TaxTMI 
TaxTMI 
2021 (2) TMI 1146
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....ation, USA and is engaged in design, manufacture, assembling, sale and dealing in axles and components thereof for off-highway applications in finished or semi-finished forms. The assessee filed a return declaring loss of Rs. 5.18 crore. Certain international transactions and domestic transactions were reported. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the transactions. The TPO observed that the assessee aggregated some of the international transactions and applied the Transactional Net Marginal Method (TNMM) as the most appropriate method. The assessee determined its Profit Level Indicator (PLI) of Operating Profit (OP)/Total Cost (TC) at 5.32%. Seven comparables were chosen with their average OP/OC at 7.20% calling for no transfer pricing adjustment. The TPO did not dispute the selection of the TNMM as the most appropriate method and also the tally of comparables. He made certain alterations in the assessee's Operating profit by applying rule 10TA of the Income-tax Rules, 1962 (hereinafter also called `the Rules'). After carrying out such modifications, he worked out the assessee's PLI at (-) 0.32%. The PLI of s....
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....authorities shall accept the transfer price .... declared by the assessee.' It is for the purpose of calculating value of various components under the safe harbour rules, such as, operating profit or operating expense etc. that one needs to knock at the door of rule 10TA for finding out their respective connotation. Clause (l) of Rule 10TA defines "operating profit margin" in relation to operating expenses to mean the ratio of operating profit, being operating revenue in excess of operating expenses, to operating expense. So, for determining the operating profit margin under the safe harbour rules, one requires figures of operating expenses [defined in Rule 10TA(j)] and operating revenue [defined in Rule 10TA(k)]. It is the definitions of operating revenue and operating expense, which have been invoked by the TPO for construing the items of certain expenses and revenue as non-operating. 7. At this juncture, it is apposite to take note of rule 10TD(1), which underscores that the exercise of option for safe harbour rules by an eligible assessee [as defined under Rule 10TB] in respect of an eligible international transaction [as given in Rule 10TC] is optional. Thus, it is axiomatic ....
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....dopted by the Dana group. It was, therefore, pleaded before the TPO that such reduction should be allowed. The TPO did not concur with the assessee's contention by noticing that the financial statements of the assessee clearly indicated that depreciation was calculated as per the rates prescribed in Schedule XIV of the Companies Act. The DRP observed from paras b and c of Significant Accounting Policies of the Annual report of the assessee-company that it calculated depreciation at the rates higher than those prescribed under the Companies Act. The assessee's contention was that the comparables had charged depreciation as per the rates given in the Companies Act. The DRP ruled in this regard directing the AO/TPO that: `depreciation adjustment should be worked out in the hands of the comparables and not for the assessee.' Giving effect to such a direction, the TPO computed the mean PLI of comparables at 6.74% as against originally computed at 6.70% in the consequential order. 10.2. The ld. AR has raised certain issues on the adjustment towards depreciation. Before delving into such aspects, we want to clarify that the dispute on this issue is about adjustment in the profit margin d....
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....m international transaction with reference to a certain base. Sub-clause (ii) requires determining the Net Profit margin realized by the comparables with similar base. It is with the help of the adjusted margin of the comparables as per sub-clause (iii), that the ALP of the international transaction is determined. Subclause (iii) unequivocally provides that the net profit margin referred to in clause (ii), pertaining to the comparables, is to be adjusted to take into account differences, if any, between the international transaction and the comparable uncontrolled transactions. In view of the clear mandate of sub-clause (iii) of Rule 10B (1)(e), there remains no doubt whatsoever that the adjustment on account of differences between the international transactions and the comparable uncontrolled transactions, including the one on account of depreciation, is possible only in the net profit margin of the comparables and not that of the assessee. We, therefore, approve the direction of the DRP and reject the assessee's contention that adjustment on account of higher rates of depreciation should be granted in the hands of the assessee and not the comparables. 10.4.1. The ld. AR contende....
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....ee did not appear in the schedule of assets of the comparables, is sans merit. 10.5.1. The next leg of the submissions of the ld. AR on this issue was that its depreciation claim includes depreciation on certain Intangible assets. It was put forth that since such intangible assets have not impacted the international transaction, the same may be excluded under sub-clause (i) of rule 10B(1)(e). 10.5.2. We have noted sub-clause (iii) of the rule 10B(1)(e) supra, which seeks first considering the operating profit margin of the assessee and comparables and then adjusting the profit margin of the comparables towards differences, if any, between the international transaction and the comparable uncontrolled transactions. The focus under this sub-clause is to fine-tune the operating profit margin of the comparables on the basis of the operating margin of the assessee as deduced under sub-clause (i). Thus sub-clause (iii) proceeds with the base figure provided by sub-clause (i) of rule 10B(1)(e) of the Rules. Sub-clause (i) calls for determining the operating profit margin of the assessee from an international transaction. On a conjoint reading of the two sub-clauses, it become palpable t....
