TaxTMI 
TaxTMI 
2016 (10) TMI 103
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....tion of 'Rule 46A and not allowing the Assessing Officer or the Transfer Pricing Officer (TPO) an opportunity to verify & comment upon the additional evidences furnished by the Assessee, on application of the data from the Prowess. 3. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in granting an adjustment to the Assessee for increase in the price of raw materials, by considering such an increase as an item of "extra ordinary" nature after placing misplaced reliance on Rule 10B(e)(iii). 4. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in considering foreign exchange fluctuation gain as item of "operating income" especially in light of the fact that the Assessee has fixed price contract with its associate enterprise and forex fluctuation has no effect on such fixed price. 5. The Ld. Commissioner of Income-Tax (Appeals)-XlV, Ahmedabad has erred in law and on facts in considering the increase in closing stock as part of operating costs, in light of the fact that the increase is mainly on account of increase in finished goods rather than raw materials. 6. The L....
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.... 8,23,29,643 6. The Transfer Pricing Adjustment in relation to the international transaction to be considered before us relates to the sales of finished goods amounting to Rs. 7,36,18,184/-. The assessee company has selected TNMM as the most appropriate method using profit before interest and tax (PBIT) as the Profit Level Indicator (PLI). 7. The assessee chose three companies as comparable companies as under:- Chembond Ashland Water Technologies Ltd. Chembond Ashland Water Technologies Ltd. is a joint venture between Chembond Chemicals Ltd., India and Ashland Inc., USA. It has been operating in the value added Water Treatment Solutions field since 1980 and serve diverse industries like Steel, Power, Fertilizers, Refineries, Petrochemicals, Mining, Sugar, Paper and pulp, textile and Municipal Corporation. Ion Exchange (India) Ltd. Ion Exchange (India) Ltd. specializes in water and waste water treatment. It is engaged in providing total water solutions for industry, homes and communities. Integrating process technology, design engineering and project management capability by taking end-to-end responsibility-planning, integrating an....
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....ble company Ion Exchange (India) Ltd. and secondly, the assessee also questioned the working of PLI at 16.58%. To substantiate its claim, the assessee furnished the correct working of the comparable companies by taking the financial data from the Prowess database. 14. The contentions of the assessee were dismissed by the TPO and the TPO proceeded by adopting the PLI as PBIT/Operating Cost whereas the assessee has used PLI by PBIT/Total Cost. The calculation and the working of TP adjustment made by the TPO read as under:- Calculation in the case of comparables (Amount in Cr.) Chembond Ash and Water Technologies Ltd. HLL Halco Ltd. Sale 32.43 165.62 Operating Cost 28.55 138.52 Operating Profit 3.88 27% OP/Cost 13.59% 19.56% Average 16.58% Working of adjustment Sale 8,95,64,803 Operating Cost 10,26,37,410 Operating Profit (-1,30,72,607) OP/Cost (%) (-12.74%) Operating profit (at ALP of 16.58%) 1,70,17,283 Sales at Book Value 8,95,64,803 Sales at ALP 11,96,54,693 Transfer Pricing Adjustment 3,00,89,890 15. Accordingly, Upward Adjustment ....
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....lso brought to the notice of the ld. CIT(A) that the fluctuation in the margins of profit in earlier years has arisen because of fluctuating price of the aluminium. The financial data of the two comparable companies as retrieved from Prowess database was shown as under:- ' Expression Chembond Ashland Water Technologies Ltd. N L C Nalco India Ltd. Income & expenditure Total income 32.5 164.9 Sales 32.43 163.95 Industrial sales 0 158.49 Income from non-financial services 32.43 5.46 Income from financial services 0.02 0.01 Interest 0.02 0.01 Dividends 0 0 Treasury operations 0 0 Other income 0.05 0.15 Prior period income & extraordinary income 0 0.79 Change in stock 0 1.67 Total expenses 30.36 152.79 Raw material expenses 0 50.94 Packaging expenses 0 4.09 Purchase of finished goods 16.45 5.05 Power, fuel & water charges 0.01 1.57 Compensation to employees 3.5 10.3 Indirect taxes 2.95 28.14 Royalties, technical know-how fees, etc. 1.53 0 Lea....
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....m the raw material expenses as the closing stock of raw material would consist of the raw material which has not been consumed for production. The provision for direct taxes, expenses on fee based financial services and interest paid should be excluded from the operating expenses. Accordingly, by taking the operating revenue and the operating expenses in the above manner, the figures would be as under: Chembond NLC Nalco Operating Revenue (R) 32.43 163.95 Operating Expenses (E) 28.72 141.00 Opearing Profit (O=R-E) 3.71 22.95 OP/Cost (D=O/E) 12.92% 16.27% Average 14.59% Accordingly, this margin has to be applied on the operating expenses incurred by the appellant to work out the arms length sale price. However, an adjustment of 5% as discussed above, as per the proviso to Section 92C(2) will have to be made. Accordingly, the margin to be applied would be 14.59- 5 = 9.59%. For final working of adjustment, it is also noted that the figures of sales as well as operating cost taken by the A.O. and claimed by the appellant are different. For this purpose, the profit and loss acc....
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....,53,355/- Net adjustment 21,44,692/- Therefore, upward adjustment of Rs. 21,44,692/- should be made as per the provisions of section 92C of the Act. The ground of appeal is, therefore, partly allowed." 19. Aggrieved by this, the revenue is in appeal before us and the assessee has preferred Cross Objection. 20. The ld. D.R. strongly relied upon the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. 21. Having heard the rival contentions, we have given a thoughtful consideration to the orders of the authorities below. We have also gone through the financials of the comparable companies qua the margins shown by the assessee. 22. It is an admitted fact that assessee entered into an agreement for marketing tie-up with its AE Summit Research Lab an incorporated company registered in USA vide agreement dated 08.02.1999 by which the AE Company agreed to purchase 75% of the finished products of the assessee company. This contract has been accepted by the revenue authorities. It is also an admitted fact that out of three comparable companies chosen by the assessee, t....