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TMI Blog2016 (10) TMI 1386X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessee has prove first about the actual loss incurred leading concrete evidences. We set aside this issue to the file TPO/AO to examine with respect to quantity, price and quality or specification of the material revalued with respect to the material which was purchased or designed by the assessee specifically for that buyer who cancelled the orders and gone bankrupt. The appellant is also directed to furnish all this information to justify its claim and also to show the nature and extent of extraordinary loss incurred by the assessee with evidences. Directions given by the Ld. Dispute resolution panel with respect to the selection of certain companies which were incurring persistent losses - grievance of the assessee was only with respect to the only one comparable that is Scott industries Ltd. - TPO has refused to give effect to the direction of the LD. DRP on the ground that the annual report of the company is not available in public domain. It was submitted by the Ld. authorized representative that assessee has submitted the copy of the profit and loss account of the party for 3 years from prowess database, which has not been considered by the Transfer pricing officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted any scientific methodology in selecting the comparables and in determination of arm's length margin. 4) The Ld. AO has not followed the directions given by the Ld. Dispute Resolution Panel w.r.t. to the selection of certain companies which were not incurring persistent losses. The Ld, AO has finalized the draft assessment order without considering the above directions. 5) Ld AO erred in not rectifying factual inaccuracies as apparent on face of the record, in the computation of average gross margin of comparables and the appellant co. 6) Ld AO erred in charging consequential interest and initiating penalty proceedings. 3. During the course of hearing, the appellant raised additional grounds of appeal vide application dated 27/07/2016 where 5 grounds are raised. It was contended that the above grounds are legal in nature and go to the root of the matter and that the said facts are already on record. Therefore, same may be admitted. It was further submitted that these grounds are specifically with reference to ground No. 1 of the appeal of the assessee and therefore they may not be considered as an independent additional grounds and new issues but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d adjudicated separately. 6. The appellant is a private limited company engaged in the business of manufacture and export of ready-made garments and home furnishing items. This company sells merchandise to the associated enterprise and other group companies of Cornell trading group. The appellant filed its return of income on 29.11.2006 declaring a loss of 28875663/ . During the year the assessee has entered into international transaction with its associated enterprises and therefore reference was made to the Ld. transfer pricing officer to determine the arm s length price of the international transaction of export of ready-made garments of Rs. 162465043/ . The appellant in its transfer pricing study report has bench marked this transaction applying the cost plus method as the most appropriate method and computed the margin of the assessee at 18.23%. The assessee selected comparables using prowess database and 40 companies were selected as comparable and average PLI for 3 years of comparable was 17.65 % and therefore the assessee was of the opinion that the transaction of the export of ready-made garments to its associated concern is at arm s length. Ld. Transfer pricing office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal of the assessee is against not considering the loss of Rs. 2 407 9629 as the abnormal cost of consumption of raw material for the purpose of calculation of normal gross profit markup over cost. According to the appellant, abnormal losses purely during the course of normal manufacturing operations and does not constitute and not attributable to any international transaction between the assessee and its associated enterprise. Accordingly, appellant has submitted that this disallowance of Rs. 2 80, 09153/ has resulted in to difference in arm s length prices. Mainly the difference has arisen because of the computation of profit level indicator at 18.23% by the assessee and computed by the Ld. TPO at 6.02%. There is no difference between the value of the sales determined by the rival parties. However, the real difference arises that the direct and indirect cost taken by the assessee is at Rs. 2 0913 5656/ whereas the Ld. TPO/ Ld assessing officer has computed it at Rs. 2 3321 5285/ . Therefore there is a difference in the indirect cost and direct cost computed by the parties amounting to Rs. 24079629/ which has resulted into the above difference in the PLI computed by the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an abnormal expenditure charged to the profit and loss account which needs to be excluded. It was further the submission of the Ld. authorized representative that the Ld. Transfer pricing officer has failed to consider the difference between the TNMM method and the cost plus method. To buttress his claim, He further relied upon the decision of the assistant Commissioner of income tax versus MSS India private limited [32 SOT 132 (Pune)] . He further submitted that the contention of the Ld. Transfer pricing officer that the loss incurred by the appellant on account of diminution in value of the inventory should have been recovered from the associated enterprises is also against the accepted business practices. He further submitted that the trend of the raw material consumption shown by the assessee in the past year will also justify the claim of the assessee that during the year the consumption of raw material 61.24% over total income as compared to average consumption of 54% in the past 3 years. This itself shows that the assessee has incurred abnormal cost. He further referred to the decision of Skoda auto India private limited versus assistant Commissioner of income tax [30 SO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale of the goods, then such costs are required to be excluded. We also draw support from the safe harbour rules wherein it provides that operating expenses means the cost incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations, including depreciation and amortisation expenses relating to the assets used by the assessee, but it does not include extraordinary expenses. The contention of the assessee is that it has incurred an extraordinary expenditure by valuation of the inventory which was for a specific product and to a specific customer orders which were cancelled and therefore the inventory of finished goods and semi finished goods with respect to that order was written off. However, on looking at the balance sheet of the company, We could not find out in the profit and loss account itself or in the schedules attached thereto relating to the profit and loss account where such extraordinary expenditure have been specifically shown which is a requirement of the accounting standard. Furthermore analysis of the transfer pricing study report submitted by the assessee, It is noted that the company selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee specifically for that buyer who cancelled the orders and gone bankrupt. The appellant is also directed to furnish all this information to justify its claim and also to show the nature and extent of extraordinary loss incurred by the assessee with evidences. In view of this ground No. 1 and 2 of the original grounds of appeal and ground No. 1, 2 and ground No. 3 of the additional grounds raised by the assessee are disposed of accordingly. 11. Ground No. 4 of the appeal was with respect to the directions given by the Ld. Dispute resolution panel with respect to the selection of certain companies which were incurring persistent losses. The Ld. assessing officer in draft assessment order without considering the about direction of the Ld. dispute resolution panel has continued with the adjustment. The grievance of the assessee was only with respect to the only one comparable that is Scott industries Ltd. It was submitted by the Ld. AR are that the Ld. dispute resolution panel vide order dated 24/09/2013 has directed the Ld. TPO/ AO to verify whether the Scott industries Ltd is having negative profit markup for financial year ended on 31st of March 2014. The Ld. Transfer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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