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TMI Blog2013 (5) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... nst a loss of Rs.53,82,33,226/- as claimed by the Appellant. Part 1- Transfer pricing adjustment of Rs.97,19,43,002/- The learned AO/Additional Commissioner of Income Tax Transfer Pricing - II(4) (hereinafter referred to as the 'learned TPO') has erred in law and in facts by: Not providing an opportunity of being heard 2. not following the principles of natural justice and not providing an adequate opportunity of being heard to the Appellant in respect of the transfer pricing adjustment. Rejecting the economic analysis undertaken by the Appellant 3. not appreciating the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income- tax Rules, 1962 (hereinafter referred to as the 'Rules'), conducting a fresh economic analysis for the determination of the arm's length price (hereinafter referred to as the 'ALP') in connection with the international transactions relating to manufacture and export of Active Pharmaceutical Ingredients ('APIs'), manufacture and export of Finished Drug Formulations ('FDFs'), trading of APIs/FDFs and provision of contract development support services and holding that the Appellant's international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO. Not considering +/- 5% variation 11. not considering the +/- 5% variation from the ALP permitted to the Appellant under the proviso to section 92C(2) of the Act. Undertaking a double adjustment in respect of reimbursement transaction 12. erroneously undertaking a double adjustment of Rs.15,55,01,002/- in respect of the reimbursement amounts, by holding that they are in the nature of services rendered by the Appellant and such amounts do not form part of the Appellant's profit and loss statement. *12a. Without prejudice to ground no. 12, relating to adjustments on reimbursement transactions, even if it is considered that the reimbursements are in the nature of provisions of contract development support services and not pure reimbursements, no adjustment is called for on margins earned from this segment as it is at arm's length. Part II - Corporate tax adjustments The learned AO has erred in law and in facts by: Disallowing software expenses incurred by the Appellant 13. disallowing the software expenditure of Rs.5,67,500/- incurred by the Appellant on the ground that the same represents capital expenditure. Non-grant of depreciation on software expenses disallowed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c mean of updated average margin of comparables selected by the Appellant 1 Import of raw materials in connection with manufacture of APIs 27,53,97,970 TNMM - Operating Profit Operating Revenue as PLI 11.50% -7-37% 2 Manufacture and export of APIs 92,86,59,862 3 Import of raw materials/ APIs/ packing materials in connection with manufacture of FDFs 20,37,83,582 TNMM - Operating Profit Operating Revenue as PLI 21.94% 4.83% 4 Manufacture and export of FDFs 184,52,84,406 5 Trading of APIs/FDFs 47,07,12,556 TNMM - Operating Profit Operating Revenue as PLI 8.58% 11.25% 6 Provisions of contract development support services 74,95,72,742 TNMM - Operating Profit Operating Revenue as PLI 41.24% 17,79% 7 Provision of Information Technology ('IT') support services 12,10,750 TNMM - Operating Profit Operating Revenue as PLI 46.46% 10.11% 8 Reimbursements/ recovery of costs (including cost allocations) 85,95,96,474 At cost No benchmarking required PLI - Profit Level Indicator 4. Based on the PLI statement it was assessee's contention that the international transactions with the AEs are at arm's length. The TPO did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee furnished segmental accounts with reference to each of the activity undertaken by the assessee company which the AO rejected on the reason that they are not audited. It was submitted that the audited reports were submitted to the DRP, who did not consider the issue at all in its order. Therefore, when assessee has submitted segmental reports, with out rejecting them the AO was not correct in adopting the entity level approach of making the transfer pricing adjustments. 5.1 The next objection is with reference to the method adopted by the TPO in arriving at the operating profit at 18.09%. It was submitted that this method is not supported by any Rule. It was the contention that the TPO should have examined different operating profits adopted in the order with reference to same segment rather than undertaking weighted average method and arriving at different arithmetic mean, which is not supported by any methodology or the Rules in this regard. 5.2 The third objection is with reference to making adjustment on the entire turnover of the assessee company rather than restricting to the transactions with AEs. 5.3 Fourth objection is with reference to various comparables and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish audited segmental accounts before the DRP along with its various objections. The DRP, however, while recording that assessee has furnished segmental audited accounts, did not give any finding either accepting or rejecting assessee's segmental accounts. Therefore in our opinion the entire approach of the TPO/DRP is not correct. Assessee did submit segmental accounts for each of its operation which are different from the other and therefore the correct approach under TNMM should be with each of the segmentals with the corresponding comparables involved in similar lines of functioning after proper FAR analysis. 8. In addition to the above, we are also unable to support the TPO's weighted average method of arriving at the profit margins, which is not supported by any methodology prescribed or Rules prescribed. Since the AO has details of each segment-wise profit margins of comparables, at best he could have compared with relevant profit margins with that of assessee's profit margins in each segment. However, instead of taking segmental analysis, he undertook weighted average method of arriving at entity based profit margin. After arriving at the margin, instead of restricting it t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opportunity and pass a detailed and reasonable order and then make TP adjustments. The assessee should be given due opportunity and if any objections were raised they should be considered properly why they are accepted or rejected. 9. Another contention, which was also raised in the ground, is the double addition made of an amount of Rs.15.05 crores. Prima facie objection seems correct. The AO/TPO is also directed to examine this issue and decide afresh after considering the objections of the assessee. With these directions, the entire order of the TPO alongwith the consequential orders of the AO and DRP are set aside and the matter is restored to the file of the AO for fresh TP analysis and report by the TPO. The grounds 1 to 12 are allowed for statistical purpose. 10. Ground No. 13 is with reference to the treatment of software expenditure of Rs.5,67,500/- on the reason that the same represent capital expenditure. Originally, the AO considered an amount of Rs.66,77,457/- as capital expenditure on various software purchases and consequent to the direction of the DRP the AO examined the nature of software and determined that purchase of software, whose life is more than two years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties below. 13. We have considered the submissions of representatives of parties and orders of authorities below as well as the decisions relied upon by Id A.R. We observe that Hon'ble Delhi High Court in the case of Mahaveer Almn Ltd (supra) have held after considering the decision in the case of CIT v. Ahmedabad New Cotton Mills Co. Ltd., AIR 1930 PC 56, that a mistake in the method of valuation cannot be rectified by refusing the valuation of closing stock only but the valuation of opening and closing stock had to be revised. In the case of Mahalaxmi Glass Works Pvt Ltd., (supra), the issue related to closing stock valuation of adjustment of unutilized modvat credit. The Tribunal allowed the adjustment. Hon'ble High Court confirmed the order of the Tribunal. Therefore, the issue is covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court (supra). Hence, we decide Ground No.3 of appeal in favour of assessee by modifying the orders of authorities below that if the closing stock is to be increased on account of unutilized modvat credit, the corresponding opening stock of that year should also be increased. Ground No.3 is allowed." 10 Following the ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies "shall not be included in the total income of the assessee". The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under section 10B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction. The Division Bench observed as follows:- "Plainly, section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section lOB was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent export oriented undertaking, to which the section applies "shall not be included in the total income of the assessee". The, provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of Section 1 OB by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened 'is belied by a plain reading of the provision. The Assessing Officer was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source under the same head. On the other hand, there is intrinsic material in Section l0B to indicate that such a prohibition was sub -section (7) of Section 10B provides that the provisions of sub-section (8) and subsection(10) Section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in the section as they apply for the purposes of an undertaking referred to in Section 80-IA. Section 80-IA contains a specific provision in sub-section (5) to the following effect: "(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1)apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." A similar provision corresponding to sub-section (5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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