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2018 (5) TMI 515
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....es from the set of comparable identified by the Appellant in its transfer pricing report 5.Ground of Objection 5- Non consideration of correct operating margins of comparable companies adopted in the TP Order Erred in considering incorrect operating margin of comparable companies adopted in the Order 6.Ground of Objection 6- Non exclusion of provision for inventory obsolescence from the operating cost of the Appellant. Erred on facts and in circumstances of the case and in law by not excluding INR 61,825,865/- pertaining to provision for inventory obsolescence (being non-operating in nature) from the operating cost of the Appellant for AY 2008-09 7.Ground of Objection 7-Treating loss on sale of fixed assets as operating in nature for the purpose of computing operating margins of the Appellant Erred in treating INR 3,905,868 pertaining to loss on sale of fixed assets as operating in nature for the purpose of computing operating margins of VSIPL for AY 2008-09, and accordingly not considering correct operating margin of VSIPL 8.Ground of Objection 8-Non-consideration of risk adjustment Erred on the facts and circumstances of the case and in law by ....
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.... benchmark these transactions with operating Profit / Total Cost [OP/TC] as the Profit Level Indicator [PLI], the assessee being the tested party. The assessee's PLI came to 6.90% as against mean PLI of 9.49% of 15 comparables as selected by the assessee in its TP study and therefore, the same being within the tolerance range of +/-5%, the transactions were claimed to be at Arm's length Price [ALP]. The prime dispute under appeal is related with computation of correct PLI reflected by the assessee and selection / rejection of certain comparables. 2.4 As noted by Ld. TPO, the assessee was engaged in the business of labor assisted assembly process of semi-conductor devices of different types which were mainly used in general power management applications. Semi-conductor manufacturing involved two phases of production-Wafer Fabrication and Assembly. The assessee was primarily an assembler of semi-conductor devices such as rectifiers, discrete and modules which were essentially low technology activity involving manual labor operations. The specialized nature of business activity carried out by the assessee shall have bearing on selection / rejection of certain comparables as discuss....
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....activity wherein certain parts are brought together and attached to each other using screws, connectors etc. VSIL is engaged in manufacturing process of semiconductor devices of different types and it is the general industry practice to call such process as 'assembly process'. Considering the same we submit that the companies identified in the transfer pricing study report are functionally comparable to VSIL. 2.5 So far as the computation of assessee's PLI is concerned, the only issue involved is adjustment of provision for inventory obsolescence of Rs. 6.18 Crores & Loss on Sale of Fixed Assets for Rs. 0.39 Crores. These two items, as per assessee's submissions, were not part of operating income and hence not required to be adjusted / deducted while computing assessee's operating margins whereas the Ld. TPO opined that the same being operating in nature, require adjustment while computing operating income reflected by the assessee. The adjustment of these two items brought down assessee's PLI to -1.05%, which was adopted by Ld. TPO to compute the impugned Transfer Pricing Adjustment [TP]. 2.6 The second issue is related with selection / rejection of comparables. After consid....
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....find favor before Ld. DRP and the stand of lower authorities on most of the issues has been confirmed by Ld. DRP. Accordingly, incorporating the aforesaid directions u/s 144C(5) of Ld. DRP, final assessment order dated 30/10/2012 has been passed, which has further been contested before us by the assessee by way of present appeal. 4. The Ld. Authorized Representative [AR], by way of written submissions and with the help of tabular chart, has assailed the additions made by lower authorities and placed reliance on several judicial pronouncements to support the various submissions. The same has been controverted by Ld. Departmental Representative [DR]. Vehement arguments have been adduced by both the representatives qua computation of assessee's PLI and selection / rejection of comparables. 5.1 We have carefully perused the rival contentions and perused relevant material on record. Upon due consideration, we find that whole controversy primarily revolves around computation of assessee's PLI and selection / rejection of nine comparables besides some minor issues. 5.2 First, we deal with computation of assessee's PLI. So far as the adjustment of loss on sale of fixed assets is c....
