TaxTMI 
TaxTMI 
2019 (4) TMI 412
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....into international transactions during the year under consideration, the AO referred issue of determination of the Arm's Length Price (ALP) of the international transactions entered into by the assessee to the Transfer Pricing Officer (TPO). 2.1 The TPO proposed adjustment on three accounts as under: a. Business Support Segment: Rs. 18,24,354/- b. Technical (Engineering Design) Support Service: Rs. 1,20,99,788/- c. Purchase of raw material: Rs. 12,93,90,068/- 2.2 The AO, in the draft assessment order, made the addition as proposed by the TPO and also made addition on account of Foreign Exchange Loss of Rs. 2,04,92,202/- and on account of provision for warranty of Rs. 1,97,33,000/-. 2.3 The assessee filed objections against the draft assessment order before the Ld. DRP. The Ld. DRP, vide Order dated 07.09.2015, gave partial relief in respect of the Transfer Pricing (TP) adjustment. Consequent to that, the TPO passed its Order dated 20.10.2015 whereby the adjustments on account of TP were as under: a. Business Support Segment: Nil b. Technical (Engineering Design) Support Service: Rs. 44,03,813 c. Purchase of raw material: Rs. 8,28,99,850 2.4 The Ld. DRP....
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....king an adjustment of INR 8,73,03,663/-to the Arm's Length Price ('ALP') of the Appellant's international transactions with Associated Enterprises ('AEs'). Grounds relating to Manufacturing segment: 3. The TPO, AO and DRP have erred, in law and facts, by not appreciating that the losses incurred by the Appellant were on account of various economic and commercial reasons due to the fact that the subject year is the initial year in which the Appellant has commenced its full-fledged manufacturing operations. 4.The DRP, ought to have rejected McNally Sayaji Engineering Ltd as a comparable since the said company is engaged in noncomparable functions/ products and does not satisfy the comparability criteria. 5.The TPO, AO and DRP have erred, in law and in facts, in not appreciating the business/ economic circumstances faced by the Appellant and consequently not allowing the following economic adjustments claimed by the Appellant while comparing the operating margins: 5.1 Adjustment for differences in capacity utilisation * The TPO, AO and DRP erred both in facts and law by not appreciating that the overheads relating to Manufacturing Segment was incurred for manufacturi....
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....the ALP in connection with the impugned international transaction to hold that the Appellant's international transaction is not at arm's length. 9. The TPO, AO and DRP have erred, in law and in facts, by rejecting the entire benchmarking analysis (comparable search) performed by the Appellant for EDS segment without providing any cogent reasons. The action of adhoc rejection of Appellant's benchmarking analysis (comparable search) by TPO, AO and DRP is arbitrary and illegal and accordingly, the entire comparable set of Appellant should be reinstated. 10. The TPO, AO and DRP have erred, in law and in facts, by not providing the details of the search process followed by them in respect of the EDS segment. 11. The TPO, AO and DRP have erred, in law and in facts, by selecting following companies as comparables which do not satisfy various comparability criteria without considering the submission filed by the Appellant: * Ashok Leyland Project Services Ltd. * Bengal SREI Infrastructure * Development Ltd. IBI Chematur * (Engineering & Consultancy) Ltd. * Mahindra Consulting Engineers Ltd. * Mitcon Consultancy & Engg. Services Ltd. * T....
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....he TPO, however, rejected 4 comparables out of the 8 comparables selected by the assessee company and included 10 new comparables after carrying out a fresh search. The TPO, therefore, on the basis of 14 comparables, worked out the PLI of this segment at 21% and thus proposed an adjustment of Rs. 18,24,354/-. 3.2.1 Aggrieved by the order of the TPO, the assessee filed objections before the Ld. DRP. The Ld. DRP, while deciding the adjustment proposed in the business support service segment, accepted the contention of the assessee regarding the exclusion of only 1 comparable being Global Procurement Consultants Ltd. on the ground that this company is doing World Bank funded projects and the Functions Assets and Risk (FAR) analysis is not similar to that of the assessee company. Consequent to the above order of the Ld. DRP, the TPO passed the order dated 20.10.2015 giving effect to the Ld. DRP's directions. The margin of the 13 remaining comparables has been worked out at 13.96%, which is lower than the 14% of the margin of the assessee company and hence, the adjustment on this Business Support segment was worked out at Nil. 3.2.2 The Ld. Departmental Representative (CIT DR) sub....
