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TMI Blog2016 (7) TMI 811X X X X Extracts X X X X X X X X Extracts X X X X ..... as the assessee-company exports constitutes 100% of the sales. Gains made on account of foreign exchange earnings as part of operating income included. Exclusion of preliminary expenditure and preoperating expenditure from operating cost - Held that:- As this expenditure have nothing to do with operations of the company. We hold that this should not be included as part of operating cost. Accordingly, we direct the AO to exclude this expenditure from operating expenditure. We make it clear that our directions relating to adjustment of operating profits/operating cost should be made applicable even in case of comparable companies finally chosen and accordingly, the issue is restored to the file of TPO/AO on the above lines. - IT(TP)A No.1748/Bang/2013 - - - Dated:- 17-6-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri Padamchand Khincha,CA For The Respondent : Shri P.Chandrashekar, CIT(DR) ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee-company directed against the order of the CIT(A)-IV, Bangalore, dated 31/10/2013 for the assessment year 2006-07. 2. Briefly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted by the TPO. The total operating profit/total cost was adopted as profit level indicator (PLI). The TPO proceeded to identify different set of comparable entities for the purpose of determining the ALP. While doing so, the TPO had applied the following filters: i) Only those companies whose economic activity was shown as Manufacture of Ball bearings were taken. ii) The entities whose turnover is more than ₹ 30 crores and less than ₹ 1 crore were excluded. iii) The entities making consistent losses were also excluded. iv) The entities whose manufacture sales are less than 60% of total sales were excluded. v) Only current year data was used. Applying the above filters, the TPO finally selected the following comparables: Austin Engineering Co. Ltd. SNL Bearing Ltd. HMT Bearings Ltd. Out of the above comparables, HMT Bearings Ltd. was eliminated on account of falling revenues and finally the TPO computed the arithmetic mean of margins of operating cost of comparables finally selected at 10.03% as follows: Austin Engineering 5.77% of operating costs SNL Bearings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and consequently the orders passed by the learned income tax authorities are bad in law. 4.1 The learned ITO, Ward 11(2) and Addl. Director of Income-tax (Transfer Pricing)-I, have erred in not appreciating that Chapter X only provides for computation of income and there is however no amendment to the definition of the term income to include the amounts computed under Chapter X. The order passed by the learned income tax authorities is therefore bad in law. 5.1 On the facts and in the circumstances of the case and on the basis of the prevalent law, the method and the comparables chosen by the appellant deserve to be adopted; and even under the method initially proposed or that ultimately applied by the Transfer Pricing Officer, the profits earned from price paid/charged in the transactions with the associated enterprises compares favourably with the profits of the comparable companies and consequently the transfer pricing addition is to be deleted in entirety. 5.2 The learned ITO, Ward 11(2) and Addl. Director of Income tax (Transfer Pricing)-I, having admitted that the product manufactured by the appellant has no market in India, and nobody else in India manufactures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quashed; or in the alternative; (b)(i) the adjustment made to the income returned on the basis of the provisions of Chapter X be deleted; (ii) the adjustment made to the computation of book profits under section 115JB be deleted; (iii) interest levied under section 234B be deleted (iv) interest under section 234D be deleted. 7. The assessee also raised the following additional grounds of appeal: Assuming without admitting that TNMM is the most appropriate method, the learned CIT(A) has erred in confirming the action of the lower authorities in: 1. Selecting operating profit to operating cost as the profit level indicator (PLI) in computing the ALP, without appreciating the facts and circumstances of the case. 2. Not appreciating in the facts and circumstances of the case, appropriate PLI to arrive at ALP would be gross profit to value added expenses . 3. Not appreciating that SNL Bearings is engaged in predominantly domestic activity and therefore cannot be adopted as a comparable. 4. Rejecting HMT Bearings Ltd. as a comparable on unjustified grounds. 8. Learned AR of the assessee-company submitted the TPO as well as the CIT(A) are not justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok profits in light of decisions of co ordinate bench in the case of Moser Baer India Ltd. vs. DCIT (2007) 17 SOT 510(Del.) and DCIT vs. Roxy Investments (P) Ltd. (2008) 24 SOT 227 (Del). 8.2 On the other hand, learned DR relied on the orders of the CIT(A) and the order of the TPO. As regards additional grounds of appeal, learned DR submitted that the grounds may be sent back to the file of TPO/AO for adjudication in accordance with law. 9. We have considered the rival submissions and perused the material on record. In the present appeal, the issues that arise for adjudication are whether the TPO as well as the CIT(A) were justified in excluding HMT Bearing Ltd., from the list of comparables and selecting SLN Bearings Ltd., as comparable and while calculating operating margins, whether foreign exchange gain should be considered as part of the operating income and the pre-operative expenditure and preliminary expenditure written off should be considered as part of operating expenditure. 10. Now, we shall deal with each of these issues as under. (i) Exclusion of HMT Bearings Ltd:. This company was chosen by the TPO himself, however excluded it from the list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of labour and capital in the markets (domestic and export) are different. v) Overall economic development and level of competition is different. vi) Government incentives like tax incentives etc are available only for exporters. vii) As the pricing for services differs in the domestic market vis- -vis the export market, the level of competition, size of the market etc. are different in the domestic and export sectors. Similarly, the co-ordinate bench of Tribunal (Mumbai) DCIT vs. Indo American Jewellery Ltd. (2010) 41 SOT 1 (Mum) held that company with domestic operations cannot be compared with taxpayer who has 95% exports. Respectfully following the decisions of the co-ordinate benches cited supra, we hold that this company cannot be compared with the assessee-company whose export earnings are less than 4% as the assessee-company exports constitutes 100% of the sales. (iii) As regards the issue whether the gains made on account of foreign exchange fluctuations should be considered as operating revenue or not? The issue is no longer res integra in view of the decisions cited by the learned AR of the assessee-company. Therefore, we direct the TPO/AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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