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TMI Blog2011 (3) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... E. Veerabhadrappa, JJ. Mukesh Butani, Amit Agarwal and Deep Raj for the Appellant Naresh K. Chand and A.D. Mehrotra for the Respondent ORDER I.P. Bansal, Judicial Member:- 1. This is an appeal filed by the assessee under the provisions of section 253(1)(d) of the IT Act, 1961, against the order passed by the Assessing Officer dated 29th July, 2010 u/s. 143 (3) read with section 144C of the Income-tax Act, 1961 (the Act). The main addition agitated in the present appeal is an amount of Rs.6,97,92,811 on account of variation in income as a consequence of order of Transfer Pricing Officer (TPO) u/s. 92C (3) of the Act. The other disallowances were made regarding (i) disallowance of claim of set off of loss of Rs.38,89,499; and (ii) Rs.16,057 on account of excess claim of depreciation i.e., the depreciation claimed on computer peripherals and printers and UPS @ 60% as, according to the Assessing Officer, the same was allowable at 15% only. The grounds of appeal read as under:- "Based on the facts and circumstances of the case, Geodis Overseas Private Limited (hereinafter referred to as "the Appellant"), respectfully submits with respect of the order passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... range as provided by the proviso of sec. 92C(2) of the Act. 10. The ld. AO/DRP/TPO has erred in law and on facts, in making several observations and findings which are based on incorrect interpretation of law and without appreciating and understanding the intricacies and criticalities of the facts of the case. 11. The ld. TPO has erred in law in not providing adequate opportunity of being heard to the appellant while adjudicating on the Transfer Pricing issues and has consequently not followed the principal of natural justice. 12. The ld. AO has erred in law and in facts in making an addition of Rs.16,057 to the income of the appellant on account of excessive depreciation on Computer peripherals, Printers and UPS. 13. The ld. DRP has erred in not adjudicating in its directions on the issue of allowance of depreciation on Computer peripherals, Printers and UPS. 14. The ld. AO has erred in law in the adjustment on account of depreciation without providing an opportunity of being heard to the appellant. No discussion was undertaken with the appellant with respect to this adjustment during the course of assessment proceedings. 15. The ld. Collegium of Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The assessee is aggrieved, hence has raised the above grounds of appeal against the order passed by the Assessing Officer in pursuance of the order passed by the DRP. The grounds of appeal were summarised by the learned AR as under:- 3.1. Ground Nos.1 and 2 were stated to be general in nature. 3.2. Ground No. 2, as did not represent the actual grievance of the assessee, was revised and read as under:- "2. The learned A.O/DRP/TPO has erred, in law and on facts by making an adjustment of Rs.69,792,811 to the income of the appellant and in holding that the transactions between the appellant and its associate enterprise were not at an arm's length price. 3.3. Ground Nos. 4, 5 and 6 represent the grievance of the assessee regarding adjustment claimed in respect of international transaction on account of capacity utilization, fixed assets and working capital adjustment. 3.4. Ground Nos. 7 and 10 represent the grievances of the assessee regarding non-appreciation of business modalities of its business by the TPO/DRP as a result of which proper adjustment has not been granted. 3.5. Ground No. 8 is regarding user of multiple year data of comparables to arrive at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gross Profit 200,836,359.86 Operational Expenses Employee Costs 52,326,690.00 Administrative Expenses 39,642,651.00 Business Promotion Expenses 29,709,060.00 Depreciation 2,589,758.00 Total 1,24,268,159.00 Net Operating Profit 76,568,200.86 NPM(%) 4.95 Table B (As per books of account) Particulars Amount (Rs.) Income Sales 971,055,854 Other Income 10,046,563 Total (A) 981,102,417 Expenditure Freight and Other operational Expenses 46,447,867 Personnel Expenses 52,326,690 Operating and Other Expenses 76,409,408 Depreciation 2,589,758 Miscellaneous expenditure written off 8,000 Total (B) 977,774,723 Net Profit( c ) = (A) (B) 3,327,694 NPM (%) (C)/(A)+100 0.34% 6. Observing the difference in figures, the TPO issued the show ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 parties, data for 6 comparables was not available for the financial year 2005-06. The TPO also rejected the two comparables, namely, Skypak Service Specialist Ltd. and Transport Corporation of India Ltd. on the ground that those two concerns were not comparable as they were having negative net worth. He has taken into consideration the following 8 parties to arrive at an arithmetical mean of 