TaxTMI 
TaxTMI 
2019 (3) TMI 554
X X X X Extracts X X X X
X X X X Extracts X X X X
....eals, the Revenue has raised multiple grounds of appeal, but at the time of hearing, we have carefully perused all the grounds raised by the Revenue. Most of the grounds raised by the Revenue, are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the Revenue. With this background, we summarize and concise the grounds raised by the Revenue as follows: Transfer Pricing Grounds (i).Ld.CIT (A) erred in deleting following additions made on account of Transfer Pricing adjustments by ignoring analysis done by Transfer Pricing Officer (TPO): (a).Arm`s Length Price adjustment for A.Y.200203 at Rs. 5,19,77,000/- (b).Arm`s Length Price adjustment for A.Y.200304 at Rs. 10,02,37,000/- Other Grounds (i).Ld CIT(A) erred in deleting provision for payment of gratuity under section 40A(7) of the Act and addition made on account of contribution to superannuation fund U/s 40A(9) of The Act. (a). Provision for gratuity u/s 40A(7), for A.Y.200203 Rs. 8,28,600/- (b). Provision for gratuity u/s 40A(7), for A.Y.200304 Rs. 20,71,870/- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....td. The assessee company,'EPCOS India Private Limited, is a subsidiary of EPCOS AG, Germany (EPCOS AG). The assessee company is inter alia engaged in the business of manufacture and sale of electronic component, namely, soft ferrites components. The soft ferrite components are widely used in entertainment electronics, telecommunication and industrial electronics industries.The assessee company filed its return of income for the assessment year 200304 on 28112003 declaring a loss to the tune of Rs. 15,35,09,431/. The determination of arm's length price of the international transactions was referred to the Ld. Transfer Pricing Officer (hereinafter referred to as the 'TPO') under section 92CA of the Act. The TPO directed following arm's length price (ALP) adjustments, under the Transactional Net Margin Method (TNMM') at the entity level, as under: (a).Arm`s Length Price adjustment for A.Y.200203 at Rs. 5,19,77,000/- (b).Arm`s Length Price adjustment for A.Y.200304 at Rs. 10,02,37,000/- 6. The assessee company entered into the following international transactions with its associated enterprises during the financial year ended 31st March, 2003: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ociated Enterprises buy or sell similar goods or services in comparable transaction with unrelated enterprises or when unrelated enterprises buy or sell similar goods or services, as is being done between Associated Enterprises. According to the OECD guidelines where it is possible to locate comparable uncontrolled transaction, CUP method is the most direct and reliable way to apply the arm's length principle. As a result,in such cases the CUP method is preferable over all other methods. Accordingly, the assessee applied the CUP method for determining the arm's length price of export of finished goods to its associated enterprises. However, the TPO rejected CUP as the most appropriate method to determine the arm's length price of export of finished goods to associated enterprises.The Ld.TPOalso rejected the RBI approval as benchmark to determine the ALP for payment of knowhew fees and considering TNMM as the most appropriate method for determining the ALP for technical knowhow fees/royalties. 7. Selection of comparable companies by assessee:The assessee carried outobjective search process in the Prowess database to identify independent comparablecompanies, whose func....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d operation of the enterprise affecting the controlled and uncontrolled dealings. It may be noted that the participants in an industry may not be uniformly affected by business and products cycles and therefore, difference between dealings may reflect differencein circumstances, not the effect of nonarm's length dealings. This approach of usingmultiple year data is consistent with the OECD guidelines on transfer price. According to the Para 3.44 of OECD guidelines, multiple year data should be considered in the TNMM for both the enterprise under examination and independent enterprises to the extent their net margin are being compared to take into account the effects on profits of products life cycles and shortterm economic condition.This also evident from the facts in the case of the assessee company. The Assesseecompanyincurred operating losses during the financial year ended 31 March 2003, due to change in economic and market conditions. There was a fall in the market of telecom business. As a result, the ferrite manufacturers shiftedtheir capacities from telecom sectors the electronic and lighting sectors.Assessee caters to the electronics and lighting sector. As a fall out,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Uncontrolled Price (CUP) method for determining arm's length price. (3) For payment of royalty (Item no. F), the RBI's approval has been considered as appropriate benchmark for determination of arm's length price. (4) For item No. G above, Interest paid on corporate loan, the RBI's approval has been considered as appropriate benchmark for determination of arm's length