2014 (2) TMI 1287 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - So far as it relates to inclusion of two comparables namely, Santogen Exports Ltd. and Vanasthali Textiles Industries the fact has not been denied that those two comparables were included in the list of comparables during the assessment year 2007-08. It has not been shown that these two comparables were consistent loss making companies. It is the plea of the assessee that comparables should be chosen from the perspective of their functional comparability and as per parameter laid down in Rule 10B(2) of Income Tax Rules, 1962. It was also the submissions of the assessee that these two companies had made profit in the earlier years and have suddenly come into losses in the year under consideration. If it is so, those two concerns cannot be excluded from the list of comparables just for the reason that for the year under consideration these two concerns have incurred losses. Therefore, we se no justifiable reason for exclusion of these comparables. DEPB should be taken as operating income - Held that - No error in the order of Ld. CIT(A) vide which it is held that DEPB benefits should be included in operating profit margin. We are aware that Department in its appeal has not agitated such direction of Ld. CIT(A) but as it was argued before us and we uphold the inclusion of DEPB benefit in operating profit margin. depreciation be treated as operating expenses while computing ALP by TNMM - Held that - No infirmity in such directions of Ld. CIT(A) as according to well established principle of law while working out profit margin and cost, comparison should be made with like to like and similar to similar. This principle has also been held applicable by the ITAT in assessee s own case in the aforementioned two orders, where on the basis of similar proposition DEPB benefits have been held to be computed as part of profits while computing margin of the assessee as well as comparables. Accordingly, we decline to interfere in such finding recorded by Ld. CIT(A) and the ground of revenue is dismissed.

Issues Involved:
1. Adjustment of Arm's Length Price (ALP) using the Comparable Uncontrolled Price (CUP) method versus the Transactional Net Margin Method (TNMM).
2. Inclusion of depreciation as an operating expense.
3. Inclusion of Duty Entitlement Pass Book (DEPB) benefits in operating income.
4. Exclusion of certain comparables (Santogen Exports Ltd. and Vanasthali Textiles Industries).
5. Levy of interest under sections 234B, 234C, and 234D of the Income Tax Act, 1961.
6. Premature initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP) using CUP vs. TNMM:
The assessee contended that the adjustments made by the Assessing Officer (AO) towards ALP based on the Transfer Pricing Officer's (TPO) order were incorrect and invalid. The assessee had consistently followed the CUP method, which was previously accepted by the AO/TPO. However, the TPO rejected the CUP method, arguing that the quality and styling of products sold to different countries were not the same, and applied the TNMM instead. The CIT(A) upheld the TPO's decision to apply TNMM but allowed partial relief to the assessee by including depreciation as an operating expense and DEPB benefits in operating income.

2. Inclusion of Depreciation as an Operating Expense:
The TPO excluded depreciation from operating expenses while computing the margin of the assessee and comparables. The CIT(A) disagreed, stating that depreciation should be considered an operating expense, especially for a manufacturing entity. This view was upheld by the Tribunal, agreeing that net profit should be computed in accordance with accepted norms, and depreciation is a legitimate operating cost.

3. Inclusion of DEPB Benefits in Operating Income:
The assessee argued that DEPB benefits should be included in the profits while computing margins. The CIT(A) agreed, stating that DEPB should be considered as operational receipts. The Tribunal upheld this view, referencing previous orders where DEPB benefits were included in the turnover for working out profit margins, ensuring a like-to-like comparison.

4. Exclusion of Certain Comparables:
The TPO excluded Santogen Exports Ltd. and Vanasthali Textiles Industries from the list of comparables due to their losses in the year under consideration. The assessee argued that these comparables were included in the previous year and should not be excluded solely based on one year's performance. The CIT(A) initially upheld the TPO's exclusion, but the Tribunal found no justifiable reason for excluding these comparables, noting that they were not consistent loss-making companies.

5. Levy of Interest under Sections 234B, 234C, and 234D:
The CIT(A) held that the levy of interest under sections 234B, 234C, and 234D of the Income Tax Act, 1961, is mandatory. The assessee denied liability for such interest, but this issue was not argued further before the Tribunal and thus was not addressed in detail.

6. Premature Initiation of Penalty Proceedings under Section 271(1)(c):
The CIT(A) held that the ground disputing the initiation of penalty proceedings under section 271(1)(c) was premature. The assessee denied liability for such penalties, but this issue was also not argued further before the Tribunal and thus was not addressed in detail.

Conclusion:
The Tribunal's findings were as follows:
1. Santogen Exports Ltd. and Vanasthali Textiles should be included in the list of comparables.
2. DEPB benefits should be considered part of the turnover for working out profit margins.
3. Depreciation should be considered an operating expense while computing the margin of the assessee and comparables.

The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was dismissed. The order was pronounced in the open court on 05/02/2014.

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