M/s. Aerzen Machines (India) Pvt. Ltd., Vadodara V. The Addl. CIT, Range-1, Baroda

ITA 111/AHD/2016

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 7024 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 18-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Arm length price
• Section: 92C; 143(3); 10B; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL , D BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI MAHAVIR PRASAD , JUDICIAL MEMBER AND SHRI WASEEM AHMED , ACCOUNTANT MEMBER ./ IT (TP) A NO. 111/AHD/2016 / ASSTT. YEAR: 2011 - 2012 M/S. AERZEN MACHINES(INDIA) PVT. LTD. , E 115/116, GIDC , MANJUSARI TALUKA , SAVLI , VADODARA - 391775 . PAN : AADCR3755R VS. A .C.I.T. , RANGE - 1 , BARODA . (APPLICANT) ( RESPON D ENT ) ASSESSEE BY : SHRI T.P. HEMANI , SR. ADVOCATE WITH SHRI PAR I MAL PARMAR, A.R REVENUE BY : SHRI RAJ DEEP SINGH , SR .D. R / DATE OF HEARING : 03 / 03 / 2021 / DATE OF PRONOUNCEMENT: 24 / 03 /2021 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE A GAINST THE ORDER OF THE LEARNED COMM ISSIONER OF INCOME TAX (APPEALS) - 1 VADODARA , DATED 23/10/2015 ARISING IN THE MATTER OF ASSESSMENT ORDER PASSED UNDER S. 143(3) R.W.S 92C (4) OF THE INCOME TAX ACT, 1961 ( HERE - IN - AFTER REFERRED TO AS 'THE ACT') RELEVANT TO THE ASSESSMENT YEAR 2011 - 20 12 . IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 2 2. THE ONLY ISSUE RAISED BY THE ASSESSEE IS THAT THE LEARNED CIT (A) ERRED IN CONFIRMING THE ORDER OF THE AO IN PART BY MAKING UPWARD ADJUSTMENT UNDER THE PROVISIONS OF SECTION 92 OF THE ACT ON ACCOUNT OF TRANSFER PRICING. 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IN THE PRESENT CASE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF MANUFACTURING OF MACHINERIES AND COMPONENT SUCH AS POSITIVE DISPLACEMENT BLOWERS. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS CARRIED OUT CERTAIN INTERNATIONAL T RANSACTIONS WITH ITS ASSOCIATED ENTERPRISE BASED IN GERMANY. THE DETAILS OF SUCH TRANSACTION STAND AS UNDER: SR.NO. DESCRIPTION AE AMOUNT(RS) 1. PURCHASE OF POSITIVE DISPLACEMENT BLOWERS, SCREW COMPRESSORS AND ALLIED PRODUCTS, ITS SPARES AND COMPONENTS AERZENER MASCHINENFABRIK VERWALTUINGSUND BETELLIGUNGSESELLSCHAFT MBH REJERWEG 2831855 AERZEN GERMANY 8,32,23,667/ - 2. DESIGN AND DEVELOPMENT CHARGES RECEIVED AERZENER MASCHINENFABRIK VERWALTUINGSUND BETELLIGUNGSESELLSCHAFT MBH REJERWEG 2831855 AERZEN GERMANY 68,36,53 3. INTEREST PAID ON EXTERNAL COMMERCIAL BORROWING AERZENER MASCHINENFABRIK VERWALTUINGSUND BETELLIGUNGSESELLSCHAFT MBH REJERWEG 2831855 AERZEN GERMANY 15,77,326/ - 4 WARRANTY CLAIM RECEIVABLE AERZENER MASCHINENFABRIK VERWALTUINGSUND BETELLIGUNGSESELLSCHAFT MBH REJERWEG 2831855 AERZEN GERMANY RS.32,23,090 3.1 THE ASSESSEE HAS DETERMINED THE ARM LENGTH PRICE (ALP) OF THE AFORESAID