TaxTMI 
TaxTMI 
2016 (4) TMI 377
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....er section 250 of the Act are bad in law and on facts. Without prejudice to the to the generality of the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Essilor Manufacturing India Private Limited ('the Appellant or 'the Company'), a show cause notice as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The AO erred in law in making a reference to the Assistant Commissioner of Income-tax (Transfer Pricing) - VI ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA(1) of the Act. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. c) On the facts and in the circumstances of the case and in law, the Ld. TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision o....
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.... companies. 4 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO a) The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) depreciation adjustments, (c) research and development expenditure adjustment and (d) capacity under-utilisation adjustment between the Appellant and the comparable companies. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The Ld. CIT(A) erred in rejecting capacity adjustment citing reasons that the working capital adjustment has been allowed to the Company. Further, the Ld. CIT(A) erred in incorrectly observing that the Appellant had not provided workings for capacity underutilisation adjustment in relation to comparable companies identified by the TPO in his order. 5 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the variation as per the proviso to Section 92C(2) of the Act. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. 6 Disallowance of prior period expenses a) The AO erred in disallowing a sum of Rs. 11,03....
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....onsideration as under :- Nature of Services Receipts (Rs.) Payment (Rs.) Purchase of raw material, spares, consumables. 4,17,15,955 --- Sale of finished goods. --- 14,84,15,357 Purchase of plant & machinery 16,98,775 Recovery of expenses. 37,46,231 To Benchmark its international transactions, the assessee adopted CPM as MAM and compared the average gross margins of the comparables at 34.83% with that of the assessee at 45.42%. Thus the assessee claimed that its international transactions are at Arms' Length. The assessee has also used the TNMM as supplementary method. The assessee selected 5 comparables to benchmark the transaction under TNMM with Mean Profit Level Indicator (PLI) of 7.93% as against the PLI of the assessee at - 7.12%. The assessee also adjusted for the unutilized capacity of the plant and arrived at 15.71% operating profit on sale and claimed that the operating profit on sale of the assessee is more than the operating profit margins of its comparables and therefore the transaction with AEs are claimed to be at arms length. The TPO observed that certain portions of the expenses have been retain....
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....he assessee has submitted that the assessee is not in full fledged manufacturing activity but more into process activity which involves the process of casting and coating of plastic ophthalmic lenses. The learned Authorised Representative has further submitted that since raw material is imported from the group companies and the entire sale is made to the AEs as well as domestic group companies, therefore, the assessee is more doing a job work than manufacturing and selling. He has further submitted that a different raw material used by the various comparable companies making them uncomparables under TNMM. In support of his contention he has relied upon the decision of the co-ordinate benches of this Tribunal in the case of GE Medical Systems India Pvt. Ltd. Vs. DCIT 61 Taxmann.com 109 and submitted that the Tribunal while dealing with an identical issue has made a reference to the UN Practical Transfer Pricing Manual and Guidelines for use of CPM. Thus the CPM is typically applied in costs involving the inter-company sale of tangible property where the Related Party manufacturer perform limited manufacture functions or in the case of intra group provisions of services. The method u....
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....s under the UN Practical Transfer Pricing Manual has held in paras 49 & 50 are as under : " 49. Having said so, one should embark upon the stand taken by the Assessee as to why TNMM is the most appropriate method to be adopted for determining ALP in the case of the Assessee. The arguments advanced on behalf of the Assessee have already been set out in the earlier part of this order and are not being repeated. The arguments proceed on purely theoretical basis without citing as to how the required data of direct and indirect costs of production of the property in the case of the comparable companies chosen by the TPO are not available. No specific instance as to how in the case of comparable companies chosen by the TPO, indirect costs of production has been taken at the net profit level. The other argument was that the Assessee is a contract manufacturer and the comparable companies selected should also perform a function performed by a contract manufacturer. If comparable companies perform functions beyond that of a contract manufacturer then they are not comparable. This argument is again general in nature without any particulars on the three comparable companies chosen by the T....
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....on hand undisputedly the assessee has not undertaken the job work or a contract manufacture for its AEs but the assessee is carrying out its independent activity of manufacturing the ophthalmic plastic lenses by using the raw material purchased from the AEs as well as from other parties. There is no contract between the assessee and its AEs regarding the remuneration and mark up in respect of the value added by the assessee in the manufacturing process and further when the assessee is using the raw material of its own and not supplied by the AE for job work or contract manufacturing. Further, we find that there are variations of cost components in respect of the manufacturing activity of the assessee as well as the other comparables selected either by the assessee or by the TPO. The assessee is also seeking adjustment on account of variation of depreciation method applied by the assessee in comparison to the comparables which itself shows that the cost components of the assessee are in variations with that of the comparables and therefore in our considered opinion CPM cannot be regarded as MAM in the case of the assessee. Accordingly, we uphold the orders of the authorities below o....
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....ee has submitted that the grievance of the assessee is confined only to the adjustment on account of depreciation rates and method adopted by the assessee in comparison to the comparables. Thus the hearing on this ground was limited only on the issue of depreciation adjustment and the other claims have not been pressed by the assessee. The learned Authorised Representative of the assessee has pointed out that the assessee is following a straight line method of depreciation in comparison to the written down method adopted by the comparables and therefore the cost of depreciation booked by the assessee is more in comparison to the comparables and consequently an appropriate adjustment is required under Rule 10B on this account. The learned Authorised Representative has referred the comparable details of the depreciation at page No.389 of the Paper Book and submitted that the average depreciation expenses of the comparables is 7.60% to the total cost excluding depreciation whereas the assessee's depreciation expenses to total cost excluding depreciation is 22.85% which shows that the depreciation calculated on straight line method is higher than the comparable companies and accord....