price. However, the ld TPO rejected the most appropriate method (MAM) adopted by the assessee and held as follows: (a) Application of comparable uncontrolled price method (CUP) in respect of export of soft ferrites to Associated enterprises (AE) is not acceptable in absence of any verifiable data. Even auditors of the assessee who prepared the transfer pricing report have not verified any data in this regard. Even during the proceedings, U/s 92CA (2) of the Act, the assessee did not provide evidence to support their claim that the goods sold by the assessee to its AE were then sold at the same price to the third party without any mark-up. Therefore, Ld TPO held that it is imperative to consider the transactions of export of soft ferrites under the last resort m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the following : "The data to be used inanalysing the comparability of an uncontrolled transaction with an International transaction shall be the data relating to the financial year. In which the international transaction has been entered Into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered, if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." It is evident that for determination of Arm's Length Price u/s 92C, the data to be used in analysing the comparability of an uncontrolled transaction with the International transaction, in general, has to be the data relating to the FY in which the International transaction was entered Into. A distinction needs to be drawn between data to be used for computation of arm's length price (Section 92C/Rule 10B) and the data used for supporting documentation maintained by the assessee (Section 92D/Rule 10D). For the purpose of documentation, assessee can use data which is existing latest by the specified date referred to in Clause IV of Section 92F i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions would be erroneous. 11. The ld TPO then examined the contention of assessee in respect of 14 companies selected as comparable in the TP report. These comparable companies were analyzed by TPO as follows:- (1) Sanmar Micropak Ltd This company's turnover is less than one tenth of assessee's turnover. It manufactures printed circuit boards at a very small scale level. Neither the product mix nor the size of this company can be compared with the assessee company. (2) Karnataka Hybrid Devices Ltd This company manufactures electrical equipment and the assessee company manufactures raw material for the electronics Industry. The activities performed by both are completely different. Moreover, the turnover of this company at 7 crores is significantly less than the assessee company. It cannot be compared with the assessee company. (3) SPEL Semiconductors Ltd. This company is in the business of manufacture of computer and related hardware. This is once again a consumer of ferrite based electronic components whereas the assessee is a producer/manufacturer of ferrite components. It cannot be compared with th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ferrites Ltd This company manufactures soft ferrite based electronic components and its turnover is also comparable to that of the assessee company. It is the closest comparable to the assessee company. Thus, TPO noted that out of 14 companies which were considered in the transfer pricing report by the assessee, only two can be taken as valid comparison for the assessee company. Other companies differ either because of incomplete turnover or in some cases the product mix is completely different. And also incomparable turnover and incomparable product mix signify incomparable economic circumstance in which the enterprises operate. 12. The ld TPO noted that the size of an enterprise is an important factor in determining comparability. Size as reflected by turnover, determines 'relative competitive positions by buyers and sellers' and is thus a significant economic condition which could affect prices or profitability. Similarly, the TPO noted that the product comparability also play no less a significant part in determining whether an enterprise can be considered for comparison. The ld TPO, based on the above observations noted that the closest comparable Companies ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....773 The Associated Enterprise related transactions on debit side are only 15.35 crores out of total costs of 61.99 crores (i.e 24%) whereas those on the credit side amount to 45.96 crores out of 58.2 crores of total income (i.e 78%). Therefore, for sake of simplicity and least distortions, first the AE transactions on the debit side are assumed as at arm's length and after adjusting the AE related sales transactions credit side values will be used to adjust cost related AE transactions, in the following manner: Reference Rs. In '000' Arm's length Operating Profit Margin on Sales As Discussed 10.36% A Total Cost (excluding interest expense) as claimed TP Report page 29 6,04,060 B Arm's length OP/Cost ratio As Discussed 11.56% C Adjusted Profit A x B 69,813 D Adjusted total income on credit side A+C 6,73,873 E Total income shown on credit side TP Report page 22 5,66,117 F Value of AE transactions (exports) 3CEB report 4,59,605 G Third party transactions on credi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are at arm's length by applying the +5% arm's length range as laid down in proviso to sub-section (2) of section 92C of the Income-tax Act, 1961. The ld CIT(A) accepted the arm's length analysis submitted by the assessee using cash profit margin as the appropriate net profit Indicator and therefore he deleted the ALP adjustment of Rs. l0,02,37,000/-. 