M/s. Vishay Components India Pvt.Ltd, Pune V. Assistant Commissioner of Income-tax, Circle - 13, Pune

ITA 1501/PUN/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 1291 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 24-11-2020
• Assessment Year: 2008-2009
• Appeal Filed On: 21-09-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: IN RELATION TO; CITA PUNE ON
• Keywords: Depreciation; Transfer pricing; International transaction; Additional depreciation; Onus to prove; Set aside
• Section: 201; 43; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE VIRTUAL COURT BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA NOS. 1198 AND 1501/PUN/2018 / ASSESSMENT YEARS : 2007-08 & 2008-09 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED, LONI-KALBHOR, NEAR PUNE (CENTRAL RAILWAY), PUNE 412 201 PAN : AAACB9652L VS. ACIT.CIRCLE-13, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THESE TWO APPEALS BY THE ASSESSEE LAY CHALLENGE TO THE SEPARATE ORDERS PASSED BY THE CIT(A)-13, PUNE ON 11-05 -2018 AND 13-07-2018 IN RELATION TO THE ASSESSMENT YEARS 2007-08 & 2 008-09 RESPECTIVELY. SINCE A COMMON ISSUE IS RAISED IN BOTH THE AP PEALS, WE ARE, THEREFORE, PROCEEDING TO DISPOSE THEM OFF BY THIS CONSOLIDATED ORDER. 2. WE ARE FIRST ESPOUSING THE APPEAL FOR THE ASSESSMENT YEAR 2007-08. IT IS A SECOND ROUND OF PROCEEDINGS BEFORE TH E TRIBUNAL. ASSESSEE BY SHRI MADHUR AGRAWAL REVENUE BY SHRI SANGRAM GAIKWAD & SHRI MAHADEVAN A.M. KRISHNAN DATE OF HEARING 15-12-2020 DATE OF PRONOUNCEMENT 17-12-2020 ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 2 THE ONLY GRIEVANCE PROJECTED BY THE ASSESSEE IS THAT THE AUTH ORITIES BELOW ERRED IN GIVING PROPER EFFECT TO THE ORDER PASSED BY THE TRIBUNAL U/S. 254(1) ON 10-02-2017 (ITA NO.1712/PUN/11). TO BE MORE SPECIFIC, CASE OF THE ASSESSEE IS THAT ITS CLAIM FOR GRANT OF ADJUSTMENT TOWARDS HIGHER DEPRECIATION WAS EX-FACIE WRONGLY DECIDED WHEN THE TRIBUNAL HAD GIVEN SPECIFIC DIRECTION IN THIS REGARD. 3. THE FACTUAL MATRIX OF THE CASE IS THAT THE ASSESSEE MANUFACTURES RESISTORS, CAPACITORS USED IN VARIOUS APPLICATION S AND PRODUCTS. THE ASSESSEE UNDERTOOK CERTAIN INTERNATIONAL TRANS ACTIONS DURING THE YEAR. FOR DEMONSTRATING THAT THE INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH PRICE (ALP), THE ASSESSE E APPLIED TRANSACTIONAL NET MARGINAL METHOD (TNMM). WHILE CALCULATING THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COS TS, THE ASSESSEE ADOPTED OPERATING PROFIT BEFORE DEPRECIATION, I NTEREST AND TAXES (OPBDIT) AND SOUGHT TO MATCH THE SAME WITH THAT OF THE COMPARABLES. THE CONTENTION OF THE ASSESSEE WAS REJE CTED BY THE TRANSFER PRICING OFFICER (TPO) AS WELL AS THE DISPUTE RESOLUTION PANEL. THE ASSESSEE PLEADED