TRANSACTIONS USING CPM METHOD FOR PURCHASES AND DESIGN AND DEVELOPMENT CHARGES RECEIVED AND CUP METHOD WI TH RESPECT TO INTEREST EXPENSES AND WARRANTY RECEIVABLE. ACCORDINGLY, THE ASSESSEE CLAIMED THAT THE METHODS USED FOR DETERMINING THE ALP ARE THE MOST APPROPRIATE METHOD (MAM) AND ITS PLI IS AT THE ARM LENGTH PRICE. THE ASSESSEE HAS ADOPTED PBDIT AS PROFIT LEVEL INDICATOR FOR IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 3 WORKING OUT THE ALP. THUS THERE IS NO NEED TO MAKE ANY ADJUSTMENT WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS CARRIED OUT WITH THE ASSOCIATED ENTERPRISES. 3.2 HOWEVER, THE AO BEING DISSATISFIED WITH THE WORKING OF THE ASSESSEE REGA RDING THE DETERMINATION OF ALP, REJECTED THE SAME AND ADOPTED TNMM METHOD AS MOST APPROPRIATE METHOD FOR WORKING OUT THE ALP. THE AO FOR THIS PURPOSE HAS SELECTED 3 COMPARABLES AND WORKED OUT THE ARITHMETIC MEAN OF OPERATING MARGIN OF THESE COMPARABLES AT 9.80% WHEREAS THE MARGIN OF THE ASSESSEE WAS WORKED OUT AT 1.40%. 3.3 THE AO HAS ADOPTED PBIT AS PROFIT LEVEL INDICATOR AFTER EXCLUDING THE RENTAL INCOME FOR COMPUTING OPERATING PROFIT IN WORKING OUT THE PLI AND SUBSEQUENT DETERMINATION OF THE ALP OF THE ASSESSEE. 3.4 IN VIEW OF THE ABOVE THE AO MADE THE UPWARD ADJUSTMENT FOR RS. 62,70,202/ - WITH RESPECT TO ALL THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE INCLUDING THE INTERNATIONAL TRANSACTIONS WITH NON - AE. 4. AGGRIEVED ASSESSEE PREFERRE D AN APPEAL TO THE LEARNED CIT (A) WHO HAS DELETED THE ADDITION MADE BY THE AO IN PART BY OBSERVING AS UNDER: 4.5.1. I HAVE CONSIDERED THE FACTS OF THE CASE, THE SUBMISSION OF THE APPELLANT AND THE AO'S OBSERVATION. THE FIRST CONTENTION OF THE APPELLANT IS REGARDING SELECTION OF TNMM AS THE MOST APPROPRIATE METHOD BY THE TPO AS AGAINST CPM AND CUP ADOPTED BY THE A PPELLANT. IN THIS REGARD, IT IS SEEN THAT THE APPELLANT'S SUBMISSIONS ARE BASED UPON LEGAL PROPOSITIONS ONLY. AS ALREADY DISCUSSED THE APPELLANT HAD NOT CARRIED OUT ANY TP REPORT WHILE PREPARING FORM 3CED. IT HAS NOT DEMONSTRATED ANY COMPARABLES IN ORDER T O SHOW THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ALP AS PER CUP AND CPM METHODS. IT WAS ONLY AFTER THE AO POINTED OUT THESE FACTS AND ISSUED SHOW CAUSE TO THE APPELLANT, THAT THE APPELLANT MADE A SEARCH AND THIS WAS ALSO MADE AS PER TNMM METHOD. NO FACTU AL EVIDENCE HAS BEEN FURNISHED BY THE APPELLANT TO ESTABLISH THAT TNMM IS NOT THE MOST APPROPRIATE METHOD IN ITS CASE. HENCE, THIS CONTENTION IS REJECTED. 