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TMI Blog2017 (5) TMI 1166X X X X Extracts X X X X X X X X Extracts X X X X ..... olved with the comparables, we are inclined to grant risk adjustments at 2% on adhoc basis. Accordingly, this ground is partly allowed. Adjustment towards Abnormal Expenses incurred by the Appellant during the year - Held that:- The assessee is a contract-manufacturer and having mark-up raised from 5% to 9.5% on the goods procured by it, later it was revised to 7%, so that the wastage suffered by the assessee taken care of by mark-up prices and manufactured goods. Once the price was marked up, there cannot be any loss to the assessee and the entire wastage is taken care by marked up price of sale price. Hence, we do not find any merit in the plea of the assessee with regard to claim of abnormal wastage. Abnormal depreciation as discussed in earlier, the assessee’s pricing pattern is marking up of 7% on the cost of goods manufactured. Being so, the increase in depreciation cost has also taken care of by mark up of sales price. Accordingly, the assessee cannot seek any further adjustments towards additional depreciation cost. This ground of appeal by assessee is also rejected. Reject the claim of deduction u/s.10B - Held that:- There was a business loss in the assessment year 2000-01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st ground for our consideration is with regard to sustaining the addition of ₹ 4,01,18,602/- towards upward adjustment in the ALP of Transfer Pricing adjustmets with the following grounds:- 2. Transfer pricing adjustments 2.1 The learned DRP, AO and TPO (collectively referred to as 'lower authorities' ) have erred in law and facts by making an adjustment to the transfer price of the Appellant by INR 40,118,602. 2.2 The learned lower authorities failed to appreciate the fact that AY 2010- 11 was abnormal year of operations for the Appellant: 2.2.1 The Appellant expanded its manufacturing facility by expanding its weaving production line and addition of knitting division; and 2.2.2 Such expansion resulted in certain capacity cost which could not be absorbed due to underutilization of the capacity. 2.3 The learned lower authorities have erred in law and facts by considering only single year financial data instead of multiple year financial data considering the abnormal year of operations of the Appellant. 2.4 The learned lower authorities have erred in law and facts by not granting: 2.4.1 Economic and commercial adjustments without taking cognizance of the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpared to a contract manufacturer. 4.1 Further, ld.A.R drew our attention to the assessee's letter dated 23.12.2013 filed before the TPO given the details of the risk adjustment (Copy at pages 246-255 of the Paper Book). The average risk adjusted margin of the comparable companies comes to 2.59% which when compared to the margin of the Appellant of 1.92% and after giving benefit of proviso to section 92C(2) of ± 5% is at arms length and as such no adjustment to ALP is warranted. The ld.A.R further vide submission dt. 9.1.2014 (copy at pages 266-289 of Paper Book) and vide submission dt. 17.1.2014 (copy at pages 290-308 of Paper Book) in response to Show Cause Notices issued by the TPO explained in the detail the methodology of calculating Risk Adjustment as claimed by the Appellant. The ld.A.R pleaded that the Ld. TPO/DRP ignoring the submissions and contentions of the Appellant and merely on conjectures and surmises proceeded to dismiss the claim of the Appellant for risk adjustment. The extent of risk being an integral part in determining the extent of margin earned, adjustment towards risk becomes imperative. The assessee further more having given the detailed working of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables, we are inclined to grant risk adjustments at 2% on adhoc basis. Accordingly, this ground is partly allowed. 7. The next issue is with regard to Adjustment towards Abnormal Expenses. 7.1 Before us, ld.A.R submitted that the assessee is a contract Manufacturer. Vide contract manufacturer agreement; the assessee is entitled to compensation of cost plus 9.5% which was reduced to 7% w.e.f 1.1.2010. Cost includes cost of materials, manufacturing overheads and store-cost and Administration cost and other essential costs except Corporate taxes but including Fringe Benefit Tax. Further, ld.A.R submitted that the A.E is supposed to issue to the appellant within 60 days prior to the end of each calendar year a forecast of the contract manufacture containing the details and estimates of the contract manufacture required to next calendar year. The assessee in turn submits an operating plan giving estimates of the costs to it's A.E based on which the Selling Price is fixed and the Selling Price remains constant throughout the year. Considering the same, the assessee could not predict the abnormal costs it incurred during the year which could be factored in the Selling Price which