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TMI Blog2014 (12) TMI 892X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in its books of accounts is on Written Down Value (WDV) method whereas the depreciation charged in the case of M/s. Span Diagnostics Limited is on Straight-line method, hence for comparing Transaction Net Margin Method of the two companies, adjustment in respect of depreciation is must – thus, the matter is to be remitted back to the Transfer Pricing Officer for proper verification of the claim of the assessee regarding huge difference in the amount of depreciation between the assessee company and the chosen comparable case and also the difference in the method of providing of depreciation in the two companies - if the methods of depreciation adopted by the two companies are different, then the net margins arrived at are not strictly comparable unless suitable adjustment is made in the amount of depreciation so as to adopt depreciation under the same method in the two cases – thus, the TPO is directed to take into consideration the difference in the method of providing depreciation in the case of the assessee and the chosen comparable case and if the methods are different, then to make suitable adjustment for the same as per law – Decided in favour of assessee. Claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in upholding / confirming the action of the learned TPO in not accepting the two comparables selected by the Appellant i.e. Casil Health Products Ltd and Monozyme India Ltd on the premise of "functional comparability", without appreciating the fact that the same were considered as "functionally comparable" in earlier assessment year (AY) i.e. AY 2007-08. 3. On the facts and in the circumstances of the case and in law, the learned AO/TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO in not accepting the comparables selected by the Appellant based on updated search performed by the Appellant during the course of assessment proceedings before the TPO, on the basis that the international transactions of the Appellant ought to be benchmarked separately, without appreciating the fact that the said international transactions are closely linked and cannot be separated. 5. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO in rejecting the use of multiple year data for computing the operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SHDL Span Diagnostics Ltd. Depreciation Cost 63,502,982 14,465,868 Total Operating Cost 792,291,108 549,724,372 Depreciation as % of Total Operating Cost 8.02% 2.63% Thus, from the aforesaid analysis, it is evident that ratio of depreciation cost to total cost ratio is almost three times higher in the case of the assessee as compared to Span Diagnostics Ltd. Hence, for the purpose of "like to like" comparison an adjustment in respect of depreciation cost while computing margin of the assessee and comparable companies is claimed. Accordingly, the assessee has computed the operating margins of the assessee and the comparable companies without considering depreciation cost. Based on above, operating margin of the assessee and Span Diagnostics Ltd works out to as follows. Particulars Span Diagnostics Ltd. The Assessee NPM 13.28 percent 13.30 per cent Hence, the international transactions entered into by the assessee appear to be consistent with the arm's length standard from an Indian Transfer pricing perspective." 5. In support of above submission, the assessee placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Schefenacker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions, representing purchase of capital goods from the AE and capitalized in the books of account, from the purview of the benchmarking exercise. This is so because the effect of the international transactions, representing asset purchase from AE, on the margin is only through depreciation. Therefore since the entity level margin is considered by the assessee, the depreciation is to 'be included necessarily to find out the correct benchmarking for the international transactions representing purchase of capital goods. Thus this contention is not accepted." 7. On appeal before the Dispute Resolution Panel, the assessee submitted as follows: "Any receipt or expenditure having no bearing on price or margin of profit can be ignored. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. "Net profit" used in Rule 10B can be taken to mean commercial profit. Depreciation, which can have varied basis and is allowed at difference rates is not such an expenditure which must be deducted in all situations. It h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vel of depreciation. More so, considering that there is only one company that the TPO is comparing, it is important to make this truly comparable on all parameters. Alternatively, if fresh comparables are added to Span, the average margin would not be heavily dependent on one comparable and may better represent the arm's length scenario. The Assessee's plea is on principle grounds that if there are differences in its own facts vis-à-vis facts of comparable then adjustment is warranted. Adjustment can be made by excluding depreciation or adjusting the level of depreciation." 10. In support of the above submission, the Authorized Representative of the assessee quoted following judgments: 1. Schefenacker Motherson Ltd. v. ITO (2009) 123 TTJ 509 (Del) 2. DCIT v. Reuters India Pvt. Ltd. (2013) 24 ITR (Trib) 231 (Mum) 3. Pentair Water India Pvt. Ltd. v. Addl. Commissioner of Income Tax (2014) 47 taxmann.com 132 (Panaji) 4. Market Tools Research Pvt. Ltd. v. ACIT ITA No. 2066/Hyd/2011 11. We have heard the rival submissions and perused the orders of lower authorities and material available on record. In the instant case, the assessee is engaged in the business of trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pricing Officer. 13. The Dispute Resolution Panel has also not recorded any finding in respect of the claim of the assessee about the difference in the amount of depreciation as well as in respect of difference in the method of providing depreciation employed in the case of the assessee vis-à-vis the method employed in the case of M/s. Span Diagnostics Limited. The Dispute Resolution Panel without recording any finding on this issue confirmed the action of the Transfer Pricing Officer. We find that the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. vs. ITO & Anr. (2009) 123 TTJ 509 (Del) has held as under: "In the present appeal, ALP of transactions carried was to be determined by comparing net profit of the taxpayer (tested party) with mean net profit of comparables. Only receipts and expenditure, having connection with international transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... start of operations. Thus, age of plant/machinery and other related information is available on record and, therefore, contention of the taxpayer on differences in claim of depreciation is fully established on record. Obviously there are differences between the machinery employed by the taxpayer and other comparable concerns which is reflected in amount and percentage of depreciation claimed. How this variation and difference could be ignored under TP Regulations is neither shown nor explained. The taxpayer has debited high amount/ratio of depreciation as per rules as it