M/S. VENTURE POWER SYSTEMS INDIA PVT LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

1.0 This is an appeal filed by the assessee against the Order dated 29.10.2010 of Commissioner of Income Tax (Appeals)-III, Chennai, in for the AY 2007-08.

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2.0 The assessee is engaged in the business of manufacturing and export of electrical ballasts and components. The company filed its return of income for the AY 2007-08 with a net income of Rs.55,52,222/-.

M/s.Venture Power Systems India Pvt. Ltd., is a company promoted by Venture Lighting Inc.USA is engaged in the manufacture of High Intensity Discharge Ballast. During the previous year relevant to the assessment year there was an international transaction of Rs.69.41 Cr. with the AE.

Therefore, the AO made reference to the TPO for determining the Arms length Price. The assesse followed TNMM method for bench marking the transactions with AE. The tested party is assesse’s company and PLI adopted is operating profit to sales. The TPO noticed from the TP document and other submissions made by the assessee that it revealed an operating margin of 3.053% in respect of comparables companies and the assessee company’s margin was only 1.39%.

3.0 The TPO conducted independent T.P. study and selected 18 comparables and arrived at the arithmetic mean of the comparables at 10.48%. The AO after issuing show cause notice, adopted the margin at 10.48% on the basis of comparable companies selected and determined the ALP and suggested for addition of Rs.13,48,65,995/-. The AO passed Assessment Order u/s.143(3) r.w.s. 144C of Income Tax Act making the addition of Rs.13,48,65,995/- as suggested by the TPO.

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4.0 Aggrieved by the order of the AO, the assesse went on appeal before the CIT(A) challenging the adoption of comparable margin at 10.48% against the assessee company’s margin of 1.39% and adoption of entire turnover for determining the ALP instead of AE turnover. The Ld.CIT(A) given a partial relief directing the AO to apply the PLI only on the turnover of the AE and make necessary adjustments in ALP, as a result, the upward revision worked out Rs.5,66,40,825/- on which the assessee is in appeal before us.

5.0 Appearing for the assessee, the Ld.AR argued that the assessee company’s margin was 2.28% and the TPO worked out 1.39% due to difference of opinion with regard to TPO’s approach in taking the PLI of the total turnover including non-AE’s turnover, whereas the assessee reported PLI at 2.28% in the profit which is arrived at based on the turnover pertaining to AE. The TPO adopted PLI of comparables at 10.48% as against the PLI of the comparables taken by the assessee in the TP document at 3.053% on cost. Further, the Ld.AR argued that the assessee has selected 8 comparables and justified it’s Arm’s length Price where as the AO has selected 18 comparables with a turnover ranging from Rs.3.00 Cr. to Rs.730.00 Cr. against assessee’s turnover of Rs.148.00 Cr. The Ld.AR argued that the assessee has selected the comparables with turnover filter ranging from Rs.60.00 Cr. to Rs.240.0 Cr. and from the comparables selected by the TPO, eight comparables are abnormal in size should be eliminated and re-compute the ALP. The ITA No.1703/Mds/2016 :- 4 -:

Ld.AR, further, argued that comparables of well-established and big size companies with medium size companies give’s the distorting picture of financialls and economic indicators. The Ld.AR stated that the assesse made a submission before the Ld.CIT(A) to remove the eight comparables with unreasonable turnover and to re-compute the PLI but the Ld.CIT(A) has not adjudicated on this issue and the order of the Ld.CIT(A) is silent on exclusion of eight comparables requested by the Ld.AR of the assesse.

On the other hand, the Ld.DR argued that the exclusion of the eight comparables requested by the assesse need further study of TP document, turnover filters, FAR Analysis, etc. Therefore, the Ld.D.R. submitted that the issue should go back to the TPO for further study and to decide whether to include the all the comparables selected by the TPO or to exclude any of the comparables.

6.0 We heard the rival submissions and perused the material placed on record.

There is no dispute on method adopted by the assessee. Both the assesse and TPO have accepted the TNMM as most appropriate method.

