TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 515
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....ts 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 comparing fullfledged risk bearing entities with the Appellant, without making any adj....
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.... 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 discussed by us in succeeding paragraphs. The nature of business, as per assessee's submissions, which is extracted by Ld. TPO in h....
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....s 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 considering functional comparability, the Ld. TPO, in the final analysis has adopted the five comparables and rejected the other by observing as under:- 6.6 The assessee's above s....
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....r 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 concerned, we find that Ld. DRP has concurred with the stand of the assessee that the same do not form part of operating cost. At the same time, the Ld. AO was directed to verify the claim of the assessee and was further directed to exclude the said item while arriving ....
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....d 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 measure. This does not appear to be so from the note No. 14 which states that the company has revised the estimates, in this year. It appears that in the industry obsolescence is quick and therefore, provisions have to be made. If this is a regular feature, then such expenditure for provision should also be ....
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.... 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 exposed to this kind of risk in normal course of business. Resultantly, Ground No. 6 stands allowed for statistical purposes. 6. Ground No. 5 is related with adoption of correct margins of comparables adopted by Ld. TPO. In this regard, Ld. AR seeks endorsement of Ld. DRP directions only. As evident from the order of L....
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....ive 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 submissions, semi-conductor devices, capacitors and PCBs are all are all being used for general power management applications and therefore comparable. Upon due consideration, we find that the important factor to adjudge the comparability is nature of manufacturing process being carried out by the assessee as well as the comparables since we have already noted that TNMM m....
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....d 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. Resultantly, this ground stand dismissed. 9. Ground Number 9 is related with benefit of +/-5% in terms of erstwhile proviso to Section 92C(2) which has been rejected by Ld. DRP in terms of Board's Circular No. 142/13/2010-SO (TPL) dated 30/09/2010. Prima facie, the said circular applies to pending proceedings as on 01/10/2009. Therefore, since the matter of comparable has already been re....