TaxTMI 
TaxTMI 
2017 (5) TMI 1166
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....pany was having international transactions, a reference was made to TPO u/s.92CA of the Act. Based on the order of the TPO, the draft assessment order was passed which was confirmed by the DRP vide order dated 29.12.2014 making additions as under:- Sl. No. Particulars Amount (INR) 1 ALP upward adjustment to the international transactions 4,01,18,062/- 2 Disallowance of claim of deduction u/s. 10B 1,20,28,476/- Total 5,21,46,538/- Consequently, the AO passed the assessment order on 30.01.2015. Against this assessee is in appeal before us. 3. The first ground for our consideration is with regard to sustaining the addition of Rs. 4,01,18,602/- towards upward adjustment in the ALP of Transfer Pricing adjustmets with the following grounds:- 2. Transfer pricing adjustments 2.1 The learned DRP, AO and TPO (collectively referred to as 'lower authorities' ) have erred in law and facts by making an adjustment to the transfer price of the Appellant by INR 40,118,602. 2.2 The learned lower authorities failed to appreciate the fact that AY 2010- 11 was abnormal year of operations for the Appellant: 2.2.1 The Appellant expanded its manufacturing facility by e....
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....with that of Comparable Companies and ii. Adjustment towards Abnormal Expenses incurred by the Appellant during the year. According to ld.A.R, Adjustment towards Risk Profile undertaken by the Appellant is different than that of the comparable companies and as such the margins of the comparables warrant adjustments. The assessee is a contract manufacturer and the comparables are entrepreneur companies. The Appellant does not bear any market risk, credit risk, R&D risk and foreign exchange risk. The risks borne by the entrepreneur companies are significantly higher when compared to a contract manufacturer. 4.1 Further, ld.A.R drew our attention to the assessee's letter dated 23.12.2013 filed before the TPO given the details of the risk adjustment (Copy at pages 246-255 of the Paper Book). The average risk adjusted margin of the comparable companies comes to 2.59% which when compared to the margin of the Appellant of 1.92% and after giving benefit of proviso to section 92C(2) of +/- 5% is at arms length and as such no adjustment to ALP is warranted. The ld.A.R further vide submission dt. 9.1.2014 (copy at pages 266-289 of Paper Book) and vide submission dt. 17.1.2014 (copy at page....
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....taking for analyses in the transfer pricing documents. The risk adjustments could be given only to company to company basis considering levelof risk involved between the assessee and the comparable companies. It is primary duty of the assessee to provide requisite information pertained to the claim. Since the assessee did not discharge its initial onus and in the absence of information to compute the reliable accurate risk adjustments, it is not possible to grant risk adjustments claimed by the assessee. However, considering high degree of risk involved with the comparables, we are inclined to grant risk adjustments at 2% on adhoc basis. Accordingly, this ground is partly allowed. 7. The next issue is with regard to Adjustment towards Abnormal Expenses. 7.1 Before us, ld.A.R submitted that the assessee is a contract Manufacturer. Vide contract manufacturer agreement; the assessee is entitled to compensation of cost plus 9.5% which was reduced to 7% w.e.f 1.1.2010. Cost includes cost of materials, manufacturing overheads and store-cost and Administration cost and other essential costs except Corporate taxes but including Fringe Benefit Tax. Further, ld.A.R submitted that the A.E i....
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....economic useful life of its fixed assets based on technical study. As a result of this change, the depreciation charge for the year has increased by Rs. 99,94,929/- with a consequential impact on the profit for the year." b. The appellant has further calculated an amount of Rs. 56, 17,980/- as excess depreciation charged during the year on account of expansion of weaving production line. The appellant has made an investment in Fixed Assets amounting to Rs. 21,94,56,363/- (Rs. 22 Crores approx) (Details at page 144 of the Paper Book) which has resulted in excess depreciation for the year. c. The appellant has taken F.Y 2008-09 as base year as the business operations in F.Y 2008-09 were conducted in normal business conditions wherein the depreciation was 3.78% of Sales. Considering the same ratio for the current year, the abnormal depreciation comes to 1,56,12,909/- out of which Rs. 99,94,929/- is on account of revision of estimated useful life of assets as per point (a) supra and the balance amount of Rs. 56,17,980/- has thus been attributed to abnormal depreciation attributable to expansion. (Detailed working at page 13 of TPO order). d. The excess depreciation being abnormal c....
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....nly the assessee could explain. Since the assessee as a contract manufacturer is operating on a cost plus model and the agreement provides for reckoning all the expenses other than finance cost and taxes, the claim to exclude the above from the operating expenditure deserves no consideration. 9. We have heard both the parties and perused the material on record. The assessee is a contract-manufacturer and having mark-up raised from 5% to 9.5% on the goods procured by it, later it was revised to 7%, so that the wastage suffered by the assessee taken care of by mark-up prices and manufactured goods. Once the price was marked up, there cannot be any loss to the assessee and the entire wastage is taken care by marked up price of sale price. Hence, we do not find any merit in the plea of the assessee with regard to claim of abnormal wastage. 10. Next issue is with regard to abnormal depreciation. As discussed in earlier, the assessee's pricing pattern is marking up of 7% on the cost of goods manufactured. Being so, the increase in depreciation cost has also taken care of by mark up of sales price. Accordingly, the assessee cannot seek any further adjustments towards additional deprecia....
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....U/s 10B and accordingly held the 10th consecutive year of deduction as A.Y 2009-10 thus denying the Appellant the benefit of deduction U/s 10B for A.Y2010-11. That the assessee did not commence production in A.Y 2000-01 is further substantiated from the fact that the Appellant in A.Y 2001-02 procured raw material of 28 tons for carrying out commercial production whereas in A.Y 2000-0 1 it had procured only 0.08 ton which was used for trial run. d) The ld.A.R places reliance on CIT Vs. Himalayan Magnesite Ltd. (2005) 276 ITR 56 (Allahabad) wherein the Hon'ble High Court while deciding the allowability of deduction under erstwhile section 80I held that the deduction has to be allowed held that the assessee having undertaken only trial production in the relevant previous year and regular production having started in the subsequent year, assessee was not entitled to deduction U/s 80J. Going by the same analogy the deduction U/s 10-B has to be allowed only in the year of actual commercial production and not in the year of trial production. e) The ld.A.R further places reliance on Dy CIT Vs. Bhansali Trading Co. ITA No. 784/JP/2014 wherein the Hon'ble ITAT has while deciding the allowa....
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....duction u/s.10B is available for a period of 10 successive assessment years starting from the year in which the undertaking begins to manufacture the things or article etc. Furhter, ld.D.R submitted that the assessee started the activity of manufacturing the goods. However, the production of finished goods did not come into existence as on 31.03.2000. The raw material and the stores consumed in the manufacturing activity have remained in the form of 'work in progress as on 31.03.2000. There is no dispute in this regard. As per Form No.56 G, the date of commencement of the production is 27.03.2000 itself. Ld.D.R submitted that the assessment year 2010-11 is the 11th year and the assessee is not eligible for deduction u/s.10B of the Act. 14. We have heard both the parties and perused the material on record. The main plea of assessee is that the present assessment year 2010-11 is the 10th year of claim of deduction u/s.10B of the Act and filed a copy of return for assessment year 2000-01 stating that there was no claim of deduction u/s.10B of the Act. He has also relied on the judgement of Jaipur Bench of Tribunal in the case of CIT Vs. Bhansali Trading Company in ITA No.784/JP/2014 ....