Cost of Goods Cannot be Included in Denominator of PLI while Computing Net Profit Margin u/s 10(B)(1)(e) of Income Tax Act: ITAT [Read Order]

The New Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the cost of goods cannot be included in the part of Profit Level Indicator (PLI) while computing the net profit margin under section 10(B)(1)(e ) of the Income Tax Act,1961. 

ADM Agro Industries Kota & Akola P. Ltd, the appellant assessee was a resident corporate entity and engaged in the following streams of activities : 

(i). Trading Activity: In this segment, the assessee undertakes physical trading of agricultural commodities, such as sorghum, barley, wheat, oilseeds, yellow peas, etc. 

(ii). Merchanting trades: In this segment, the assessee undertakes merchanting trade in agricultural commodities under the Foreign Exchange Management Act and guidelines issued by the Director General of Foreign Trade (DGFT). 

The assessee appealed against the order passed by the Transfer Pricing Officer (TPO) for disallowing the claim filed by the assessee. 

Ajay Vohra and Ananya Kapoor, the counsels for the assessee contended that the assessee furnished a detailed reply opposing the adoption of Operating profit (OP) or Operating Cost (OC) as PLI on the ground that since the comparables are in business auxiliary services, they do not have any cost of goods, hence, the assessee had taken the Value Added Tax (VAT) as the PLI after reducing the cost of goods. 

It was further submitted that the assessee had computed its profit margin by applying operating profit as the PLI. While doing so, the assessee has excluded the cost of goods from the denominator of PLI and the assessee cannot have a different PLI. 

Rajesh Kumar, the counsel for the revenue relied on the decisions made by the lower authorities and contended that while the PLI of the comparables was Operating Profit(OP)/Operating cost(OC) and the PLI of the assessee was operating profit. 

It was further submitted that the assessee had not provided any justifiable reason why the PLI different from the PLI of the comparables was taken by the assessee. 

The two-member bench comprising G.S. Pannu (President) and Saktijit Dey ( Judicial) directed the assessing officer to re-adjudicate the computation of Arm’s Length Price (ALP) by applying Profit Level Indicator (PLI) of operating profit to value-added cost, excluding the cost of goods while allowing the appeal filed by the assessee. 

To Read the full text of the Order CLICK HERE

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