BEFORE THE TRIBUNAL TH AT ITS ADJUSTED PLI, I.E., OPBDIT/TOTAL COSTS PRESENTED A BETTER COMPARISON AS IT HAD CHARGED HIGHER AMOUNT OF DEPRECIATION IN ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 3 COMPARISON WITH THE COMPARABLES. THE ASSESSEE SUBMITTED TH AT ITS AVERAGE RATE OF DEPRECIATION, I.E. THE RATIO OF DEPRECIATION TO AVERAGE WRITTEN DOWN VALUE (WDV) AT 17.97% WAS HIGHER THA N THE SIMILAR AVERAGE RATIO OF THE COMPARABLES AT 12.07%. THAT IS HOW, THE ASSESSEE REQUESTED THAT ITS PROFITS SHOULD BE CONSIDERE D BEFORE THE AMOUNT OF DEPRECIATION. IN THE ALTERNATE, IT WAS CONTENDED THAT ITS OPERATING PROFIT RATIO SHOULD BE REDUCED BY THE EXCESS AM OUNT OF DEPRECIATION CHARGED BY ITS COMPARABLES. THE TRIBUNAL IN ITS ORDER PASSED U/S 254(1) FOUND THAT THE ASSESSEE WAS EN GAGED IN ASSET INTENSIVE INDUSTRY. THE ASSESSEES CONTENTION OF ADOP TING CASH-PLI OR PROFIT BEFORE DEPRECIATION ETC. WAS JETTISONED IN PA RA 43 OF ITS ORDER AND THE FURTHER CONTENTION THAT THE ADJUSTM ENT ON ACCOUNT OF ITS HIGHER DEPRECIATION SHOULD BE CARRIED OUT IN ITS HANDS ALSO DID NOT FIND FAVOR WITH THE TRIBUNAL. HOWEVER, IT WAS H ELD IN PARA 44 THAT IN CASE THE ASSESSEE WAS ABLE TO ESTABLISH THAT TH ERE WAS MATERIAL DIFFERENCE IN THE CLAIM OF DEPRECIATION VIS--VIS ITS COMPARABLES, THEN SUITABLE ADJUSTMENT MAY BE ALLOWED IN THE CA SE OF COMPARABLES AFTER DUE VERIFICATION BY THE ASSESSING OFFIC ER (AO)/TRANSFER PRICING OFFICER (TPO). WHILE GIVING EFFECT TO THE ORDER PASSED BY THE TRIBUNAL, THE TPO DID NOT TOUCH THIS ASP ECT. THE ASSESSEE RAISED GROUND BEFORE THE LD. CIT(A) ARGUIN G THAT THE ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 4 AVERAGE RATE OF DEPRECIATION TO W.D.V. OF COMPARABLES WAS 12.48% AS AGAINST ITS SIMILAR RATIO OF 17.97%. THAT IS HOW, THE AS SESSEE CLAIMED ADJUSTMENT BY WAY OF RELIEF AT 5.50%, WHICH THE LD. CIT(A) DID NOT COUNTENANCE. AGGRIEVED THEREBY, THE ASSE SSEE HAS MOVED THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS THROUGH VIRTUAL COURT IN THE HUE OF THE RELEVANT MATERIAL ON RECORD. THERE IS NO D ISPUTE ON THE FACT THAT THE ASSESSEE SELECTED THE TNMM AS THE MOST APPROPRIATE METHOD, WHICH REMAINED UNDISTURBED. THE ASSES SEE ADOPTED PLI OF OPBDIT TO TOTAL COST, WHICH BECAME THE BONE OF CONTENTION THAT WAS FINALLY RESOLVED BY THE TRIBUNAL AGAINST THE ASSESSEE. HOWEVER, THE EXTANT DISPUTE HAS ARISEN BECAUS E OF THE DIRECTION GIVEN BY THE TRIBUNAL IN THE LATER PART OF PARA 44 O F ITS ORDER, READING AS UNDER: - 44. IN THE WRITTEN NOTE FILED, THE ASSESSEE HAD MADE SUBMISSIONS FOR DIFFERENTIAL DEPRECIATION ADJUSTMENT WHICH WAS WITHOUT PREJUDICE TO HIS CLAIM. THE ASSESSEE CLAIMS THAT THE RATE OF DEPRECIATION I.E. DEPRECIATION / AVERAGE WRITTEN DOWN VALUE CHARGED