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TMI Blog2020 (12) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... and comparables will obviously be upon the assessee, who is claiming such an adjustment and also once this exercise is undertaken, it needs to be given a logical conclusion across the board notwithstanding that it may lead to having adverse impact in some comparables, where the rate of depreciation charged may be lower than that of the assessee. However, such an exercise should not put the assessee in more prejudicial position than in which it is before carrying out such an adjustment. - ITA Nos. 1198 and 1501/PUN/2018 - - - Dated:- 17-12-2020 - Shri R.S. Syal, Vice President And Shri Partha Sarathi Chaudhury, Judicial Member For the Assessee : Shri Madhur Agrawal For the Revenue : Shri Sangram Gaikwad And Shri Mahadevan A.M. Krishnan ORDER PER R.S.SYAL, VP : These two appeals by the assessee lay challenge to the separate orders passed by the CIT(A)-13, Pune on 11-05-2018 and 13-07-2018 in relation to the assessment years 2007-08 2008-09 respectively. Since a common issue is raised in both the appeals, we are, therefore, proceeding to dispose them off by this consolidated order. 2. We are first espousing the appeal for the assessment year 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its comparables, then suitable adjustment may be allowed in the case of comparables after due verification by the Assessing Officer (AO)/Transfer Pricing Officer (TPO). While giving effect to the order passed by the Tribunal, the TPO did not touch this aspect. The assessee raised ground before the ld. CIT(A) arguing that the average rate of depreciation to w.d.v. of comparables was 12.48% as against its similar ratio of 17.97%. That is how, the assessee claimed adjustment by way of relief at 5.50%, which the ld. CIT(A) did not countenance. Aggrieved thereby, the assessee has moved the Tribunal. 4. We have heard the rival submissions through Virtual Court in the hue of the relevant material on record. There is no dispute on the fact that the assessee selected the TNMM as the most appropriate method, which remained undisturbed. The assessee adopted PLI of OPBDIT to Total cost, which became the bone of contention that was finally resolved by the Tribunal against the assessee. However, the extant dispute has arisen because of the direction given by the Tribunal in the later part of para 44 of its order, reading as under: - 44. In the written note filed, the assessee had made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrive at an arm's length price in relation to the international transaction or the specified domestic transaction 6. It can be seen from sub-clause (i) above that there is reference to the determination of the assessee s Net Profit margin realized from international transaction with reference to a certain base. Sub-clause (ii) talks of determining Net Profit margin realized by the comparables with similar base. It is with the help of the adjusted margin of the comparables as per sub-clause (iii) that the ALP of the international transaction is determined. This Rule unequivocally speaks of computing the Net Profit margin of the assessee under sub-clause (i) and that of the comparables under sub-clause (ii). Ergo, while the numerator in the TNMM is invariably `Net profit , the denominator is optional. The Hon ble Supreme Court in DIT (IT) Vs. Morgan Stanley Co. (2007) 292 ITR 416 (SC) has held that ratio of Operating profit to Costs or Sales etc. is mandated under the TNMM. Thus, the entire emphasis in Rule 10B(1)(e) is on determining the Operating profit rate of the assessee and comparables and then comparing the adjusted operating profit rate of the comparables wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gated legislature has stipulated the adoption of Operating Profit as a Numerator under Rule 10B(1)(e) rather than Profit before distinct items of operating costs/revenue so that the effect of such varying business models may be eliminated to facilitate a better comparison. This appears to be the reason which persuaded the Tribunal in para 43 of its order passed u/s. 254(1) of the Act to reject the assessee s contention for adoption of Profit before depreciation as numerator and instead directing to consider the true operating profit (i.e. profit after depreciation). 7. Coming straight to the lis that is involved in the appeal is the observations of the Tribunal in para 44 of its order which have been reproduced above. Having repelled the assessee s contention for adopting profit before depreciation in para 43 of its order, the Tribunal also rejected the assessee s another contention in the earlier part of para 44 that adjustment, if any, should be made in its hands rather than the comparables. It was in the later part of the para 44 that the Tribunal directed that in case the assessee is able to establish that there is material difference in the claim of depreciation by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rwise. 10. We have noted above that rule 10B(1)(e) requires consideration of operating profit and not profit before individual item(s) of certain operating costs. The logic is that the effect of individual items of expenses per se do not depict complete picture of profitability. That is why, a simple high or low individual items of expenses or income do not ordinarily call for adjustment unless there is some material difference, in principle, on recognizing them. Continuing with the above example of having own building versus rented premises, let us suppose that two enterprises are evenly placed in all respects except own building and rented building. Further suppose that depreciation on all items of machinery etc. in both the enterprises is ₹ 100. In case of an enterprise having own building with depreciation of ₹ 20, its total depreciation cost will rise to ₹ 120. On the other hand, the enterprise having rented building, will be albeit having depreciation cost of ₹ 100, but by incurring rent cost of ₹ 20, operating profit of both of them remains similar. If the contention of the first assessee is accepted for allowing adjustment on account of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 25% and the comparable has claimed depreciation on the same item of asset at 15%, it is then that an adjustment will be required in the operating profit of the comparable on account of lower rate of depreciation on such item of asset at 10% irrespective of the amount of depreciation on such asset or the overall percentage of depreciation to the value of assets. 13. Adverting to the facts of the extant case, we find the Tribunal directed the assessee to establish its case of material difference of depreciation before the AO/TPO. The assessee again proceeded on the same premise before the authorities as was its rejected case before the Tribunal that its ratio of depreciation to average w.d.v. was higher than the comparables. As against that, the assessee ought to have demonstrated difference in the rates of depreciation charged by it vis- -vis the comparables for seeking any adjustment on this score. The ld. AR submitted that such a data portraying difference in rates of depreciation can be compiled very easily and hence requested for granting one more opportunity for making out a case on the above lines before the authorities below. In view of the foregoing discussion and mor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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