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ACIT (OSD) Circle-8, Ahmedabad Versus Summit (India) Water Treatment and Services Ltd. and Vica-Verssa

2016 (10) TMI 103 - ITAT AHMEDABAD

Transfer pricing adjustment - working of the PLI by the assessee and by the TPO/AO - bone of contention is the fluctuating price of aluminium - 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” - Held that:- We find that if the adjustment for raw material i.e. higher .....

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ins of the comparable companies are not restricted by fixed sale price. Therefore, the margin of the assessee company will definitely be less due to increase in the price of aluminium qua the sale price. Therefore, the adjustment in respect of the substantial increase in the cost of raw material i.e. “aluminium” has to be made for the working of correct PLI. We, therefore, do not find any error or infirmity in the computation of the Upward Adjustment as worked out by the First Appellate Authorit .....

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nd cross objection of the Assessee directed against the very same order of the Ld. CIT(A)-XIV, Ahmedabad dated 30.11.2011 pertaining to A.Y. 2007-08. 2. The grievance of the Revenue reads as under:- 1. The Ld. Commissioner of income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in restricting the transfer pricing adjustment u/s.92CA(6) to ₹ 21,44,692/-as against ₹ 3,00,89,890/-made by the Assessing Officer / Transfer Pricing Officer. 2. The Ld. Commissioner of Income-tax .....

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f 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. Th .....

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x (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. 8. It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad may be set-aside and that of the order of the Assessing Officer be restored. 3. And the Cross Objection of the assessee reads as under:- 1. The learned CIT(A) has erred in confirming the transfer pricing adjustment to the extent of ₹ 21,44,692/- under section 92CA on the ground that: (i) The calculation .....

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as ignored the margins made by the AE in US while making an adjustment. (iii) Iron (Exchange) India Ltd. is having the business of water treatment chemicals and plants and that it is directly comparable with the business of the assessee company. This company was accepted as comparable during earlier years. 2. The learned CIT(A) has erred in not granting the benefit of range of +/- 5% while calculating the transfer pricing adjustment. 4. Assessee is a closely held Limited Company established in 1 .....

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of finished Goods -do- 7,36,18,184 Total 8,23,29,643 6. The Transfer Pricing Adjustment in relation to the international transaction to be considered before us relates to the sales of finished goods amounting to ₹ 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. .....

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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 Company operates in two segments: Specialty Chemicals and Equipments. Specialty chemicals include water tre .....

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) 5.23% 16.30% 9. In comparison to the margins of the comparables as shown hereinabove, the assessee has shown its own margin as under:- Particulars Figure in Rs. Operating Revenue 76,682,935.00 Operating Cost 71,685,511.00 Operating Profit 4,997,424.00 Operating Margin (Operating Profit/Operating Cost) 6.97% 10. During the course of the scrutiny assessment proceedings, a reference u/s. 92CA(1) of the Act was made to the TPO for the computation of arms length price in relation to the internation .....

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notice to the assessee to explain why the average PLI of the comparables should not be adopted at 16.58% and why the ALP of sales to its AE should not be recomputed accordingly. 13. Assessee filed a detailed reply firstly, questioning the exclusion of the comparable company Ion Exchange (India) Ltd. and secondly, the assessee also questioned the working of PLI at 16.58%. To substantiate its claim, the assessee furnished the correct working of the comparable companies by taking the financial data .....

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ge 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 ₹ 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 str .....

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n. After considering the facts and the submissions and the reasons given by the TPO for excluding Ion Exchange as a comparable, the ld. CIT(A) was convinced that the TPO has given valid reasons for not taking Ion Exchange (India) Ltd. as the comparable company. The ld. CIT(A) agreed that Ion Exchange Ltd. is engaged in water treatment plant and not in water treatment chemicals alone. The major part of the business of this company is that of water treatment plant whereas the appellant company is .....

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accepted by the TPO, the assessee strongly contended that the working of PLI at 16.58% by the TPO is not correct. It was brought to the notice of the ld. CIT(A) that the assessee has incurred extra ordinary cost for purchase of raw material i.e. Aluminium as compared to earlier years for which the adjustment to total cost has not been allowed by the TPO/AO while calculating the PLI. It was explained that the profit margin available to the assessee will be directly affected by the price of alumin .....

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sion Chembond Ashland Water Technologies Ltd. N L C Nalco India Ltd. Income & expenditure Total income 32.5 164.9 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 .....

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es 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 Shares of loss in subsidiaries/JVs, etc. 0 0 Lease equalization adjustment 0 0 Loss on securitization of assets/loans 0 0 Fee based financial service expenses 0.08 0.35 Treasury operations expenses 0 0.11 Total provisions 0 0 Write-offs 0.17 4.15 Less: Expenses capitalized 0 0 Less: DRE & expenses ch .....

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as well as in the operating revenue. The ld. CIT(A) finally concluded by holding as under:- An examination of both the figures shows that the approach adopted by the TPO as well as the appellant is not correct. For taking the operating revenue and the operating expenses only those items of income or expenses should be considered which affect the profit margin of the industrial enterprise. The correct method would be to take the operating revenue which includes industrial sales and income for non .....

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from the operating expenses. Accordingly, by taking the operating revenue and the operating expenses in the above manner, the figures would be as under: Chembond NLC Nalco Operating Revenue (R) 32.43 163.95 Operating Expenses (E) 28.72 141.00 Opearing Profit (O=R-E) 3.71 22.95 OP/Cost (D=O/E) 12.92% 16.27% Average 14.59% Accordingly, this margin has to be applied on the operating expenses incurred by the appellant to work out the arms length sale price. However, an adjustment of 5% as discussed .....

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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 ₹ 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 fo .....

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f operating cost should be taken after reducing the value of increase in stock from the cost of raw material and after excluding the financial charges and preliminary expenses. The submission of the appellant is logically correct. The cost of raw material consumed can be worked out after reducing the value of items that are included in the stock from the purchases made during the year. Therefore, the operating cost is taken by adjusting the figure taken by the A. O. by the value of closing stock .....

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68,98,047/- Operating profit earned by the appellant 47,53,355/- Net adjustment 21,44,692/- Therefore, upward adjustment of ₹ 21,44,692/- should be made as per the provisions of section 92C of the Act. The ground of appeal is, therefore, partly allowed. 19. Aggrieved by this, the revenue is in appeal before us and the assessee has preferred Cross Objection. 20. The ld. D.R. strongly relied upon the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated what has been .....

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se 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 .....

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