4.5.2. SO FAR AS THE APPELLANT'S CLAIM THAT ONLY ONE COMPARABLE IS ENOUGH FOR TP PURPOSES IS CONCERNED, IT IS SEEN FROM THE JUDICIAL DECISIONS RELIED UPON BY APPELLANT THAT IN THOSE CASES EITHER THE TPO OR T HE ASSESSEE COULD FOUND OUT ONLY ONE COMPARABLE CASE. IN SUCH CIRCUMSTANCES, THE TRIBUNALS HAVE HELD THAT FOR TRANSFER PRICING PURPOSES, EVEN ONE COMPARABLE CAN BE SELECTED. NOWHERE IT HAS BEEN HELD THAT IN NO CASE MORE THAN ONE COMPARABLE SHOULD BE SELECTED EVEN IF SUCH OTHER COMPARABLES ARE AVAILABLE. THE APPELLANT IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 4 HAS NOWHERE SUBMITTED THAT THE COMPARA BLES SELECTED BY THE AO ARE NOT COMPARABL E TO IT UNDER TNMM METHOD. HENCE THIS CONTENTION OF THE APPELLANT IS ALSO REJECTED. 4.5.3. SO FAR AS SUBMISSIONS RELATING TO COMPUTATION OF OPERATING MARGINS OF THE APPELLANT ARE CONCERNED, THE APPELLANT'S CONTENTION THAT IF RENTAL INCOME IS NOT CONSIDERE D AS A PART OF OPERATING REVENUE, THEN THE EXPENSES RELATED TO SUCH INCOME SHOULD ALSO NOT BE CONSIDERED FOR THIS PURPOSE IS CORRECT AND ACCEPTABLE. IT IS SEEN THAT A PART OF THE FACTORY BUILDING OF APPELLANT COMPANY HAD BEEN LET OUT TEMPORARILY DURING THI S YEAR. SUCH TEMPORARY LETTING OUT OF PART OF THE BUSINESS PREMISES HAS TO BE HELD TO BE THE INCOME FROM BUSINESS ACTIVITY. MOREOVER, EXPENSES LIKE DEPRECIATION, SECURITY ETC. ARE ALSO RELATABLE TO SUCH INCOME. THE TPO HAS NOT EXCLUDED THE EXPENSES RELATIN G TO SUCH RENTAL INCOME BY STATING THAT THE APPELLANT HAD NOT FURNISHED THE COMPUTATION OF COST CONTRIBUTABLE TO EARN SUCH REVENUE. FROM THE SUBMISSION MADE DURING THE APPELLATE PROCEEDINGS, IT IS SEEN THAT SUCH COMPUTATION OF DIRECT COST IS POSSIBLE. BUT IN MY OPINION, THE BEST SOLUTION IS THAT SUCH RENTAL INCOME IS TREATED AS PART OF THE OPERATING INCOME OF THE COMPANY AND OPERATING PROFIT TO BE DETERMINED ACCORDINGLY. THIS WILL AUTOMATICALLY TAKE INTO ACCOUNT THE EXPENSES RELATED TO SUCH INCOME. ACCORDIN GLY, THE AO IS DIRECTED TO TREAT THIS RENTAL INCOME AS PART OF THE OPERATING INCOME. THIS CONTENTION OF THE APPEAL IS ACCORDINGLY ALLOWED. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 4.5.6. NOW COMING TO THE APPELLANT'S CONTENTION REGA RDING COMPUTATION OF OPERATING PROFIT AS PBDIT INSTEAD OF PBIT AS DONE BY THE TPO, THE APPELLANT'S ONLY CONTENTI ON IN THIS REGARD IS THAT BEING A NEW SET UP, ITS DEPRECIATION COST IS VERY HIGH AS COMPARED TO THE COMPARABLES. IN THIS RESPECT, IT IS SEEN THAT THE ONLY EXPENDITURE CONSIDERED BY THE APPELLANT FOR THIS PURPOSE IS THE DEPRECIATION ALLOWANCE. IT IS A FACT THAT A NEWLY SET UP ENTITY HAS HIGHER DEPRECIATION ALLOWANCE AS AGAINST OLD ENTITY, BUT AT THE SAME TIME, THIS IS A LSO A FACT THAT THE REPAIR AND MAINTENANCE EXPENSES IN CASE OF OLD ENTITY ARE MUCH HIGHER THAN A NEW ENTITY. SO EFFECT OF DEPRECIATION ON THE OPERATING PROFIT CANNOT BE DETERMINED UNTIL AND UNLESS SIMILAR EXERCISES ARE CONDUCTED FOR EFFECT OF REPAIR AND MA INTENANCE EXPENDITURES ON THE OPERATING PROFITS. THE APPELLANT HAS NOT SUBMITTED THE DETAILS OF REPAIR AND MAINTENANCE EXPENDITURES OF THE COMPARABLES