TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 1595
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder the TP provision TOP proposed An adjustment of Rs. 8,98,90,000/- u/s. 92CA(3) and AO issued a draft order accordingly. Assessee objected before DRP and DRP has issued direction accepting certain objections.AO however passed order determining TP adjustments at Rs 8,80,08,000/- aggrieved by the order assessee has raised the following grounds "2. Tha the Learned AO and the learned TPO erred in law in not restricting the TP adjustment for the auto components manufacturing segment to the cost relating to import of raw materials from the AES i; e,16% of the cost as specifically directed by the Learned Panel. 3. That the learned AO and the learned panel erred both in facts and law: in confirning the action of the learned TPO after making a revised adjustment to the transfer prices of the appellant with respect to the impoet of raw material and components from its associated enterprises (AEs) for the auto components manufacturing segment by Rs 88,008,000 holding that the international transation do not satisfy the arm's length principle envisaged under the income tax act, 1961 (the act) and in doing so grossly reeed in . 3.1. Rejecting the economic analysis undertaken by the A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee was that better comparability in the circumstances was GP over sales, when GP was calculated as sales less cost of raw material consumed. It was Submitted that due to under-utilisation of capacity, the comparability of OP/cost does not give proper analysis and relied on the Co-ordinate Bench decision in the case of Schefenacker Motherson Ltd., vs. DCIT [123 TTJ 509] of the Delhi Bench of ITAT, 3.2. It Was also contended that the issue of MAT credit objected to by assessee was not adjudicated by the DRP even though AO in the draft assessment order has determined the tax liability without giving appropriate MAT credit and so assessee is aggrieved. Ld. Counsel submitted that interests calculated u/s. 234 & 234C are consequential in nature. 4. Ld. DR however, referred to the detailed orders of TPO as to why assessees TP study was rejected and adjustments proposed by TPO under the TP provisions. While accepting that DRP has directed to restrict the adjustment to the cost of. material, the DR however, submitted that detailed working is not on record and so the issue can be restored to AO. Regarding the capacity utillsation, the DR submitted that DRP opined that assessee has not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Having heard the assessee, we noted that the TP adjustment has been made in the auto manufacturing segment by applying the PLI of operating cost io operating revenue which in the case of the taxpayer was found to be -4.86% as against average PLI of 8.51 % of the 22 uncontrolled comparable selected by the TPO. However, it is stated by the assessee that auto manufacturing segment has incurred total of operating cost of Rs.70.4 crores and the material cost was only 34.53 crores including import from AE of 11.32 crores. Thus, the AE imports component in the total material cost was only 33% and only 16% with regard to the total operating cost. In view of the facts submitted were of the view that the adjustment has to be restricted to the cost relating to imports of material from the AEs. Assessing Officer is directed accordingly" 5.2. As, seen from the draft order, the TP adjustment proposed was Rs. 8,98,90,000/-whereas the final adjustment made was Rs. 8,80,08,000/- It seems AO has implemented only other direction of adopting average OP/sales Of comparable companies at 8.23% as against 8.51% proposed as directed in para 3.1.2. The direction of DRP in para 3.1.3 has not been i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich would be applicable university and in all cricumstances. Net profit used by the TPO and confirmed on appeal by the LD CIT(A). But depreciation in such profit on commercial principles has to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, revenue authorities went wrong in disregarding the context and purpose for, which the 'net profit" was to be computed. Depreciation, which can have varied basis and is allowed different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing by Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n India in large umber of cases. It specifically confirmed the following decisions:- BECO ENGINEERING CO. LTD. V CIT (1984) 148 ITR 478 (P and H); CIT V. Andhra Cotton Ltd. (1996) 219 ITR 404 (AP); CIT vs Andhra Cotton Mills Lt . (1997) 228 ITR 30 (AP); CIT vs Friends Corporation (1989) 180 ITR 334 (P and H); CIT v. JK. Industries Ltd. (2000) 241 ITR 537 (Cal); CIT v. shri Someshwar Sahakari Sakhar Karkhana Ltd. (1989) 177 ITR 443 (Bam) and Chief CIT (Admn.) v Machine Tool Corporation of lndia Ltd. (1993) 201 ITR 101 (Kar). Opposite View 16. The opponent of the above vie while accepting that depreciation is a capital loss, justify its deduction, to replace the value of an asset to the extent it has depreciated hu 'ng the period of accounting - and corresponding aIlowance for depreciation takes its place. Therefore, when arriving at profit for the relevant period, the amount of depreciation has to be deducted, which must be replaced first, as otherwise, initial capital loss would to that extent, be incorrectly and falsely converted into treated as profits. Paton in his "Accounts' Handbook" described depreciation as out- of- pocket charge as any other payment. He obs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar. It is not necessary that allowance shouId match loss actually suffered in the relevant period It is allowed as a fixed notional allowance Principles governing "assessable" ' commercial" or "operating" profit 16.3 Provision of a Statute like explanation 5 to section 32 of the Act Make it compulsory to take depreciation into consideration in computing taxable profit (total income). Even in the case of the taxpayer before us for the years under consideration, depreciation has been taken into account in computing its total income. Rs 2,18,97,046/- and Rs 1,82,99,975/- against Rs 1,60,13,886/- and Rs 1,33,54,123/- claimed in the profit and loss accounts have been allowed in assessment year 2003-04 and 2004-05 respectively. In the first year, it has been allowed at a figure much higher than claimed in the profit and loss account. However, as at present, we are not concerned with above statutory provision or with the computation of total income The reason being the following observations Supreme Court the case of vs. Bipinchandra Maganlal and Co. Ltd. 41 ITR 290. "There is no definable relation between the assessable income and the profits of a business concern in a Comme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any law or some policy or statutory provision. If any part of amount claimed as depreciation does not represent the true amount of depreciation suffered, by plant and machine or any other asset then to the extent of such excess would only be the profit of the enterprise wrongly claimed as depreciation It is nobody's case that depreciation in case of comparables or tested party, was depreciation actually suffered and not depreciation claimed under artificial rules. Indian Transfer Pricing Regulations: 18. Having noted vicissitudinary nature of "profit" and its connection with "depreciation", we may do refer to Indian Transfer Pricing Regulation under which ALP is required to be determined to consider whether deduction of depreciation is imperative to compute margin or mean operational margin 18.1. The Indian Transfer Pricing regulations is a complete code and are contained in Chapter-X of the act, supplemented by Rules IOA to 1 DE of Income-tax Rues. Tittle of Section 92 is "computation of income from international transaction having regard to arms length price" Sub-sections (1) and (2) of section 92, (subsection (3) not being relevant here) are as under: [Computatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be employed by the enterprise or having regard to any other relevent base (ii) the net profit margin realised by the enterprise or by an unrelated Enterprise from a comparable uncontrolled transaction or a number of Such transaction is computer having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit mar in in the open market; (iv) the net profit margin realised by the enterprise and referred to in Sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be Judged with reference to the following, namely- (a) the spe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... similar uncontrolled transaction (ie a transaction between unrelated parties). In other words controlled activities are compared with uncontrolled activities of independent parties. But comparison would serve its purpose only if transaction or entities under comparison are found to be similar or almost similar and this "almost" representing differences are evaluated and adjustments are made to bring transaction or enterprises to the same level. If a similar uncontrolled transactions is available for comparison then arm's length price is determined by taking such price of similar uncontrolled transaction carried in similar circumstances As similar transactions are not easy to find, and, therefore, an attempt is made to find entities carrying similar function and their profit margin or mean of such margin from a range of entities is taken into account and compared with profit margin of entity involved in international transaction called "tested party". Even he it is fundamental that comparable selected should carry similar functions in similar circumstances. This is achieved by carrying functional assets and risk (FAR) analysis of the tested party and comparables if there are an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hasized in the case of Bangalore Clothing by Bombay High court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any by suitable adjustment is to be seen. Therefore, there was justification in the part of the taxpayer in pleading that profit be taken without deduction of depreciation as depreciation was leading to large differences in margin for various reason" 5.4. Further, Co-ordinate Benches in various cases has approved comparison of profits before depreciation holding as under: a) The Tribunal in the case of Market Tools Research Private Limited vs. ACIT (2013) ITA No. 2066/HYD/ 2001, held as under: "11 .... c) All facts which impact the financial result of comparable companies should be taken into account and reasonable accurate adjustment should be made for the same. In this connection the rates of depreciation adopted by the asseessee are significantly different from (straight line as compared with WTP: higher rate than that prescribed in schedule VI) those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be conside....