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2012 (5) TMI 613 - AT - Income TaxTPA - ALP determination - costs are incurred during normal business operations - assessee demonstrated as to the Comparable Companies did not have to incur any such expenses - Held that - he Assessee ought to succeed on this Ground and we accordingly direct the AO/TPO to examine the claim of the assessee in the light of the directions contained in the order of the Tribunal in the case of Demag Cranes& components (India) Pvt. Ltd (2012 (1) TMI 60 - ITAT Pune ) Working capital adjustment - Held that - The plea of the assessee has to be upheld in principle. So however as the issue has not been examined by the lower authorities we therefore deem it fit and proper to restore the issue back to the file of the AO/TPO with direction to examine the claim of the assessee relating to working capital adjustment and eliminate such difference if any as are likely to materially affect the profit margins Deduction under section 10B - Held that - We set-aside the matter back to the file of the Assessing Officer to ascertain the appropriate amount of communication and insurance expenses that are attributable to export outside India so as to be excludible from the figure of export turnover as well as total turnover and thereafter rework the deduction under section 10B
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Adjustment for extraordinary expenses in computing operating profit margin. 3. Application of the +/-5% variation under the erstwhile proviso to section 92C(2) of the Act. 4. Working capital adjustment. 5. Selection/rejection criteria of Comparable Companies. 6. Computation of deduction under section 10B of the Act. Issue-Wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The appellant company, part of the Vishay Group, filed a return of income for the assessment year 2006-07, showing Book Profit u/s 115JB of the Act at Rs. 4,01,98,256/-. The total income was determined at Rs. 15,38,24,330/- after making certain additions, including Rs. 10,98,07,842/- representing adjustment on account of international transactions with Associated Enterprises (AEs). The transactions included export of finished goods, import of raw materials, import of finished goods, receipt of commission, import of capital machinery, amount paid for software and data communication expenses, provision of IT services, and reimbursement of expenses. 2. Adjustment for Extraordinary Expenses in Computing Operating Profit Margin: The appellant argued that costs of Rs. 2,13,78,691/- for the RISFIC project and Rs. 50,00,000/- for the power capacitor project were extraordinary and should be excluded from operating costs. The Revenue opposed this, stating that these costs were incurred during normal business operations. The Tribunal referenced the decision in Demag Cranes & Components (India) Pvt. Ltd., which supports adjustments for extraordinary expenses likely to materially affect the price/profit in the open market. The Tribunal directed the AO/TPO to examine the claim in light of the Demag Cranes decision. 3. Application of the +/-5% Variation Under the Erstwhile Proviso to Section 92C(2) of the Act: The appellant claimed the benefit of the +/-5% variation for computing ALP. The Tribunal referenced the decision in Starent Networks (India) P. Ltd., which supports the application of the erstwhile proviso for the assessment year 2006-07. The Tribunal restored the matter to the AO for re-examination in light of this precedent. 4. Working Capital Adjustment: The appellant raised an additional ground for working capital adjustment due to differences in working capital employed by the appellant and comparable companies. The Tribunal referenced the decision in Demag Cranes & Components (India) Pvt. Ltd., which supports working capital adjustments in TNMM to generate credible comparability data. The Tribunal directed the AO/TPO to examine and allow the adjustment as per the cited decision. 5. Selection/Rejection Criteria of Comparable Companies: The appellant contested the rejection of three Comparable Companies (Keltron Component Complex Ltd., Keltron Resistors Ltd., and Keltron Electro Ceramics Ltd.) by the TPO. The Tribunal found the rejection criteria inconsistent, noting that mere government ownership should not disqualify comparables. The Tribunal directed the AO to re-examine the matter, including the inclusion of Keltron group companies and the exclusion of Gujarat Poly Avx Electronics Ltd. if required. 6. Computation of Deduction Under Section 10B of the Act: The appellant contested the reduction of insurance and communication expenses from the export turnover by the AO. The Tribunal agreed that only relevant portions of such expenses should be excluded. Additionally, the Tribunal upheld that any amount excluded from export turnover should also be excluded from total turnover, referencing the decision in Sak Soft Ltd. The Tribunal directed the AO to re-compute the deduction under section 10B, considering the appropriate amounts. Conclusion: The appeal of the assessee was partly allowed, with several issues remanded back to the AO/TPO for re-examination and re-computation in light of the Tribunal's directions and relevant precedents. The detailed analysis ensures the application of correct legal principles and accurate computation of tax liabilities.
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