BY THE ASSESSEE AT 17.97% WAS HIGHER THAN AVERAGE RATE OF DEPRECIATION CHARGED BY THE COMPARABLE COMPANIES I.E. 12.07%. THE ASSESSEE SUBMITS THAT EXCESS DEPRECIATION SHOULD BE EXCLUDED WHILE COMPUTING OPERATING MARGINS OF THE ASSESSEE. WE FIND NO MERIT IN THE SAID PLEA O F THE ASSESSEE UNDER RULE 10B(1)(E)(III) OF THE RULES, ADJUSTMENT IF ANY, HAS TO BE MADE IN THE HANDS OF COMPARABLES AND NOT IN THE HANDS OF TESTED PARTY. WE DISM ISS THE PLEA OF THE ASSESSEE IN THIS REGARD. HOWEVER, IN CASE THE ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 5 ASSESSEE IS ABLE TO ESTABLISH THAT THERE IS MATERIAL DIFFERENCE IN THE CLAIM OF DEPRECIATION BY THE ASSESSEE VIS--VIS COMPARABLES, THEN SUITABLE ADJUSTMENT MAY BE ALLOWED IN THE HANDS OF COMPARABLES AFTER DUE VERIFICATION BY THE ASSESSING OFFICER / TPO. 5. DETERMINATION OF ALP UNDER THE TNMM, AS DISCUSSED IN THE ABOVE PARA, IS GOVERNED BY RULE 10B(1)(E), RELEVANT PAR T OF WHICH READS AS UNDER:- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC 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 T RANSACTION 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 OR THE SPECIFIED DOMESTIC 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 ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCO UNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 6 6. IT CAN BE SEEN FROM SUB-CLAUSE (I) ABOVE THAT THERE IS REFERENCE TO THE DETERMINATION OF THE ASSESSEES NET PROFIT M ARGIN REALIZED FROM INTERNATIONAL TRANSACTION WITH REFERENCE TO A CERTA IN BASE. SUB-CLAUSE (II) TALKS OF DETERMINING NET PROFIT MARGIN REALIZED BY THE COMPARABLES WITH SIMILAR BASE. IT IS WITH THE HELP OF THE ADJUSTED MARGIN OF THE COMPARABLES AS PER SUB-CLAUS E (III) THAT THE ALP OF THE INTERNATIONAL TRANSACTION IS DETERMINED. THIS RULE UNEQUIVOCALLY SPEAKS OF COMPUTING THE NET PROFIT MARGIN OF THE ASSESSEE UNDER SUB-CLAUSE (I) AND THAT OF THE COMPARA BLES UNDER SUB-CLAUSE (II). ERGO, WHILE THE NUMERATOR IN THE TNMM IS INVARIABLY `NET PROFIT, THE DENOMINATOR IS OPTIONAL. THE HONB LE SUPREME COURT IN DIT (IT) VS. MORGAN STANLEY & CO. (2007) 292 ITR 416 (SC) HAS HELD THAT RATIO OF OPERATING PROFIT TO COSTS OR SALES ETC. IS MANDATED UNDER THE TNMM. THUS, THE ENTIRE EMPHASIS IN RULE 10B(1)(E) IS ON DETERMINING THE OPERATING PR OFIT RATE OF THE ASSESSEE AND COMPARABLES AND THEN COMPARING THE ADJUSTED OPERATING PROFIT RATE OF THE COMPARABLES WITH THAT OF THE ASSESSEE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. OPE RATING PROFIT IS A NET FIGURE WHICH IS DETERMINED AFTER EXCLUDING TOTAL O F OPERATING COSTS FROM THE TOTAL OF OPERATING REVENUES. ONCE FIGURE OF OPERATING PROFIT HAS BEEN MANDATED TO BE CONSIDER ED, ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 