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TMI Blog2016 (10) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed sale price. Therefore, the margin of the assessee company will definitely be less due to increase in the price of aluminium qua the sale price. Therefore, the adjustment in respect of the substantial increase in the cost of raw material i.e. “aluminium” has to be made for the working of correct PLI. We, therefore, do not find any error or infirmity in the computation of the Upward Adjustment as worked out by the First Appellate Authority after giving the benefit of adjustment for raw material “extra ordinary item”. We decline to interfere. Appeal filed by the Revenue is accordingly dismissed - ITA. No: 377/AHD/2012 & C.O. No. 73/AHD/12 - - - Dated:- 24-8-2016 - SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, JJ. Appellant by : Shri Rakesh Jha, Sr. D.R. Respondent by : Shri Ashwin Shah, A.R. PER N.K. BILLAIYA, ACCOUNTANT MEMBER 1. ITA No. 377/Ahd/2012 and C.O. No. 73/Ahd/2012 are appeal by the Revenue and cross objection of the Assessee directed against the very same order of the Ld. CIT(A)-XIV, Ahmedabad dated 30.11.2011 pertaining to A.Y. 2007-08. 2. The grievance of the Revenue reads as under:- 1. The Ld. Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Iron (Exchange) India Ltd. has not been accepted as a comparable company for the purpose of bench marking the margins since the company is in the business of water treatment plant and not in the water treatment chemicals. In as much as: (i) The Unit of the assessee company is situated in SEZ and hence entitled for benefits under Section 10A and hence the transfer pricing provisions are not applicable; (ii) The AO has ignored the margins made by the AE in US while making an adjustment. (iii) Iron (Exchange) India Ltd. is having the business of water treatment chemicals and plants and that it is directly comparable with the business of the assessee company. This company was accepted as comparable during earlier years. 2. The learned CIT(A) has erred in not granting the benefit of range of +/- 5% while calculating the transfer pricing adjustment. 4. Assessee is a closely held Limited Company established in 1997 and engaged in the manufacture of water treatment chemicals namely, Aluminium Chloride and Poly Aluminium Chloride. The main raw materials used are Aluminium Ingots and Hydrochloric Acid. 5. During the year under consideration, the assessee enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Sl. No. Name of the Company Weighted average margins (%) 1 Chembond Ashland Water Technologies Ltd. 11.74% 2 Ion Exchange (India) Ltd. 4.68% 3 NLC Nalco Ltd. 15.87% Arithmetic mean 10.76% Lower Range (-5%) Upper Range (+5%) 5.23% 16.30% 9. In comparison to the margins of the comparables as shown hereinabove, the assessee has shown its own margin as under:- Particulars Figure in Rs. Operating Revenue 76,682,935.00 Operating Cost 71,685,511.00 Operating Profit 4,997,424.00 Operating Margin (Operating Profit/Operating Cost) 6.97% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,70,17,283 Sales at Book Value 8,95,64,803 Sales at ALP 11,96,54,693 Transfer Pricing Adjustment 3,00,89,890 15. Accordingly, Upward Adjustment of ₹ 3,00,89,890/- was made by the TPO and the same was accepted by the A.O. while completing the assessment made u/s. 143(3) of the Act vide order dated 20.12.2010. 16. Assessee strongly objected the Upward Adjustment made by the A.O. before the ld. CIT(A). It was strongly contended before the ld. CIT(A) that the exclusion of the comparable company Ion Exchange (India) Ltd. is unwarranted and the same should be included as a comparable company. It was brought to the notice of the ld. CIT(A) that Ion Exchange was accepted as comparable company in A.Y. 2005- 06 by the TPO and, therefore, the same should also be accepted as a comparable company for the year under consideration. After considering the facts and the submissions and the reasons given by the TPO for excluding Ion Exchange as a comparable, the ld. CIT(A) was convinced that the TPO has given valid reasons for not taking Ion Exchange (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest 0.02 0.01 Dividends 0 0 Treasury operations 0 0 Other income 0.05 0.15 Prior period income extraordinary income 0 0.79 Change in stock 0 1.67 Total expenses 30.36 152.79 Raw material expenses 0 50.94 Packaging expenses 0 4.09 Purchase of finished goods 16.45 5.05 Power, fuel water charges 0.01 1.57 Compensation to employees 3.5 10.3 Indirect taxes 2.95 28.14 Royalties, technical know-how fees, etc. 1.53 0 Leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Depreciation 0.3 4.88 Amortization 0 0 Provision for direct taxes 1.3 8.66 PAT 2.14 13.78 18. After perusing the aforementioned financial details, the ld. CIT(A) found that the figures of the TPO in its order and the figures claimed by the assessee defers because the AO/TPO has not included certain items in the expenditure as well as in the operating revenue. The ld. CIT(A) finally concluded by holding as under:- An examination of both the figures shows that the approach adopted by the TPO as well as the appellant is not correct. For taking the operating revenue and the operating expenses only those items of income or expenses should be considered which affect the profit margin of the industrial enterprise. The correct method would be to take the operating revenue which includes industrial sales and income for non financial services. Similarly, the operating expenses should include expenses in the above table from raw material to other operational expenses. Write off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. For working out the operating cost, the A. O. has taken the figureof total expenditure after reducing the figures of financial charges and preliminary expenses written off. He has thus arrived at the figure of ₹ 10,26,37,410/-. The appellant has submitted that the figure of operating cost should be taken after reducing the value of increase in stock from the cost of raw material and after excluding the financial charges and preliminary expenses. The submission of the appellant is logically correct. The cost of raw material consumed can be worked out after reducing the value of items that are included in the stock from the purchases made during the year. Therefore, the operating cost is taken by adjusting the figure taken by the A. O. by the value of closing stock. Accordingly, the operating cost figure would be ₹ 8,79,62,636/- (Rs.10,26,37,410/- - ₹ 1,46,74,774/-). Therefore after considering the above figures and allowing adjustment for extraordinary items. The working of adjustment would be as under: Figures in Rupees Sales 7,66,82,935/- Less: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration is taken as extra ordinary item for the computation of PLI, then the margins of the assessee are within the range of 5% with the PLI of the comparable companies. It is also an admitted fact that the profit margin of the assessee is directly affected by the price of the aluminium during the year under consideration. Since, the assessee is having a fixed price contract with its AE, it cannot be increase the sale price whereas the margins of the comparable companies are not restricted by fixed sale price. Therefore, the margin of the assessee company will definitely be less due to increase in the price of aluminium qua the sale price. Therefore, the adjustment in respect of the substantial increase in the cost of raw material i.e. aluminium has to be made for the working of correct PLI. We, therefore, do not find any error or infirmity in the computation of the Upward Adjustment of ₹ 21,44,692/- as worked out by the First Appellate Authority after giving the benefit of adjustment for raw material extra ordinary item . We decline to interfere. Appeal filed by the Revenue is accordingly dismissed. 23. The ld. counsel for the assessee stated that he is not pressin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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