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....sp; Sl. No. Name of the Comparables Cash Profits (Rs.) Cash Profits/Sales Dep./Expenses excl. dep. 1. GKB Opthalmics Ltd. 24,569,107 13.09 4.71 2. General Optics (Asia) Ltd. 21,660,000 23.69 12.71 3. Techtran Polylenses Ltd. 54,854,370 22.40 10.66 4. GKB Vision Ltd. 60,068,894 20.39 2.34 Average 33,348,938 19.89 7.60 Essilor India (without capacity adj.) 28.04 22.85 6.6 Though at the first look it is apparent that the depreciation expenditure of the assessee is much higher than the comparable companies, however, the exact figure has to be determined not by taking into consideration the depreciation expenditure alone but all other related expenses like lease rental if any paid by the comparable companies on the leased assets instead of using its own assets as well as maintenance cost of the assets. It is pertinent to note that there is a direct but opposite relation between the depreciation cost and maintenance cost of the asset. When the assets are new the cost of depreciation is more and cost of maintenance is less whereas when the assets/machi....
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....rned Transfer Pricing Officer. b) Claim for grant of depreciation adjustment; and c) Claim for grant of capacity utilization adjustment." 8.2 We have heard the rival submissions as well as considered the relevant material on record. The learned Authorised Representative has submitted that the TPO has selected two new comparables including General Optics (Asia) Ltd. which is not functionally comparable with the assessee. He has further submitted that this company serves the industrial consumers and he has not indicated any personal care segment. The learned Authorised Representative has submitted that this company has been manufacturing and exporting precision optical system and components. It also delivers integrated solutions to the clients in the field of design , build and test complex, opto-mechanical and opto-electronic systems. It also caters the need of defense and armed forces as well as atmospheric science products and space remote applications. The learned Authorised Representative has submitted that this company is engaged in the multiple schemes of wide range of customed precision optical instruments, devices and components besides assemblies, sub-assemblies, e....
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....From the Schedule 16 of the profit and loss account, the product description given includes pre-optic component, instrument assemblies/sub-assemblies. The raw-material consumed by this company includes glass, lenses and metals. Thus it is clear that this company is not in the manufacturing activity of optical, plastic lenses of human care but the product of this company is catering to the needs of the industry, armed forces and other organizations in the field of space applications, night vision equipments, etc. Accordingly, in the facts and circumstances of the case, we admit the additional ground raised by the assessee and set aside the issue of functional comparability of this company to the record of the Assessing Officer/TPO for proper examination and verification of the issue and decide after considering the relevant facts as well as the objections of the assessee. 9. For the Assessment Year 2008-09, the only issue raised in the revenue's grounds is regarding the directions of the CIT (Appeals) in allowing the working capital and risk adjustment. 10.1 We have heard the rival submissions as well as considered the relevant material on record. The learned Departmental Repr....
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....ssee in his transfer pricing study, has not made any working capital adjustment or risk adjustment. The Assessing Officer has, in fact, granted working capital adjustment. When the assessee is confronted with the possible transfer pricing adjustment due to change of some comparables and addition of certain other comparables by the TPO, this claim of risk adjustment is made by the assessee. Though, in principle, on the facts and circumstances of the case, as the assessee has not worked out the risk adjustment and as the Assessing Officer has already allowed 0.47 percent as working capital adjustment, we are of the opinion that no further adjustment is necessary." 10.2.2 On the basis of the aforesaid line of reasoning, the TPO is directed to grant working capital adjustment, and thereafter, there is no necessity of providing any further adjustments. It is ordered accordingly." Thus it is clear that while issuing the directions to TPO the CIT (Appeals) has followed the decision of the Mumbai Bench of this Tribunal in the case of Exxon Mobil Company India P. Ltd. Vs. DCIT 15 ITR (Trib) 353. Accordingly, we do not find any error or illegality in the order of the CIT (Appeals) in d....
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.... Rule 10D of the Income-tax Rules, 1962 ['the Rules'] without considering the functional and risk profile of the Company. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The AO/ TPO erred on facts and in law in rejecting one method ['Cost Plus Method'] and selecting another method ['Transactional Net Margin Method'] as the most appropriate method without providing cogent reasons to the Appellant for rejecting the method adopted by the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/TPO. c) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises and introducing new comparable companies, without providing an opportunity to the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. d) The AO/TPO erred in selecting comparables operating under a dissimilar functional profile and earning abnormal profits. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. e) The AO/ TPO erred in rejecting the segment-wise profit and loss for FY 2008- 09. The Ld. CI....
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....alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the AO / TPO and upheld by the Ld. CIT(A) is bad in law and liable to be deleted." 11.1 The grounds raised for the Assessment Year 2009-10 are common to that of the Assessment Year 2008-09 except the Ground No.2(g) regarding incorrect profit level indicator in case of reference (Rx) segment. 11.2 We have heard the rival submissions as well as considered the relevant material on record. For the Assessment Year 2009-10, the assessee has carried out the manufacturing activity in two segments i.e. (i) mass production segment and (ii) reference manufacturing segment. While computing the ALP and making adjustment the TPO has applied operating profit/sales in respect of the mass production segment but applied operating profit/operating cost as Profit Level Indicator (PLI) in the reference segment. The grievance of the assessee is that the TPO cannot apply a different PLI in respect of different segments of activity of the assessee when the sam....