TMI Blog2021 (5) TMI 748X X X X Extracts X X X X X X X X Extracts X X X X ..... The price or the margin of one company (tested party), depending upon facts and circumstances, should be compared with the companies which are comparable in terms of functions, capital employed, debt equity ratio, turnover, risk, contractual terms, assets employed etc. If any of the item such as capital employed, turnover is not comparable to the tested party for any reason, then the necessary adjustments are required to be made. The amount of depreciation claimed by the assessee in the ratio of turnover stands at 9.366% whereas average ratio of depreciation of the comparable companies claimed to their turnover stands at 2.086%. Thus it is inferred that the adjustments in the depreciation is required to be made. Now, the issue arises how to make the adjustments. In this regard we find that there is no guidelines or the provisions of law providing the mechanism for making the adjustments with respect to the depreciation. Furthermore, it also appears that there cannot be any guidelines or formula for making such adjustments, rather it depends upon various factors and circumstances. However, we find that none of the authorities below has made such adjustments while determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of machineries and component such as positive displacement blowers. The assessee in the year under consideration has carried out certain international transactions with its associated enterprise based in Germany. The details of such transaction stand as under: Sr.No. Description AE Amount(Rs) 1. Purchase of positive displacement blowers, screw compressors and allied products, its spares and components Aerzener Maschinenfabrik Verwaltuingsund betelligungsesellschaft mbH Rejerweg 2831855 Aerzen Germany 8,32,23,667/- 2. Design and development charges received Aerzener Maschinenfabrik Verwaltuingsund betelligungsesellschaft mbH Rejerweg 2831855 Aerzen Germany 68,36,53 3. Interest paid on External Commercial Borrowing Aerzener Maschinenfabrik Verwaltuingsund betelligungsesellschaft mbH Rejerweg 2831855 Aerzen Germany 15,77,326/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ALP as per CUP and CPM methods. It was only after the AO pointed out these facts and issued show cause to the appellant, that the appellant made a search and this was also made as per TNMM method. No factual evidence has been furnished by the appellant to establish that TNMM is not the most appropriate method in its case. Hence, this contention is rejected. 4.5.2. So far as the appellant's claim that only one comparable is enough for TP purposes is concerned, it is seen from the judicial decisions relied upon by appellant that in those cases either the TPO or the assessee could found out only one comparable case. In such circumstances, the Tribunals have held that for transfer pricing purposes, even one comparable can be selected. Nowhere it has been held that in no case more than one comparable should be selected even if such other comparables are available. The appellant has nowhere submitted that the comparables selected by the AO are not comparable to it under TNMM method. Hence this contention of the appellant is also rejected. 4.5.3. So far as submissions relating to computation of operating margins of the appellant are concerned, the appellant's con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such computation, the appellant's contentions are not acceptable. In the decision of Qual Core Logic Ltd. (Supra) relied upon by the appellant, the bench has also held that the size of the assets besides age of the ^assets of comparables lead to differences in profit margin. The differences between asset employed and risks suffered by the tested party and the comparables needs to adjusted. In the absence of any details furnished by the appellant, such adjustment cannot be made by only relying upon the decisions relied upon by the appellant in its favour. The onus is on the appellant to show that it has taken into account all the related expenses to the assets employed i.e. depreciation, repairs and maintenance, insurance etc. for the purposes of I determining the adjustments to its own operating profit as well as of the comparables. In the absence of such exercise made by the appellant, its contention of adjustment on account of depreciation is not acceptable. Hence it is held that the TPO has rightly adopted PBIT for the purposes of computation of the operating profits. 5. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the independent/unrelated parties under uncontrolled situations/circumstances. 8.2 The next aspect that arises how to determine the ALP with respect to the transactions carried out between two associated enterprises. For this purpose, the price or the margin of one company (tested party), depending upon facts and circumstances, should be compared with the companies which are comparable in terms of functions, capital employed, debt equity ratio, turnover, risk, contractual terms, assets employed etc. If any of the item such as capital employed, turnover is not comparable to the tested party for any reason, then the necessary adjustments are required to be made. The provisions of rule 10B (2) (3) of Income Tax Rules also provide for such adjustments which is reproduced as under: (2) For the purposes of sub-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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.4 In the light of the above discussion, we find that admittedly the depreciation claimed by the assessee is greater than the depreciation of the comparable companies for the year under consideration. The amount of depreciation claimed by the assessee viz-a-viz comparable companies stands as under: Sr.No. Name of the company Operating sales Operating Expenses Depreciation Depre/Operating Sales % 1. Air Control Chemical Engg. Co. Ltd. 226,454,000 195,262,000 1,088,000 0.480% 2. Kay International Ltd. 481,505,101 437,021,306 10,457,991 2.172% 3. Kulkarni Power Tools Ltd 87,114,734 81,653,265 3,519,684 4.040% 4. Neo Tech-Aid Compressor Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded before computing the corresponding profit level indicator. Accordingly, the Transfer Pricing Officer is directed in these peculiar facts to exclude assessee's corresponding depreciation claim for the purpose of the profit level indicator in question. This assessee's argument also succeeds. [Para 6] 8.6 It is also significant to note that the learned CIT (A) has equated the amount of depreciation with the repair and maintenance expenses. As per the learned CIT (A) if the assessee is claiming higher depreciation than the comparable companies, it implies that the assessee must be claiming less repair and maintenance expenses than the comparable companies. Accordingly, the learned CIT (A) rejected the contention of the assessee for making the adjustments with respect to the depreciation. In this connection, we find that the repairs and maintenance expenses cannot be equated/compared with the depreciation. These are two independent items of expenses. There is no guarantee that if the depreciation is higher then, the repair and maintenance expenses will be lower or vice versa. Accordingly we are not convinced with the reasoning of the learned CIT (A). In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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