14. Aggrieved by the order of ld CIT(A), the assessee is in appeal before us. 15. The ld DR for the Revenue submitted before us that assessee has used the cash method to compute the profit level indicator (PLI) which is not accepted in Indian transfer pricing scenario, therefore, the transfer pricing adjustment done by ld TPO should be upheld. The ld DR pointed out that ld CIT(A) contradicted the TNMM method followed by the TPO. The ld CIT(A) also ignored the analysis done by the TPO for making transfer pricing adjustment. The ld DR also pointed out that TPO selected only two comparable companies, whereas Ld CIT(A) selected 9 more comparable companies. In 9 comparable companies so selected, the product differentiation has not been taken into account by the ld CIT(A). The ld DR also objected the profit level indicator ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....profit margin on sales) of the assessee company for three financial years (FY 2000-01, FY 2001-02 and FY 2002-03) stood at 13.13%, whereas the arithmetic mean of the net profit indicators (operating profit margin on sales) for the comparable companies stood at 6.96% (weighted average for three years). Based on this analysis, the assessee company concluded that the international transactions entered into by it with its associated enterprises were at arm's length. The assessee company earned a net profit indicator of (-) 6.70% for the financial year ending 31st March, 2003. The assessee company's net profit indicator was primarily impacted by the factors discussed below: * Due to downfall in the telecommunication business, the ferrite manufacturers in India shifted their capacities from telecommunication cores to the 'electronic & lighting sector, to which the assessee company catered. As a fallout, within a short period, the capacities for ferrite cores catering to the lighting and electronic sector shot up significantly causing a price war, which adversely affected the profitability of the assessee company. The turnover of the assessee company dropped by a sum ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsistors and electronic sub-assemblies 3 Cosmo Ferrites Ltd (accepted by TPO) Soft ferrite 4 Deltron Ltd (rejected by TPO) Electronic sub-assemblies and modules 5 Fine-line Circuits Ltd (rejected by TPO) Electronic printed circuit boards 6 I neap Ltd (rejected by TPO) Aluminium electrolytic capacitors 7 PAN Electronics India Ltd (rejected by TPO) Electronic capacitor grade metalised polypropylene film, plastic film capacitor elements/capacitor, electronic capacitor grade metalised polyester film 8 Ruttonsha International Rectifier Ltd (rejected by TPO) Semi-conductor- diodes, silicon-controlled rectifiers, power rectifiers [Turnover of INR 6.41 crore being more than one-tenth of the turnover of the respondent company (one-tenth of INR 53,13,00,000/- i.e. INR 5,31,30,000/-)] 9 SPEL Semiconductor Ltd (rejected by TPO) Integrated circuits It is pertinent to note that the TPO rejected seven companies i.e. serial no. (1) and serial no. (4) to (9)] mentioned in table no. (1) hereinabove, primarily based on product comparison. The TPO accepted Cosmo Ferrites Ltd as comparable as the company manufactured the same product as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... etc. 2 Continental Device India Ltd (accepted by TPO) Transistors and electronic sub-assemblies 3 Cosmo Ferrites Ltd (accepted by TPO) Soft ferrite 4 Deltron Ltd (rejected by TPO) Electronic sub-assemblies and modules 5 Fine-line Circuits Ltd (rejected by TPO) Electronic printed circuit boards 6 I neap Ltd (rejected by TPO) Aluminium electrolytic capacitors 7 PAN Electronics India Ltd (rejected by TPO) Electronic capacitor grade metalised polypropylene film, plastic film capacitor elements/capacitor, electronic capacitor grade metalised polyester film 8 Ruttonsha International Rectifier Ltd (rejected by TPO) Semi-conductor- diodes, silicon-controlled rectifiers, power rectifiers [Turnover of INR 6.41 crore being more than one-tenth of the turnover of the respondent company (one-tenth of INR 53,13,00,000/- i.e. INR 5,31,30,000/-)] 9 SPEL Semiconductor Ltd (rejected by TPO) Integrated circuits We note that the TPO rejected seven companies i.e. serial no. (1) and serial no. (4) to (9)] mentioned in table no. (1) hereinabove, primarily based on product comparison. The TPO accepted Cosmo Ferrites Ltd as comparab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....001-02 to INR 84,582 thousand in FY 2002-03 (i.e. 19.65 percent increase in depreciation). (iv) The turnover of the assessee company dropped by a sum of INR 16.80 crore over the last two financial years. The profit before tax earned by the assessee company stood at INR 1.72 crore in the FY 2001-02. The company suffered Substantial