TO SHOW THAT THESE EXPENDITURES IN THE CASE OF THE COMPARABLES ARE COMPARABLE TO SUCH EXPENSES OF THE APP ELLANT. IN THE ABSENCE OF ANY SUCH COMPUTATION, THE APPELLANT'S CONTENTIONS ARE NOT ACCEPTABLE. IN THE DECISION OF QUAL CORE LOGIC LTD. (SUPRA) RELIED UPON BY THE APPELLANT, THE BENCH HAS ALSO HELD THAT THE SIZE OF THE ASSETS BESIDES AGE OF THE ASSETS OF COMPARABLES LEAD TO DIFFERENCES IN PROFIT MARGIN. THE DIFFERENCES BETWEEN 'ASSET' EMPLOYED AND 'RISKS' SUFFERED BY THE TESTED PARTY AND THE COMPARABLES NEEDS TO ADJUSTED. IN THE ABSENCE OF ANY DETAILS FURNISHED BY THE APPELLANT, SUCH ADJUSTMENT CANNOT BE M ADE BY ONLY RELYING UPON THE DECISIONS RELIED UPON BY THE APPELLANT IN ITS FAVOUR. THE ONUS IS ON THE APPELLANT TO SHOW THAT IT HAS TAKEN INTO ACCOUNT ALL THE RELATED EXPENSES TO THE ASSETS EMPLOYED I.E. DEPRECIATION, REPAIRS AND MAINTENANCE, INSURANCE ETC . FOR THE PURPOSES OF I DETERMINING THE ADJUSTMENTS TO ITS OWN OPERATING PROFIT AS WELL AS OF THE COMPARABLES. IN THE ABSENCE OF SUCH EXERCISE MADE BY THE APPELLANT, ITS CONTENTION OF ADJUSTMENT ON ACCOUNT OF DEPRECIATION IS NOT ACCEPTABLE. HENCE IT IS HE LD THAT THE TPO HAS RIGHTLY ADOPTED PBIT FOR THE PURPOSES OF COMPUTATION OF THE OPERATING PROFITS. 5. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE ASSESSEE IS IN APPEAL BEFORE US. 6. THE LEARNED AR BEFORE US HAS MADE TWOFOLD CONTENTIONS. FIR STLY, IT WAS CONTENDED BY THE AR THAT THERE IS A HUGE DIFFERENCE IN THE AMOUNT OF DEPRECIATION IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 5 CLAIMED BY THE ASSESSEE VIZ A VIZ CLAIMED BY THE COMPARABLE COMPANIES. THEREFORE, IN SUCH A SITUATION THE PBDIT SHOULD HAVE BEEN TAKEN AS PROFIT LEVEL INDICATOR WHILE COMPUTING OPERATING MARGIN INSTEAD OF PBIT. AS SUCH THE PROFIT LEVEL INDICATOR I.E. PBIT IS GIVING DISTORTING POSITIONS OF THE ASSESSEE AS WELL AS OF THE COMPARABLE COMPANIES WHICH IS UNWARRANTED WHILE DETERMINING THE ALP. FOR THIS PURPOSE THE LEARNE D AR HAS RELIED ON THE ORDER OF THIS TRIBUNAL IN THE CASE OF ERHARDT + LEIMER (INDIA) (P.) LTD. VS. ACIT IN ITA NO - 3298/AHD/2011 & 2880/AHD/2012 REPORTED IN 78 TAXMAN.COM 258. 6.1 THE 2 ND FOLD OF CONTENTION OF THE LEARNED AR IS THAT THE TURNOVER OF THE ASSESSEE STANDS AT 7,46,45262/ - IN THE YEAR UNDER CONSIDERATION AND THE TURNOVER OF THE COMPARABLE COMPANIES NAMELY AIR CONTROL & CHEMICAL ENGG. CO. LTD. AND KAY INTERNATIONAL LTD. STANDS AT 22,64,54,000/ - & 48,15,05,101/ - WHICH IS MUCH HIGHER THAN T HE ASSESSEE. AS PER THE LEARNED AR IF THE FILTER OF 100% OF THE TURNOVER ON THE HIGHER AND LOWER SIDE IS APPLIED THEN BOTH THE COMPANIES SHOULD BE EXCLUDED. ACCORDINGLY, THE COMPARABLE NAMELY KULKARNI POWERS TOOLS LTD, SHOWING THE TURNOVER OF 8 ,71,14,734.00 SHOULD BE ADOPTED AS COMPARABLE. 