7 THERE REMAINS NO SANCTITY FOR CLAIMING THAT A PARTICULAR ITEM OF OPERATING EXPENSE BE REDUCED BECAUSE OF THE SAME BEING EXCESSIVE OR LOWER IN COMPARISON WITH COMPARABLES AND THE RESULTANT OPERATING PROFIT BEFORE SUCH AN ITEM OF EXPENDITURE BE CONS IDERED FOR MAKING COMPARISON. THERE IS A RAISON DETRE FOR COMPARING OPERATING PROFIT RATE OF THE ASSESSEE WITH COMPARABLES AND NOT TRUNCATED OPERATING PROFIT COMPUTED BY EXCLUDING CERTAIN ITEM(S) OF OPERATING COSTS. IT IS THIS THAT THE OVERALL FIGURE OF OPERATING P ROFIT IMBIBES THE EFFECT OF ALL OPERATING COSTS ON CUMULATIVE BASIS. ONE CAN COME ACROSS SEVERAL BUSINESS MODELS IN THE SAME LINE O F BUSINESS LEADING TO INCURRING OF DIFFERENT PERMUTATIONS AND COMBINATIONS OF OPERATING COSTS. WHEN OPERATING PROFIT IS CONSIDERED, THE EFFECT OF SUCH DIFFERENT BUSINESS MODELS IS IRONED OUT AND WE GET A REFINED FIGURE OF OPERATING PROFIT FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTION WITH THAT OF THE COMPARABLES UNDER THE TNMM. IF OPERATING PROFIT IS CONSIDERED IN A CONDENSED FORM NOT HAVING EFFECT OF CERTA IN CONSTITUENTS, IT CAN SERIOUSLY JEOPARDIZE THE COMPARISON. IN O NE BUSINESS MODEL, THERE MAY BE A FOCUS ON HAVING ITS OWN EMPLOYEES, WHILE IN ANOTHER, THE FOCUS MAY BE ON OUTSOURC ING THE SERVICES. THOUGH IN THE FIRST MODEL, THERE MAY BE HIGHER SALARY ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 8 COST, THE SECOND MODEL WILL ENTAIL LOWER SALARY BILL BUT HIGH OUTSOURCING COST. ON CONSIDERING THE OPERATING PROFIT, THE E FFECT OF HIGHER SALARY COST IN THE FIRST CASE IS SET OFF WITH HIGHER OUTS OURCING COST IN THE SECOND. IF WE PROCEED TO COMPUTE OPERATING PRO FIT BEFORE SALARY COST ON THE PLEA THAT IN THE FIRST CASE SALARY COST IS HIGHER THAN THAT IN THE OTHER, THE COMPARISON WILL BECOME MEANINGLESS. SIMILARLY, ONE ASSESSEE MAY HAVE ITS OWN BUILDIN G FOR OPERATIONS WHILE THE OTHER MAY TAKE IT ON RENT. OBVIOUS LY, THE FIRST ASSESSEE WILL INCUR HIGHER OPERATING COST IN TERMS OF DEPRECIATION ON BUILDING AND THE OTHER WILL INCUR MORE RENT EXPENSE. THUS BY CONSIDERING OPERATING PROFIT, THE EFFECT O F LOWER DEPRECIATION IN THE SECOND SITUATION IS CREASED WITH HIGHER REN T IN THE FIRST. THAT IS WHY, THE DELEGATED LEGISLATURE HAS STIPULATED THE ADOPTION OF OPERATING PROFIT AS A NUMERATOR UNDER RULE 10B(1 )(E) RATHER THAN PROFIT BEFORE DISTINCT ITEMS OF OPERATING COSTS/REVEN UE SO THAT THE EFFECT OF SUCH VARYING BUSINESS MODELS MAY BE ELIMINATED TO FACILITATE A BETTER COMPARISON. THIS APPEARS TO BE THE REASON WHICH PERSUADED THE TRIBUNAL IN PARA 43 OF ITS ORD ER PASSED U/S. 254(1) OF THE ACT TO REJECT THE ASSESSEES CONTENTION FOR ADOPTION OF PROFIT BEFORE DEPRECIATION AS NUMERATOR AND INSTE AD ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 9 DIRECTING TO CONSIDER THE TRUE OPERATING PROFIT (I.E. PROFIT AFTE R DEPRECIATION). 