7.53%:- Table D td Name of the Company NPM (March, 2006) td ABC India Ltd. 6.00 td Balmer Lawrie and Co. Ltd. 23.52 td Delhi Assam Roadways Corpn. Ltd. 3.27 td Gati Limited 10.05 td Premier Road Carries Ltd. 1.44 td Roadways India Ltd. 0.96 td SER Industries Ltd. 1.31 td Sical Ltd. 13.72 td Arithmetic Mean 7.53% 9. So as it relates to the claim of the assessee regarding adjustment on account of capacity utilization, working capital and fixed asset, learned TPO has observed that it was for the assessee to furnish the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h comes out to only 22% of the operating expenses and, thus, the difference has wrongly been calculated at Rs.6,97,92,811. (iv) According to OECD guidelines the data regarding earlier years could also be used, therefore, the transfer pricing study submitted by the assessee for calculation of arms length price on the basis of available three years financial data should have been accepted. (v) DRP has committed an error in not taking into consideration the current year data of following two parties as the same was available in the proceedings before DRP:- (a) Coastal Roadways Ltd. - net profit margin 0.73% (b) North Eastern Carrying Corporation Ltd. - 1.63% (vi) The exclusion of comparable, namely, Transport Corporation of India is not proper as, according to the data available, it was not having a negative worth. (vii) 5% difference in the calculation of arm's length price should be allowed as standard deduction and such claim has wrongly been rejected by TPO and DRP. (viii)The adjustment on account of working capital, capacity utilization and fixed asset is required to be given and has wrongly been rejected by the DRP without assigning any reason for rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue respectively. Under sub-section (12) directions under sub-section (5) cannot be passed after nine months from the end of the month in which draft order is forwarded to the eligible assessee. Under sub-section (13), on receipt of directions issued under sub-section (5), the Assessing Officer has to pass the assessment order in conformity with the directions without providing any further opportunity of being heard to the assessee within one month from the end of the month in which such directions are received. 12. In view of aforementioned statutory provisions there cannot be any dispute to the proposition that where the order of the DRP is a non-speaking order, the same cannot withstand the test of law and this issue has also been set at rest by the Hon'ble jurisdictional High Court in the case of Vodafone Essar Ltd. v. Dispute Resolution Panel-II in Writ Petition (Civil) No. 7028/2010. The decision in the said case reads as under:- "JUDGMENT Heard Mr. Syali, ld. Sr. Counsel for the petitioner and Mr. Sanjeev Sabh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled at pages 202-310 of the paper book. There is no discussion in the report with regard to calculation of net profit margin of 4.95%. No basis has been given upon which the total receipts of the assessee have been worked out at Rs.154,57,85,430 against the actual figure in the books of account of Rs.98,11,02,417. Similar is the case for operational expenses which are stated in the transfer pricing report at Rs.134,49,49,070 against book figure of Rs.97,77,74,723. To support such calculation, the assessee has assumed that its recovery of cost is at a lower rate 55% as compared to cost incurred at 100% and, in this manner, capacity utilization has been taken by the assessee @ 55%. An assumption has been made that 100% capacity utilization is achieved and on that basis the receipts are notionally taken. Learned TPO has turned down such pleas for the following reasons:- (a) It is evident from audited financial that during year, the assessee has earned freight and other operational income at Rs.9,71,055,854 whereas cost of freight and other operational expense was at Rs.8,45,442,807. This data clearly prove that assumption of return rate of 55% on the cost incurred is factually in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee at a higher figure which is not permissible to be taken. Moreover, the net profit margin is the actual margin in the case of the tested party which, in the present case, is the assessee itself. It is very difficult to accept such submissions of the assessee that on the basis of assumption that the assessee has attained full capacity, its receipts should be presumed at a figure and, then, the net profit margin should be calculated accordingly. If it is so done, then, the very purpose of the statute will be defeated. What has to be seen in the present case is that whether the international transactions of the assessee with its associate enterprises are at an arm's length price or not. Therefore, we are of the opinion that such claim of the assessee has rightly been rejected. The provisions contained in the Act and rule do not