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Advance Power Display Systems Ltd. Unit No.8 SDF, Seepz, Andheri (E), Mumbai 400 096 Vs. The DCIT Cir 8(1), Mumbai
November, 21st 2015
               ,                   Û `       ',  
             IN THE INCOME TAX APPELLATE TRIBUNAL
                  MUMBAI BENCHES "K", MUMBAI

     Before Shri Saktijit Dey, Judicial Member & Shri N K Billaiya, AM

                    ./ ITA No.1653/Mum/2014
                    [ [ / Assessment Year 2009-10

Advance Power Display Systems                    The DCIT Cir 8(1),
Ltd.                                             Mumbai
Unit No.8 SDF, Seepz,                      Vs.
Andheri (E), Mumbai 400 096
PAN AAACA5970G
      ( /Appellant)                                   (×/Respondent)


              Appellants By        : Shri Y P Trivedi & Ms. Usha Dalal
              Respondent By        : Shri N K Chand


     /                                         /
Date of Hearing :16.11.2015.                Date of Pronouncement : 20.11.2015

                                    / O R D E R

Per N K Billaiya, Accountant Member:

       This appeal by the assessee is directed against the assessment order dated
20.01.2014 made u/s. 143(3) r.w.s. 144C(13) of the Act. The assessee is aggrieved
by the transfer pricing adjustment of Rs.13,46,11,058/-.

2.     The assessee is an export oriented unit engaged in the business of electronic
manufacturing specializing in assembly and test of Switch Mode Power Supplies.

3.     During the year under consideration the assessee has entered into following
international transactions with its AEs:
                                           2
                                                                 ITA No.1653/Mum/2014
                                                      Advance Power Display Systems Ltd.

S.No.      Description     of      the      Associated         Amount      (Rs.   In
           transactions                     Enterprise         crores) A.Y. 2009-10
     1     Import of raw materials             QCS                     106.87
                                              QCSys                     6.84
     2     Export of finished goods           QCSys                    172.02
     3     Purchase of fixed assets             QCS                      1.07
                                               QC Sys                   0.2058


A reference was made to the TPO for the determination of arm's length price in
respect of international transactions entered into by the assessee as per the
provisions of law.

4.       During the course of transfer pricing proceedings, the TPO noticed that the
assessee has not produced any fresh transfer pricing Study Report but has relied
upon the transfer pricing study for F.Y 2007-08 relevant to A.Y. 2008-09 on the
ground that the assessee as well as the transactions as regards FAR analysis
essentially remained the same.        The TPO proceeded by this admission of the
assessee.




5.       The assessee was asked to submit the working of adjustment for the year
under consideration on the same lines as was done in AY 2008-09. The assessee
gave the working of the same comparable with updated margins for the current
year. The same comparables were adopted by the TPO in A Y 2008-09.

6.       The assessee has shown cost plus margin at 6.26%. The working of the
same read as under:

             Particulars                                   Amount (Rs.)
             Operating Income                               1,720,276,369
             Operating Cost
             Manufacturing expenses                        1,367,538,644
             Employee Cost                                   158,616,665
             General & Administrative expenses                49,326,000
             Depreciation                                     44,010,583
             Change of stock                                  13,000,532
             Foreign Exchange Fluctuation                     10,523,084
             Operating Costs                               1,643,015,508
             Less: Adj. for accelerate depreciation            9,004,050
             Adj. for Fixed cost                              16,669,851
                                         3
                                                              ITA No.1653/Mum/2014
                                                   Advance Power Display Systems Ltd.

           Tour Adjustment                                  25,673,901

           Adjusted operating cost                       1,617,341,607

           Operating profit                               102,934,762

           Cost plus margin                                     6.26%


The assessee was asked to justify the reasons for which adjustment of fixed cost
and accelerated depreciation should be allowed. The assessee filed detailed reply
vide letter dated 17.12.2012. The assessee's reply was two-fold; firstly, on account
of accelerated depreciation and secondly, on account of lower capacity utilization of
the assets. In so far as the claim of lower capacity of utilization is concerned, the
TPO followed the stand taken by the TPO in the earlier A.Y. i.e. 2008-09 and has
drawn support from the findings given for A.Y. 2008-09. The TPO dismissed the
claim of the assessee.

