TaxTMI 
TaxTMI 
2014 (4) TMI 617
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....Ld. CIT(A) erred in allowing the cost plus method followed by the assessee in determining the arm's length price as against the profit margin method followed by the Ld. Assessing Officer. Ground No. 7 for A.Y. 2004-05: Ld. CIT(A) erred by excluding profit on sale of DEPB licence for computing deduction U/s. 80HHC of the Act." 3. The assessee is a private limited company, engaged in the business of manufacturing and exporting of industrial valves made of steel casting, filed its return of income for the assessment year 2004-05 on 29.10.2004 and for the assessment year 2005-06 on 17.10.2005 admitting an income of Rs. 60,46,100/- and Rs Nil respectively. Subsequently the case was taken for scrutiny and assessment was finalized on 28.12.2006 and 19.11.2008 respectively wherein additions made on the increase income on the basis of determining of Arm's Length Price (ALP) for Rs. 72,95,381/- for the assessment year 2004-05 and Rs. 3,94,00,000/- for the assessment year 2005-06 and the increase in profit as per the third proviso to Section 80HHC(3) for computing deduction U/s. 80HHC was denied for the assessment year 2004-05....
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....e. Due to this reason the cost of power and labour incurred by M/s Audco is very low when compared to the assessee company. The Ld. TPO rejected the above submissions of the assessee based on the information obtained by surfing the internet wherein the following facts emerged:- (i) The basic profile and product description of both the assessee company and M/s. Audco India Ltd., showed that they were manufacturers of steel castings, various kinds of valves, carbon steel, stainless steel, alloys steel etc. (ii) Both the companies were in the same business performing similar functions. (iii) Both the companies utilized same type of assets and undertook the similar risks. (iv) The products manufactured by both the companies are used in the petroleum industry for similar purpose. (v) The assessee company was operational from year 1992 whereas M/s. Audco India Ltd. was operational from year 1962. Though M/s. Audco India Ltd. had more experienced than the assessee company, yet the assessee company was also an experienced entity. &nbs....
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.... big concern and it cannot be compared with the appellant company. (ix) The Ld. TPO for the A.Y 2005-06 had accepted that M/s. Audco India Ltd. is not a comparable company for the A.Y.2005-06. 7. Before us the Ld. D.R argued stating that the ld. TPO and Ld. Assessing Officer had considered all these factors before arriving at the conclusion and for reasons substantiated in their respective order had adopted TNMM method and therefore prayed that the order of the Ld. Assessing Officer may be upheld. Ld. A.R. on the other hand relied on the order of the Ld. CIT(A). 8. We have heard both the parties and carefully perused the materials available on record. From the facts and circumstances of the case, we find that the Ld. TPO has judiciously arrived at a conclusion for adopting a TNMM method and compared the financial results of the assessee company and the comparable company M/s. Audco India Ltd., though there are certain dissimilarities as observed by the Ld. CIT(A). On perusing the facts of the case we find that the products manufactured by both the companies are similar though not identical. There is nothing on record to suggest that the nature of b....
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....7.54 Operating Profit 40.51 Operating Profit 1.94 OP/COST 12.16 OP/COST 7.04 9. However, on perusing the computation made by the Ld. Assessing Officer, we find that the Ld. Assessing Officer has excluded the research and development expenditure of Rs. 6.05 crores while arriving at the operational profit of M/s. Audco India Ltd. Since both the companies are manufacturing identical type of products, it cannot be presumed that the assessee company has not incurred any expenditure on research and development. If this amount is also considered, the operation profit to ratio cost to M/s. Audco India Ltd. would work out as follows:- (a) Total cost 333.01 (+) 6.05 R&D expenditure = 339.06 (b) Operating profit 40.51 ( - ) R&D expenditure 6.05 = 34.46 (c) O/P/cost = {34.46 ( x) 100} / 339.06 = 10.16 Thus O/P to cost ratio of M/s. Audco India Ltd would fall from 12.16 to 10.16. Further, giving leverage of 5% due to the second proviso of Sec. 92C(2) of the Act, the difference in profit margin between both the companies w....