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....ssee has submitted the copies of the Director's report and Notes to Account to the Balance Sheet of the assessee company. It is mentioned in the Directors report that during the year there was a revision in the estimates for determining the provision for obsolescence of inventory. It is mentioned in the notes to account at para 14 that the provision for inventory obsolescence had been revised during the year. The total amount charged to P & L account for the current year was Rs. 61,825/-. The assessee has explained in the submission that the amount is in thousands, which means the actual amount was Rs. 6,18,25,000/-. In the profit and loss account, the obsolescence is not separately shown under the operating expenses at Schedule No.14. The note at item 14 of the notes to account also does not specify under which head of expenditure this amount is debited in the profit and loss account. The Assessing Officer is, therefore, correct in observing that the assessee has not demonstrated that the provision is included in the operating cost computed by the assessee. 34. It is also not explained whether such provision has been made for the first time and as an extraordinary mea....
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....n computation of income, has added back this item treating the same as provisions and claimed an amount of Rs. 2.58 Crores against the same on account of stock actually destroyed by the assessee out of these items before filing of return of income. The pleadings made by the assessee reveal that the deduction of Rs. 2.58 Crores has been allowed to the assessee in subsequent years. These factors, in our opinion, are not at tandem with each other and require re-appreciation. The lower authorities had also rejected the assessee's stand primarily by noticing that the said item was not debited in the Profit & Loss Account. This issue remains unaddressed before us also and the factual matrix is not clear. Therefore, the issue is remitted back to the file of Ld. AO / TPO for appreciation of the factual matrix and re-adjudicate the same with a direction to the assessee to demonstrate / substantiate his stand in this regard. In principle, we are of the opinion that stock valuation is done in accordance with policy adopted by the management in this regard and the same constitute part and parcel of assessee's trading operations only particularly when assessee was technology driven company and ....
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....s / diodes / Bridges / Modules and Discrete which were essentially a low technology activity involving manual labor operations. These products find use in various electronic and industrial applications including motor and lighting controls, welding equipments, forklifts, machine tools, induction heating, locomotives, motor drive production lines, smelting equipment and power supplies. In contrast to this, the nine comparables, as evident from page numbers 83 to 85 of the paper book, were primarily engaged in following line of business:- Sr. No. Name of Company Product 1. BCC Fuba Ltd. Printed Circuit Boards 2. Circuits Systems Ltd. Printed Circuit Boards 3. Fine-Line Circuits Ltd Printed Circuit Boards 4. Incap Limited Capacitors 5. K.Dhandhapani & Co. Ltd. Capacitors 6. Precision Electronics Ltd Printed Circuit Boards 7. SPEL Semiconductor Ltd Integrated Circuits 8. Solectron EMS Ltd Printed Circuit Boards 9. Sulakshana Circuits Ltd Printed Circuit Boards The Ld. TPO has rejected the same on the ground that these were functionally dissimilar. On the other hand, as per assessee's subm....
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....it is noted that the assessee has written-off an amount of Rs. 6.18 crores for stock obsolescence which has actually been destroyed over a period of time and deduction thereof has been claimed by the assessee. Therefore, we have no hesitation in concluding that the assessee was certainly exposed to technology risk. Secondly, it is noted that Ld. DRP has rejected the ground of the assessee by making following observations:- 42. We have considered the submissions of the assessee, the views of the Assessing Officer and the material on record. A necessary condition before such adjustment is made is there should be complete financial details with regard to the comparable companies, the process employed in the business, the turnover rate etc. Without a full knowledge of the comparable companies, such adjustment cannot be made. A calculation based on a mathematical model does not necessarily give a proper result. This ground is rejected. We concur with the stand of Ld. DRP also in this regard since the adjustment could not be provided to the assessee on mere assumptions without there being any cogent material on record to substantiate those assumptions / contentions. Resultant....