TaxTMI 
TaxTMI 
2016 (4) TMI 377
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....s. 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 of Chapter X of the Act. The Ld. CIT(A) erred in upholding the actions ....
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....ed 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. 11,03,000 incurred by the Appellant towards Overtime labour charges debited under the head 'Prior Period Expenses'. The Ld. CIT(A) erred in upholding th....
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....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 retained as unapportionable and these expenses pertains to the business of the assessee and needs to be apportioned according to the AE and non-AE sales. Thus the TPO has reworked out the operating margin of the assessee a....
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....ic 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 usually assume the incurrence of low risk of cost will then be better reflected the value being added and hence the market price. The CPM is also generally used in transactions involving by contract manufacturer, toll manufacturer or a low risk assembler which does not own product intangible as incurred little risk. Thus the learned Authorised Representative has submitted that....
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....der 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 TPO. 50. One of the pleas raised by the Assessee was that functional similarity is to be first seen before choosing an appropriate method and that the TPO in choosing CPM has given weightage to product similarity rather than functional similarity. The Assessee had further pointed out that the comparable chosen by the TPO were manufacturing medical consumables viz., disposal syringe....
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....pect 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 on this issue in rejecting the CPM as MAM and adopting the TNMM as MAM for determination of ALP. This ground is decided against the assessee. 5.1 Ground No.3 is regarding rejection of the Multi Year Data adopted by the assessee while computing the margins of the comparables and considering the current year data by the TPO for the purpose of determining the ALP. 5.2 At the time of hear....
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....inted 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 accordingly a suitable adjustment is required to be made for the purpose of determination of ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of ACI Worldwide Solutions Pvt. Ltd. Vs. DCIT in IT(TP)A No.652/Bang/2012 as well as in the case of 24/7 Customer.com Vs. DCIT in IT(TP)A No.227/Bang/2010. 6.3 On the other hand, the learne....
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....essee 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/machinery becomes old, the depreciation cost may be less or static but the cost of maintenance will be definitely high. Therefore, in order to provide any adjustment on account of differential depreciation cost, the figure of depreciation cost alone are not enough but the composite expenditure relating to the use of the fixed assets has to be taken into account like depreciation, maintenance, lease rentals if any, etc. We further note that the cost of depreciation depends on the level of automation of the manufacture process of a particular entity which in turn reduce the other direct expenses ....
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....tted 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, etc. which is not similar to the business activity of the assessee. He has referred the decision of the Delhi Bench of the Tribunal in the case of Actis Advisers Pvt. Ltd. Vs. DCIT wherein the Tribunal has held that this company serves the different line of business and not into the sector of business like personal care but it was engaged into the industrial usage including Defense Products, Night Vision Equipment Products, Thermal & IR Imaging Products, Optical Test Setups Products, Atmospheric Sciences Products, Ground Based Telescopes and Space Applications. The learned Authorised Representative ha....
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....d 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 Representative has submitted that when the assessee has not clarified or identified the working capital and risk adjustment in the T.P.Study then allowing the claim of the assessee by the CIT (Appeals) without giving an opportunity to the A.O/TPO is not permissible. She has further submitted that in the absence of accurate computation it is not a matter of routine to grant such adjustment. When the assessee has not brought on record the requisite details and quantification for adjustment on account of working capital and risk under Rule 10B then the said claim of the assessee cannot be accepted. 10.2 On the oth....
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....pinion 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 directing the A.O/TPO to grant working capital adjustment. However, we clarify that the assessee should furnish the relevant details and quantification for working capital adjustment to be arrived by the TPO. For the Assessment Year 2009-10. 11. The assessee has raised the following grounds : "1. Assessment and reference to Transfer Pricing Officer are bad in law a) The order issued by the Deputy Commissioner of Income-tax - Circle 11(3) ('AO'] under section 143(3) of the Income-tax Act, 1961 ['the Act'], and the order passed by the Commissioner of Income-tax (Appeals)-IV, Bangalore ['the CIT(A)'] under section 2....
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....neous 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. CIT(A) erred in upholding the actions of the AO/ TPO. f) The AO/ TPO erred in summarily rejecting the submission made by the Appellant in connection with Rx business and no taking note of the specific facts pertaining to the Rx Business submitted by the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. g) The AO/ TPO erred in application of incorrect Profit Level Indicator in case of Rx segment. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. 3 Erroneous data used by the AO/TPO a) The AO/TPO erred in law and the Ld. CIT(A) further erred in confirming use of data, which was not contemporaneo....
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....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 same are the transactions with AEs of the assessee. It is pointed out that though this issue/ground was not raised before the CIT (Appeals) however, it is an apparent defect in the order of the TPO in applying the different PLI in respect of different segments and further when the TPO has applied a particular PLI for the Assessment Year 2008-09, then without giving an opportunity of hearing to the assessee, it is not permitted to apply a different PLI. 11.3 On the other hand, the learned Departmental Representative has objected to this ground of appeal raised by the assessee when the same was not raised before the CIT (Appeals). The learned Authorised ....