7.    In so far as the claim of adjustment for accelerated depreciation is
concerned, the TPO was of the firm belief that the adjustments, if any, have to be
made only to the margins of the comparable companies and not to the tested
parties as has been claimed by the assessee. The TPO rejected the claim on this
point also. The TPO proceeded by computing the margins of the tested parties
after rejecting the claim of the assessee and the same reads as under:

           Particulars                                  Amount (Rs.)
           Operating Income                             1,720,276,369
           Operating Cost
           Manufacturing expenses                         1,367,538,644
           Employee Cost                                    158,616,665
           General & Administrative expenses                 49,326,000
           Depreciation                                      44,010,583
           Change of stock                                   13,000,532
           Foreign Exchange Fluctuation                      10,523,084
           Operating Costs                              1,643,015,508

           Operating profit                                 7,72,60,861

           Cost plus margin                                       4.70%
                                          4
                                                                ITA No.1653/Mum/2014
                                                     Advance Power Display Systems Ltd.

8.      In so far as the comparables are concerned, the assessee has selected
following comparables as has been done in the earlier assessment year.

        Sr. No.   Name of the company                          OP/OC
            1     Alpha Transformers                             22.53
            2     BBC Fuba India                               -13.68
            3     Circuit Systems II                              6.26
            4     ECE Industries (seg)                            8.22
            5     Incap                                           5.28
            6     Toyama Electric                                 5.91
            7     Voltamp Transformers                          22.53
            8     Hyderabad Flextech                           -26.92

The TPO did not accept Hyderabad Flextech as a comparable company since it was
a perpetual loss making company.

9.      After excluding Hyderabad Flextech as a perpetually loss making comparable
and after considering the segmental profits of ECE on the basis taken during the
preceding A.Y. 2008-09, the profit is worked out @1.94% and the TPO concluded
by making the adjustment worked out as under:-

     Particulars                                        Amount (Rs.)
     Operating Income (A)                               1,720,276,369
     Operating Cost
     Manufacturing expenses                               1,367,538,644
     Employee cost                                          158,616,665
     General & Administrative expenses                       49,326,000
     Depreciation                                            44,010,583
     Change of stock                                         13,000,532
     Foreign Exchange Fluctuation                            10,523,084
     Operating Costs (B)                                1,643,015,508

     Operating profit (C)                                  7,72,60,861

     OP/OC (actual)                                              4.70%
     Arm's length OP/OC                                         9.14%
     Arm's length operating profit (D) = B x 9.14%         15,01,71,617
     Arm's length operating income (E)= D +B              179,31,87,125
     Adjustment = E - A                                     7,29,10,756


The TPO made an adjustment of Rs.7,29,10,756/-
                                           5
                                                               ITA No.1653/Mum/2014
                                                    Advance Power Display Systems Ltd.

10.    The matter was carried before the DRP. The assessee strongly objected to
the adjustments made by the TPO. The objections raised before the DRP were on
the same lines as were taken before the TPO.

11.    The contentions/objections of the assessee did not find favour with the DRP,
who was of the opinion that the DRP has already taken a view in the earlier
assessment year against the assessee.            However, on going through the
comparables, the DRP found that the TPO has considered BCC Fuba India Ltd., as a
comparable. The DRP observed that in AY 2003-04, this company was rejected as a
comparable by the Tribunal on account of the fact that it was showing persistent
losses. Accordingly, in exercise of powers vested upon the DRP u/s. 144C(8) read
with explanation, the DRP excluded this company from the final list of comparables
and issued necessary directions for the completion of the assessment. Following
the directions of the DRP an upward adjustment of Rs.13,46,11,058/- was made by
the AO. Aggrieved by which the assessee is before us.

12.    Before us the learned senior counsel presented his submissions, which were
three fold. Firstly, he strongly argued upon the point raised during the proceedings
before the lower authorities relating to installed capacity qua utilization capacity. It
is the say of the learned senior counsel that the installed capacity was 17 lacs
whereas the utilized capacity was much less because of which the fixed cost have
become very heavy. The learned counsel further pointed out that in support of this
contention the assessee had produced certificate from the Chartered Accountant,
which did not find any favour with the revenue authorities. The counsel further
stated that an identical issue was there before the Tribunal in A.Y. 2008-09 and the
Tribunal has restored the matter back to the file of the TPO with a direction to
examine the veracity of the assessee's contention about the installed capacity and
the actual utilization.

13.    Secondly, the learned senior counsel argued on the claim of accelerated
depreciation. It is the say of the learned counsel that the assessee wanted to re-
adjust the higher depreciation. This claim was also negated by the TPO and the
DRP. The counsel brought to the notice of the Bench the decision of the Tribunal in
                                          6
                                                              ITA No.1653/Mum/2014
                                                   Advance Power Display Systems Ltd.

