9911796707
TMI Blog2016 (10) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer or the Transfer Pricing Officer (TPO) an opportunity to verify & comment upon the additional evidences furnished by the Assessee, on application of the data from the Prowess. 3. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in granting an adjustment to the Assessee for increase in the price of raw materials, by considering such an increase as an item of "extra ordinary" nature after placing misplaced reliance on Rule 10B(e)(iii). 4. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in considering foreign exchange fluctuation gain as item of "operating income" especially in light of the fact that the Assessee has fixed price contract with its associate enterprise and forex fluctuation has no effect on such fixed price. 5. The Ld. Commissioner of Income-Tax (Appeals)-XlV, Ahmedabad has erred in law and on facts in considering the increase in closing stock as part of operating costs, in light of the fact that the increase is mainly on account of increase in finished goods rather than raw materials. 6. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law in gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to Rs. 7,36,18,184/-. The assessee company has selected TNMM as the most appropriate method using profit before interest and tax (PBIT) as the Profit Level Indicator (PLI). 7. The assessee chose three companies as comparable companies as under:- Chembond Ashland Water Technologies Ltd. Chembond Ashland Water Technologies Ltd. is a joint venture between Chembond Chemicals Ltd., India and Ashland Inc., USA. It has been operating in the value added Water Treatment Solutions field since 1980 and serve diverse industries like Steel, Power, Fertilizers, Refineries, Petrochemicals, Mining, Sugar, Paper and pulp, textile and Municipal Corporation. Ion Exchange (India) Ltd. Ion Exchange (India) Ltd. specializes in water and waste water treatment. It is engaged in providing total water solutions for industry, homes and communities. Integrating process technology, design engineering and project management capability by taking end-to-end responsibility-planning, integrating and managing water on supply, quantity, quality discharge and environmental fronts. NLC Nalco Ltd. The principal activities of NLC Nalco are to develop, manufacture and market industrial chemicals. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO proceeded by adopting the PLI as PBIT/Operating Cost whereas the assessee has used PLI by PBIT/Total Cost. The calculation and the working of TP adjustment made by the TPO read as under:- Calculation in the case of comparables (Amount in Cr.) Chembond Ash and Water Technologies Ltd. HLL Halco Ltd. Sale 32.43 165.62 Operating Cost 28.55 138.52 Operating Profit 3.88 27% OP/Cost 13.59% 19.56% Average 16.58% Working of adjustment Sale 8,95,64,803 Operating Cost 10,26,37,410 Operating Profit (-1,30,72,607) OP/Cost (%) (-12.74%) Operating profit (at ALP of 16.58%) 1,70,17,283 Sales at Book Value 8,95,64,803 Sales at ALP 11,96,54,693 Transfer Pricing Adjustment 3,00,89,890 15. Accordingly, Upward Adjustment of Rs. 3,00,89,890/- was made by the TPO and the same was accepted by the A.O. while completing the assessment made u/s. 143(3) of the Act vide order dated 20.12.2010. 16. Assessee strongly objected the Upward Adjustment made by the A.O. before the ld. CIT(A). It was strongly contended before the ld. CIT(A) that the exclusion of the comparable company Ion Exchange (India) Ltd. is unwarranted and the same should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales 32.43 163.95 Industrial sales 0 158.49 Income from non-financial services 32.43 5.46 Income from financial services 0.02 0.01 Interest 0.02 0.01 Dividends 0 0 Treasury operations 0 0 Other income 0.05 0.15 Prior period income & extraordinary income 0 0.79 Change in stock 0 1.67 Total expenses 30.36 152.79 Raw material expenses 0 50.94 Packaging expenses 0 4.09 Purchase of finished goods 16.45 5.05 Power, fuel & water charges 0.01 1.57 Compensation to employees 3.5 10.3 Indirect taxes 2.95 28.14 Royalties, technical know-how fees, etc. 1.53 0 Lease rent & other rent 0.08 1.18 Repairs & maintenance 0.02 0.96 Insurance premium paid 0.01 0.42 Outsourced mfg. jobs (incl. job works, etc.) 0.07 5.7 Outsourced professional jobs 0.19 3.97 Directors' fees 0 0.02 Selling & distribution expenses 1.83 10.25 Travel expenses 1.08 5.08 Communication expenses 0.23 0.91 Printing & Stationery expenses 0.08 1.24 Miscellaneous expenses 0.15 3.82 Other operational exp. of indl. Enterprises 0.07 0 Other oper. Exp. of non-fin. Service enterprises 0 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of 5% as discussed above, as per the proviso to Section 92C(2) will have to be made. Accordingly, the margin to be applied would be 14.59- 5 = 9.59%. For final working of adjustment, it is also noted that the figures of sales as well as operating cost taken by the A.O. and claimed by the appellant are different. For this purpose, the profit and loss account submitted by the appellant was examined. It is noted that the A.O. has adopted the sales after taking the sales during the year and the value of closing stock. The values taken by the A.O. are not correct as the closing stock should be reduced from the purchases made during the year so as to arrive at the correct consumption for production. The appellant has claimed that the sales should be taken after including the other income of Rs. 17.92 lacs that has arisen due to fluctuation in foreign exchange rate.The claim of the appellant is acceptable as the total income from the business would include the income to the profit generated on account of foreign exchange fluctuation as it is income directly derived from the exports and should therefore be included in the sale price. Therefore, the sale price for working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 08.02.1999 by which the AE Company agreed to purchase 75% of the finished products of the assessee company. This contract has been accepted by the revenue authorities. It is also an admitted fact that out of three comparable companies chosen by the assessee, two comparable companies have been accepted by the TPO/AO. The only dispute relates to the working of the PLI by the assessee and by the TPO/AO. The bone of contention is the fluctuating price of aluminium. The main contention of the assessee is that since it had a fixed price contract with its USA based AE and which contract has been accepted by the revenue authorities, it is not proper to give effect to the extra ordinary items of cost due to higher cost of raw material i.e. "Aluminium". We find that if the adjustment for raw material i.e. higher cost of aluminuim during the year under consideration is taken as extra ordinary item for the computation of PLI, then the margins of the assessee are within the range of +/- 5% with the PLI of the comparable companies. It is also an admitted fact that the profit margin of the assessee is directly affected by the price of the aluminium during the year under consideration. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X
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