TaxTMI 
TaxTMI 
TaxTMI 
2010 (5) TMI 845
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....of Income-tax, Range 6(2), Mumbai of Rs. 23,95,132/- on account of unutilised Modvat credit to the closing stock and further erred in enhancing it to Rs. 26,64,545/-. 5. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed that the assessee has not included unutilised CENVAT credit in the value of closing stock as on 31st March, 2002 to the extent of Rs. 23,95,132. He noted that while doing so, the assessee has deviated from the method of accounting as laid down in section 145A of Income-tax Act, 1961 (the Act). According to the Assessing Officer, as per the provisions of the section, one has to follow the inclusive method for valuing the closing stock by including CENVAT credit which remains unutilised on the last day of the concerned financial year. However, the assessee company in the instant case has followed inclusive method of valuing the closing stock and the unutilised CENVAT credit is reflected under the head "loans and advances" in the assets side of the Balance Sheet. The Assessing Officer asked the assessee to explain as to why the same should not be included in the closing stock in view of the provisions of s....
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....e is in appeal before us. 8. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find merit in the submission of the learned counsel for the assessee that it has nil effect in view of the following calculations. Sl.No. Particulars Increase in profit (Rs.) Decrease in profit (Rs.) 1. Increase in cost of opening stock of material on inclusion of : a. Cenvat availed 7,132,473 b. Sales tax set off availed 42,258 2. Increase in purchase cost of materials on inclusion of a. Cenvat availed 42,419,091 b. Sales tax set off availed 231,621 3. Increase in closing stock of materials on inclusion of Cenvat availed 5,059,677 4. Accounting of CENVAT credit/ sales tax set off availed and utilised on materials consumed in payment of excise duty & sales tax on finished goods accounted on the basis of materials consumed. a. Cenvat availed 44,491,887 &....
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....ment entries to be passed by the assessee for this account and such adjustment entries are not related to the requirement of Section145A. Such balance in Modvat account not related to purchase sale and inventory is not required to be added in the valuation of purchase and sale of goods and inventory for the purpose of determining the income chargeable under the head "Profits and gains of business or profession". Considering the totality of the facts of the case we are of the considered view that addition made by the Assessing Officer and enhanced by the ld. CIT(A) is not sustainable in law. We accordingly delete the addition." 10. Since the CIT(A) has decided the issue against the assessee by following his order for the preceding assessment year which has been set aside by the Tribunal, therefore, respectfully following the decision of the Tribunal in assessee's own case in the immediately preceding assessment year, we set aside the order of the CIT(A) on this issue and the above two grounds raised by the assessee are allowed. 11. Concise grounds of appeal No. 3 by the assessee reads as under: "3. On the facts and in the circumstances of the case and in law, the learned CIT(A) e....
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....t determining the arms length price of exports to AE by using internal TNMM method. 14. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed from Form10CEB that the assessee during the relevant assessment year had international transactions with Associated Enterprises (AEs)/concerns to the tune of Rs. 34,32,69,351. In order to determine the Arms' Length Price (ALP) in relation to international transactions the case was referred to the Transfer Pricing Officer (TPO) u/s. 92CA(1). He noted that the TPO had passed the order u/s. 92CA(3) of the Act on 21st December, 2004 wherein the ALP of international transactions relating to export to AEs has been computed at Rs. 37,40,58,731 as against the transactions value of Rs. 34,32,69,351 declared by the assessee. The Assessing Officer accordingly made the addition of Rs. 3,07,89,380 to the total income of the assessee on account of adjustments of ALP of international transactions with AEs. 15. Before the CIT(A), it was submitted that the assessee company has entered into international transactions with the AEs and as per the Transfer Pricing Report prepared by it, the most appropr....
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.... adjustment of Rs. 3,867,421 in the instant case. 18. Aggrieved with such order of the CIT(A), the assessee is in appeal before us. 19. The learned counsel for the assessee filed a detailed written submission and submitted that during the relevant assessment year the company entered into the following international transactions with the AEs: S. No. Particulars A.Y. 2002-03 Amount (Rs.) 1. Export of goods 343,269,351 2. Reimbursements paid 3,581,066 3. Reimbursements received 2,198,676 He submitted that for the purpose of justifying the arm's length price for these international transactions the company applied the TNM method using operating profits/sales as the profit level indicator. 20. The learned counsel for the assessee reiterated the same submissions as made during the assessment and appellate proceedings. Referring to Paper Book pages 90, 105, 106 and 109, he submitted that there are substantial differences in the functional and risk profile of the activities undertaken by the assessee in respect of the exports made to the AEs and Non-AEs. He submitted that the assessee undertakes certain additional functions in respect of the exports made to the Non-AEs whi....