7. COMING STRAIGHT TO THE LIS THAT IS INVOLVED IN THE APPEAL IS THE OBSERVATIONS OF THE TRIBUNAL IN PARA 44 OF ITS ORDER WHICH H AVE BEEN REPRODUCED ABOVE. HAVING REPELLED THE ASSESSEES C ONTENTION FOR ADOPTING PROFIT BEFORE DEPRECIATION IN PARA 43 OF ITS O RDER, THE TRIBUNAL ALSO REJECTED THE ASSESSEES ANOTHER CONTENTION IN T HE EARLIER PART OF PARA 44 THAT ADJUSTMENT, IF ANY, SHOULD BE M ADE IN ITS HANDS RATHER THAN THE COMPARABLES. IT WAS IN THE LATER PART O F THE PARA 44 THAT THE TRIBUNAL DIRECTED THAT IN CASE THE ASSESSEE IS ABLE TO ESTABLISH THAT THERE IS MATERIAL DIFFERENCE IN THE CLAIM OF DEPRECIATION BY THE ASSESSEE VIS--VIS THE COMPARABLES, THEN SUITABLE ADJUSTMENT MAY BE ALLOWED IN THE HANDS OF COMPARABLE S AFTER DUE VERIFICATION BY THE AO/ TPO. 8. NOW THE QUESTION IS ABOUT THE RELEVANCE OF THE DIRE CTION OF THE TRIBUNAL IN PARA 44 OF ITS ORDER, BY WHICH THE MATTER WAS SE NT BACK TO THE AO/TPO AND THE ASSESSEE WAS DIRECTED TO ESTABLISH THAT THE RE WAS MATERIAL DIFFERENCE IN THE CLAIM OF DEPRECIATION BY THE ASSESSEE VIS--VIS COMPARABLES. IN THIS REGARD, IT IS APT TO NOTE THAT SUB- CLAUSE (III) TO RULE 10B(1)(E) PROVIDES FOR ADJUSTING THE PRO FIT MARGIN OF COMPARABLES DUE TO DIFFERENCES, IF ANY, BETWEEN THE ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 10 INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS ETC. WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. SUCH AN ADJUSTMENT CAN BE SOUGHT AND GRANTED WHE N TWO OTHERWISE EVENLY POISED ENTITIES HAVE DIFFERENT INTERNAL ECONOMIC POLICIES INFLUENCING THEIR OPERATING PROFITS. 9. THE VERDICT OF THE TRIBUNAL ALLOWING GRANTING AN ADJUS TMENT ON ACCOUNT OF MATERIAL DIFFERENCE IN THE CLAIM OF DEPRECIATION BY THE ASSESSEE VIS--VIS COMPARABLES IS TO BE SEEN IN THE BACKDROP OF ITS ORDER IN ENTIRETY, MORE SPECIFICALLY PARA 40 OF ITS ORDER , WHERE THE TRIBUNAL ACKNOWLEDGED: ` THAT THE DIFFERENCES IN AMOUNTS OF DEPRECIATION IN CASE OF TESTED PARTY VIS--VIS COMPARABLES DU E TO DIFFERENT DEPRECIATION RATES CALLED FOR APPROPRIATE ADJUSTMENT . THE OVERT EMPHASIS OF THE TRIBUNAL IN REMITTING THE MATTER TO THE AO/TPO WAS TO ENABLE THE ASSESSEE TO ESTABLISH ITS CASE ABOUT MATERIAL DIFFERENCES IN THE CLAIM OF DEPRECIATION NOT IN ABSOLUTE TERMS OR AS A PERCENTAGE OF W.D.V. BUT BECAUSE OF DIFF ERENT RATES OF DEPRECIATION ON SIMILAR ITEMS OF ASSETS. THIS IS FURTHER FO RTIFIED FROM THE FACT THAT THE TRIBUNAL TOOK NOTE OF THE ASSESSEES CONTENTION THAT ITS RATE OF DEPRECIATION TO AVERAGE W.D.V. WAS 17.97% AS AGAINST 12.07% OF THE COMPARABLES IN PARA 44 ITSELF. IF ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 