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TMI Blog2018 (7) TMI 1972X X X X Extracts X X X X X X X X Extracts X X X X ..... variation in the manner of charging depreciation by the Assessee and the comparable companies. The question therefore is as to whether the profits to be compared should be ignoring the depreciation charge/expenditure. An identical issue was considered by this Tribunal in the case of Honeywell Technology Solutions Lab v. DCIT, [ 2013 (9) TMI 189 - ITAT BANGALORE] wherein relied case of 24/7 Customer.com (P.) Ltd. v. Dy. CIT [ 2013 (1) TMI 45 - ITAT BANGALORE] held that if there are differences in the method of charging depreciation between the Tested party and the comparable companies, then there would be impact on the operating profits and in such circumstances it is safe to consider PLI without considering depreciation as part of the operating cost. The Tribunal in the case of BA Continuum India Pvt Limited v. ACIT [ 2014 (9) TMI 258 - ITAT HYDERABAD] took the view that depreciation had an impact on the profit margin of the assessee. The Assessing Officer was directed to use the profit level indicator as profit before depreciation, interest and taxes to recompute the arm s length price. It would be just and appropriate to set aside the order of DRP and the final order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assesse and the comparable after excluding depreciation to arrive at correct comparability. b) The Hon'ble DRP has erred in law and on facts on relying the decision of the Hon'ble AP and Telangana High court in the case of BA continum India Pvt. Ltd (ITTA 440 of 2014) (Supra) in the present case even though the facts and circumstances of the Assessee are different. 3. The assessee is a company engaged in the business of manufacture of Frequency Control Products (FCP). The product manufactured by the assessee is a component used for equipments that are used in defence, telecom and other industries. The assessee imports raw materials, utilizes R D services and also imports capital equipments from Rakon (Mauritius) Limited, who held 49% of the shares with the assessee. The assessee after manufacturing exported the frequency control products to Rakon (Mauritius) Ltd. The transaction of manufacture and export of FCP was an international transaction and the income from such international transactions had to be determined having regard the Arm s Length Price (ALP) as envisaged u/s. 92 of the Income Tax Act, 1961 (Act). 4. It is not in dispute between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance expenses (non operating in nature) - Depreciation 57,454,945 Operating expenses 666,485,882 Operating Profit 52,698,422 OP/OC 7.91% 5. The TPO selected 7 comparable companies, whose OP/OC was 18.77% as follows:- SI No Company Name OP/OC 1 Bharat Electronics Ltd. 24.07% 2 Bharat Heavy Electricals Ltd. 21.92% 3 Hind Rectifiers Ltd. 12.69% 4 M I C Electronics Ltd. 33.36% 6 Ruttonsha International Rectifier Ltd. 12.86% 7 Spectrum Infotech P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by MIC Electronics Ltd are totally different. They are in the nature of LED display systems, LED lighting products, solar grid, sports perimeter, bill boards ticker tape etc. These products cannot be compared with FCP components manufactured by their petitioner. 8. The DRP agreed with the submissions of the assessee for the following reasons:- Having considered the submission, we perused the order of the TPO and also the order passed by the DRP for A.Y. 2010-11, it is noticed by us that considering the functional differences the DRP directed to exclude Bharat Electronics Ltd and MIC Electronics Ltd from the comparables, as the function of the above 2 companies remains the same, we do not find any reason to deviate from the findings of the DRP in preceding year and accordingly, direct the A.O. to exclude the above 2 companies from comparables. In respect of Bharat Heavy Electricals Ltd, we are in agreement with the submission of the assessee that the above company cannot be considered comparable to the assessee, accordingly we direct the A.O. to exclude the above company from the comparables. 9. Before the DRP, the assessee also made sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties in this regard. At page-355 of the paper book filed by the Assessee, a chart showing the difference in the method of charge of depreciation by the Assessee and the comparable companies chosen by the TPO is given. Perusal of the same shows that there is substantial variation in the manner of charging depreciation by the Assessee and the comparable companies. The question therefore is as to whether the profits to be compared should be ignoring the depreciation charge/expenditure. An identical issue was considered by this Tribunal in the case of Honeywell Technology Solutions Lab v. DCIT, 61 SOT 61 (URO) (Bang) wherein this Tribunal took the view following decision in the case of 24/7 Customer.com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/[2012] taxmann.com 258 (Bang.), held that if there are differences in the method of charging depreciation between the Tested party and the comparable companies, then there would be impact on the operating profits and in such circumstances it is safe to consider PLI without considering depreciation as part of the operating cost. The Tribunal in the case of BA Continuum India Pvt Limited v. ACIT [2013] 28 ITR (Trib.) 445 (Hyd) took the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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