AI Drafter 
TaxTMI 
TaxTMI 
2012 (5) TMI 613
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....d Unit (EOU), which exports to overseas group entities. For the assessment year under consideration, assessee filed a return of income wherein Book Profit u/s 115JB of the Act was shown at Rs. 4,01,98,256/-. The return was subject to a scrutiny assessment u/s 143(3) r.w.s. 144C(13) of the Act dated 25-11-2010 whereby the total income was determined at Rs. 15,38,24,330/- after making certain additions, which inter alia, included an amount of Rs. 10,98,07,842/-, representing adjustment on account of international transaction with the Associated Enterprises (AEs) pertaining to manufacturing activities, and such addition is the substantive dispute in the present appeal. 3. During the year under consideration, assessee has undertaken the following international transactions. S. No. Nature of Transaction Amount (Rs) Method Applied 1 Export of finished goods to overseas Group companies 599,729,362 TNMM 2. Import of raw materials and components for manufacturing finished goods 176,057,018 TNMM 3. Import of finished goods for resale 3,160,161 TNMM 4. Receipt of commission 4,980,548 TNMM 5. Import of capital machinery 41....
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.... 362.75 1963.40 18.48% Gujrat Poly AVX electronics Ltd. 183.71 458.44 40.07% Incap Limited 96.73 1115.41 8.67% Tibrewala Electronics Ltd. 1198.73 4425.57 27.09% Universal Cables Ltd. 311.47 1164.81 26.74% 21.59% 6. Based on the above, an addition of Rs. 10,98,07,842/- has been determined which has been challenged in appeal before us. 7. The first area of difference between the assessee and the Revenue is with regard to computing the operating profit margin in the assesee's case. The TPO/AO has computed the operating margin of the assessee as follows: Sr. No. Head Description Amount (Rs) 1. Operating income Manufacturing sale + Sale of scrap 108,7457,000 +48,32,000 = 109,22,89,000 2. Operating cost Including depreciation Total expenses -cost for back office activities -financial expenses 109,65,60,000 -2,18,75,000 -36,69,000 =107,10,16,000 3. Depreciation 9,79,82,000 4. PBDIT 1-2+3 11,92,55,000 5. Operating profit Margin 4/(2-3_ 12.25% 8. In this connection, the plea of the assessee is that....
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....ers with the last quarter, Vishay India has identified an amount of Rs. 21,378,691 as extraordinary cost incurred during the initial phase of production. This cost has been accordingly, excluded from the operating costs. The working of the extraordinary cost as referred above has been enclosed as Attachment 10. In view of the above, the assessee requests your Goodself to exclude the above cost from the operating costs as such costs being abnormal and non-operating in nature. Cost pertaining to power capacitors project In connection with the project of power capacitors, it is further bought to your goodself's attention that the said project was in a nascent stage with negligible sales value during the year ended 31st March 2006. The sales for this project picked up in the later years. However, Vishay India incurred substantial costs for recruitment of marketing staff and their training and travel as well as participation in various exhibitions. Therefore, these costs have been excluded from the operating costs. In view of the above, the assessee requests your Goodself to exclude the above cost from the operating costs as such costs being abnormal and non-o....
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....sales (adjusted for higher import cost) 6.61% Arm's length operating Margin of Comparables (unadjusted) 7.18% Adjust after considering adjustment for high Import cost (Rs. 233,242,565*(7.18% - 6.61% = 0.57%) Rs.1,317,822 The appellant places reliance on rule 10B(3) of the Rules and the OEC Guidelines, which lays emphasis on adjustment for difference between the transactions being compared which are likely to materially affect the profit arising from such transactions in the open market for which reasonably accurate adjustments are possible. Thus the differences on account of higher imports and warranty provision have resulted into lower profit as compared to the transactions in the open market for which reasonable adjustment is possible. In view of the above, the appellant submits that the margins of appellant be adjusted to take into consideration excess warranty claims and high import cost. 35. Elaborating the above, Ld Counsel for the assessee has mentioned that assessee imported components and spares from AE to the tune of Rs. 602.18 lakhs for manufacturing segment. It works out to nearly 40% of total imports i.e. Rs. 1557.38 ....
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.... principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Coordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. A....
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.... factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations. 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto." 13. Furthermore, the appellant pointed out that the Comparable Companies, have not incurred any start-up activity cost as is amply clear from the Annual Reports. 14. In view of the aforesaid discussion, in our view, the assessee ought to succeed on this Ground and....
