Ge India Industrial (P) Ltd.,, Nadiad vs Department Of Income Tax on 26 June, 2015

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TPO that th international transactions relating to manufacturing activity were not at arms length price because the TNMM method was selected as most appropriate method and PL1 margin of tested party was worked out to (-) 7.81%(OP/Sales) whereas the PL1 margin of the comparables selected by the assessee was 6.78%(OP/Sales). Since the difference between PLI margin of the tested party and the comparables was beyond 5% variation, the adjustment was worked out to Rs. 15,23,80,530/-. However, the value of international transaction shown by the assessee was Rs.12,12,69,639/-, therefore TPO did not adopt this amount of Rs.15.23 crores for adjustment. The TPO observed that the cost of raw material was a major cost affecting the profit of the assessee and the TPO removed the raw material cost from the assessee as well as the comparables to arrive at the adjusted value of total purchases. However, the TPO did not exclude the value of raw material purchased from AE as the same was at ALP as per 3CEB report and the entire exercise was being carried out to find out whether the value as per 3CEB is at ALP or not. The TPO worked out the margin of raw material to sales in the case of comparables which was worked out to 49.38%, whereas the margin of raw material with sales in the case of assessee was worked out to 67.88%. Thus it was found that cost of raw material of the assessee was more by 18.50% as compared to comparables. Accordingly the adjustment was made to the cost of raw material of the assessee and the OP/Sales margin of the assessee was worked out to 4.75%, whereas the ALP margin was 6.78%. After applying the ALP profit margin, the ALP cost of material was worked out to Rs. 10,01,14,028/- and after allowing the +7-5% variation, this figure was arrived at Rs. 10,51,19,729/-, whereas the value of international transaction was Rs.12,12,69,639/-. Since the value of international transaction was beyond the benefit +/-5%, the downward adjustment of Rs.2,11,55,611/-( 12,12,69,639/- (-) 10,01,14,028/-) was made by the TPO.

The assessee has claimed that the adjusted margin (OP/Sales) of the comparables after allowing the adjustment for difference in cost of material, the arithmetic mean of adjusted OP/Sales comes to (-) 11.73% as per the methodology adopted by TPO in AY 2005-06 whereas the PLI margin of the assessee is (-) 7.81% and therefore the margin of the assessee is better than the comparables and hence the international transaction is at ALP. However, the CIT(A) has changed the methodology for working out the adjustment to be made to eliminate the differences on account of cost of raw material by taking the ratio of cost of raw material to total expenses to avoid the effect of profit involved in the sales. This methodology is discussed in the earlier para(underlined portion). The calculation of raw material adjustment of (-)2.54% is mentioned by the CIT(A) in the order u/s 154 dated 25.10.2012. A copy of relevant page of order u/s 154 is attached as per annexure-A. In view of the above, the ground raised by the assessee may be rejected.

TPO's comments:

The assessee has claimed that the adjusted operating margin of the appellant would be at 10.69%(OP/Sales) instead of 4.75% worked out by the TPO. The computation of 10.69% margin worked out by the assessee is reproduced as under:

Particulars                          Amount(lNR)    Amount(INR)

Income

Income from operations                              104,50,39,761

Expenditure

Total Expenses(Excluding      raw                   41,72,62,348
material cost)

Total material cost                  70,93,46,049

Less: Downward adjustment of 19,33,32,356           51,60,13,693
material cost of comparables
(104,50,39,761*18.50%)

Total expenditure(after adjustment                  93,32,76,041
for raw material cost)

Revised profit                                      11,17,63,720

Adjusted OP/Sales                                   10.69%

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"i.b. Assessee had taken OP/Sales as it PLI. The OP/Sales computed by the assessee is -7.81%. The calculation of margin of the assessee is as under:-

 Operating Income/Sales       1,045,039,761
             Total Expenses               1,126,608,397
             Operating Loss                (81,568,636)
             Operating Loss/Sales               -7.81%"

10. The TPO noticed that as per list of comparables provided by the assessee, the operating margin of the comparables was 6.78%, as under:-

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