The assesse has selected eight comparables and arrived at the operating margin at 3.053% and the Ld.TPO has adopted 18 comparables with margin 10.48% after making T.P study and the difference in margin is substantial. The Ld.AR contended that the comparables selected by the TPO from Rs.3.00 Cr. to Rs.730.00 Cr. against the turnover Rs.148 Cr. of the assesse. The assessee intends to apply the turnover filter of Rs.60.00

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Cr. to Rs.240.00 Cr. The assesse was of the opinion that the following eight comparables need to be excluded from the comparative study to determine the PLI:-

1) Alpha Transformers Limited. 2) ECE Industries Limited. 3) EMCO Limited. 4) Marsons Limited. 5) Tarapore Transformers Ltd. 6) Tesla Transformers Ltd. 7) Transformers & Rectifiers India Ltd. 8) Volt Amp Transformers Ltd.

6.1 The assessee argued that before the Ld.CIT(A) (as evident from the order of the Ld.CIT(A) in Page No.5 of the Ld.CIT(A) orders) that the turnover of the comparable companies is very vital for determination of the ALP. Relevant part of CIT(A) is extracted as under:-

The turnover of the comparable companies is very vital for the determination of the ALP in as much as the larger company’s financial results would give distorted picture in the event of making comparison of such figures to a medium sized company. Therefore, the plea for the Appellant’s attempt to filter 8 companies based on the correct turn over filter may be accepted while the TPO’s attempt in this regard resulting in distorted and unrealistic comparability analysis may be rejected.

6.2 The Ld.CIT(A) has not commented and given a finding on the 8 comparables requested by the assessee for exclusion from the list of comparables. The TPO has also not discussed the exclusion of the eight comparables requested to be eliminated by the assesse. The turnover of the company is very vital for determining the ALP since financial results will have substantial impact on the basis of the turnover. We are of the considered opinion that the issue regarding elimination of comparables based on turnover required to be further examined and finding need to be given whether the comparable to be remained or to be excluded.

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Therefore, we remit the matter back to the file of the AO/ TPO who in turn make further study of comparables with relevant turnover filters, PLI and decide the issue afresh on merits. The assessee should cooperate with the AO/TPO and submit specific and necessary information how the comparable are un-comparable instead of giving generalization of huge turnover. Accordingly, the Order of lower authorities on this issue is set aside and remitted back to the file of the AO to decide the matter afresh on merits.

7.0 Since the issue regarding selection of comparables is set aside and remitted back to the file of the AO/TPO all the issues raised in the appeal relating to transfer pricing is kept open for fresh consideration and the assessee is free take up the issues before the AO/TPO.

8.0 The next issue is Ground No.20 relating to depreciation of Rs.4,15,023/-on electrical installations. During the assessment proceedings, the AO found that the assessee has claimed depreciation of Rs.12,45,270/- @15% on electrical installations. As per the schedule the allowable depreciation on electrical installations is only @10%. Therefore, the AO has restricted the depreciation at Rs.8,30,047/- @10% and the balance amount of Rs.4,12,023/- was disallowed and added back to the income.

The assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) confirmed the addition holding that as per Appendix-1 of ITA No.1703/Mds/2016 :- 7 -:

Income Tax Rules effective from the FY 2006-07, the furniture and fittings including electrical fittings are entitled for depreciation @10% only.

Aggrieved by the Order of the Ld.CIT(A), the assessee filed appeal before this Tribunal and the assessee’s AR has not made any argument on this ground. The Ld.AR of the assessee did not place any material to convert the finding of the Ld.CIT(A) and the electrical installations were in fact plant and machinery. As per Appendix-1 of Income Tax Rules, the electrical fittings are eligible for depreciation @10%. Therefore, we do not find any infirmity in the Order of the Ld.CIT(A) and the same is upheld and the assessee’s ground on the appeal is dismissed.

In the result, the appeal of the assessee is dismissed. 9.0