was first or second year of commencement of its business. Other enterprises nave claimed depreciation at much lower amounts. It is more than 5 and 15 times of the taxpayer. Size of the assets besides the age of the assets of comparables was leading to difference in the profit margins and in mean margin. On the contrary, claim of depreciation is eating up large chunk of profit in the case of the taxpayer. How above differences were not considered in applying FAR analysis? The CIT(A) has not said a word on "asset" employed and "risks" suffered by the tested party and the comparables. Thus, material di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est way to adjust difference on account of depreciation was to ignore depreciation both in case of the party and the comparables. After all TP adjustments are to be made of differences in price charged or for international transactions and not of difference in the claim of depreciation as has been done in this Such adjustments also matched the requirement of the context (TP principles). The basic issue was whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profit are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation and facts of case overwhelmingly approve adoption of cash profit only. The taxpayer in both the assessment years showed before the Revenue authorities that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CDR unit before depreciation, it will be as under: Particulars Total Revenue from CDR Operations 109,449,682 Notional revenue 1,629,003 Total 111,078,685 Total Operating Cost 97,289,193 Less: Adjustment for Excess Depreciation provided 13,565,825 Adjusted Operating Cost 83,723,368 Operating Profits 27,355,317 Net Operating Profit/Operating Cost 32.67%" 15. In the above facts and circumstances, in our considered view, it shall be fair and in the interest of justice to restore the matter back to the file of the Transfer Pricing Officer for proper verification of the claim of the assessee regarding huge difference in the amount of depreciation between the assessee company and the chosen comparable case and also the difference in the method of providing of depreciation in the two companies. In our considered view, if the methods of depreciation adopted by the two companies are different, then the net margins arrived at are not strictly comparable unless suitable adjustment is made in the amount of depreciation so as to adopt depreciation under the same method in the two cases. Therefore, the Transfer Pricing Officer is directed to take into consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is ₹ 97,75,036/- (for 180 days or more) and ₹ 32,42,031/- (for less than 180 days) totalling to ₹ 1,30,17,067/-.". The submission of the assessee has been perused and duly considered. The assessee has reiterated its arguments as argued in earlier years. Since, the department is in appeal on this issue, the plea of assessee is not sustainable. Therefore, a sum of ₹ 1,30,17,067/- being depreciation claimed on machinery placed with customers is disallowed and added back to the total income of the assessee. The objection has been raised by the assessee before the DRP, against this addition also. The Ld. DRP held that it is mentioned in the AO's order that this issue is pending before the ITAT in earlier years. In such circumstances, we refrain from issuing any direction on this issue. Hence, a sum of ₹ 1,30,17,067/- being depreciation claimed on machinery placed with customers is disallowed and added back to the total income of the assessee. Penalty proceedings u/s. 271(1)(c) of the Income Tax Act, 1961 are separately initiated." 19. On appeal, the Dispute Resolution Panel held as under: "It is mentioned in the AO's order that this issue is pending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rections given by the Tribunal in Assessment Year 2005-06 as quoted above. Thus, these grounds of appeal are allowed for statistical purpose. 23. Ground nos. 11 & 12 are directed against the order of Dispute Resolution Panel confirming the order of the Assessing Officer disallowing the claim of ₹ 4,12,609/- on provision of sick leave u/s. 43B. 24. The Assessing Officer observed as under: "During the year under consideration, the assessee has debited an amount of ₹ 4,12,609/- being provisions for sick leave. The assessee was asked to justify the claim of such vis-à-vis section 43B or 37(1) of the Act. The assessee was apprised with the provisions of section 43B of the Act. The provisions of section 43B of sub clause (f) envisages that any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall only be allowed on actual payment. The submission of the assessee on this point reads as under: "In respect of provisions for sick leave to the tune of ₹ 4,12,609/- during the year under consideration based on valuation report, we wish to submit that the same is in accordance with and to comply with Accounting Standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Resolution Panel held as under: "The assessee made provision for sick leave to the tune of ₹ 4,12,609/- based on valuation report. The assessee further argued that the same is in accordance with and to comply with Accounting Standard-15 "Employee Benefits". The valuation is claimed to be based on scientific basis and by the Actuary, who is expert in the field. The TPO disallowed the same under section 43B. We direct the TPO to verify whether the amount was actually paid in the subsequent years. If so, then the assessee's claim may be allowed this year if the same has not been allowed in the year of payment. However, if it is found that no such payments were actually made even in the next two or three yeas, then no deduction needs to be allowed for the provision made for the future contingent liabilities." 26. Before us, the assessee submitted that Section 43B(f) is not valid for provision of leave encashment since the same is not a statutory liability. In support of its submission, the assessee quoted the following judgements: 1. Exide Industries Limited & Anr. v. Union of India & Ors. (2007) 212 CTR 206 (Cal) 2. Eimco Elecon (India) Ltd. v. ACIT (2013) 22 ITR (Trib.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court being arbitrary, unconscionable and dehors the Hon'ble Supreme Court's decision. He submitted that in view of this judgment of Hon'ble Calcutta High Court, disallowance made by the A.O. is not justified. Ld. D.R. supported the orders of authorities below. 3.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgment of Hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra). We find that the A.O. has made disallowance by invoking the provisions of clause (f) of Section 43B and the same was confirmed by Ld. CIT (A) also on the basis of Section 43B. As per the judgment of Hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra), it was held that clause (f) of Section 43B is arbitrary, unconscionable and dehors of the Hon'ble Supreme Court decision, and therefore, not valid. In view of this, clause (f) of Section 43B is not valid and, therefore, disallowance made by the A.O. on the basis of clause (f) of Section 43B cannot be sustained. We therefore delete the same." 30. The Departmental Representative could not point out any good reason as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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