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....) & (iv), the Revenue is challenging the exclusion of three comparables by the Ld. DRP in the technical support services (Engineering Design Services) Segment. 3.4.1 In the Technical Support service segment, the assessee's margin was 12.39%, and on the basis of margin of 9 comparable companies considered by the assessee in the TP Study at 8.41%, the transaction was considered to be at arm's length. The TPO, however, carried out a fresh search. He rejected all the 9 comparables of the assessee and considered 13 new comparables with an average margin of 33.89%, and made an adjustment of Rs. 1,20,99,788/-. 3.4.2 Aggrieved by the order of the TPO, the assessee filed objections before the Ld. DRP challenging inclusion and exclusion of the comparables as well as the margins of the comparables. The objections were classified into three parts, i.e. Government companies, accounting being different as Accounting Standard AS-7 has been followed which is different than the assessee and the third being other filters. The Ld. DRP accepted the contention of the assessee by rejecting the following four comparables: i. Certification Engineers International Ltd.- FAR different ii. Kitco ....
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.... mainly in performing Government related contracts. Accordingly, we uphold the direction of the Ld. DRP in excluding the above comparable. Our above view gets supported from the following judicial precedents: i. ITAT Delhi in the case of AT&T Communication Services India Pvt. Ltd. v. ACIT in ITA No. 1016/Del/2015 dated 15.02.2018; ii. ITAT Bangalore in the case of KHF Components Pvt. Ltd. v. ITO in ITA No. 1748/Bang/2013 dated 17.06.2016; iii. ITAT Delhi in the case of Bechtel India Pvt. Ltd. v. DCIT in ITA No. 1478/Del/2015 dated 21.12.2015 (ii) RITES Ltd.: It was submitted by the Ld. CIT DR that the TPO has considered this company as a good comparable after taking into account the FAR of this company and that of the assessee. The Ld. CIT DR submitted that merely because the company is a Government company, it cannot be a good ground for exclusion of such company. In response, it was submitted by the Ld. AR that the turnover of this company is more than Rs. 200 crores, which was the upper turnover filter adopted by the assessee company, and thus, the company could not be considered as a comparable company. This fact is evident from the Profit & ....
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.... which is only 34% of the total revenue. Thus, this company fails the 75% service revenue filter adopted by the TPO. Further, from the annual report it is evident that this company undertakes and manages mostly the contracts provided by Government of India. In view of these facts, we uphold the decision of the Ld. DRP in excluding this comparable and ground raised by the Revenue is rejected. 3.4.7 Ground Nos. 11 and 12 in the assessee's appeal are regarding exclusion of certain comparables in the Engineering Services segment. The contention of the assessee is that the TPO and the Ld. DRP both have gone wrong in including seven comparables while determining the arm's length price of the engineering design services segment. It was submitted by the Ld. AR that the assessee is engaged in providing technical and engineering services to its AE and only such comparables need to be considered which are providing similar services and accordingly, the Ld. AR pleaded for excluding the 7 comparables. The Ld. CIT DR supported the orders of the TPO and the Ld. DRP confirming inclusion of these 7 comparables. Each of these comparables is being considered as under: a) Ashok Leyland Pro....
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....Profit & Loss account of the company, wherein the Engineeering Service charges of the company are shown at Rs. 18,88,21,452/-, out of the total revenue of the company of Rs. 29,74,92,912/-. Therefore, the service/revenue ratio of the company comes out to 63.47%, which is less than 75%, which is one of the filters adopted by the TPO himself. Moreover, no segmental information with regard to the different segments of the company is available in the financial statements. This company has been considered by the ITAT Delhi Bench in the case of Bechtel India (P.) Ltd. v. DCIT in ITA No. 1478/Del/2015 dated 21.12.2015 and in the case of BG Exploration & Production India Ltd. v. JCIT in ITA Nos. 1170 & 1581/Del/2015 dated 24.04.2017 wherein it has been held to be not a good comparable. Taking into consideration all the above facts, we are of the view that this company is not a good comparable with that of the assessee company and, accordingly, we direct the AO to exclude this comparable. d) Mahindra Consulting & Engg. Services Ltd.: We have perused the financial statements of the company placed at Paper Book pages 491 - 509. On going through the same, we note that this company is eng....
