2016 (4) TMI 1125 - AT - Income Tax

Tribunal ruling: Excluding non-operating expenses from profit calculation, limiting segment adjustment to intl transactions.

The Tribunal partly allowed the appeal, directing the exclusion of non-operating expenses (derivative losses) from the Profit Level Indicator calculation. ... Non exclusion of non-operating expenses i.e. interest and finance cost while calculating the profit level indicator (“PLI”) i.e. Operating Margin to Operating Expenses of the Appellant - Held that:- The TPO noted that the Dispute Resolution Panel (DRP), Pune vide order passed under section 144C(5) of the Act relating to assessment year 2007-08, dated 20.05.2011 had directed to exclude the import licence fees of ₹ 4.54 crores from the segmental profit and proportionate unallocated expenses shown for working out PLI of comparables. However, the figure of segmental revenue of ₹ 86.97 crores was taken from Annual Report of ADF Foods Ltd., which did not include the income from import of licence. After looking at the figures of M/s. ADF Foods Ltd., the TPO observed that the income from import of licence was not at all taken into account for working out the PLI and as such the assessee’s request to calculate PLI was found to be not accepted. Further, the claim of the assessee to exclude derivative losses from operating losses was also held to be not correct because the same was part of business and hence, could not be excluded from the expenses. Even in the case of comparable companies i.e. M/s. ADF Foods Ltd., there was derivative loss of ₹ 18.28 lakhs and the same was considered as part of operating expenses, while working out the PLI on segmental profit. Exclusion of bad debts as sundry balances written off from the operating expenses on the ground that the same relates to domestic sales was also refused as the assessee had not furnished complete details in support of its claim. Direction to Assessing Officer / TPO to exclude derivative losses from the operating expenses of tested party i.e. the assessee before us and also from the operating expenses of comparable M/s. ADF Foods Ltd. while working out the PLI of both the concerns. Computation of PLI - Held that:- While computing the PLI of concern of costs, which are relatable to carrying on of the business are to be considered as part of operating margins / operating expenses. Only such items which are not relatable to carrying on of business are to be excluded while computing the operating margins / operating expenses of the assessee, in turn, working out the PLI of the company. The assessee before us has claimed that the non-operating expenses of interest on finance cost needs to be excluded while calculating PLI of the assessee company. The perusal of Profit & Loss Account of the assessee company shows that the major revenue is from business carried on by the assessee and some part of the income is shown as other income. We find no merit in the claim of the assessee that the interest on finance cost is to be excluded while calculating PLI of the assessee company being non-operating expenses. The assessee has failed to furnish the complete details in this regard and in the absence of the same, we reject the claim of the assessee. Issues Involved:1. Exclusion of non-operating expenses (provision for loss on derivative contracts) in calculating the Profit Level Indicator (PLI).2. Inclusion of entire Ready to Serve (RTS) segment for PLI calculation.3. Adjustment to RTS segment restricted to international transactions.4. Incorrect operating margin of comparable company (ADF Foods Limited).5. Adjustment for underutilization of capacity.6. Disallowance of sundry balances written off.7. Levying interest under section 234B.8. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Exclusion of Non-Operating Expenses:The assessee argued that the provision for loss on derivative contracts should be excluded from the operating expenses while calculating the PLI. The Tribunal observed that the derivative loss was related to External Commercial Borrowings (ECB) and not directly to international transactions. It was noted that the assessee had not claimed this loss in the final computation of income, thus it should not be included in the operating expenses. The Tribunal directed the Assessing Officer (AO) to exclude the derivative losses from both the assessee and the comparable company (ADF Foods Ltd.) while calculating the PLI.2. Inclusion of Entire RTS Segment for PLI Calculation:The issue was whether the entire RTS segment should be considered for PLI calculation or only the international transactions. The Tribunal referred to the previous year’s decision and held that the transfer pricing adjustment should be made only with respect to international transactions and not the entire RTS segment. The matter was remitted back to the AO for verification and recomputation.3. Adjustment to RTS Segment Restricted to International Transactions:Similar to the second issue, the Tribunal reiterated that the transfer pricing adjustment should be restricted to international transactions. The AO was directed to recompute the adjustment after verification.4. Incorrect Operating Margin of Comparable Company (ADF Foods Limited):The assessee pointed out discrepancies in the operating margin of ADF Foods Ltd. The Tribunal directed the AO to verify and adopt the correct margins for benchmarking the international transactions.5. Adjustment for Underutilization of Capacity:The assessee claimed an adjustment due to underutilization of capacity. The Tribunal referred to its previous decision and agreed in principle that such an adjustment should be allowed. The matter was remitted back to the AO for verification and recomputation.6. Disallowance of Sundry Balances Written Off:The assessee did not press this issue, and thus, it was dismissed as not pressed.7. Levying Interest under Section 234B:The assessee did not press this issue, and thus, it was dismissed as not pressed.8. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee did not press this issue, and thus, it was dismissed as not pressed.Additional Ground: Exclusion of Non-Operating Expenses (Interest and Finance Cost):The assessee argued that interest and finance costs should be excluded from operating expenses while calculating the PLI. The Tribunal found no merit in this claim due to the lack of complete details and dismissed the additional ground.Conclusion:The appeal was partly allowed, with several issues remitted back to the AO for verification and recomputation, while some claims were dismissed either due to lack of merit or being not pressed by the assessee.