9911796707
TMI Blog2019 (6) TMI 1716X X X X Extracts X X X X X X X X Extracts X X X X ..... vice versa. The effect of all the individual items of operating expenses and incomes culminates into the overall operating profit margin. That is why, the legislature has provided for comparing the ratio of operating profit margin to a similar base of the assessee with that of its comparables, thereby dispensing with the need for making any adjustment on account of higher or lower amount of individual items of expenses or incomes. Merely because the amount of depreciation of one enterprise is more or less than the other, can never be a ground for seeking adjustment. Such higher amount of depreciation may be due to large scale of the company and host of other factors. By considering percentage of operating profit margin under the TNMM of the assessee as well as comparables, the higher or lower volume of two companies becomes immaterial and so is the quantum of depreciation. The nitty-gritty of the matter is that no adjustment can be allowed simply for the reason that one company has charged higher amount of depreciation vis-a-vis its comparable companies. Not only no adjustment on this score is permissible, the assessee cannot also seek an exclusion or inclusion of a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n manufacturing activity only of similar products or if it is engaged in both the manufacturing and trading, then segmental information qua the manufacturing segmental should be discernible from its Annual report. It is observed that FMBIL is engaged both into trading and manufacturing and further no segmental information of its manufacturing segment is available and the assessee has considered this company at entity level as comparable with its manufacturing segment. Once the position is such, we are unable to hold this company as comparable. In view of the foregoing discussion, we are of the considered view that this company was rightly excluded by the authorities below from the list of comparables on the ground of functional differences. In view of the functional dissimilarity at the threshold, there is no need to examine certain other factors taken note of by the TPO making it incomparable. We, therefore, uphold the exclusion of this company from the list of comparables. Grant of +-5% margin in determining the ALP - Second proviso to section 92C(2) provides that if the variation between the ALP and the price at which the international transaction has actually been under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Respondent : Shri Shivraj B. Morey. ORDER PER R.S. SYAL, VP : These two cross appeals one by the assessee and other by the Revenue - arise out of the order passed by the CIT(A)-13, Pune on 15-11-2016 in relation to the Assessment year 2009-10. 2. Briefly stated, the facts of the case are that the assessee is one of the companies of INA brand of Schaeffler group worldwide. It is a wholly owned subsidiary of Schaeffler KG, Germany. The assessee is engaged in the business of manufacturing, development, marketing and distribution of roller bearing, linear bearings system and engine components. The assessee filed its original return declaring loss of Rs.8,89,36,198/-. This return was revised to total loss of Rs.19,80,74,542/-. The assessee reported certain international transactions entered into with its Associated Enterprises (AEs). The Assessing Officer (AO) referred the matter of determination of the arm s length price (ALP) of the international transactions to the Transfer Pricing Officer (TPO). The TPO observed that though the assessee reported twelve international transactions, but it categorized its business into two segments viz., Distributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely, that Depreciation ought to have been excluded from the ambit of total costs in applying the TNMM. It is clarified that there is no dispute on the application of TNMM as the most appropriate method. The mechanism for determining the ALP under the TNM method has been enshrined in clause (e) of rule 10B(1), which reads as under : '(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are incurred in relation to the operations of a business. So, all the costs which facilitate the operation of a business are operating costs. Like raw material and labour costs, there can be no production of goods without the use of machinery or other related assets. One cannot contemplate manufacture of goods without use of assets for fetching sales revenue, which is the starting point for calculating the amount of operating profit. In fact, it is the user of the assets which results into production and the resultant operating revenue. Depreciation is an allowance for wear and tear of the assets used. Thus, depreciation is an inseparable and an integral part of the operating costs. The Hon ble Bombay High Court in CIT Vs. Welspun Zucchi Textiles Ltd. (2017) 292 CTR 1 (Bom.) had an occasion to deal with the nature of depreciation. Question no. (ii) as urged before the Hon ble High Court reads : (ii) Whether on the facts and in the circumstances of the case and despite the prescription of parameters of comparability by Rule 10 B (2) of the Income Tax Rules, 1962, the Tribunal was correct in law, in directing the inclusion of DEPB in turnover and depreciation in net profit for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 10B(1)(e) that sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. It is this adjusted net profit margin of the comparable companies, as determined under sub-clause (iii), which is used for the purpose of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). 9. There can be no dispute on the principle that calculation of Operating profit as envisaged under Rule 10B(1)(e) embraces cumulative effect of all the items of income and expenses which are of operating nature. Ordinarily, there can be no question of considering each item of such operating expenses or income in isolation de hors the other expenses/income to claim adjustment on the ground of such expenditure or income of the assessee being on the higher or lower side seen individually or as a percentage of other operating expense/incomes in comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be due to large scale of the company and host of other factors. By considering percentage of operating profit margin under the TNMM of the assessee as well as comparables, the higher or lower volume of two companies becomes immaterial and so is the quantum of depreciation. The nitty-gritty of the matter is that no adjustment can be allowed simply for the reason that one company has charged higher amount of depreciation vis-a-vis its comparable companies. Not only no adjustment on this score is permissible, the assessee cannot also seek an exclusion or inclusion of a company on the ground that the ratio of its depreciation to total expenses or sales etc. is more or less in comparison with comparables. It is so for the reason that such higher percentage of depreciation to total expenses is marginalized by the lower percentage of repairs and other incidental costs of the assets and vice versa. Thus the contention of the ld. AR in this regard, being devoid from any substance, is liable to be and is hereby jettisoned. 12. However, the position may be different when there is a difference in the rates of depreciation charged by two companies on similar category of assets. One company m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observing on pages 6 and 29 of his order that its manufacturing turnover was less than 90% of total turnover and further that the activities of this company also extended to Power Production and Aluminum Tins other than the bearings. He further held that there were significant Related Party Transactions (RPTs). 16. It goes without saying that the first and the foremost crucial test in a comparability analysis is the functional similarity. If a company fails on this count, then it loses the tag of comparability. In such a situation, there is no need to examine other factors. Once the functional similarity is established, only then it is further examined if the comparability is not dislodged even on other filters, such as, extraordinary events like acquisition and mergers etc. or the extent of the related party transactions or the magnitude of the operations. 17. As against the assessee engaged only in the manufacturing of bearings in this segment, the TPO noted that FMBIL was engaged in manufacturing of Powder and Aluminum Tins apart from Bearings. In this regard, it is relevant to note that this company declared turnover of Rs.39.36 crore inclusive of `Other income of Rs.3.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng activity only of similar products or if it is engaged in both the manufacturing and trading, then segmental information qua the manufacturing segmental should be discernible from its Annual report. It is observed that FMBIL is engaged both into trading and manufacturing and further no segmental information of its manufacturing segment is available and the assessee has considered this company at entity level as comparable with its manufacturing segment. Once the position is such, we are unable to hold this company as comparable. 19. In view of the foregoing discussion, we are of the considered view that this company was rightly excluded by the authorities below from the list of comparables on the ground of functional differences. In view of the functional dissimilarity at the threshold, there is no need to examine certain other factors taken note of by the TPO making it incomparable. We, therefore, uphold the exclusion of this company from the list of comparables. 20. The Revenue in its appeal is firstly aggrieved by the grant of +-5% margin in determining the ALP. 21. We have hard both the sides and gone through the relevant material on record. Second proviso to section ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