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....onsidered as a comparable by the Hon'ble High Court of Delhi in the case of Pr. CIT v. WSP Consultants India (P.) Ltd. in ITA No. 935 of 2017 dated 03.11.2017 and ITAT Delhi Bench in the case of Granite Services International (P.) Ltd. v ACIT in ITA No. 532/Del/2016 dated 12.09.2017. Taking into consideration all the above facts, we are of the view that this company is not a good comparable with that of the assessee company and, accordingly, we direct the AO to exclude this comparable. f) TCE Consulting Engineers Ltd.: We have perused the financial statements of the company placed at Paper Book page 565 - 650. On going through the same, we note that this company should not be compared to the assessee as the company does not satisfy the upper turnover filter adopted by the assessee of Rs. 200 crores. This fact is evident from the income statement of the company at Paper Book Page 629, wherein the income of the company is reflected at Rs. 416.02 crores, as compared to Assessee Company's turnover of Rs. 9.08 crores. The turnover of this company is almost 46 times more than that of the assessee company, and therefore, the company should not be considered as a comparable to the as....
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....n the basis of three comparables. The TPO rejected the adjustments on account of capacity utilization, custom duty adjustment and foreign exchange fluctuation on capital assets and proposed an adjustment of Rs. 12,93,90,068/-. 3.5.2 Before the Ld. DRP, the assessee pleaded for exclusion of McNally Sayaji Engineering Ltd. as a comparable. The assessee also contended that the computation of operating margin at 16.06% is also wrong and that the correct margin is 9.32%. The assessee also asked for Custom duty adjustment as the assessee is heavily reliant on imports, capacity utilization adjustment and foreign exchange adjustment. 3.5.3 The Ld. DRP in its order dated 07.09.2015 rejected the contention of the assessee for exclusion of McNally Sayaji Engineering Ltd. On the error in computation of margin, the Ld. DRP directed the TPO to verify the same. On the custom duty adjustment and such adjustment in any case to be restricted to the value of consumption of goods, the Ld. DRP rejected the contention of the assessee. The Ld. DRP rejected the contention of the assessee to allow adjustment on account of capacity utilization in the absence of necessary information being available. T....
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....irst year of operation, and in order to compare the said companies with the assessee, capacity utilization adjustment was required to be made. It was submitted that the purpose and intent of the comparability analysis is to examine whether or not, the values stated for the international transactions are at ALP i.e. whether the price charged is comparable to the price charged under an uncontrolled transaction of similar nature. It was submitted that the Income Tax regulations do not provide that the adjustments cannot be made on the results of the tested party. It was prayed that the adjustment on account of capacity utilization should be provided to the assessee company. The Ld. AR, in support of the contention, placed reliance on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Petro Araldite Pvt. Ltd. in ITA No. 1540 of 2014 dated 26.04.2018 and on the following judgments: (i) ITAT Bangalore in the case of IKA India Pvt. Ltd. v. DCIT in ITA No. 2192/Bang/2017 dated 17.09.2018 - Relevant findings being in Para 22 - 36; (ii) ITAT Bangalore in the case of Biesse Manufacturing Co. Pvt. Ltd. v. ACIT in ITA No. 97, 493/Bang/2015 dated 06.11.2015 - Relevant find....
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....IT DR submitted that in absence of credible data, the TPO was justified in not allowing the capacity utilization adjustment. It was submitted that it is the assessee's responsibility to provide the necessary details and data and that in absence of such details and data, the TPO will be well within his right to not to make any adjustment on account of the difference in the capacity utilization. It was also submitted that adjustment, if any, can be made only in the comparables and not to the tested party. The Ld. CIT DR supported the order passed by the TPO and as confirmed by the Ld. DRP. 3.5.10 We have heard the rival submissions have also perused the order passed by the TPO and the Ld. DRP. From the facts, we note that this is the second year of the commercial operations by the assessee company. The fact that only 41.18% of its installed capacity of the manufacturing segment was utilized during the year is also not in dispute. In fact, the TPO in his order, has stated this fact. However, the TPO has rejected the assessee's contention in Para 21 of its order by stating as under: "21. Discussion on capacity adjustment claimed by taxpayer The taxpayer had claimed capacity ad....
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....mpanies. On going through the facts, it is evident that the assessee company has been able to utilize only 41.18% of the installed capacity and this is the second year of production which is increasing in the subsequent years as is evident from the table in the figures provided by the assessee as under: A.Y. Installed capacity Actual production Capacity Utilization 2010-11 238 17 7.14% 2011-12 238 98 41.18% 2012-13 238 128 53.78% 2013-14 252 175 69.45% 3.5.12 Thus, there is under-utilization of the capacity in the year under consideration. Now, the next issue is whether the TPO was correct in concluding that in absence of details/ difficulty in finding out the details about the other comparables, the benefit of capacity adjustment could not be allowed to the assessee. In this regard, the TPO has relied on Rule 10B (3). It may be relevant to quote Rule 10B (3) which reads as under: "10B (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between t....
