TaxTMI 
TaxTMI 
2019 (6) TMI 1716
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsactions entered into with its Associated Enterprises (AEs). The Assessing Officer (AO) referred the matter of determination of the arm's length price (ALP) of the international transactions to the Transfer Pricing Officer (TPO). The TPO observed that though the assessee reported twelve international transactions, but it categorized its business into two segments viz., Distribution business and Production business. In the Transfer Pricing study report, the assessee included certain purchases and sale of goods along with other expenses under the Distribution business segment. In the Production business segment, the assessee recorded import of raw material, export of manufactured goods and certain other expenses like Payment for services/product development, technical and management support and Payment of charges for SAP software and IT costs. Whereas the assessee's appeal is focused only on the Production Business or Manufacturing segment, the Revenue's appeal is based on Distribution Business or Trading segment. 3. Espousing the assesssee's appeal first, it is seen that the assessee employed the Transactional Net Marginal Method (TNMM) as the most appropriate method for benchmark....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 margin 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 (iii) ; (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.' 6. Sub-clause (i) provides for the computation of net operating profit margin realized by the assessee from an international transaction. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. Sub-clause (iii) of Rule 10B(1)(e) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, is adjus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nature of depreciation. Question no. (ii) as urged before the Hon'ble High Court reads : "(ii) Whether on the facts and in the circumstances of the case and despite the prescription of parameters of comparability by Rule 10 B (2) of the Income Tax Rules, 1962, the Tribunal was correct in law, in directing the inclusion of DEPB in turnover and depreciation in net profit for the purpose of profit margin of comparables and assessee?" The Tribunal in that case held that depreciation was includible in arriving at the total operating costs. Affirming the view of the Tribunal, the Hon'ble High Court held that : `So far as depreciation is concerned, we find that the analysis done by the Tribunal to include DEPB benefit to hold it to be an operating revenue to determine operating profit, would be equally applicable in case of depreciation for the purposes of holding it to be an operating expenses to determine operating costs.' From the foregoing discussion, it is manifest that depreciation has to be necessarily considered as part of operating costs not only of the assessee but also of the comparables in the process of determining operating profit under the TNMM. As such, there can be no que....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s which are of operating nature. Ordinarily, there can be no question of considering each item of such operating expenses or income in isolation de hors the other expenses/income to claim adjustment on the ground of such expenditure or income of the assessee being on the higher or lower side seen individually or as a percentage of other operating expense/incomes in comparison with its comparables. The reason is obvious that when we consider the operating profit margin, the effect of all the individual higher or lower items of expenses or incomes is subsumed in the overall operating profit margin, ruling out the need for any adjustment on comparison of one-to-one items resulting into the determination of the operating profit margin. 10. A company may have taken a building on rent for carrying on its business, in which case, it will pay rent which will find place in the operating costs. For the purpose of making comparison, one cannot contend that the payment of rent by one enterprise in comparison with a non-payment of rent by another, should be neutralized by giving proper adjustment from the operating profit of the comparable. The manifest reason is that the other enterprise may ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....percentage of repairs and other incidental costs of the assets and vice versa. Thus the contention of the ld. AR in this regard, being devoid from any substance, is liable to be and is hereby jettisoned. 12. However, the position may be different when there is a difference in the rates of depreciation charged by two companies on similar category of assets. One company may adopt the policy of charging depreciation on its assets in conformity with the rates prescribed in Schedule XIV of the Companies Act and other company may adopt a policy of charging depreciation at the higher rates than those prescribed under Schedule XIV. In such a situation, although both the companies use similar type of assets and everything else is also equal, but their respective operating profit percentages undergo change due to higher or lower rate of depreciation, thereby distorting their comparability. It is this difference in the amounts of depreciation due to different rates of depreciation and not due to different quantums of depreciation simplicitor, which calls for bringing both the companies at par. It is an agreed proposition on behalf of the assessee that the TPO himself allowed adjustment on ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s or the magnitude of the operations. 17. As against the assessee engaged only in the manufacturing of bearings in this segment, the TPO noted that FMBIL was engaged in manufacturing of Powder and Aluminum Tins apart from Bearings. In this regard, it is relevant to note that this company declared turnover of Rs.39.36 crore inclusive of `Other income' of Rs.3.11 crore. Bifurcation of `Other income' has been given in Schedule 13 of the Annual report of this company, a copy of which has been placed on record by the ld. AR. `Other income' include Sale of scrap to the tune of Rs.2.05 crore and Interest, Insurance claim and bad debts recovered etc. The ld. AR has drawn our attention towards bifurcation of sales of this company given at page 161 of the paper book. For the year under consideration, this company made sales of Powder products at Rs.3.42 crore, Scrap at Rs.2.05 crore, Aluminum Tins and large size Rs.0.55 crore in addition to Bimetal Bearings at Rs.35.17 crore. All these items total up to Rs.42.06 corre. This figure of Rs.42.06 crore is inclusive of Trading sales and Manufacturing sales. Out of such total sales of Rs.42.06 crore, this company made sales of Bearings at Rs.35.1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her factors taken note of by the TPO making it incomparable. We, therefore, uphold the exclusion of this company from the list of comparables. 20. The Revenue in its appeal is firstly aggrieved by the grant of +-5% margin in determining the ALP. 21. We have hard both the sides and gone through the relevant material on record. Second proviso to section 92C(2) provides that if the variation between the ALP and the price at which the international transaction has actually been undertaken does not exceed the specified margin, which at the material time was 5%, then the price at which the international transaction has actually been undertaken shall be deemed to be the ALP. The effect of this proviso is that so long as the difference between the ALP as determined by applying one of the specified methods and the price at which the international transaction was undertaken is within the prescribed percentage, no transfer pricing adjustment can be made. This proviso was substituted by the Finance (No.2) Act, 2009 w.e.f. 01-10-2009. Explanation to sub-section (2) of section 92C has clarified : "that the provisions of the second proviso shall also be applicable to all assessment or reassessm....