loss of INR 11 crore in the FY 2002-03. We note that in view of the above facts, the assessee company had critical financial condition during the FY 2002-03.The Ld. CIT(A) accepted the cash profit margin as appropriate net profit indicator (PLI) after considering the facts and circumstances of the case as mentioned hereinabove so that the tested party (i. e, assessee company) and the comparable companies are placed on the same foothold after eliminating the impact on profitability of the differences in respect of technology, age of assets used in production, capacity utilization and depreciation expenses and interest expenses. For that we rely of the judgment of the Coordinate Bench of Kolkata in the case Dy. CIT v. AT & S India (P.) Ltd. [2015] 154 ITD 150 wherein it was held that application of 'cash profit margin', under TNMM, in ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TTJ 509 wherein coordinate bench confirmed the use of cash profit for the purpose of application of the TNMM. We also rely on the decision of the Hon'ble Bombay High Court in the matter of CIT v. Returns India (P.) Ltd. [2016] 69 taxmann.com 187/239 Taxman 428 wherein the Hon'ble High Court confirmed the application of the cash profit margin for the purpose of computation of net profit indicator (PLI) under the TNMM. Keeping in view the aforesaid judicial precedents, we approve the use of cash profit margin by the assessee for placing the tested party and the comparable companies on equal footing. The assessee has demonstrated that the cash profit margin of the assessee was 8% (approximately), whereas the arithmetic mean of the cash profit margins of the aforesaid nine comparable companies stands at 12.41%. It is noted that the net profit margin of the tested party was (-)6.70%, whereas the cash profit margin of the tested party stood 8% thereby indicating that the loss was caused by a considerable increase in provision for depreciation. We are of the considered view that the assessee was justified in applying cash profit margin as more appropriate financial indicator than ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e pad, roll lining, brake block etc. 5 India Pistons Ltd. Piston, piston ring, cylinder liners, ring carriers, valves, camshafts and crankshafts. 6 J S L Industries Ltd HT Indoor and outdoor instrument transformers, full and reduced voltage motor starters etc. 7 Jem Industries Ltd L.T. motors and 3-phase mono-block pump sets, starting and safety couplings for motor cars. 8 Lakshmi Electricals Control Systems Ltd Control panels, engineering plastic components, wind power generation etc. 9 Rajendra Electrical Industries Ltd Electric motors and engines 10 Sazler Electronics Ltd. CAM operated rotary switches, selector switches, wiring ducts, voltmeter switches, and allied products. 11 Kaycee Industries Ltd Rotary switches, rotary cam switches etc. 12 Reed Relays & Electronics India Ltd Reed switch, reed sensors, proximity sensors, thermal switch, float switch etc. Table No. 3 - Comparable companies considered by the assessee company from AY 2007-08 Sl. No. Comparable Companies Products manufactured 1 Controls & Switchgear Contractors Ltd Auxiliary relays, power contactors, thermal ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anani & Co Ltd. Electrical products Table No. 5 - Comparable companies considered by the assessee company for AY 2009- Sl. No. Comparable Companies Products manufactured 1 Cosmo Ferrites Ltd Soft ferrite-based components 2 Incap Ltd Insulator, solar energy and capacitor 3 Strontium Ferriten Ltd Hard and soft ferrite rods 4 Tibrewala Electronics Ltd MPP films and capacitors Table No. 6 - Comparable companies considered by the assessee company for AY 2010-11 Sl. No. Comparable Companies Products manufactured 1 Cosmo Ferrites Ltd Soft ferrite-based components 2 Incap Ltd Insulator, solar energy and capacitor 3 Tibrewala Electronics Ltd MPP films and capacitors As disclosed in above tables, the ld. TPO, while examining the arm's length analysis under the entity level TNMM, had accepted comparable companies manufacturing wide range of electronics and related products and having functional similarity with the assessee company. Therefore, based on the same facts, products and circumstances, the ld TPO accepted in subsequent assessment years a few comparable companies for ALP under TNMM. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Coordinate Bench of Mumbai Tribunal in the matter of Diageo India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 150, wherein it was held that the product similarity has to be seen while applying CUP method and not under the TNMM because under the CUP, the focus is on the price of the product sold or transferred and under the TNMM, functional comparability of transactions is to be analysed at net profit margin level. If such a high degree of similarity is to be seen in TNMM, then it would become impractical to apply TNMM in any of the case. It is noted that the principle enunciated by the Coordinate Bench of Mumbai Tribunal in the aforesaid decision, finds support in the OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administration. The principle enunciated by the Coordinate Bench