$ * IN HIGH COURT OF DELHI AT NEW DELHI 21. + ITA 848/2015 PR COMMISSIONER OF INCOME TAX-3 ..... Appellant Through: Mr Rohit Madan, Senior Standing Counsel. versus FEDERAL MOGUL AUTOMATIVE PRODUCTS (INDIA) PVT LTD ..... Respondent Through CORAM: JUSTICE S.MURALIDHAR JUSTICE VIBHU BAKHRU ORDER % 06.11.2015 1. This appeal by Revenue is directed against order dated 25th March, 2015 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No.5769/Del/2011 for Assessment Year ( AY ) 2003-04. question urged by Revenue is whether Commissioner of Income Tax (Appeal) [CIT(A)] erred in accepting plea of Assessee that provision for stock obsolescence/inventory for sum of Rs.2,53,06,608/- should be excluded from net operating expenditure of Assessee for determining net operating margin since it was abnormal and extraordinary ITA 848/2015 Page 1 of 4 expenditure? 2. perusal of order of CIT (A) in this case reveals that Assessee applied Transactional Net Margin Method to import of raw material from its associated enterprise. Assessee undertook transfer pricing study of eight comparables with profit level indicator being operating margin on operating income. Since on such analysis, operating margin on operating income of Assessee (10.94%) was higher than arithmetic mean of weighted average margins earned by comparables (8.04%), Assessee contended that international transactions between it and its AEs were at arm s length. 3. Transfer Pricing Officer (TPO) re-computed net operating margin and included provision for obsolescence in sum of Rs. 2,53,06,608 as part of operating expenditure of Assessee. As result, difference of Rs.1,81,79,699 in net operating margin was attributed to import of raw materials and accordingly, TPO made downward adjustment to value of import of raw materials by Assessee from its AE. 4. CIT (A) after analysing stock obsolescence to sales ratio for comparables found that none of comparable companies, except Kirloskar ITA 848/2015 Page 2 of 4 Oil Engines Ltd. (KOEL) had made any provision for stock obsolescence/non-moving inventory. In case of KOEL, provision for stock obsolescence was only 1.03% of its sales whereas it was 8.98% as far as Assessee was concerned. CIT (A) also noted that mean of revised margin of comparable companies after considering provision for non-moving inventory as non-operating expenses was 8.17% as compared to 10.85% in case of Assessee. CIT(A) accepted plea of Assessee that since provision for stock obsolescence was abnormal and extraordinary in nature, it was required to be excluded for cost of Assessee in computing its operating margin. Since said item occurred only in KOEL, CIT (A) was of opinion that its margin needed to be re-worked. rationale for this was that same treatment had to be accorded to tested party i.e. Assessee and its comparables. Since Assessee s ALP was above margin of comparables, proviso to Section 92 C (2) of Act was held not to apply. 5. Having heard learned counsel for Revenue, Court is unable to discern any legal infirmity in approach of CIT (A) which was upheld by ITAT in impugned order. It is sought to be suggested that Assessee makes provision for stock obsolescence year after year and, ITA 848/2015 Page 3 of 4 therefore, this could not be treated as extraordinary or non-recurring . However, when one peruses order of CIT (A) it is seen that question was not whether Assessee was claiming it only as one-time measure but whether it was gaining any undue advantage in using this device as measure for avoiding tax. Ultimately, entire exercise of determining ALP for international transactions is to ensure that there is no avoidance of tax by Assessee by resorting to accounting device. Court is unable to hold that provision made for stock obsolescence by Assessee resulted in any undue advantage to it. comparability analysis undertaken by CIT (A) which has been affirmed by ITAT does not suffer from any legal infirmity. 6. No substantial question of law arises. appeal is dismissed. S.MURALIDHAR, J VIBHU BAKHRU, J NOVEMBER 06, 2015 MK ITA 848/2015 Page 4 of 4 PR COMMISSIONER OF INCOME TAX-3 v. FEDERAL MOGUL AUTOMATIVE PRODUCTS (INDIA) PVT LTD