TMI Blog2016 (5) TMI 1595X X X X Extracts X X X X X X X X Extracts X X X X ..... y assessee, as GP over sales can eliminate the difference in claim of depreciation due to age of machinery rate at which it was claimed and method of claims like straight line or written down value. We accordingly direct the AO/TBO to adopt the comparison of profitability ratios adopting GP over sales. Since the details of capacity utilization of the comparable companies and rate of depreciation could not be analysed as commented by DRP, it would be better if GP analysis was undertaken taking sales less cost of raw material as basis (excluding other cost including Depreciation, interest etc) so that auto components profitability could be analysed so as to consider whether the import of raw material from AE has effected the profitability of assessee under the TP provisions. Accordingly, we set aside the impugned orders of the Revenue authorities on this issue and restore the matter to the file of AO/TOP to carry out the exercise as stated above. Assessee should be given due opportunity. However, we make it clear that if any adjustment is required' to be made the same is to be restricted, as directed by DRP above. The matters which have attained finality are not be reopened. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned AO and the learned panel erred both in facts and law: in confirning the action of the learned TPO after making a revised adjustment to the transfer prices of the appellant with respect to the impoet of raw material and components from its associated enterprises (AEs) for the auto components manufacturing segment by Rs 88,008,000 holding that the international transation do not satisfy the arm s length principle envisaged under the income tax act, 1961 (the act) and in doing so grossly reeed in . 3.1. Rejecting the economic analysis undertaken by the Appellant in the transfer pricing (TP) documentation pointing out that the computation of arm's length price is not reliable and thereby erred in not appreciating the fact that the appellant had prepared the TP documentation bona fide and in good faith in compliance with the Income-tax Act, 1961 and income tax Rules, 1962 ('the Rules ). 3.2. Upholding the use of data which was not contemporaneous and which was not available in the public domain at the time of conducting the TP study by the Appellant. 3.3. The Learned AO and t Learned Panel erred both in facts and law by not appreciating that the fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout giving appropriate MAT credit and so assessee is aggrieved. Ld. Counsel submitted that interests calculated u/s. 234 234C are consequential in nature. 4. Ld. DR however, referred to the detailed orders of TPO as to why assessees TP study was rejected and adjustments proposed by TPO under the TP provisions. While accepting that DRP has directed to restrict the adjustment to the cost of. material, the DR however, submitted that detailed working is not on record and so the issue can be restored to AO. Regarding the capacity utillsation, the DR submitted that DRP opined that assessee has not furnish the relevant data for comparison, so the adjustments under TNMM method is correct and it will take care of small adjustments ehich may require 5. We have considered the rival contentions and perused the Order and documents placed on record. 5.1. As far as the Ground No. 2 is concerned, the contention of assessee seems valid. The DRP has considered the issue and directed the AO to restrict the adjustment to the cost of material. The detailed analysis before DRP on this issue is as under: 3.1.3. Objection 4- The learned TPO and the learned Assessing officer have erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omponent in the total material cost was only 33% and only 16% with regard to the total operating cost. In view of the facts submitted were of the view that the adjustment has to be restricted to the cost relating to imports of material from the AEs. Assessing Officer is directed accordingly 5.2. As, seen from the draft order, the TP adjustment proposed was Rs. 8,98,90,000/-whereas the final adjustment made was Rs. 8,80,08,000/- It seems AO has implemented only other direction of adopting average OP/sales Of comparable companies at 8.23% as against 8.51% proposed as directed in para 3.1.2. The direction of DRP in para 3.1.3 has not been implemented. To that extent, AO's order is not in compliance with the directions of DRP. AO is directed to modify the adjustment as per the direction of the DRP on the issue. Ground No. 2 of assessee is accordingly allowed 5.3. With reference to the adjustment for capacity utilisation, the Submission of assessee was that the better comparability on GP over sales When GP was calculated as sales less cost of raw material consumed. It was submitted that due to underutilization of capacity, the comparability of OP/cost does not give pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. Depreciation, which can have varied basis and is allowed different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing by Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons. 5.4 Further AT has analysed the issue as under: 14. We have aIready noted that the department has accepted orders of the Id. CIT (Appeals) superseding orders of the T.P.O and the AO. We are further inclined t accept principle the general observations of the Id. CIT(Appeals) on TP analysis subject to modification discussed hereinafter we may start our discussion considering the nature of depreciation d its role in computing commercial profit, assessable profits and operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (1993) 201 ITR 101 (Kar). Opposite View 16. The opponent of the above vie while accepting that depreciation is a capital loss, justify its deduction, to replace the value of an asset to the extent it has depreciated hu 'ng the period of accounting - and corresponding aIlowance for depreciation takes its place. Therefore, when arriving at profit for the relevant period, the amount of depreciation has to be deducted, which must be replaced first, as otherwise, initial capital loss would to that extent, be incorrectly and falsely converted into treated as profits. Paton in his Accounts' Handbook described depreciation as out- of- pocket charge as any other payment. He observed There is still widespread misapprehension as to the precise significance of the Depreciation charge. It is often deemed a more or less imaginary and hypothetical Element and is sharply contrasted with the regular 'out-of-pocket' cost as any other. The depreciation charge is merely the periodic operating aspect of fixed asset, costs, and there is no doubt as to the reality of such costs. Far from being non-out-of- pocket charge depreciation represents the extreme example o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation has been taken into account in computing its total income. Rs 2,18,97,046/- and Rs 1,82,99,975/- against Rs 1,60,13,886/- and Rs 1,33,54,123/- claimed in the profit and loss accounts have been allowed in assessment year 2003-04 and 2004-05 respectively. In the first year, it has been allowed at a figure much higher than claimed in the profit and loss account. However, as at present, we are not concerned with above statutory provision or with the computation of total income The reason being the following observations Supreme Court the case of vs. Bipinchandra Maganlal and Co. Ltd. 41 ITR 290. There is no definable relation between the assessable income and the profits of a business concern in a Commercial sense Computation of income for purposes of assessment of income-tax is based on a variety of artificial rules and takes into account several fiction receipts, deduction and allowances smallness of the profit in section 2 A has to be adjudged in the light of commercial principal and not in the light of total receipts, actual or fictional. There is no need to apply artificial rules or take fictional receipts or deductions into account while computing prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial rules. Indian Transfer Pricing Regulations: 18. Having noted vicissitudinary nature of profit and its connection with depreciation , we may do refer to Indian Transfer Pricing Regulation under which ALP is required to be determined to consider whether deduction of depreciation is imperative to compute margin or mean operational margin 18.1. The Indian Transfer Pricing regulations is a complete code and are contained in Chapter-X of the act, supplemented by Rules IOA to 1 DE of Income-tax Rues. Tittle of Section 92 is computation of income from international transaction having regard to arms length price Sub-sections (1) and (2) of section 92, (subsection (3) not being relevant here) are as under: [Computation of income from international transaction having regard to arm's length price. 92. (1) Any income arising from an international transaction shall be computed having regard to the arm s length price Explanation. -From the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm s length price. (2) wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit mar in in the open market; (iv) the net profit margin realised by the enterprise and referred to in Sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be Judged with reference to the following, namely- (a) the special characteristics of the property transferred or services provided in either transaction (b) the function 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 are formal or in writing) of the transactions which lay down explicitly or imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are evaluated and adjustments are made to bring transaction or enterprises to the same level. If a similar uncontrolled transactions is available for comparison then arm's length price is determined by taking such price of similar uncontrolled transaction carried in similar circumstances As similar transactions are not easy to find, and, therefore, an attempt is made to find entities carrying similar function and their profit margin or mean of such margin from a range of entities is taken into account and compared with profit margin of entity involved in international transaction called tested party . Even he it is fundamental that comparable selected should carry similar functions in similar circumstances. This is achieved by carrying functional assets and risk (FAR) analysis of the tested party and comparables if there are any difference between selected comparables and the tested party, then such differences are adjusted. This has been emphasized in US and OECD guidelines and in sub-rule (2) and (3) of Rule 1 DB quoted above. These principles are applicable to analysis carried under alt methods, These are also applicable under TNM Method as noted above though TNMM is more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation as depreciation was leading to large differences in margin for various reason 5.4. Further, Co-ordinate Benches in various cases has approved comparison of profits before depreciation holding as under: a) The Tribunal in the case of Market Tools Research Private Limited vs. ACIT (2013) ITA No. 2066/HYD/ 2001, held as under: 11 .... c) All facts which impact the financial result of comparable companies should be taken into account and reasonable accurate adjustment should be made for the same. In this connection the rates of depreciation adopted by the asseessee are significantly different from (straight line as compared with WTP: higher rate than that prescribed in schedule VI) those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be considered b) The Tribunal in the case Qual Core Logic Ltd. vs. DCIT (2012) 22 taxmann.com 4, held as under 57 .It is evident from Statutory provisions that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed so as to consider whether the import of raw material from AE has effected the profitability of assessee under the TP provisions. Accordingly, we set aside the impugned orders of the Revenue authorities on this issue and restore the matter to the file of AO/TOP to carry out the exercise as stated above. Assessee should be given due opportunity. However, we make it clear that if any adjustment is required' to be made the same is to be restricted, as directed by DRP in para 3.1.3 (Ground No.2) above. The matters which have attained finality are not be reopened. AO/TPO is directed accordingly. Ground No. 3 is allowed for statistical purposes. 6. With reference to the ground No. 4, AO is directed to give MAT credit as per the provision and facts on record. Assessee is directed To furnish necessary details to the AO. Ground is allowed. 7. Interest u/s.' 234BC and 234C are consequential In nature and does not require separate adjudication. However, AO is directed to furnish the working of calculation of 'interest in the order so that assessee can object if there are any omissions/commissions in the levy. 8. In the result appeals is considered allowed for statisti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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