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....(P) Ltd. (supra); Electrobug Technologies Ltd. (supra), and Development Consultant P Ltd v DCIT 115 TTJ 577 (Kol.) wherein it has been observed that the benefit of the option contained in the latter part of the Proviso to section 92C(2) is available to all assessees, irrespective of the fact that price of the international transaction disclosed by them exceeds the margin prescribed in the Proviso. 21. So, however, the other argument set up by the Revenue and which has been more potently argued is to the effect that the benefit of such Proviso is not available to the assessee in the instant case, because the said Proviso has been amended by the Finance (No 2) Act, 2009 with effect from 1.10.2009 which reads as under: "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken sh....
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....y. Thus, it can be said that the Proviso is not a procedural piece of legislation and therefore, unless it is so clearly intended, the newly amended proviso cannot be understood to be retrospective in nature. In fact, it is a wellsettled proposition that the statutory provisions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability of the above amendment has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment year 2009-10 and subsequent years. In this regard, we also find that the Delhi Bench of the Tribunal in the case of ACIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed that the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5%....
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....ate to the detriment of the assessee since at the relevant point of time the contents of the Circular No 5/2010 (supra) were in operation. In other words, the withdrawal of the interpretation placed in circular No 5 /2010 (supra) on the applicability of the amended proviso is sought to be done away by the Corrigendum dated 30.9.2010 and, therefore, such withdrawal shall be effective only after 30.9.2010, even if such Corrigendum is accepted as valid. We may note here that the appellant has assailed the validity of the Corrigendum itself on which we have not made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to dis-entitle the assessee from its claim of the benefit of +/-5% in terms of the erstwhile proviso to section 92C(2) of the Act. In coming to the aforesaid, we have been guided by the parity of reasoning laid down in the judgments of the Hon'ble Bombay High Court in the cases of BASF (India) Ltd. v CIT 280 ITR 136 (Bom); Shakti Raj Films Distributors v CIT 213 ITR 20 (Bom); and, Unit Trust of India & Anrs. v ITO 249 ITR 612 (Bom). The Hon'ble High Court has opined in the case of BASF (India) Ltd. (supra) that the....
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.... primarily on the ground that no such plea was raised before the lower authorities. 20. In this connection, in our considered opinion, the non-raising of such an issue before the lower authorities does not preclude the assessee from raising it before the Tribunal, so long the issue is bonafide, relevant and is likely to affect the determination of tax liability of the assessee. In a somewhat similar situation, Pune Bench of the Tribunal in the case of Demag Cranes & Components (I) Pvt. Ltd (supra) has dealt with the issue of allowing working capital adjustment in the following words: "30. To sum up, the case of the assessee is that in TNMM, the working capital adjustments are required to be done to the margins of the comparable uncontrolled transactions to generate credible comparability data on transactional net margins. On the other hand, if appears that the case of the revenue is that the no such adjustments are called for to the set of comparable, which are supplied by the assessee. 31. We have so far analyzed Rule 10B(1)(e) on one side and other sub rules and in the context of the TNMM, we have analyzed the need for the elimination of the difference, if any in the ....
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.... accounts appearing in P&L account or Balance sheet, which are likely to materially affect the NPM in open market and therefore, the demands of the assessee should be ignored, is not the correct approach. Revenue's reasoning that the demanded adjustments should not be entertained by the TPO merely on the basis the comparables are supplied by the assessee is not the correct. In our opinion, it is the duty of the TPO to apply the provisions of rule 10B(1)(e) to establish the ALP in relation to international transaction as per the TNPM, which is an undisputed method found applicable to the present case by both the parties. It is a settled accounting principle that the net margins can be influenced by some of the same factors which can influence price or gross margins. Further, it is the requirement of the rules / provisions that any difference which is likely to materially affect the NPM in open market has to be eliminated. TPO must know that the TNMM visualizes the undertaking of the thorough comparability analysis and elimination of the differences through the requisite adjustments. Yes, data availability is the limitation and both the parties need to ensure the procurement and use ....
