×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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13-01-2020, Vishay Components India, Section 144C(13), 10A, Tribunal Pune
This appeal by the assessee is directed against the final assessment order dated 26-02-2015 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called ‘the Act’) in relation to the assessment year 2010-11.
I. MANUFACTURING SEGMENT
2. The first issue is against the transfer pricing adjustment in the ‘Manufacturing segment’ of the assessee. Succinctly, the factual panorama of the case is that the assessee is engaged in the manufacturing of electrical capacitors and resistors. A return was filed declaring total income at Nil. Certain international transactions were reported in Form No.3CEB. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions. The TPO noticed that the assessee aggregated four major international transactions in the ‘Manufacturing segment’, namely, Export of Finished goods; Import of raw materials and components; Import of Finished goods for resale; and Receipt of Commission and applied the Transactional Net Margin method (TNMM) for demonstrating that such international transactions were at ALP. The assessee with Profit Level Indicator (PLI) of Operating profit/Operating cost worked out its Operating profit marginbefore depreciation, interest and taxes at 11.44%. Three companies were chosen as comparable with their average PLI of OP/OC at 11.31% on the basis of multiple year data. The TPO did not accept the assessee’s view point, inter alia, on the determination of the PLI on the basis of Operating profit before depreciation, interest and taxes. He worked out the Operating profit rate of the assessee, after depreciation but before foreign exchange loss, at 0.30%. Out of the three comparables chosen by the assessee, the TPO retained two and added a new company in the list of comparables, namely, CTR Manufacturing Industries. He also did not approve the profit rate of comparables based on the multiple year data. In this way, he worked out the average PLI of the new set of comparables on single year basis at 15.19%. This is how, he proposed transfer pricing adjustment amounting to Rs.19,23,48,242/- in this segment. The assessee could not convince the Dispute Resolution Panel (DRP) on its line of reasoning, which led to the impugned transfer pricing addition.
3. We have heard both the sides and gone through the relevant material on record. It is made clear that admittedly there is no dispute on the application of the TNMM as the most appropriate method and aggregation of the four sets of international transactions under the Manufacturing segment, which have been accepted by the TPO. In so far as the working out of the assessee’s own PLI is concerned, the assessee is aggrieved by the adoption of operating profit after depreciation. The ld. AR fairly settled down to admit that difference on account of rates of depreciation on individual assets (not the quantum of depreciation or the percentage of depreciation on overall basis) should be adjusted. We agree with this contention and hold that the operating profit of the assessee and that of the comparables should be calculated after depreciation since depreciation is an integral part of the operating cost. It is further held that no adjustment can be allowed if there is difference just on account of the amount of depreciation or percentage of depreciation to a certain base. An adjustment can be allowed in the computation of profit of the comparables only if there is difference in the rates of depreciation as charged by the assessee and comparables on the same assets.
4. The other grievance of the assessee is that the foreign exchange loss taken by the TPO as non-operating should be considered as operating. In this regard, we find that the Hon’ble Delhi High Court in Pr. CIT Vs. B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Delhi) has held that foreign exchange fluctuation in relation to trading transactions, prior to Safe Harbour Rules from 2013, should be treated as an operating item. In view of the above, it is held that the amount of foreign gain/loss arising out of the revenue transactions should be considered as an item of operating revenue/cost, both for the assessee as well as the comparables.
5. Another issue raised by the assessee is against the making of transfer p icing addition in respect of the whole segment rather than restricting it only to the international transactions. This issue is no more res integra in view of several judgments rendered by various higher forums including the Hon’ble jurisdictional High Court holding that the transfer pricing adjustment should be restricted only to the international transactions and not the entity level transactions. The Hon’ble jurisdictional High Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2019) 414 ITR 704 (Bom.) has held that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. Here, it is pertinent to mention that the Department’s SLP against the judgment in the case of Phoenix Mecano (India) Pvt. Ltd. has since been dismissed by the Hon’ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2018) 402 ITR 32 (St ). Similar view has been taken by the Hon’ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefor , direct to restrict the transfer pricing addition only in respect of transactions with Associated Enterprises.
6. Still another issue raised by the assessee in this segment is against non-granting of working capital adjustment. In this regard, it is observed from the direction given by the Dispute Resolution Panel (DRP) on page 68 para 2.19.8 that the AO was directed : `to examine the computation of working capital adjustment worked out by the assessee and adopt correct operating margin of the comparable companies after working