNL Bearing Ltd. learned AR of the assessee submitted that this company cannot be compared with that of the assessee-company as the exports revenue is less than 4.% of the total revenue whereas the assessee-company has 100% exports. In this connection, he relied on the decision of the co-ordinate be .....

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vate Limited v DCIT ITA No. 1054/Bang/2011. iv) CSR India Pvt Ltd v ITO - IT(TP)A No. 1119/Bang/2011 v) Four soft Ltd v DCIT (2011-TII-92ITAT-HYD-TP) vi) Capital IQ Information Systems (India) Pvt Ltd v DCIT - ITA No. 1961/HYD/2011 vii) M/s Bearing Point Business Consulting Pvt. Ltd Vs. DCIT - ITA No. 1124/Bang/2011 Learned AR of the assessee submitted that the TPO was also not justified in including the pre-operative and preliminary expenses written off and debited to P&L A/c as part of ope .....

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d deprecation should not be added back to book profits in light of decisions of co ordinate bench in the case of Moser Baer India Ltd. vs. DCIT (2007) 17 SOT 510(Del.) and DCIT vs. Roxy Investments (P) Ltd. (2008) 24 SOT 227 (Del). 8.2 On the other hand, learned DR relied on the orders of the CIT(A) and the order of the TPO. As regards additional grounds of appeal, learned DR submitted that the grounds may be sent back to the file of TPO/AO for adjudication in accordance with law. 9. We have con .....

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considered as part of operating expenditure. 10. Now, we shall deal with each of these issues as under. (i) Exclusion of HMT Bearings Ltd:. This company was chosen by the TPO himself, however excluded it from the list of comparables on the ground that there is a falling revenue, work force is being phased out, reduction in employee-cost. On the other hand, learned AR of assessee-company contended that this company cannot be excluded as it is functionally similar to that of assessee-company. Ther .....

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ompany cannot be compared with that of the assessee-company, which is a private company operating in uncontrolled business environment. In this regard we rely on the decision of co-ordinate bench in the case of Delhi Adidas Technical Services (P) Ltd. vs. DCIT (69 taxmann.com 401)(Del) (ii) As regards exclusion of SLN Bearings Ltd., the assesseecompany is seeking exclusion of this company from the list of comparables on the ground that its export sales are less than 4%. We find from the Annual R .....

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Bechtel India is 100% of operating income as there is no domestic client, thus as per Rule 10B(2)(d) of the Rules, the comparability test also fails on this count. Further, the pricing and profitability in export and domestic market are not likely to be the same for the following reasons: i) Conditions prevailing in the export and domestic market in which the respective parties to the transactions operate are different. ii) Geographical locations (domestic and export) are different. iii) Size of .....

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