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2017 (2) TMI 636 - AT - Income TaxTransfer pricing adjustment - use of single year s data and applying the said data to determine the arithmetic mean of margins of comparables - Held that - Where the assessee has failed to demonstrate any qualitative clarities in the data which would justify invoking of the proviso to Rule 10B(4) of the Income Tax Rules in the present case and hence, we find no mistake in the order of Assessing Officer / TPO in considering single year s data pertaining to assessment year 2007-08 in order to arrive at the PLI of comparable cases while applying transfer pricing provisions. The ground of appeal raised by the assessee is thus, dismissed. Selection of companies - Held that - There is difference in the factual aspects, wherein the concerns are not simply loss making concerns but persistently loss making concerns. In case they fall in the category of persistent loss making, then the margins of said concerns should not be adopted in order to benchmark the international transactions of the concern which is making supplies to its associate enterprises and which is market dominant concern. Accordingly, we hold so. We direct the Assessing Officer to verify the claim of assessee that both the Keltron group companies and Gujarat Poly-Avx Electronics Ltd. are persistent loss making concerns and if so, then both the concerns are to be excluded from the final set of comparables while benchmarking the international transactions in manufacturing segment Non-exclusion of depreciation while calculating PLI - Held that - We hold that where the assessee is engaged in the business of manufacture of resistors and capacitors which in turn, are used in various electronic applications and products and where the assessee s manufacturing facilities are established separately for the domestic tariff area and for export oriented unit and the items manufactured by the are used in different products which contained electronic circuits and has wide application in different spheres, there is no merit in the claim of assessee in adopting the cash PLI or PBDIT as the PLI. We dismiss the plea of the assessee in this regard. Non allowance of capacity utilization while computing the margins of assessee company - Held that - Rule 10B(1)(e)(iii) of the Act, adjustments for variations is to be provided which could materially affect the amount of net profit margin in the open market in Comparable Uncontrolled Transactions, then adjustments are to be made in respect of net profits realized by the comparable transactions or enterprises. In other words, adjustment, if any, on account of capacity under-utilization is not to be made in the profits earned by the tested party i.e. assessee but in the hands of comparables. So, we find no merit in the claim of assessee that capacity utilization adjustment should be allowed in the hands of assessee. Adjustment on account of differences in working capital employed by the assessee and the companies considered as comparables - Held that - Similar issue was raised in assessment year 2006-07 and the Tribunal remitted the issue back to the file of Assessing Officer/TPO to examine the claim of assessee relating to working capital adjustment and eliminate such difference, if any, as would materially affect the profit margins, following the same parity as in Demag Cranes & Components (2012 (1) TMI 60 - ITAT Pune ) Pvt. Ltd. Vs. DCIT (supra) and as per law. Following the same parity of reasoning, the issue is remitted back to the file of Assessing Officer. Non-allowance of benefit of provision available to the assessee under the proviso to section 92C(2) - Held that - Issue of computing adjustment without giving benefit of provision available to the assessee under the proviso to section 92C(2) of the Act for /- 5% stands decided against the assessee and following various decisions on this issue, this ground of appeal raised by the assessee is thus, dismissed. Computation of transfer pricing adjustment with reference to total turnover of exports, computing and restricting the same with reference to the value of international transactions - Held that - This issue also has been adjudicated by the Tribunal in assessment year 2006-07 wherein the plea of assessee that transfer pricing adjustment, if any, was to be made to the total income of the assessee, then the same should only with reference to international transactions of the assessee with associate enterprises and not with reference to total turnover, is accepted and the Assessing Officer was directed to determine the arm s length price of international transactions accordingly. Transfer pricing adjustment, if any, is to be made to the total income of assessee, then the same should only be with reference to international transactions of assessee with its associate enterprises and not with reference to total turnover. The Assessing Officer is thus, directed to determine the arm s length price of international transactions accordingly. Disallowance of stock written off in DTA unit - Held that - The plea of the assessee for the year under appeal is that all the evidences were before the Assessing Officer. However, we find that the Assessing Officer has not considered the said evidence since the matter was already decided against the assessee in assessment year 2006-07 and following the same, the amount was disallowed. The assessee has also furnished certain additional evidences in this regard i.e. evidence relating to the amount of stock written off in the case of raw materials and manufactured finished goods with monthly returns and in case of finished goods trading with quarterly Excise returns filed by the assessee. The Assessing Officer is directed to consider the said evidences while adjudicating the issue raised. We remit this also back to the file of Assessing Officer, who shall verify the claim of assessee and decide the issue in accordance with law. Reduction of insurance and communication expenses from export turnover and not from total turnover while computing deduction under section 10B - Held that - We remit this issue also back to the file of Assessing Officer to determine the appropriate amount of insurance and communication expenses which are attributable to the exports made by the assessee and the same are to be excluded both from the export turnover and total turnover. Re-computation of deduction under section 10B of the Act by setting off of brought forward losses of eligible unit and all the other units before computing deduction under section 10B - Held that - Deduction under section 10B of the Act is unit specific and is to be allowed anterior to the application of provisions of sections 71/72 of the Act which deals with carry forward and set off of business losses. The Assessing Officer is thus, directed to compute the deduction before adjusting brought forward unabsorbed losses or depreciation of eligible unit or other units.