11 THE INTENTION OF THE TRIBUNAL HAD BEEN TO GRANT ADJUSTMENT IN THE WAY AS HAS BEEN MADE OUT BY THE ASSESSEE, IT WOULD HAVE ITSELF ORDERED TO GRANT IT SINCE THE REQUISITE FIGURES FOR ENABLING SUCH AN ADJUSTMENT WERE ALREADY BEFORE IT. IT IS THUS EVIDENT THAT THE DIRECTION OF THE TRIBUNAL WAS TO ALLOW ADJUSTMENT ON ACCOUNT O F MATERIAL DIFFERENCE IN DEPRECIATION BECAUSE OF DIFFERENCE IN RATES OF DEPRECIATION ON SIMILAR ASSETS AND NOT OTHERWISE. 10. WE HAVE NOTED ABOVE THAT RULE 10B(1)(E) REQUIRES CONSIDERATION OF OPERATING PROFIT AND NOT PROFIT BEFORE INDIVIDU AL ITEM(S) OF CERTAIN OPERATING COSTS. THE LOGIC IS THAT THE EFFECT OF INDIVIDUAL ITEMS OF EXPENSES PER SE DO NOT DEPICT COMPLETE PICTURE OF PROFITABILITY. THAT IS WHY, A SIMPLE HIGH OR LOW INDIVIDUAL ITEMS OF EXPENSES OR INCOME DO NOT ORDINARILY CALL FOR ADJUSTMENT U NLESS THERE IS SOME MATERIAL DIFFERENCE, IN PRINCIPLE, ON RECOGNIZING THEM. CONTINUING WITH THE ABOVE EXAMPLE OF HAVING OWN BUILDING VERSUS RENTED PREMISES, LET US SUPPOSE THAT TWO ENTERPRISE S ARE EVENLY PLACED IN ALL RESPECTS EXCEPT OWN BUILDING AND RENTED BUILDING. FURTHER SUPPOSE THAT DEPRECIATION ON ALL ITEMS OF MACHINERY ETC. IN BOTH THE ENTERPRISES IS RS.100. IN CASE OF AN ENTERPRISE HAVING OWN BUILDING WITH DEPRECIATION OF RS.20, ITS TOTAL DEPRECIATION COST WILL RISE TO RS.120. ON THE OTHER HAND, THE ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 12 ENTERPRISE HAVING RENTED BUILDING, WILL BE ALBEIT HAVING DEPRECIATION COST OF RS.100, BUT BY INCURRING RENT COST OF R S.20, OPERATING PROFIT OF BOTH OF THEM REMAINS SIMILAR. IF THE CON TENTION OF THE FIRST ASSESSEE IS ACCEPTED FOR ALLOWING ADJUSTMENT ON ACCOUNT OF HIGHER DEPRECIATION OF RS.20 IN ISOLATION WITHOUT CONSIDERING OTHER OPERATING COSTS INCLUDING RENT, ITS PROFIT WILL BE NEEDLESS LY SKEWED BECAUSE ADJUSTMENT ON ACCOUNT OF ADDITIONAL DEPRECIA TION WITHOUT CONSIDERING THE ADDITIONAL COST OF RENT WILL DISTORT THE FIGURE OF OPERATING PROFIT AS A WHOLE AND PLACE THE TWO OTHE RWISE SIMILARLY SITUATED ENTERPRISES ON DIFFERENT PLATFORMS. 11. IN THE LIKE MANNER, ONE ASSESSEE MAY BE HAVING ITS OWN MANUFACTURING SET UP INCURRING HUGE AMOUNT OF DEPRECIATION W HILE ANOTHER MAY BE OUTSOURCING MAJOR MANUFACTURING ACTIVITY ON JOB BASIS. ADDITIONAL DEPRECIATION COST INCURRED BY THE FIRST ASSES SEE WILL COUNTERBALANCE ADDITIONAL JOB CHARGES INCURRED BY THE OTHER . THAT IS THE REASON FOR NOT ALLOWING ANY ADJUSTMENT ON ACCOUN T OF ITEMIZED DIFFERENCES. TAKE ANOTHER CASE OF A NEWLY PURCHA SED ASSET YIELDING DE MINIMIS REPAIR COST WITH HIGHER AMOUNT OF DEPRECIATION IN INITIAL YEARS. ON THE OTHER HAND, ANOTHER ASSESSEE USING THE SAME ASSET PURCHASED A COUPLE OF YEARS AGO WILL ENTAIL MORE REP AIR