Mumbai Tribunal in the aforesaid decision also finds support in the decision of the Mumbai Tribunal in the matter of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT /147 ITD 83 (SB) and the decision of the Bangalore Tribunal in the matter of GE India Technology Centre (P.) Ltd. v. Dy. DIT [2013] 141 ITD 245 and the decision of the Mumbai Tribunal in the matter of Rolls Royce Marine I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s no need to get any approval from the concerned Commissioner. The assessee duly stated the above facts before the tax auditor but they did not appreciate the above fact and qualified the same under section 43B of the Act in his tax audit report that approval of the Commissioner of Income Tax is awaited for both the funds. We note that the assessee has claimed the deduction for the contribution made to Gratuity fund and Superannuation fund during the previous year relevant to the assessment year under consideration. The assessee was maintaining the said fund not on its own but managed and maintained through the Life Insurance Corporation of India. Therefore, the contribution made to Superannuation and Gratuity fund maintained by the LIC can be claimed by the assessee while computing the total income and would not be hit by the provision of sections 40A(7) & 40A(9) of the Act. Therefore, we delete the above mentioned additions. That being so we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby upheld and grounds raised by the Revenue are dismissed. 27. (ii) Ld CIT(A) erred in deleting the addition made on account of provision for tax ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntire facts and circumstances of the case and submission filed by the Ld. AR of the assessee company. I have also carefully perused the calculation of deduction u/s 80HHC as computed by the Ld. AO. On perusal of the submission filed by the assessee, I find that the Ld. AO has not added the foreign exchange gain to the export turnover even though the same was added to the total turnover. In this regard reliance has been placed by the assessee on the decision of the Hon'ble Delhi Tribunal in the case of Sujata Grover (supra) wherein it has been held that gains made from exchange rate fluctuation is part of the export turnover. My attention was also drawn to the decision of the Hon'ble Jurisdictional Tribunal in the case of Chloride India Ltd. (supra) wherein it was stated that to make an apple to apple comparison the gain on foreign exchange as added to the total turnover should also be added to the export turnover as well. 2. In view of the above, I direct the Ld. AO to add back the gains on foreign exchange while computing 'export turnover' for the purpose of computing deduction u/s 80HHC of the Act. 3. The assessee has further stated that "the AO ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duction to be allowed u/s 80HHC of the Act after taking due consideration of the above facts enumerated by me. The aforesaid ground of the appeal is accordingly allowed. Admission of Additional Ground of Appeal 12. It is now well settled by the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra) that an assessee is entitled to raise a new ground before the Hon'ble Tribunal for the first time even if the same was not raised at any time before the lower authorities. 13. In the instant case, the facts relating to the additional grounds of appeal are embedded in the order passed under section 143(3) of the Act. Therefore, since the relevant facts relating to the additional ground are undisputedly available in the assessment order, I admit the additional ground of appeal filed by the assessee. DECISION ON MERITS 14. I have carefully considered the submission filed by the assessee and the case laws relied on by the ld.AR in respect of deduction u/s. 80 HHC at 100% of export profit in the computation of Book Profit, being the same was the profit eligible for deduction under the said section in comput....
X X X X Extracts X X X X
X X X X Extracts X X X X
....airly agreed that this issue should be sent back to the file of the assessing officer for verification of TDS certificates with the challans indicating deposit of the amount to the government exchequer. Therefore, we set aside the order of the ld CIT(A), so far this issue is concerned, and remit the matter back to the file of the assessing officer for his examination. Statistical purposes, this ground of the Revenue is treated to be allowed. 33. (v) Ground Nos. 7 and 8 raised by the Revenue for A.Y. 2003-04 relate to addition deleted by the ld CIT(A) under section 43B of the Act in respect to payment of interest on term loan under section 43B of the Act in violation of provisions of Rule 46A of the I.T. Rules. 34. We have heard both the parties and perused the material available on record. We note that the clause (d) of section 43B of the Act which inter alia states that deduction under section 43Bof the Act would be allowed in respect of interest on any loan in the previous year in which such sum is actually paid by assessee. The proviso to the said section states that nothing contained in section 43B of the Act shall apply in relation to any sum which is actually paid by th....