A.Y. 2008-09, wherein the Bench has followed the findings of the co-ordinate Bench
in the case of Petro Araldite (P.) Ltd., 35 taxmann.com 590 in ITA No.
3782/Mum/2011.

14.   Thirdly, the counsel submitted his case on the selection of the final
comparables. It is the say of the counsel that one comparable was ignored by the
TPO while the DRP removed one more without referring the matter back to the
TPO. The counsel strongly relied upon the decision of the Hon'ble jurisdictional
High Court in the assessee's own case for A.Y. 2003-04.

15.   Per contra, the DR strongly supported the findings of the revenue authorities.
The DR objected to the claim of exclusion of two comparables. It is the say of the
DR that both the companies fail to pass the test of filter adopted by the assessee
itself. He further pointed out that both these companies viz., Hyderabad Flextech
Ltd. and BCC Fuba India Ltd are perpetual loss making companies and by assessee's
own filters these companies do not pass the test. Therefore, there is no reason why
these two companies should not be excluded.




16.   We have heard the rival submissions at length. We have given a thoughtful
consideration to the order of the authorities below and with the assistance of the
learned senior counsel we have considered the relevant documentary evidence
brought on record before us. In so far as the issue of capacity utilization qua actual
utilization is concerned, the same was considered by the Tribunal in the assessee's
own case in ITA No. 6490/Mum/2012 for A.Y. 2008-09. The issue finds place at
para 14, wherein the co-ordinate Bench has followed the principle laid down by the
Tribunal in the case of M/s. Petro Araldite (P.) Ltd. (supra). After discussing the
decision of the Tribunal in the case of Petro Araldite (P.) Ltd at length the Tribunal
finally came to the conclusion "in view of the above, the entire matter of transfer
pricing adjustment is restored to the file of the AO to deal and decide this issue
afresh and in accordance with the provisions of law and also after considering the
ratio of the aforesaid decisions of the Tribunal". Respectfully following the decision
of the co-ordinate Bench and following the rule of consistency, we restore the issues
                                          7
                                                              ITA No.1653/Mum/2014
                                                   Advance Power Display Systems Ltd.

relating to the transfer pricing adjustment to the file of the AO. The AO is directed
to decide the same in line with the directions given for A.Y. 2008-09.

17.    In so far as the claim of accelerated depreciation is concerned, this issue is
taken care of by the decision of the Tribunal for A.Y. 2008-09, which we have relied
upon and direct the AO to decide the issue for the year under consideration also
following the order for A.Y. 2008-09.

18.    In so far as the third contention relating to the exclusion of two comparables
viz. Hyderabad Flextech Ltd. and BCC Fuba India Ltd. is concerned, undisputedly,
these two companies are loss making companies as demonstrated by the learned
DR successfully.       However, the TPO excluded Hyderabad Flextech Ltd. and
considered BCC Fuba India Ltd. on the same ground that the company is loss
making; this is self contradictory and, therefore, in the interest of justice and fair
play, we restore this issue also to the files of the AO. The AO is directed to decide
the issue afresh after verifying whether these two companies are perpetual loss
making companies or have shown loss for the year under consideration only. The
assessee is directed to furnish all necessary details, which will include the under
utilization of capacity by the comparable, perpetual loss or otherwise made by the
two companies viz. Hyderabad Flextech Ltd. and BCC Fuba India Ltd. The AO is
directed to consider the details and decide the entire issue of transfer pricing
adjustment after giving a reasonable and fair opportunity of being heard to the
assessee.

19.    In the result, the appeal filed by the assessee is treated as allowed for
statistical purpose.

       Order pronounced in the open court on this 20th day of November, 2015.


                Sd/-                                                Sd/-
            (Saktijit Dey)                                      (N K Billaiya)
Û è/JUDICIAL MEMBER                              è/ ACCOUNTANT MEMBER
 Mumbai;  Dated : 20th November, 2015.

SA
                              8
                                                ITA No.1653/Mum/2014
                                     Advance Power Display Systems Ltd.



         /Copy of the Order forwarded to :

1.     /The Appellants.
2.    × / The Respondent.
3.     È() / The CIT(A), Mumbai.
4.     È / CIT
5.     ,   ,  / DR, `K' Bench, ITAT, Mumbai

                                   / BY ORDER,

        ×  //True Copy//

                             /  (Dy./Asstt. Registrar)
                              ,  / ITAT, Mumbai

 
 
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