2017 (4) TMI 1585 - AT - Income Tax

Tribunal adjusts customs duty & forex fluctuations in transfer pricing, rejects comparables based on product quality.

The Tribunal partially allowed the assessee's appeal, directing the Assessing Officer to make adjustments for customs duty and forex fluctuations in ... TP Adjustment - disallowance of customs duty payment - contention of the ld.A.R is that TPO erred in including 30% of the customs duty as part of the operating cost of the assessee to determine the ratio of operating profit to sales - contention of the assessee company is that it is in initial year of operations has been considered and the customs duty adjustment was provided to the assessee company - HELD THAT:- It has to be noted that the assessee has not excluded the customs duty in the comparables. To bring in uniformity, the customs duty was eliminated in the comparable also. The import percentage in the Comparables comes to 30% and this 30% was excluded from the assessee’s customs duty to weed out the difference between the assessee company and the comparables. TPO observed that while requesting for customs duty adjustment, the assessee had stated that they need to import because their customers are into highly engineered products and find applications in automobiles and they require an exact made to specification product and hence good calendaring process is required and the assessee company is in initial year of operations. The price reduction claimed for such high engineered products cannot be believable because from the submissions it can be gathered that the assessee company is operating in a special niche zone. The assessee company has not submitted any competitive factors that compelled them to sell their products at lesser price, than their production cost. The higher production of the assessee company than that of the comparables would also be one of the reasons for such price reduction since normally any company would not like to store the goods for longer time, which will affect their working capital. The fact that the assessee company had imported the calendared product from their AE has to be taken into account in this regard. Even though the assessee company argues that their profitability had reduced due to the sales factors, actually it is not so. The assessee has not submitted any valid documentary evidences to substantiate their claim. Hence, the TPO rejected the claim of assessee.DRP observed that the assessee submitted the computation of the ratio of operating profit to sales to arrive at the profit level indicator of the assessee. In the same, the assessee excluded the customs duty of ₹ 4.31 crores as this was a variation with materially different facts listed below and hence excluded.A.R submitted that 90% of the raw materials of the assessee are imported as such customs duty adjustments to be made and it includes ₹ 4.31 crores pertained to the customs duty in the manufacturing segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd.[2016 (8) TMI 1423 - ITAT CHENNAI] Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the isuse to the file of AO for fresh consideration. Excluding Forex gain from the Profit Level Indicator (PLI) by the assessee - According to TPO, as per assessee, forex loss arises only due to sales or purchase activities which are revenue in nature are not classified as a part of the operating expenses - Now the assessee is coming with the fresh submissions that their import percentage is higher and their export percentage is lower than that of the comparables - HELD THAT:- In our opinion, forex fluctuations loss in the operating cost of the assessee and also forex gains in the operating income of assessee, both to be excluded from the operating expenses as well as operating income respectively in view of the Order of Tribunal in the case of Motonic India Automotive Pvt. Ltd.[2016 (8) TMI 1423 - ITAT CHENNAI] Accordingly, this issue is remitted to the file of AO for fresh consideration. Rejection of certain comparables - HELD THAT:- We are of the opinion that if the product of the comparables selected by the TPO is not comparable with the assessee’s product, it cannot be considered. In the case of Gujarat Reclaims and Rubber Products Ltd., the raw material used by the assessee is a re-cycled from worn out tyres and tread peelings. Being so, the product of that comparable is inferior to the assessee’s product, hence it cannot be compared to the assessee’s case. Regarding Victor Gaskets India Ltd., the assessee wants to include it. Its annual report shows that the company exited out of asbestos based products in totality at its manufacturing location, thus completing a strategic plan to go asbestos free. Being so, it cannot be considered as comparable to assessee’s case. Rejection is justified. Issues Involved:1. Disallowance of customs duty payment.2. Exclusion of Forex gain from the Profit Level Indicator (PLI).3. Rejection of certain comparables.Issue-wise Detailed Analysis:1. Disallowance of Customs Duty Payment:The assessee contended that the Transfer Pricing Officer (TPO) erred by including 30% of the customs duty as part of the operating cost to determine the operating profit to sales ratio. The assessee highlighted that their business model, which involved importing 99% of raw materials due to the specialized nature of their products, was materially different from the comparables, which had an average import content of 29%. The assessee referenced the Tribunal decision in M/s. Skoda Auto India Private Limited, which allowed for customs duty adjustments in the initial years of operations. The TPO, however, rejected this claim, arguing that the assessee had not provided sufficient evidence to substantiate the need for such adjustments. The Dispute Resolution Panel (DRP) also rejected the adjustment based on the decision in the case of Sony India. The Tribunal, referencing the case of Motonic India Automotive (P.) Ltd. and other precedents, directed the Assessing Officer (AO) to provide suitable adjustments against the customs duty component while determining the Arm's Length Price (ALP).2. Exclusion of Forex Gain from the Profit Level Indicator (PLI):The assessee argued that forex losses should not form part of the operating items and should be excluded from the margin computation. The TPO initially disagreed, stating that forex losses due to sales or purchase activities should be considered part of the operating expenses. The DRP, however, agreed with the assessee, directing the TPO to exclude forex restatement losses from the PLI calculations. The Tribunal supported this view, citing the case of Motonic India Automotive Pvt. Ltd., and remitted the issue to the AO for fresh consideration, directing the exclusion of both forex losses and gains from operating expenses and income respectively.3. Rejection of Certain Comparables:The assessee challenged the rejection of Gujarat Reclaims and Rubber Products Ltd. and Victor Gasket as comparables. The assessee argued that Gujarat Reclaims used low-quality raw materials, making it incomparable to the assessee’s high-quality products. The Tribunal agreed, stating that products made from recycled materials could not be compared to the assessee’s products. Regarding Victor Gaskets India Ltd., the Tribunal noted that the company had exited asbestos-based products, making it non-comparable to the assessee’s operations. Consequently, the Tribunal upheld the rejection of these comparables.Revenue’s Appeal:The Revenue raised issues regarding the DRP's direction to exclude forex losses from the operating costs. The Tribunal found the Revenue's appeal infructuous in light of the findings in the assessee’s appeal.Conclusion:The Tribunal partially allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The Tribunal directed the AO to make suitable adjustments for customs duty and forex fluctuations while determining the ALP, and upheld the rejection of certain comparables based on the quality and nature of products.