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2016 (4) TMI 377 - AT - Income TaxTransfer pricing adjustment - selection of most appropriate method - Held that - There is no contract between the assessee and its AEs regarding the remuneration and mark up in respect of the value added by the assessee in the manufacturing process and further when the assessee is using the raw material of its own and not supplied by the AE for job work or contract manufacturing. Further, we find that there are variations of cost components in respect of the manufacturing activity of the assessee as well as the other comparables selected either by the assessee or by the TPO. The assessee is also seeking adjustment on account of variation of depreciation method applied by the assessee in comparison to the comparables which itself shows that the cost components of the assessee are in variations with that of the comparables and therefore in our considered opinion CPM cannot be regarded as MAM in the case of the assessee. Accordingly, we uphold the orders of the authorities below on this issue in rejecting the CPM as MAM and adopting the TNMM as MAM for determination of ALP. - Decided against assessee Rejection of the Multi Year Data adopted by the assessee while computing the margins of the comparables and considering the current year data by the TPO for the purpose of determining the ALP - Held that - 3 Rule 10D(4) further states that the information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date. Therefore, it is revealed by the provisions of transfer pricing that unless and until the current year data does not gives a true and correct picture of the uncontrolled comparable price more than one year data are not required to be considered. Only in the case when the current year data does not give a true and correct picture and more than one year data not being more than two years prior to the financial year can be considered if such data reveals the fact which have an influence on the determination of transfer pricing. In the case on hand, the assessee has not brought on record any fact to show that the current year data are not reflecting the correct uncontrolled comparable price. Therefore, this ground of the assessee s appeal is dismissed. Adjustment for difference in accounting policies, depreciation adjustment, etc.- Held that - In order to provide any adjustment on account of differential depreciation cost, the figure of depreciation cost alone are not enough but the composite expenditure relating to the use of the fixed assets has to be taken into account like depreciation, maintenance, lease rentals if any, etc. We further note that the cost of depreciation depends on the level of automation of the manufacture process of a particular entity which in turn reduce the other direct expenses like cost of salary/wages. Therefore the comparison of the cost of depreciation has to be worked out in the ratio of turnover to the cost of depreciation and other expenditure for use of the asset/machinery. Accordingly, in the facts and circumstances of the case when this issue has not been decided either by the TPO or by the CIT (Appeals), we set aside the same to the record of the TPO/A.O for working out the comparative analysis of the cost of depreciation/use of machinery in the ratio of turnover of the assessee as well as the comparable companies and then grant an appropriate adjustment on account of differential ratio of the cost of depreciation including other incidental expenses of use of machinery/fixed assets in the margins of the comparable companies and then determine the ALP. No error or illegality in the order of the CIT (Appeals) in directing the A.O/TPO to grant working capital adjustment. Application of uniform PLI - Held that - When there is no facts or circumstances to indicate that the change in PLI in respect of reference segments is applied to avoid distorted results then the TPO is not permitted to apply different PLI an international transactions which are similar except that in mass segment manufacturing of optical plastic lenses are on standard basis without a specific personal requirements and in the case of reference lenses are prepared as per the specific personal requirements. Therefore, the material as well as process in both the segments is not significantly different except the powering of the lenses which is as per the specific requirements under the referral segments as against the standard power of various levels in the mass production. This itself will not justify the adoption of different PLI. Therefore, the TPO was not justified in not maintaining the consistency of applying the PLI while computing the ALP in respect of the international transactions. In view of the above facts and circumstances of the case, we set aside this issue to the record of the TPO for applying the uniform PLI as applied in the case of mass production segment as well as in the Assessment Year 2008-09.
Issues Involved:
1. Assessment and reference to Transfer Pricing Officer (TPO) legality. 2. Comparability analysis and selection of Most Appropriate Method (MAM) for Transfer Pricing. 3. Use of erroneous data by AO/TPO. 4. Non-allowance of appropriate adjustments by AO/TPO. 5. Variation of 5% from the arithmetic mean. 6. Disallowance of prior period expenses. 7. Initiation of penalty proceedings. 8. Relief and additional grounds. Detailed Analysis: 1. Assessment and Reference to TPO Legality: The assessee challenged the legality of the assessment and reference to the TPO, arguing that the AO did not issue a show cause notice as per the proviso to section 92C(3) of the Income-tax Act, 1961. The AO also failed to record an opinion that conditions in section 92C(3) were satisfied, and the TPO did not demonstrate that the motive was to shift profits outside India. The Tribunal did not find merit in these arguments and upheld the actions of the AO/TPO. 2. Comparability Analysis and Selection of MAM for Transfer Pricing: The assessee, engaged in manufacturing plastic ophthalmic lenses, used the Cost Plus Method (CPM) for benchmarking its international transactions, arguing that it was more of a job work than full-fledged manufacturing. The TPO rejected CPM and adopted the Transactional Net Margin Method (TNMM) as MAM, finding that the assessee was not a contract manufacturer but purchased raw materials and independently carried out manufacturing. The Tribunal upheld the TPO's decision, noting that the CPM was not appropriate due to variations in cost components and the nature of the assessee's business activities. 3. Use of Erroneous Data by AO/TPO: The assessee contended that the AO/TPO used non-contemporaneous data and did not apply multiple-year data. The Tribunal emphasized the mandate of Rule 10B(4), which requires using current year data unless it does not reflect the correct uncontrolled comparable price. The assessee failed to demonstrate that the current year data was inadequate, leading to the dismissal of this ground. 4. Non-Allowance of Appropriate Adjustments by AO/TPO: The assessee sought adjustments for differences in accounting practices, depreciation, research and development expenditure, and capacity under-utilization. The Tribunal focused on the depreciation adjustment, noting that the assessee's depreciation expenses were higher due to the straight-line method. The Tribunal remanded the issue to the TPO/AO for a comparative analysis of depreciation costs and other related expenses, directing an appropriate adjustment. 5. Variation of 5% from the Arithmetic Mean: The Tribunal acknowledged this as a consequential benefit, directing the AO/TPO to consider the 5% variation depending on the outcome of the re-determination of the ALP. 6. Disallowance of Prior Period Expenses: The assessee did not press this ground during the hearing, leading to its dismissal. 7. Initiation of Penalty Proceedings: The Tribunal did not specifically address this issue in detail, focusing on the substantive grounds of the appeal. 8. Relief and Additional Grounds: The assessee raised additional grounds, including the rejection of General Optics (Asia) Ltd. as a comparable, and claims for depreciation and capacity utilization adjustments. The Tribunal admitted the additional ground regarding General Optics, remanding the issue to the AO/TPO for examination of functional comparability. For the working capital adjustment, the Tribunal upheld the CIT(A)'s direction to the TPO, emphasizing the need for the assessee to provide relevant details and quantification. Separate Judgments: No separate judgments by different judges were mentioned; the order was delivered collectively by the Tribunal. Conclusion: The appeals of the assessee were partly allowed, and the appeal of the revenue was dismissed. The Tribunal upheld the TPO's adoption of TNMM over CPM, dismissed the use of erroneous data ground, and remanded the depreciation adjustment issue for further analysis. The Tribunal also directed consideration of the 5% variation and admitted additional grounds for further examination.
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