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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Assessing Officer, consequent to the directions of Dispute Resolution Panel, Chennai, dated 31.08.2012.
Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that consequent to the direction of the Dispute Resolution Panel, the Assessing Officer made downward adjustment of `2.39 Crores on account of purchase of raw material and component from Associate Enterprise. According to the Ld. counsel, the assessee- company is a joint venture company between M/s Lucas TVS Limited and M/s Koito Manufacturing Company Ltd., Japan. The business of the assessee-company is manufacturing and selling of automotive lighting equipments. The assessee adopted Transaction Net Margin Method as most appropriate method. In the course of determination of arm's length price, the assessee has adjusted depreciation in the operating margin ratio. The Transfer Pricing Officer, however, disallowed the claim of the assessee on the ground that depreciation is one of the operating costs in the manufacturing industry. Having adopted Transaction Net Margin Method as one of the most appropriate methods, the depreciation cannot be excluded from operating cost. According to the Ld. counsel, depreciation is allowable under Section 32 of the Income- tax Act, 1961 (in short 'the Act'). Therefore, it has to be adjusted towards operational cost for the purpose of determining arm's length price.
The Ld.counsel for the assessee further submitted that there is significant increase in the investment to the extent of 38% in the plant and machinery at Bawal plant, Haryana, which had material impact on the profitability of the assessee. Therefore, according to the Ld. counsel, the assessee considered the cash profit to the sales ratio as Profit Level Indicator for better comparability. The Transfer Pricing Officer, however, adopted fresh analysis and selected companies, which are functionally not comparable. The companies, which are selected by the Transfer Pricing Officer, are not functionally similar and not comparable, therefore, those companies selected by the TPO cannot be a basis for transfer pricing adjustment. The Dispute Resolution Panel, without considering all these factual aspects, simply confirmed the order of the Transfer Pricing Officer. Therefore, the adjustment made by the Assessing Officer to determine the arm's length price is not justified.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that on the direction of the Dispute Resolution Panel, the Assessing Officer made adjustment of `2.39 Crores towards arm's length price in respect of the purchase of raw material from the Associate Enterprise. The assessee imported raw material and components which is not in dispute. The assessee was manufacturing head lamp, tail lamp, head lamp with blinkers and automotive lighting equipments.
According to the Ld. D.R., since the assessee was in the manufacturing activity, claimed depreciation and made adjustment to the operating cost. As rightly observed by the Transfer Pricing Officer, depreciation is charged to Profit & Loss account. For the purpose of determining the Profit Level Indicator, the profit before depreciation has to be taken into account. According to the Ld. D.R., the Bawal plant appears to be started in the year under consideration and full capacity was not used in the second plant.
Depreciation being major component of the operating cost of the company, according to the Ld. D.R., the assessee has taken the installed capacity and utilised capacity which is not the correct method of approach. The company has to be taken as a whole.
Referring to the companies like Autolite (India) Ltd., Lumax DK Auto Industries Ltd., Fiem Industries and Halonix Ltd., the Ld. D.R. submitted that these are all companies which are manufacturing a similar product as that of the assessee. Therefore, the contention of the assessee that the Transfer Pricing Officer selected such companies, which are not comparable, is not justified.
According to the Ld. D.R., the assessee could not establish how the set of companies selected by the Transfer Pricing Officer are functionally different from the assessee-company. The Transfer Pricing Officer, after considering the annual report of each company, found that they are performing similar function and having similar profile as that of the assessee. Therefore, according to the Ld. D.R., the Transfer Pricing Officer rightly made adjustment to the extent of `2.39 Crores.
We have considered the rival submissions on either side and perused the relevant material available on record. The contention of the assessee is that depreciation of plant and machinery to the extent of investment made by the assessee at Bawal plant had material impact on the profitability of the assessee. As rightly found by the TPO and DRP, depreciation is one of the elements of operating cost which needs to be considered as part of the operating cost. Moreover, as rightly submitted by the Ld. D.R., the assessee could not establish how the companies like Autolite (India)
Ltd., Lumax DK Auto Industries Ltd., Fiem Industries and Halonix Ltd. are not comparable with that of the assessee, especially when they are manufacturing the similar products as that of the assessee- company. In the absence of any material to suggest that the companies selected by the TPO are not comparable with that of the assessee-company, this Tribunal is of the considered opinion that there is no merit in the contention of the assessee.
With regard to extraordinary costs, this Tribunal is of the considered opinion that there is no material to suggest that the so- called extraordinary costs said to be incurred by the assessee affect the profitability of the assessee. In the absence of any material, this Tribunal is of the considered opinion that the Assessing Officer has rightly determined the arm's length price at ` 2.39 Crores as per the direction of the Dispute Resolution Panel. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.