TaxTMI 
TaxTMI 
2016 (5) TMI 1595
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....for determining Arm's Length Price [ALP] under 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 . ....
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....8% of total capacity there by cost of overheads is more, has not been considered. The submission of assessee 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 r....
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....terial consumed and 16% of total cost in auto manufacturing segment and hence the operating margin auto manufacturing segment cannot be impacted only by segment i e. just 17% of sales to AE. 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....
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.... it is nowhere provided 'that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing Profit depending upon the context and purpose for which profit is to be computed. There is no formula which 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, an....
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....ith him" A privilege cannot work to a disadvantage and an option cannot become an obligation. It was accordingly held that the AO cannot grant depreciation allowance When the Same is not claimed by the taxpayer. The Hon'ble Supreme Court approved claimed view taken by different High Courts in 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 perio....
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....years Under provisions, depreciation is not deducted whereas generally it is deducted out of cost while working out "written down value" under tax laws. Obviously, such provision under tax laws are made by way of incentives for setting new structures or new installations. Rates of depreciation also differ from asset to asset and from year to year. 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 a....
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....r manufacturing cost must include "depreciation" irrespective of peculiar facts of case cannot prima facie be accepted as correct. If value of capital assets has got depleted then depleted value is to be taken into account to have commercial "true profit". Depreciation in such a case must be the actual value by which he asset has suffered depletion and not a notional amount under tax or company 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 o....
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....e method, in the following manner, namely:- (a) Comparable Uncontrolled method (details not relevant, not produced) (b) resale price method (do) (c) Cash plus method (do) (d) Profit Split method (do) (e) transaction net margin method by which (i) the net profit margin realised the enterprise from an International transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to 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; ....
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....eing compared." Summarised T, P. Principles (general) 18.3 Under provisions "Section 92(1) of the Act and Rule 1 DB, income of international transaction between associated concern is to be computed having regard to arm's length price. Arm's Length Price, in turn, is the price which will be paid or charged by unrelated parties for a similar transaction in similar circumstances as are prevailing between related parties carrying international transaction. So an exercise is required to be compare price charged or paid in a controlled transaction with price charged or paid in a 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 unco....
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.... to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It can not be deprecation 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 at 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, Principal 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 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....