Issues Involved:
1. Transfer Pricing Adjustment 2. Disallowances/Additions Other than Transfer Pricing Adjustment 3. Other Grounds of Objections Detailed Analysis: Transfer Pricing Adjustment: 1. General Ground Challenging Transfer Pricing Adjustment: - The assessee challenged the transfer pricing adjustment of ?129,006,231 related to its manufacturing activity, arguing that the analysis undertaken to determine the arm's length price was not accepted. 2. Fresh Search for Identifying Comparable Companies: - The TPO conducted a fresh search for comparable companies, including Tibrewala Electronics Ltd., which was not available in the public domain at the time of documentation. The Tribunal upheld the TPO's approach, stating that the data available at the time of assessment was valid for benchmarking. 3. Use of Single Year Data: - The assessee argued against using single-year data for comparables. The Tribunal held that single-year data is mandated by Rule 10B(4) of the Income Tax Rules and dismissed the assessee's claim. 4. Consideration of Non-Public Domain Companies: - The Tribunal upheld the inclusion of Tibrewala Electronics Ltd. as a comparable, despite it being added to the database after the documentation date, as it was functionally comparable. 5. Selection/Rejection Criteria of Comparable Companies: - The Tribunal directed the Assessing Officer to verify whether Gujarat Poly-Avx Electronics Ltd. and Keltron Group companies were persistent loss-making concerns and to exclude them if so. 6. Restructuring and Start-Up Costs: - The Tribunal directed the Assessing Officer to examine the claim of excluding restructuring costs (VRS expenses) and start-up costs from operating expenses, following the directions in the case of Demag Cranes & Components (India) Pvt. Ltd. 7. Non-Exclusion of Depreciation: - The Tribunal dismissed the assessee's plea to exclude depreciation from operating expenses, stating that depreciation is a significant cost component in asset-intensive industries. 8. Asset Utilization Adjustment: - The Tribunal found no merit in the assessee's claim for asset utilization adjustment, as adjustments should be made in the hands of comparables, not the tested party. 9. Capacity Utilization Adjustment: - The Tribunal denied the claim for capacity utilization adjustment, noting that adjustments should be made in the hands of comparables, not the tested party. 10. Working Capital Adjustment: - The Tribunal remitted the issue back to the Assessing Officer to examine the claim of working capital adjustment and make necessary adjustments. 11. Benefit of +/-5% Range: - The Tribunal dismissed the assessee's claim for the benefit of the +/-5% range under the proviso to section 92C(2) of the Act. 12. Transfer Pricing Adjustment with Reference to Total Turnover: - The Tribunal held that the transfer pricing adjustment should be made with reference to the value of international transactions, not the total turnover. Disallowances/Additions Other than Transfer Pricing Adjustment: 13. Disallowance of Stock Written-Off: - The Tribunal remitted the issue back to the Assessing Officer to verify the claim of stock written off and decide in accordance with the law. 14. Re-Computing Deduction under Section 10B: - The Tribunal directed the Assessing Officer to re-compute the deduction under section 10B by excluding insurance and communication expenses from both export turnover and total turnover. 15. Reduction of Insurance and Communication Expenses: - The Tribunal remitted the issue back to the Assessing Officer to determine the appropriate amount of insurance and communication expenses attributable to exports and exclude them from both export turnover and total turnover. 16. Disallowing Deduction under Section 10B: - The Tribunal held that the deduction under section 10B is unit-specific and should be computed before adjusting brought forward unabsorbed losses or depreciation. Other Grounds of Objections: 17. Initiation of Penalty Proceedings under Section 271(1)(c): - The Tribunal dismissed the ground as premature. 18. Erroneous Levy of Interest under Section 234B: - The Tribunal held that the issue is consequential and dismissed the ground. Conclusion: The appeal of the assessee was partly allowed, with several issues remitted back to the Assessing Officer for re-examination and re-computation as per the Tribunal's directions. The Stay Application filed by the assessee was dismissed.
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