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2017 (1) TMI 1037 - BOMBAY HIGH COURT

2017 (1) TMI 1037 - BOMBAY HIGH COURT - [2017] 391 ITR 211 - Transfer pricing adjustment - selection of comparable - SEL and VTI companies - Held that:- Revenue has itself accepted SEL and VTI as comparables for the earlier assessment years. Therefore, if the Revenue were of the view that only because of the losses in the subject assessment year the two companies are not comparable, then further examination / enquiry ought to have been done by the Revenue to find out that whether the loss was a .....

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with regard to the exclusion of the DEPB benefit stands concluded by virtue of order of this Court for earlier assessment years against the Revenue and in favour of the respondent assessee. - So far as depreciation is concerned, we find that the analysis done by the Tribunal to include DEPB benefit to hold it to be an operating revenue to determine operating profit, would be equally applicable in case of depreciation for the purposes of holding it to be an operating expenses to determine op .....

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NO. 1286 OF 2014 - Dated:- 6-1-2017 - M.S. SANKLECHA AND P. R. BORA, J.J. For The Appellant : Mr. Suresh Kumar For The Respondent : Mr. F.V. Irani a/w Mr. Atul Jasani P.C. 1. This Appeal under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 5th February, 2014 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Year 200809. 2. The Revenue urges the following substantial questions of law for our consideration : ( .....

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he Tribunal was correct in law, in directing the inclusion of DEPB in turnover and depreciation in net profit for the purpose of profit margin of comparables and assessee? 3. Regarding question (i) : (a) The respondent assessee is inter alia engaged in the business of exporting bathrobes and towels. During the subject assessment year, the respondent assessee had entered into international transactions and exported bathrobes / towels to its Associated Enterprises (AE). In its transfer pricing stu .....

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t to the exclusion of the aforesaid two companies, the TPO enhanced the price of exports made by the respondent assessee to its Associated Enterprise. The Assessing Officer in terms of the order of the TPO enhanced the income on account of International Transactions by ₹ 3.96 crores in his order dated 20th December, 2011. (b) Being aggrieved, the respondent assessee carried the issue to the Commissioner of Income Tax (Appeals) [CIT(A)]. By an order dated 2nd November, 2012, the CIT(A) uphe .....

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d not been done. Therefore, SEL and VTI could not be used as comparables to determine the ALP of the respondent assessee's sales to A.E. (c) Being aggrieved, the respondent assessee carried the issue in appeal to the Tribunal. The impugned order records the fact that the two companies viz. SEL and VTI which have been excluded from the list of comparables for the subject assessment year were in fact accepted / adopted by the Revenue in the immediately preceding Assessing Year 200708. The Trib .....

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year, they ceased to be a comparables. On a specific query made by us, Mr. Suresh Kumar for the Revenue does not dispute that the two companies do satisfy the FAR analysis visavis the respondent. The only reason for their disqualification as comparable is the loss made by them in the subject assessment year. (e) In the present facts, we find that the Revenue itself had accepted SEL and VTI as comparables for the immediately preceding assessment year i.e. A.Y. 200708. Before us also, it is not d .....

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rule (1), the comparability of an international transaction (or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms .....

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on and whether the markets are wholesale or retail. (f) From the reading of the above, it would be clear that the bench marks for comparison as specified being preceded by the word 'namely' is exhaustive. Therefore, it is not permissible to include new reference point while making comparison. The aforesaid Rule does not require exclusion of a company from comparability analysis only because it had suffered a loss in a particular year. However, it must be clarified that in the facts of a .....

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that Revenue has itself accepted SEL and VTI as comparables for the earlier assessment years. Therefore, if the Revenue were of the view that only because of the losses in the subject assessment year the two companies are not comparable, then further examination / enquiry ought to have been done by the Revenue to find out that whether the loss was a symptom of the reference points in Rule 10B(2) of the Rules making it noncomparable. This is more so as the Revenue before us does not dispute that .....

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s not give rise to any substantial question of law. Thus, not entertained. 4. Regarding question (ii) : (a) The TPO while arriving at the ALP for the export of bathrobes and towels had excluded the DEPB benefit and depreciation while arriving at the operating profits and total cost respectively of the respondent for the purposes of application of the TNMM method to arrive at ALP. This exclusion of DEPB benefit from profit and depreciation from costs, was done only while arriving at the profits o .....

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grieved, the Revenue carried the issue in appeal to the Tribunal. By the impugned order, the Tribunal held that so far DEPB benefit is concerned, the issue arose for consideration before it in the case of respondent assessee itself for Assessment Years 200506 and 200708 and the Tribunal held that the same has to be included for the purposes of arriving at operating profit for the application of the TNMM method. This on the basis that comparison should be made on like to like and similar to simil .....

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