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TMI Blog2020 (12) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was ex-facie wrongly decided when the Tribunal had given specific direction in this regard. 3. The factual matrix of the case is that the assessee manufactures resistors, capacitors used in various applications and products. The assessee undertook certain international transactions during the year. For demonstrating that the international transactions were at arm's length price (ALP), the assessee applied Transactional Net Marginal Method (TNMM). While calculating the Profit Level Indicator (PLI) of Operating profit to Total costs, the assessee adopted Operating Profit before Depreciation, Interest and Taxes (OPBDIT) and sought to match the same with that of the comparables. The contention of the assessee was rejected by the Transfer Pricing Officer (TPO) as well as the Dispute Resolution Panel. The assessee pleaded before the Tribunal that its adjusted PLI, i.e., OPBDIT/Total Costs presented a better comparison as it had charged higher amount of depreciation in comparison with the comparables. The assessee submitted that its average rate of depreciation, i.e. the ratio of depreciation to average written down value (WDV) at 17.97% was higher than the similar average ratio of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be excluded while computing operating margins of the assessee. We find no merit in the said plea of the assessee under Rule 10B(1)(e)(iii) of the Rules, adjustment if any, has to be made in the hands of comparables and not in the hands of tested party. We dismiss the plea of the assessee in this regard. However, in case the assessee is able to establish that there is material difference in the claim of depreciation by the assessee vis-à-vis comparables, then suitable adjustment may be allowed in the hands of comparables after due verification by the Assessing Officer / TPO." 5. Determination of ALP under the TNMM, as discussed in the above para, is governed by Rule 10B(1)(e), relevant part of which reads as under:- "(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or lower in comparison with comparables and the resultant operating profit before such an item of expenditure be considered for making comparison. There is a raison d'etre for comparing operating profit rate of the assessee with comparables and not truncated operating profit computed by excluding certain item(s) of operating costs. It is this that the overall figure of operating profit imbibes the effect of all operating costs on cumulative basis. One can come across several business models in the same line of business leading to incurring of different permutations and combinations of operating costs. When operating profit is considered, the effect of such different business models is ironed out and we get a refined figure of operating profit for benchmarking the assessee's international transaction with that of the comparables under the TNMM. If operating profit is considered in a condensed form not having effect of certain constituents, it can seriously jeopardize the comparison. In one business model, there may be a focus on having its own employees, while in another, the focus may be on outsourcing the services. Though in the first model, there may be higher salary cost, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee vis-à-vis comparables. In this regard, it is apt to note that subclause (iii) to rule 10B(1)(e) provides for adjusting the profit margin of comparables due to differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions etc. which could materially affect the amount of net profit margin in the open market. Such an adjustment can be sought and granted when two otherwise evenly poised entities have different internal economic policies influencing their operating profits. 9. The verdict of the Tribunal allowing granting an adjustment on account of material difference in the claim of depreciation by the assessee vis-à-vis comparables is to be seen in the backdrop of its order in entirety, more specifically para 40 of its order, where the Tribunal acknowledged: `that the differences in amounts of depreciation in case of tested party vis-à-vis comparables due to different depreciation rates called for appropriate adjustment.' The overt emphasis of the Tribunal in remitting the matter to the AO/TPO was to enable the assessee to establish its case about material differences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may be having its own manufacturing set up incurring huge amount of depreciation while another may be outsourcing major manufacturing activity on job basis. Additional depreciation cost incurred by the first assessee will counterbalance additional job charges incurred by the other. That is the reason for not allowing any adjustment on account of itemized differences. Take another case of a newly purchased asset yielding de minimis repair cost with higher amount of depreciation in initial years. On the other hand, another assessee using the same asset purchased a couple of years ago will entail more repair cost but less depreciation. The effect of higher depreciation cost in the first case is absorbed by the higher amount of repair cost in the other, thereby giving level playing operating profit of both the enterprises. In all such cases, lodging a claim for adjustment in the operating profit towards higher amount of individual items of operating costs including depreciation in absolute terms or higher percentage of depreciation to the w.d.v., is destructive of making an effective comparison of operating profit rate of two entities. 12. However, an adjustment in terms of sub-cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee as well as comparables warranting adjustment, if any. We order accordingly. It is made clear that the onus to prove the difference in rates of depreciation between the assessee and comparables will obviously be upon the assessee, who is claiming such an adjustment and also once this exercise is undertaken, it needs to be given a logical conclusion across the board notwithstanding that it may lead to having adverse impact in some comparables, where the rate of depreciation charged may be lower than that of the assessee. However, such an exercise should not put the assessee in more prejudicial position than in which it is before carrying out such an adjustment. Needless to say, the assessee will be allowed reasonable opportunity of hearing. A.Y. 2008-09 : 14. Both the sides are in agreement that the facts and circumstances for this year are mutatis mutandis similar to those of the preceding year. For this year also, the Tribunal rejected the assessee's contention of having PBDIT as Numerator in determining the ALP under the TNMM and also restored the matter to the AO/TPO giving similar direction as was given for the A.Y. 2007-08. The assessee did not furnish any data of rate wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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