COST BUT LESS DEPRECIATION. THE EFFECT OF HIGHER DEPRECIATION COST IN THE ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 13 FIRST CASE IS ABSORBED BY THE HIGHER AMOUNT OF REPAIR COST IN THE OTHER, THEREBY GIVING LEVEL PLAYING OPERATING PROFIT OF BOTH THE ENTERPRISES. IN ALL SUCH CASES, LODGING A CLAIM FOR ADJUSTME NT IN THE OPERATING PROFIT TOWARDS HIGHER AMOUNT OF INDIVIDUAL ITEMS OF OPERATING COSTS INCLUDING DEPRECIATION IN ABSOLUTE TERMS OR HIGH ER PERCENTAGE OF DEPRECIATION TO THE W.D.V., IS DESTRUCTIVE OF M AKING AN EFFECTIVE COMPARISON OF OPERATING PROFIT RATE OF TWO ENTITIE S. 12. HOWEVER, AN ADJUSTMENT IN TERMS OF SUB-CLAUSE (III) OF RULE 10B(1)(E) MAY BE WARRANTED WHEN THERE IS A DIFFERENCE IN RECORDING CERTAIN EXPENSES, ON PRINCIPLE. IN OUR CONTEXT, SUCH A SITUATION WILL ARISE WHEN THERE IS DIFFERENCE IN THE RATES OF DEPRECIATION ON SIMILAR ASSETS CHARGED BY THE ASSESSEE AND COMPARABLES AND NOT WHEN THERE IS DIFFERENCE EITHER IN THE AMOUNTS OF DEPRECIATION SIMPLICITOR OR ANY RATIO OF DEPRECIATION WITH EITH ER W.D.V. OR ANOTHER BASE. TO PUT IT SIMPLY, DEPRECIATION AD JUSTMENT IN THE COMPUTATION OF OPERATING PROFIT CAN BE ALLOWED ONLY WHEN THE RATES AT WHICH THE ASSESSEE CHARGED DEPRECIATION ON FIXED ASSETS ARE AT VARIANCE WITH RATES AT WHICH THE CHOSEN COMPARABLES CHARGED DEPRECIATION. TO CITE AN EXAMPLE, IF THE ASSESSEE HAS CLAIME D DEPRECIATION ON A PARTICULAR ITEM OF ASSET AT 25% AND THE COMPARABLE HAS CLAIMED DEPRECIATION ON THE SAME ITEM OF ASSET AT ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 14 15%, IT IS THEN THAT AN ADJUSTMENT WILL BE REQUIRED IN THE OPERA TING PROFIT OF THE COMPARABLE ON ACCOUNT OF LOWER RATE OF DEPRE CIATION ON SUCH ITEM OF ASSET AT 10% IRRESPECTIVE OF THE AMOUNT OF DEPRECIATION ON SUCH ASSET OR THE OVERALL PERCENTAGE OF DEP RECIATION TO THE VALUE OF ASSETS. 13. ADVERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THE TR IBUNAL DIRECTED THE ASSESSEE TO ESTABLISH ITS CASE OF MATERIAL DIFFERE NCE OF DEPRECIATION BEFORE THE AO/TPO. THE ASSESSEE AGAIN PROCEE DED ON THE SAME PREMISE BEFORE THE AUTHORITIES AS WAS ITS REJECTED CA SE BEFORE THE TRIBUNAL THAT ITS RATIO OF DEPRECIATION TO AVERAGE W .D.V. WAS HIGHER THAN THE COMPARABLES. AS AGAINST THAT, THE ASSE SSEE OUGHT TO HAVE DEMONSTRATED DIFFERENCE IN THE RATES OF DEPRE CIATION CHARGED BY IT VIS--VIS THE COMPARABLES FOR SEEKING ANY ADJUSTMENT ON THIS SCORE. THE LD. AR SUBMITTED THAT SUCH A DATA PORTRAYIN G DIFFERENCE IN RATES OF DEPRECIATION CAN BE COMPILED VERY EA SILY AND HENCE REQUESTED FOR GRANTING ONE MORE OPPORTUNITY FOR MAK ING OUT A CASE ON THE ABOVE LINES BEFORE THE AUTHORITIES BELOW. IN VIEW OF THE FOREGOING DISCUSSION AND MORE SPECIFICALLY BECAUSE OF R EMAND