7. ON THE OTHER AND THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 8. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE 1 ST CONTROVERSY ARISES BEFORE US FOR THE PURPOSE OF ADJUDICATION WHETHER PBIT OR PBDIT SHOULD BE TAKEN AS PROFIT LEVEL INDICATORS FOR WORKING OUT THE ALP WITH RESPECT TO THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE. 8.1 THE PU RPOSE OF TRANSFER PRICING PROVISIONS IS TO ENSURE THAT THE COMPANIES WHICH ARE CONNECTED WITH EACH OTHER AND OPERATING INTERNATIONALLY, SUCH COMPANIES SHOULD NOT DIVERT THEIR INCOME TO ANOTHER COUNTRY. IN OTHER WORDS, THE PRICE CHARGED BY ONE COMPANY FROM ITS ASSOCIATED ENTERPRISES SHOULD NOT BE INFLUENCED BY THEIR IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 6 CONNECTIONS BETWEEN THEM. SUCH PRICE SHOULD HAVE BEEN AT THE ARM LENGTH PRICE, MEANING THEREBY THE PRICE/SERVICE OR THE COST SHOULD BE AT A VALUE WHICH IS AGREEABLE TO THE INDEPENDENT/UNRELATED P ARTIES UNDER UNCONTROLLED SITUATIONS/CIRCUMSTANCES. 8.2 THE NEXT ASPECT THAT ARISES HOW TO DETERMINE THE ALP WITH RESPECT TO THE TRANSACTIONS CARRIED OUT BETWEEN TWO ASSOCIATED ENTERPRISES. FOR THIS PURPOSE, THE PRICE OR THE MARGIN OF ONE COMPANY (TESTED PARTY), DEPENDING UPON FACTS AND CIRCUMSTANCES, SHOULD BE COMPARED WITH THE COMPANIES WHICH ARE COMPARABLE IN TERMS OF FUNCTIONS, CAPITAL EMPLOYED, DEBT EQUITY RATIO, TURNOVER, RISK, CONTRACTUAL TERMS, ASSETS EMPLOYED ETC. IF ANY OF THE ITEM SUCH AS CAPIT AL EMPLOYED, TURNOVER IS NOT COMPARABLE TO THE TESTED PARTY FOR ANY REASON, THEN THE NECESSARY ADJUSTMENTS ARE REQUIRED TO BE MADE. THE PROVISIONS OF RULE 10B (2) & (3) OF INCOME TAX RULES ALSO PROVIDE FOR SUCH ADJUSTMENTS WHICH IS REPRODUCED AS UNDER: (2) FOR THE PURPOSES OF SUB - RULE (1), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION [ OR A SPECIFIED DOMESTIC TRANSACTION ] WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF T HE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECON OMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION [ OR A SPECIFIED DOMESTIC TRANSACTION ] IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONAB LY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 8.3 WE ALSO NOTE THAT OECD GUIDELINES ALSO PROVIDES FOR SUCH ADJUSTMENTS AS HELD IN THE CASE RAMPGREEN SOLUTION (P) LTD. VS. CIT BY THE HON BLE DELHI HIGH COURT REPORTED IN 60 TAXMANN.COM 355 WHICH ARE REPRODUCED AS UNDER: IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 7 IN ORDER TO DETERMINE THE ALP IN RELATION TO A CONTROLLED TRANSACTION, THE ANALYSIS MUST INCLUDE COMPARABLES WHICH ARE SIMILAR IN ALL ASPECTS THAT HAVE A MATERIAL BEARING ON THEIR PROFITABILITY. 'OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATION' PUBLISHED IN 2010 INDICATES THE 'COMPARABILITY FACTORS' WHICH ARE IMPORTANT WHILE CONSIDERING THE COMPARABI LITY OF UNCONTROLLED TRANSACTIONS/ENTITIES WITH THE CONTROLLED TRANSACTIONS/ENTITIES. SUB - RULE (2) OF RULE 10B ALSO MANDATES THAT THE COMPARABILITY OF INTERNATIONAL TRANSACTIONS WITH UNCONTROLLED TRANSACTIONS WOULD BE JUDGED WITH REFERENCE TO THE FACTORS I NDICATED UNDER CLAUSES (A) TO (D) OF THAT SUB - RULE, WHICH ARE SIMILAR TO THE COMPARABILITY FACTORS AS INDICATED UNDER THE OECD GUIDELINES. THESE INCLUDE CHARACTERISTICS OF PROPERTY OR SERVICES TRANSFERRED AND FUNCTIONS PERFORMED. [PARA 30] 8.4 IN THE LIGH T OF THE ABOVE DISCUSSION, WE FIND THAT ADMITTEDLY THE DEPRECIATION CLAIMED BY THE ASSESSEE IS GREATER THAN THE DEPRECIATION OF THE COMPARABLE COMPANIES FOR THE YEAR UNDER CONSIDERATION. THE AMOUNT OF DEPRECIATION CLAIMED BY THE ASSESSEE VIZ - A - VIZ COMPARAB LE COMPANIES STANDS AS UNDER: SR.NO. NAME OF THE COMPANY OPERATING SALES OPERATING EXPENSES DEPRECIATION DEPRE/OPERATING SALES % 1. AIR CONTROL & CHEMICAL ENGG. CO. LTD. 226,454,000 195,262,000 1,088,000 0.480% 2. KAY INTERNATIONAL LTD. 481,505,101 437,021,306 10,457,991 2.172% 3. KULKARNI POWER TOOLS LTD 87,114,734 81,653,265 3,519,684 4.040% SR.NO. NAME OF THE COMPANY OPERATING SALES OPERATING EXPENSES DEPRECIATION DEPRE/OPERATING SALES % 4. NEO TECH - AID COMPRESSOR PVT. LTD. 84,880,439 81,822,075 7,950,177 9.366% AVERAGE 9.366% 8.5 THE AMOUNT OF DEPRECIATION CLAIMED BY THE ASSESSEE IN THE RATIO OF TURNOVER ST ANDS AT 9.366% WHEREAS AVERAGE RATIO OF DEPRECIATION OF THE COMPARABLE COMPANIES CLAIMED TO THEIR TURNOVER STANDS AT 2.086%. THUS IT IS INFERRED THAT THE ADJUSTMENT S IN THE DEPRECIATION IS REQUIRED TO BE MADE. NOW, THE ISSUE ARISES HOW TO MAKE THE ADJUSTMENTS. IN THIS REGARD WE FIND THAT THERE IS NO GUIDELINES OR THE PROVISI ONS OF LAW PROVIDING THE MECHANISM FOR MAKING THE ADJUSTMENTS WITH RESPECT TO THE DEPRECIATION. FURTHERMORE, IT ALSO APPEARS THAT THERE CANNOT BE ANY GUIDELINES OR FORMULA FOR MAKING SUCH ADJUSTMENTS, RATHER IT DEPENDS UPON VARIOUS FACTORS AND IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 8 CIRCUMSTANCE S. HOWEVER, WE FIND THAT NONE OF THE AUTHORITIES BELOW HAS MADE SUCH ADJUSTMENTS WHILE DETERMINING THE PLI FOR WORKING OUT THE ALP DESPITE SUCH CONTENTION WAS RAISED BY THE ASSESSEE BEFORE THE LEARNED CIT (A). IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FRO M THE ORDER OF THE COORDINATE BENCH OF THIS ITAT IN CASE OF ERHARDT + LEIMER (INIDA) (P.) LTD (SUPRA) WHEREIN THE BENCH HELD AS UNDER: THE ASSESSEE'S SECOND ARGUMENT SEEKS TO REJECT THE LOWER AUTHORITIES' ACTION TAKING PROFIT LEVEL INDICATOR OF PBIT/SALES INSTEAD OF PBDIT/SALES ( SUPRA ). THERE IS NO DISPUTE THAT THE ASSESSEE HAS IN FACT INCREASED ITS FIXED ASSETS/PLANT AND MACHINERY TO THE TUNE OF RS. 1435.98 LACS IN THE IMPUGNED ASSESSMENT YEAR HELD ELIGIBLE FOR DEPRECIATION. ITS