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....xamined. We find that there are written request of the assessee to the DRP to this extent and assessee furnished the relevant figures, which are enough to adjudicate the said request by the AO/DRR. It is not the case of the DRP that the above claims of the assessee are incorrect. Alternatively, it is not the request of the revenue's DR that these said issues should be remitted for another round of the proceedings before the revenue authorities. In our opinion, the existence of difference @ 3.41%, which is worth Rs. 31,72,099/-, attributable to the 'working capital' ought to amount to the 'material difference' considering the existing unadjusted operating margin of the comparables at 7.18%. In these circumstances, we are of the opinion that the said working capital differences constitutes quantitatively likely to materially affect the ALP / AL Operating Margin of the comparable. Therefore, the claims of the assessee are allowed. Accordingly, the grounds 4(a) is covered by the cited decisions and is allowed pro tanto. " 21. In the light of the aforesaid, the plea of the assessee has to be upheld in principle. So, however, as the issue has not been examined by the lower authorities....
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....ests of similarity. In this context, the learned DR appearing for the Revenue emphasized that a Government undertaking has altogether different objectives than a private entity and that it would not facilitate meaningful comparison if the Keltron group concerns are adopted as comparables. 24. In our considered opinion, mere fact that Comparable Company is owned by Government, it cannot be a criteria to reject the same, inasmuch as ownership structure of a concern is normally not expected to have a bearing on its operating margins. Nevertheless, even if we were to go along with that thought process of the TPO on this count to reject such Comparable Companies, but after having accepted their comparability on account of functionality, the onus was on the TPO to establish that it had certain peculiar features which actually impacted the profit margins. In this context, in para 1.9.2.3 of the written submissions addressed to DRP, a copy of which is placed in the Paper Book at pages 15.1 to 15.11, the assessee has tabulated the employee cost percentage to sales ratio of the Comparable vis-à-vis the assessee. In terms of the same, the cost of compensation of employees on sales o....
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....rounds No. (10) and (11) relate to the manner of computation of deduction under section 10B of the Act. In brief, the facts relevant are that the assessee availed deduction under section 10B of the Act at Rs. 38,39,493/- and the Assessing Officer has re-worked the deduction under section 10B of the Act at Rs. 38,03,558/-. The first grievance of the assessee is that the deduction has been wrongly reduced by reducing the expenses incurred towards insurance and communication expenses amounting to Rs. 38,333,859/- and Rs. 10,94,937/- respectively from the figure of export turnover by wrongly appreciating Explanation 2(iii) to section 10B of the Act. According to the appellant, no such adjustment was required and notwithstanding the aforesaid, it is further submitted that if at all insurance and commission expenses were to be reduced from the figure of export turnover, same be also reduced from the figure of total turnover in order to compute deduction under section 10B of the Act. 28. Before us, the learned Counsel for the assessee submitted that in terms of Explanation 2(iii) to section 10B of the Act only freight, telecommunication charges or insurance attributable to the delivery....
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.... the Revenue. As per the learned Departmental Representative, there was no specific clause permitting for exclusion of insurance and communication expenses from the figure of total turnover and, therefore, the Income-tax authorities were justified in not doing so. In so far as the plea of the assessee that no expenditure is incurred on foreign currency for exclusion in terms of Explanation 2(iii) to section 10B of the Act, the learned Departmental Representative submitted that incurrence of expenditure in foreign currency is a condition attached to the second limb of the expenses mentioned in Explanation 2(iii) to section 10B of the Act, which is providing of technical services outside India. Therefore, on this aspect the argument of the appellant has been opposed. 32. We have carefully considered the rival submission on these aspects. Explanation 2(iii) to section 10B of the Act provides the meaning of expression 'export turnover' for the purposes of section 10B of the Act. Section 10B makes a special provision in respect of newly established 100% EOUs. Subsection (1) of section 10B provides that a deduction of such profits and gains as are derived by a 100% EOU from the export....
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....g telephone expenses, that is liable for consideration in terms of Explanation 2(iii) to section 10B of the Act. Similarly, with regard to the insurance expenditure also, the amount of Rs. 3,25,027/- alone is relevant to be considered in terms of Explanation 2(iii) to section 10B of the Act. On these aspects, we therefore uphold the contention of the assessee, in principle. So however, on this point it would be necessary to examine as to the appropriate amount that is required to be considered as attributable to delivery of exports so as to be excludible in terms of Explanation 2(iii) to section 10B of the Act from the figure of export turnover. In this connection, we may make reference to the following observations of the Special Bench: "27. At this juncture, it is necessary to refer to one aspect of the matter. It may be an easy task to exclude the freight, telecom charges or insurance attributable to the delivery of computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India from the export turnover and the total turnover if they are separately mentioned in the invoice raised by the assessee. In the....