affect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich has resulted in excess depreciation for the year. c. The appellant has taken F.Y 2008-09 as base year as the business operations in F.Y 2008-09 were conducted in normal business conditions wherein the depreciation was 3.78% of Sales. Considering the same ratio for the current year, the abnormal depreciation comes to 1,56,12,909/- out of which ₹ 99,94,929/- is on account of revision of estimated useful life of assets as per point (a) supra and the balance amount of ₹ 56,17,980/- has thus been attributed to abnormal depreciation attributable to expansion. (Detailed working at page 13 of TPO order). d. The excess depreciation being abnormal costs deserve to be excluded while determining the margins earned in the interest of natural justice. i. The Appellants operating margins for various years are as under: a. A.Y 2007-08 11.00% b. A.Y 2008-09 10.03% c. A.Y 2009-10 14.60% d. A.Y 2010-11 1.92% e. A.Y 2011-12 8.39% f. A.Y 2012-13 7.56% 7.4 According to ld.A.R, the above details support the contention of the appellant that there were significant abnormal costs incurred by the appellant during the year under appeal i.e AY 2010-11 resulting in aL3norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken care of by mark-up prices and manufactured goods. Once the price was marked up, there cannot be any loss to the assessee and the entire wastage is taken care by marked up price of sale price. Hence, we do not find any merit in the plea of the assessee with regard to claim of abnormal wastage. 10. Next issue is with regard to abnormal depreciation. As discussed in earlier, the assessee's pricing pattern is marking up of 7% on the cost of goods manufactured. Being so, the increase in depreciation cost has also taken care of by mark up of sales price. Accordingly, the assessee cannot seek any further adjustments towards additional depreciation cost. This ground of appeal by assessee is also rejected. 11. The next issue is with regard to reject the claim of deduction u/s.10B of the Act. 12. Before us, the ld.A.R has advanced the following reasons in support of the claim of deduction u/s.10B of the Act by the assessee. a) The assessee filed its return of income claiming deduction U/s. 10B of ₹ 1,20,28,476/-. The assessee has been regularly getting benefit of deduction U/s. 10B for the past many years. The assessee had commenced production in A.Y 2001-02 and as such acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) wherein the Hon'ble High Court while deciding the allowability of deduction under erstwhile section 80I held that the deduction has to be allowed held that the assessee having undertaken only trial production in the relevant previous year and regular production having started in the subsequent year, assessee was not entitled to deduction U/s 80J. Going by the same analogy the deduction U/s 10-B has to be allowed only in the year of actual commercial production and not in the year of trial production. e) The ld.A.R further places reliance on Dy CIT Vs. Bhansali Trading Co. ITA No. 784/JP/2014 wherein the Hon'ble ITAT has while deciding the allowability of deduction U/s 10B held as under:- "-Deduction under section 10B--100 Per cent export oriented undertakings No positive income accrued to assessee-- Commencement of period of ten consecutive years -- Period often consecutive years for claiming of deduction under section lOB commenced from the assessment year in which positive income first accrued to assessee, i.e., assessment year 2002-03 and not from the assessment year 2001-02 in which it started manufacturing activity. AO was not, therefore, justified in disallowing the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G, the date of commencement of the production is 27.03.2000 itself. Ld.D.R submitted that the assessment year 2010-11 is the 11th year and the assessee is not eligible for deduction u/s.10B of the Act. 14. We have heard both the parties and perused the material on record. The main plea of assessee is that the present assessment year 2010-11 is the 10th year of claim of deduction u/s.10B of the Act and filed a copy of return for assessment year 2000-01 stating that there was no claim of deduction u/s.10B of the Act. He has also relied on the judgement of Jaipur Bench of Tribunal in the case of CIT Vs. Bhansali Trading Company in ITA No.784/JP/2014 vide order dated 14th July 2016 for assessment year 2011-12 wherein held that if the assessee is having positive income, then only there was occasion to claim the deduction u/s.10B of the Act as positive income accrued to it in the assessment year 2002-03 and then onwards it claimed deduction u/s.10B of the Act for a period of ten consecutive years ending in the assessment year 2011-12. The AO is not therefore justified in making the disallowance for assessment year 2011-12. 14.1 In the present case of assessee also, there was a business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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