ENDEAVOUR IN THE INSTANT CA SE IS TO EXCLUDE CORRESPONDING DEPRECIATION FOR THE PURPOSE OF DETERMINING THE PROFIT LEVEL INDICATOR WHICH ADMITTEDLY HAS NOT FOUND FAVOUR FROM THE LOWER AUTHORITIES. FIRST OF ALL THAT THE RELEVANT METHOD USED IN ASSESSEE'S CASE WAS THE TRANSACTIONAL NET MARGIN METHOD WHICH WAS AN INDIRECT METHOD AND, THUS, PROFIT LEVEL INDICATOR WAS TO BE TAKEN AFTER STATING NET FIGURE OF PROFITS. THERE CAN HARDLY BE ANY DISPUTE ABOUT ASSESSEE'S NET PROFITS WOULD SEE A DECLINE IN VIEW OF ITS DEPRECIATION CLAIM ARISING FR OM FIXED ASSETS PERTAINING TO THE IMPUGNED ASSESSMENT YEAR. IN THESE FACTS THE TRIBUNAL IN BA CONTINUUM INDIA (P.) LTD. V. ASSTT. CIT [2013] 40 TAXMANN.COM 311 (HYD. - TRIB.) HELD THAT SUCH A DEPRECIATION HAD TO BE EXCLUDED BEFORE COMPUTING THE CORRESPONDING PROFIT LEVEL INDICATOR. ACCORDINGLY, THE TRANSFER PRICING OFFICER IS DIRECTED IN THESE PECULIAR FACTS TO EXCLUDE ASSESSEE'S CORRESPONDING DEPRECIATION CLAIM FOR THE PURPOSE OF THE PROFIT LEVEL INDICATOR IN QUESTION. THIS ASSESSEE'S ARGUMENT ALSO SUCCEEDS. [PARA 6] 8.6 IT IS ALSO SIGNIFICANT TO NOTE THAT THE LEARNED CIT (A) HAS EQUATED THE AMOUNT OF DEPRECIATION WITH THE REPAIR AND MAINTENANCE EXPENSES. AS PER THE LEA RNED CIT (A) IF THE ASSESSEE IS CLAIMING HIGHER DEPRECIATION THAN THE COMPARABLE COMPANIES, IT IMPLIES THAT THE ASSESSEE MUST BE CLAIMING LESS REPAIR AND MAINTENANCE EXPENSES THAN THE COMPARABLE COMPANIES. ACCORDINGLY, THE LEARNED CIT (A) REJECTED THE CONT ENTION OF THE ASSESSEE FOR MAKING THE ADJUSTMENTS WITH RESPECT TO THE DEPRECIATION. IN THIS CONNECTION, WE FIND THAT THE REPAIRS AND MAINTENANCE EXPENSES CANNOT BE EQUATED/COMPARED WITH THE DEPRECIATION. THESE ARE TWO INDEPENDENT ITEMS OF EXPENSES. THERE I S NO GUARANTEE THAT I F THE DEPRECIATION IS HIGHER THE N, THE REPAIR AND MAINTENANCE EXPENSES WILL BE LOWER OR VICE VERSA. ACCORDINGLY WE ARE NOT CONVINCED WITH THE REASONING OF THE LEARNED CIT (A). IN VIEW OF THE ABOVE AND IN THE INTEREST OF JUSTICE WE HOLD THAT THE AO SHOULD HAVE TAKEN THE PBDIT AS THE PROFIT LEVEL INDICATOR WHILE WORKING OUT THE ARM LENGTH PRICE WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS AE. IT (TP) A NO.111/AHD/2016 ASSTT. YEAR 2011 - 12 9 8.7 AS WE HAVE ALLOWED THE CONTENTIO N OF THE ASSESSEE WITH RESPECT TO THE PROFIT LEVEL INDICATOR AS PBDIT IN ITS FAVOUR, WE DO NOT FIND ANY REASON TO ADJUDICATE THE 2 ND FOLD OF ALTERNATE CONTENTION OF THE LEARNED AR. ACCORDINGLY, WE DISMISS THE SAME AS INFRUCTUOUS. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 9. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. O RDER PRONOUNCED IN THE COURT ON 24 /03 / 2021 AT AHMEDABAD. SD/ - SD/ - (MAHAVIR PRASAD ) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER ( TRUE COPY) A HMEDABAD; DATED 24 / 03 /2021 M ANISH