×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
These are the latest case laws decided by various Income Tax Appellate Tribunals (ITAT) of India on Income Tax which have been published recently. The case laws are open for discussion and we invite expert comments from our members on its applicability and effect on relevant issues.
07-06-2019, INA Bearings India, Section 92C(2), 92C , Tribunal Pune
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 dec aring 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., Distribution business and Production business. In the Transfer Pricing study report, the assessee included certain purchases and sale of goods along with other expenses under the Distribution business segment. In the Production business segment, the assessee recorded import of raw material, export of manufactured goods and certain other expenses like Payment for services/product development, technical and management support and Payment of charges for SAP software and IT costs. Whereas the assessee’s appeal is focused only on the Production Business or Manufacturing segment, the Revenue’s appeal is based on Distribution Business or Trading segment.
3. Espousing the assesssee s appeal first, it is seen that the assessee employed the Transactional Net Marginal Method (TNMM) as the most appropriate method for benchmarking the international transactions under the Manufacturing segment. Profit Level Indicator (PLI) of Profit before Depreciation, Interest and Taxes (PBDIT)/sales was adopted. Four comparable companies were chosen with their average operating profit margin of 5.38%. That is how, it was shown that the international transactions under this segment were at ALP. The assessee emphasized on the adoption of PBDIT/Sales as PLI on the ground that it charged depreciation at rates higher than those prescribed under the Companies Act, 1956 and such higher rates of depreciation resulted into excess depreciation to the tune of Rs.6,,77,83,377/- and further that the depreciation cost on overall basis was substantially higher than the comparables. The TPO did not concur with the PLI adopted by the assessee. Instead, he held that Profit before Interest and Taxes (PBIT)/Sales should be adopted. Such a view point of the TPO was accorded imprimatur by the ld. first appellate authority. The assessee has assailed this point of view.
4. We have heard both the sides and gone through the relevant material on record. The assessee’s grievance in this regard is twofold, viz., first being the adoption of PBIT/Sales instead of PBDIT/Sales, that is, the inclusion of amount of depreciation in total operating costs for the purpose of determination of the operating profit rate; and second, in the alternative, in not allowing appropriate adjustment on account of excess amount of depreciation in the case of the assessee vis-à-vis other comparables.
5. We espouse the first grudge first, namely, 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 net profit margin in the open market ;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;