support the assumption of turnover or operational expenses on hypothetical basis ignoring the actual figures. If it is allowed to be done, then, there will be no end to the proceedings. In this manner, we find no justification in interfering with the decision of TPO, DRP and the Assessing Officer whereby the contention of the assessee with regard to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y DRP on this issue, we consider it just and proper to restore this issue to the file of DRP for verification of the claim of the assessee. After giving the assessee a reasonable opportunity of hearing in this regard and after making the verification, the claim of the assessee should be allowed accordingly. Therefore, this issue is restored back to the file of the DRP with a direction to pass a speaking order on this issue in the manner aforesaid. Whether current financial year data is only to be considered. 20. This issue is regulated by the provisions of Rule 10 (4) which read as under: "10 (4) The data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 21. Sub-rule (4) of Rule 10B clearly state that the data to be used in analyzing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support such contention, the calculations regarding net operating profit ratio of Coastal Roadways Ltd. was submitted at page 18-B of the paper book and for North Eastern Carrying Corporation Ltd., it was submitted at page 18-C of the paper book. It was submitted by learned AR that till the matter reached before DRP, the assessment was not finalized as the Assessing Officer had framed only draft assessment order. As per principle of natural justice, if any document is available before the assessment is framed and that document supports the case of the assessee, then, the same should have been considered by the authority. Thus, he submitted that the said request of the assessee has wrongly been rejected and those two comparables should have been accepted to compute the mean margin. 24. As against that it has been the submission of learned DR that the TPO in his order has clearly stated that the current year financial data of these two companies was not available, therefore, they cannot be included in the comparables. He submitted that the assessee has not shown that the financial data of those two companies were available on the date when the TPO has framed the order. He submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the figures submitted by the assessee. We direct accordingly. 26. So far as it relates to applicability of Rule 9, we observe that the same is not acceptable firstly on the ground that these documents were not in the shape of additional evidence as these parties were included by the assessee in the list of comparables for its transfer pricing document. These parties were excluded only on the ground that current year data was not available. The current year financial data of these two comparables was submitted by the assessee before the DRP, therefore, it cannot be said that it was in the shape of additional evidence. Secondly, it also cannot be said that permission was rejected by the DRP as no speaking order has been passed on such request of the assessee that why the current year data submitted by the assessee with regard to these two comparables was not acceptable. This objection of the assessee is allowed in the manner aforesaid and this issue is allowed for statistical purposes. The exclusion of comparable, namely, Transport Corporation of India. 27. According to the assessee, Transport Corporation of India does not have negative worth as has been held by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued not only before TPO, but also before DRP and the DRP has not given any verdict upon these three adjustments. He submitted that the assessee is entitled to have adjustment of all the three items while computing the arm's length price and such claim of the assessee has not been rejected by way of a speaking order and the DRP has simply upheld the order of the TPO. He submitted that this issue may be sent back to the file of DRP with a direction to pass a speaking order on all these three aspects. As against that ld. DR submitted that the TPO has assigned reasons for rejection of such adjustments, hence, Ld. DRP was right in upholding the order of the TPO and rejecting the contention of the assessee regarding adjustment of these three factors. 33. We have carefully considered the rival submissions in the light of material placed before us. It can be seen from the order of the DRP that the objections of the assessee regarding adjustment of working capital, capacity utilization and fixed asset have not been taken into consideration. No speaking order has been passed for rejecting such claim of the assessee. Therefore, we consider it just and proper to restore this issue to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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