ORDER IN THE FIRST ROUND OF PROCEEDINGS ON THIS COUNT, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE IN THE INTEREST OF JUSTICE IF TH E IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO TH E FILE OF ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 15 AO/TPO FOR DECIDING THIS ISSUE AFRESH IN THE LIGHT OF NEW CALCULATION SHEET(S) WHICH THE ASSESSEE IS CONTEMPLATING TO FILE DEPICTING DIFFERENCE IN THE RATES OF DEPRECIATION BY THE ASSES SEE AS WELL AS COMPARABLES WARRANTING ADJUSTMENT, IF ANY. WE ORDER ACCORDINGLY. IT IS MADE CLEAR THAT THE ONUS TO PROVE THE D IFFERENCE IN RATES OF DEPRECIATION BETWEEN THE ASSESSEE AND COMPARA BLES WILL OBVIOUSLY BE UPON THE ASSESSEE, WHO IS CLAIMING SUCH AN ADJUSTMENT AND ALSO ONCE THIS EXERCISE IS UNDERTAKEN, IT NEED S TO BE GIVEN A LOGICAL CONCLUSION ACROSS THE BOARD NOTWITHSTANDING THAT IT MAY LEAD TO HAVING ADVERSE IMPACT IN SOME COMPARABLES, WH ERE THE RATE OF DEPRECIATION CHARGED MAY BE LOWER THAN THAT OF THE ASSESSEE. HOWEVER, SUCH AN EXERCISE SHOULD NOT PUT THE ASSESSEE IN MORE PREJUDICIAL POSITION THAN IN WHICH IT IS BEFORE CARRYING OUT SUCH AN ADJUSTMENT. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED REASONABLE OPPORTUNITY OF HEARING. A.Y. 2008-09 : 14. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES FOR THIS YEAR ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF THE PRECEDING YEAR. FOR THIS YEAR ALSO, THE TRIBUNAL REJECTED THE ASSESSEES CONTENTION OF HAVING PBDIT AS NUMERATOR IN ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 16 DETERMINING THE ALP UNDER THE TNMM AND ALSO RESTORED THE MATTER TO THE AO/TPO GIVING SIMILAR DIRECTION AS WAS GIVEN FOR THE A.Y. 2007-08. THE ASSESSEE DID NOT FURNISH ANY DATA OF RATE WISE DIFFERENCE ON ASSETS AS CLAIMED BY IT AND THE COMPARABLE S. THE LD. CIT(A) ALSO FOLLOWED THE VIEW TAKEN BY HIM FOR THE A.Y. 20 07-08. HAVING SIMILAR REQUEST FROM THE LD. AR AND FOLLOWING THE VIEW TAKEN HEREINABOVE FOR THE IMMEDIATELY PRECEDING YEAR, WE SET-ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR DECIDING THIS ISSUE AFRESH IN ACCORDANCE WITH OUR OBSERVATION S MADE ABOVE. 15. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED FOR STATISTICA L PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH DECEMBER, 2020. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 17 TH DECEMBER, 2020 ITA NOS.1198 & 1501/PUN/2018 M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED 17 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. THE PR.CIT-5, PUNE , , C / DR C, ITAT, PUNE 6. / GUARD FILE / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 15-12-2020 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 17-12-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *