TaxTMI 
TaxTMI 
TaxTMI 
2014 (2) TMI 652
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....ss as per the books of accounts". The Assessing Officer observed that there were no accumulated losses as per the books of accounts. On being show caused, the assessee submitted that there were accumulated book losses to the tune of Rs. 3.46 crore as on 31.3.2001. Reduction in the capital of the company was effected on 30th August, 2001, by which the paid up capital stood reduced from Rs. 3250 lac to Rs. 5 lac, resulting into cancellation of paid-up capital amounting of Rs. 3245 lacs. The Assessing Officer rejected the assessee's claim on the ground that there were no accumulated losses at the beginning and at the end of the year. The ld. CIT(A) reversed the assessment order on this point and concurred with the assessee's contention. 3. We have heard the rival submissions and perused the relevant material on record. At the very outset, it is relevant to note that similar issue came for consideration before the Tribunal in assessee's own case for the immediately preceding assessment year 2002-03. Vide its order dated 11.7.2008 in ITA No. 2323/Del/2006, the Tribunal has held that the assessee to be entitled to deduction of such loss. The ld. Departmental Representative contended tha....
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.... order, following the same view, we uphold the impugned order on these grounds. These grounds, therefore, fail. 5.1. Last effective ground of the Revenue's appeal is the major ground, which is directed against the deletion of transfer pricing addition made by the AO. Briefly stated the facts apropos this ground are that the assessee was engaged in the manufacture of molds, dies and molded components and provisions of business/management consultancy services to group companies. The entire business was segmented into the following three operational divisions :- i. Components Division - For manufacture of molded components and pressed stamped product, primarily for automobile sector; ii. Tooling Division - For manufacture of molds/dies, primarily used in the automobile sector; and iii. Corporate Division - For providing business/ management consultancy to its group companies. 5.2. The assessee entered into certain international transactions with its Associated Enterprises (AEs) which were reported through Form No. 3CEB. The assessee applied Transactional Net Margin Method (TNMM) in respect of Components Division, by choosing Profit Level Indicator (PLI) of Operating profit to Tot....
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....te the amount of `Operating profit' by considering the amount of Depreciation at Rs. 3.86 crore and Tools written off at Rs. 35.14 lac. This gave ratio of Operating loss/sales at (-) 9.03%. The assessee had already carried out detailed search process under this division. The comparables so chosen by the assessee were not disturbed by the TPO. As the assessee did not calculate or communicate the ratio of `Operating profit to sales' of such comparables despite specific notice, the TPO took up this task upon himself and worked out mean of OP/sales of such comparables at 6.17%. This led to the TP adjustment of Rs. 1,95,48,015/- (earlier wrongly calculated at Rs. 2,30,62,953/- due to some calculation mistake). The ld. CIT(A) got convinced with the assessee's submissions on this issue and held that the approach of the assessee in considering `Cash Profit to Sales' as the PLI was appropriate. In reaching this conclusion, he relied on an order passed by the Delhi Bench of the Tribunal in Schefenacker Motherson Ltd. (2009-TIOL-376-ITAT-DEL). The Revenue is aggrieved against the deletion of such addition. 5.4. We have heard the rival submissions and perused the relevant material on record. ....
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....o in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (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. iii. It is manifest from the prescription of the above rule that the starting point for computing ALP under TNMM is the determination of `net profit margin' realized by the enterprise from international transaction with its AEs. Such net profit margin is computed in relation to cost incurred or sales effected or assets employed etc. Thus, it brings to light that the numerator is net profit margin and the denominator is either cost incurred or sales effected or assets employed or to be employed by enterprise or any other relevant base. The denominator varies from case to case depending upon nature of transaction and host of other relevant factors. In some cases, it may be cost employed, while in others, it may be sales effected or assets employed etc. However the numerator, being the `net profit margin' is static or fixed. Unlike denominator, no alternatives have been provided for numerator. It remains constant with the varyi....
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....013) 140 ITD 41 (SB) has held that : "It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed as per these methods. No one is authorized to add one or more new steps in the prescribed procedure or to substitute any other mechanism with the one prescribed under the rule. It is neither possible to invent a new method nor to substitute a new methodology in place of the one prescribed in the rule." In view of Morgan Stanley and Co. Inc. (supra) and LG Electronics (supra), it becomes vivid that the procedure prescribed under rule 10B(i)(e) is required to be strictly followed. On having a glance at the language of the delegated legislature given under Rule 10B(1)(e) in the light of the above referred precedents, it is manifested that in contradistinction to the varying denominator, the numerator invariably remains constant at net operating profit margin. It, therefore, follows that there is no warrant for substituting `net operating profit' with `cash profits' in determining the ALP under TNMM and thereby excluding depreciation from total operating costs. This position becomes more pertinent when fixed assets ....
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....le reduction be allowed towards higher depreciation charged by it due to change in the depreciation policy effected for the first time in this year. To bolster his submission, the ld. AR invited our attention towards page 16 of the paper book, being a copy of Schedule XIV to the Annual accounts, to demonstrate that the rates of depreciation have been revised for the current year. Elaborating this submission, he took us through page 24 of the impugned order to highlight that the assessee's percentage of depreciation to sales was 24% as against mean of such comparables ratio of 5.48%. It was on the strength of these arguments, that he strongly pressed for the adequate relief in the operating profit rate. ii. We are not impressed with the submission tendered on behalf of the assessee. Firstly, the so-called change in the depreciation policy is simply confined to upwards revision of rate of depreciation in respect of some of the items of the assets. The method of charging depreciation continues to remain the same. Now, let us view the change in the rate of depreciation of certain assets. Schedule XIV indicates that the rate of depreciation under the block of Plant and Machinery has be....