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....t level analysis using operating margins. The learned counsel for the assessee submitted that in light of the above and without prejudice to all the other submissions of the assessee, if at all an internal comparison is to be carried out in the instant case, then it should be carried out at the operating level i.e., using the net/operating margins. 23. He submitted that a net/operating level analysis using TNMM is appropriate in the instant case as the net margin are less affected by transactional differences. He submitted that under the TNMM, some level of functional diversity between the controlled and uncontrolled parties is acceptable as the differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net profits. 24. The learned counsel for the assessee drew the attention of the Bench to the following analysis of the net margins earned by the assessee on AE and Non-AE exports: Assessee's operating margin on AE Exports - before volume discount 20% Assessee's operating margin on AE Exports - after volume di....
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....-5% range as carried out by the CIT(A): Revenue for AE exports a 343,269,351 DICOP for AE exports b 239,183,280 GP for AE exports 104,079,240 GP/DICOP c 43.51% Adjusted Arm's length GP/DICOP determined by CIT(A) d 52.77% Difference from Arm's length GP/DICOP e = c - d 9.26% Difference from Arms length price f = e * b 22,137,777 Arm's length price as determined by CIT(A) g = a + f 365,407,128 -5% Range allowed under proviso to 92C(2) of the Act h = g * 95% 347,136,771 Adjustment after including -5% range I = h - a 3,867,420 28. He accordingly submitted that there should be no addition on account of ALP. 29. The learned DR, on the other hand, referred to the order passed by the TPO and submitted that the TPO has passed a very reasonable order. He submitted that when the law does not speak anything specifically, one can go to the OECD. He submitted that the company has used TNM Method for computing the ALP. However, it has not identified the uncontrolled transactions entered into by the company similar to the international transactions which it could have considered while deciding the most appropriate method. He submitted that the 26 companies g....
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....ved - 21,98,676 32. There is also no dispute to the fact that the assessee for the purpose of justifying the ALP for its international transactions has followed TNM Method using operating profit/sales as the profit level indicator (PLI). There is also no dispute to the fact that the TPO has compared the gross mark up on cost earned by the assessee from exports to the AEs at 43.51% with the gross mark up on cost earned on exports to the Non-AEs at 56.39% and after adjusting commission paid on sales made to non AEs and deficit credit period to the gross mark up on cost earned to Non-AEs the TPO effected adjustment of Rs. 3,07,89,380/-. There is also no dispute to the fact that the CIT(A) while upholding the CPM adopted by the TPO allowed adjustment on account of staff and travelling cost of dedicated marketing personnel and the benefit of +/- 5% range and sustained an amount of Rs. 38,67,421/- for which the assessee is in appeal and there is no appeal filed by the Revenue for the relief. It is the submission of the learned counsel for the assessee that the assessee has to undertake certain additional functions in respect of the exports made to the Non-AEs for marketing, di....
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....arties and, therefore, the Cost Plus Method is not applicable. Further the learned counsel for the assessee also could not satisfactorily explain as to what are the substantial differences in the functional and risk profiles of the activities undertaking by the assessee in respect of the exports made to the AEs and Non-AEs. Therefore, we do not find merit in the submission of the learned counsel for the assessee that in cases where the differences in functional profile are so material that the same cannot be reasonably adjusted while carrying out a gross profit analysis, it may be appropriate to consider a net level analysis using operating margin in view of Rule 10B(1)(c)(iii). Therefore, the submission of the learned counsel for the assessee that if at all an internal comparison has to be carried out in the instant case then it should be carried out at the operating level i.e., using the net/operating margin. Further we find force in the submission of the learned DR that since the cost data for the manufacture of products are available as per cost audit report, the reliability there of is assured and therefore Cost Plus Method is the most appropriate method. In this view of the m....