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....smuch as it has been incurred exclusively in relation to the Manufacturing activity. Apart from the costs incurred solely in relation to the trading activity, all other common costs incurred for both the Trading and Manufacturing activity will also warrant inclusion notwithstanding the fact that such costs may be indirectly or remotely connected with the Trading activity. 10.5.3. Reverting to the factual panorama obtaining in the extant case, the claim of the assessee is that depreciation on the Intangible Assets, listed on page 372 of the paper book, should be ignored, as it is alien to the Manufacturing activity and hence do not qualify under sub-clause (i) of Rule 10B(1)(e). A list of six Intangible assets has been given, out of which the dispute is only w.r.t. five items, viz., Goodwill, Computer software, Noncompete fees, Technical knowhow and Customer relationships. It is evident and also admitted on behalf of the assessee that the first three intangible assets, namely, Goodwill Computer software and Non-compete fees are common to both the Manufacturing and Trading activities of the assessee. As such, depreciation on these three items of intangible assets is liable to be con....
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....istrative operating costs incurred, the assessee sought exclusion of Rs. 4.18 crore urging that it did not relate to the international transaction under consideration. The assessee has tried to make out a case for exclusion under sub-clause (i) of rule 10B(1)(e). Ordinarily, prior period expenses cannot be construed as operating costs relating to the international transaction for the year under consideration unless there is any direct or indirect relation with the same. It goes without saying that when a particular expenditure is debited to the Profit and loss account and the assessee seeks its exclusion, the primary onus is on him to lead evidence to the effect that it is unrelated with the international transaction under consideration. We are confronted with a situation in which the TPO as well as the DRP categorically required the assessee to prove that Rs. 4.18 crore related to prior years. However, no such evidence could be filed. Unfortunately, the situation continues to remain the same before the Tribunal as well. In such a scenario, it is difficult to accept the assessee's contention for the exclusion of Rs. 4.18 crore from the operating cost base since the very foundation....
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.... this amount as operating revenue. The TPO, again relying on the definition of operating revenue under Rule 10TA, did not accept the assessee's contention. We have held above that Rule 10TA is not applicable and as such the determination of the character of foreign exchange gain will have to be guided by the normal business understanding and commercial principles. It is fairly settled that foreign exchange gain/loss arising from business transactions is operating revenue/cost. Several benches of the Tribunal including a recent decision of the Pune Benches in Delval Flow Controls Pvt. Ltd. Vs. DCIT (ITA No.640/PUN/2017) dated 20-01-2021 have laid down to this extent. We, therefore, direct to take foreign exchange gain as part of operating revenue. 14.1. The next issue raised by the assessee is that the transfer pricing adjustment should have been confined only to the international transactions and not the entity level transaction. 14.2. The case of the assessee, to which we accord our imprimatur, is that the transfer pricing adjustment ought to have been restricted to the international transactions rather than the entity level transactions. Section 92 is the first section of the C....
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....e can make out a fresh case before the higher authorities for inclusion or otherwise of a company in the list of comparables, even though it was not before the authorities below. In view of the fact that the DRP has brushed aside the assessee's claim for inclusion of the above referred two companies only on the ground that these were not part of the assessee's TP study report, we cannot countenance the same. The impugned order is set-aside and the matter is restored to the file of AO/TPO for examining the assessee's contention and then decide their inclusion or otherwise as per law after allowing an opportunity of hearing to the assessee. B. TRANSFER PRICING ADDITION IN INTRA-GROUP COSTS 17.1. The next issue raised in this appeal is against the transfer pricing addition of Rs. 11,71,80,583/- made by the AO in the international transaction of `Intra group Sales, General and Administration services'. 17.2. The facts apropos this ground are that the assessee paid Rs. 11.71 crore towards intra-group services pursuant to an agreement with Dana Corporation, USA. The assessee applied the Comparable Uncontrolled method (CUP) as the most appropriate method for benchmarking the transactio....
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....see in the year under consideration and in the earlier years, the ld. AR could give the amount of intragroup services expense only for the immediately preceding year at Rs. 2.74 crore as against cost for the year under consideration at Rs. 11.71 crore. Considering the difference in the figures of revenue on one hand and inter-group services on the other for the current year vis-a-vis the preceding year, ex facie, the transaction cannot be declared at ALP, unless a detailed examination is carried out. As the TPO has determined Nil ALP on the preliminary premise that there was no evidence of receipt of services and we have noticed above the fact of receipt of services, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for determining the ALP of the international transaction of Intra-group Sales, General and Administrative services afresh as per law after allowing reasonable opportunity of hearing to the assessee. 18.1. Now we take up the corporate grounds. The first issue is disallowance of Rs. 2,81,104/- on account of late deposit of the employees' contribution to Provident Fund. The AO invoked the provisions of section 36(1)(va) of the Act an....