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....on in the profit due to variation in the rate of depreciation as charged by the assessee could have been made by demonstrating that the rates of depreciation charged by the assessee on certain assets were more than those charged by the comparable companies. The total of depreciation amount is absolutely irrelevant. The fact that the assessee has charged depreciation at higher rate can be viewed only when it is established that the comparable companies charged depreciation on such assets at lower rates vis-à-vis that of the assessee. On a specific query from the Bench, again no such information was given by the assessee. iv. Be that as it may, we find that it is not allowed to compare each and every item of the operating cost incurred by the assessee with similar cost in the case of comparables to ask for adjustment. It is the overall effect of all such individual items culminating into operating profit, which is considered for benchmarking the assessee's international transaction. It is quite natural that if a new asset is purchased, the amount of depreciation on a written down value method will be higher but the repair cost will be low. In contrast to that, when the asset ....
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....rables is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions etc. To ask for adjustment, it is sine qua non that there should be some independent and substantial reason for claiming adjustment in profit rate of comparables. The singular effect of higher quantum of an item of expenditure de hors the other relevant factors, is not permissible. In the context of depreciation, one can rightly appreciate the need to make adjustment, if rate of depreciation charged by the assessee vis-à-vis its comparables is different. But the simplicitor difference in the amount of depreciation is inconsequential. As there is nothing to show in the extant case that the assessee did charge depreciation at higher rates in comparison with its comparables, we are not inclined to accept even the alternative prayer of the ld. AR. III. RULE OF CONSISTENCY i. The ld. AR also pressed into service a contention that the PLI of `Cash profit to total sales' adopted for the current year should not be disturbed as the Revenue has accepted the same for the assessment year 2007-08 onwards. To fortify his....
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....have heard the rival submissions and perused the relevant material on record. It is clear that the assessee applied `Cash profit to total sales' as PLI under TNMM for the current year and two subsequent years also under appeal. The application of such PLI came to be rejected by the TPO for all these three assessment years. In all these years, the TPO is consistent with his stand that the PLI of `Cash profit to sale' is not correct as it does not properly indicate the ALP of the international transactions and the same should be substituted with the correct PLI of `OP to sales. The ld. AR has relied on the order passed by the TPO for the assessment years 2007-08 and subsequent years to buttress his contention that the principle of consistency should be followed in as much as the TPO has accepted the PLI of `Cash profit to sales' for these years. We are unable to accept this contention for the reason that the ld. DR has placed sufficient material on record which indicates that the TPO did compute OP/TC for these years which was more than that of the comparables. In such a situation, not making a specific mention about the incorrectness of the PLI of `Cash profit to sales' in his order....
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.... year'. On vetting the information on record it transpired to us that the revision in the rates of depreciation in respect of some of the assets was across the board and not confined to Tooling division alone. On a specific query raised from the Bench, it was unequivocally admitted by the ld. AR that the change in depreciation rates was carried out on entity level extending to all the three segments, and it was not restricted to `Tooling Division' alone. This divulges the fallacy of the statement made before the TPO in this regard. Thus, it is palpable that the operating profit was worked out by the assessee with the changed depreciation rates under the Components Division and there was no significant impact of such change in depreciation policy of the asessee. It is so for the reason that the assessee adopted OP/TC under this segment for benchmarking its international transaction, by obviously considering depreciation at the revised rates. However, the same was found to be not workable under Tooling Division for the covert and understandable reason that the assessee had reported operating loss of Rs. 66.71 lac from international transactions with its AEs under this Division. This ....
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....d circumstances prevailing in its case under such method, it ought to have chosen another more appropriate method. Since it has adopted TNMM as the most appropriate method and the computation of ALP under such method is definitely workable by computing the operating profit, we are of the considered opinion that there can be no warrant for converting net operating profit to `Cash profit'. iii. Whereas the ld. CIT(A) relied on the decision in Schefenacker Motherson Ltd. (2009-TIOL-376-ITAT-DEL), which says that the operating profit can be substituted with the cash profit in certain cases, there are other decisions including DCIT VS. Petro Araldite P. Ltd. (2013) 36 CCH 330 MumTrib which hold that operating profit cannot be calculated without depreciation. Moreover, the bench in the case of Schefenacker Motherson Ltd. (supra) has itself noticed that : "Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances." Thus, the ratio decidendi of this decision should be confined to the peculiar facts as were obtaining i....
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....lds and dies etc. As a part of its business strategy, it was proposed to manufacture and export tools molds outside India. In this regard, it took consultancy services for conducting feasibility study for doing manufacturing and export of tools and molds in Mauritius. As project at Mauritius did not materialize, the assessee claimed deduction for the entire expenditure in this regard. The Assessing Officer opined that the provisions of section 35D were attracted and hence only 1/10th of the expenditure was allowable. As the concerned project did not commence during the year, the AO held that no expense at all was deductible. The ld. CIT(A) upheld the disallowance by relying on certain judgments which have been referred to in para 68 on page 14 of the impugned order. The assessee is against the sustenance of this addition. 6.2. We have heard the rival submissions and perused on relevant material on record. The first undisputed position is that the assessee was earlier engaged in the business of manufacture and sale of tools and molds. The expenditure in question was incurred for conducting feasibility study for undertaking the same activity of manufacturing in Mauritius. The plans ....