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....ised by the assessee in ground No.7. 22. We shall first see the statutory provisions relevant to the issue. Rule 10B(1)(e) of the Rules states that adjustments should be made to account for: "...the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market". 23. Rule 10B (2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. One such factor is conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 24. Rule 10B(3) of the Rules provide that: "An uncontrolled transaction shall be comparable to an international transaction if - (i) none of the differences, if any, IT(TP)A No.2192/Bang/2017 P....
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....lity of the results. For purposes of this section, a material difference is one that would materially affect the measure of an arm's length result under the method being applied." 28. The Indian transfer pricing regulations, OECD Guidelines and the US transfer pricing regulations call for an adjustment to be made in case of material differences in the transactions or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin. While the IT(TP)A No.2192/Bang/2017 Page 16 of 39 Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. In the following decisions it has been held that adjustment to the profit margins have to be made on account of underutilization of capacity: (i) In the case of M/s. Mando India Steering Syste....
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....to the extent that once there is unutilized capacity or men power, such underutilization impacts margin and therefore, the adjustment should be made while computing the ALP ............... If the underutilization is more than average underutilization of the industry then necessary adjustment is required to be made to the margin of computing ALP......" 29. Moreover, the above argument of the assessee for grant of capacity utilization adjustment is also supported by the following decision of Bangalore ITAT in the case of Genisys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010). Relevant extract of the decision is under:- "15.2 We agree with this contention of the counsel for the assessee. All the comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. The AO shall consider this fact also while determining the ALP and make the TP adjustments. With these directions, the appeal of the assessee is disposed of." 30. The relia....
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....in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) of the Act. The relevant extracts of the section are as under:- "(6) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act :" 34. In this regard, we find that the Mumbai ITAT in case of M/s Kiara Jewellery P.Ltd. (I.T.A.No.8109/Mum/2011), has directed the AO/ TPO to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The rele....
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....ch there is a higher proportion of fixed overheads which get allocated to such lower capacity/production. Thus, the right method is to identify all the fixed expenses including depreciation and to adjust the same in the ratio of the capacity utilized. In view of the above analysis, we direct the TPO to exercise his powers under section 133(6) of the Act and to call for the information on capacity utilization of comparable companies. After obtaining the information, he will share the details so obtained with the assessee and give an opportunity to the assessee and grant adjustment for capacity under-utilized. 3.5.15 Ground No. 3 of Revenue's appeal and Ground Nos. 3 & 5.1 of assessee's appeal are disposed of accordingly. 3.6.0 Ground No. 4 in the Revenue's Appeal is against the direction of the Ld. DRP in deleting the addition of Rs. 2,04,92,202/- proposed by the AO on account of Foreign Exchange Loss. The Assessing Officer proposed this addition holding that the claim of the assessee is not allowable in view of the provisions of section 43A of the Act. The Ld. DRP directed deletion of the addition by holding that the same is allowable in view of the judgement of the Hon'bl....
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..... This issue, as rightly stated by the Ld. DRP, is covered by the judgement of Hon'ble Supreme Court in the case of Woodward Governor India Private Limited (Supra). Similar issue had come up before the Jurisdictional Delhi High Court in the case of Pr. CIT vs. Seagram Manufacturing Private Limited (Supra) and Rampgreen Solutions Private Limited (Supra) wherein by relying on the judgement in the case of Woodward Governor India Private Limited (Supra), it has been held that such loss will be revenue in nature. In view of the above facts, we uphold the order of the Ld. DRP. 3.6.4 Ground No. 4 in Revenue's appeal is dismissed. 3.7.0 Now we take up remaining grounds in the appeal of the assessee. 3.7.1 Ground Nos. 1 & 2 in the assessee's appeal are general in nature and, hence, need no adjudication. 3.7.2 Ground No. 4 regarding rejection of one comparable namely McNally Sayaji Engineering Ltd. in the Manufacturing segment is dismissed as not pressed. 3.8.0 Ground No. 5.2 in the assessee's appeal is regarding adjustment on account of non-cenvat-able custom duty on imports made by the assessee company while computing margin of the Manufacturing segment. 3.8.1 The content....
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....d by the TPO and considering the fact that we have remitted the matter back to AO for allowing adjustment on account of capacity utilization, we deem it fit to restore this issue also to the TPO. The TPO will examine whether non-cenvat-able custom duty on imports paid by the assessee is materially affecting the PLI of the assessee company and if he finds that this payment of non-cenvat-able custom duty is materially affecting the transaction with that of the comparables then he will suitably make adjustment thereof. 3.8.4 The ground no. 5.2 is allowed for statistical purposes accordingly. 3.9.0 Ground No.5.3 in the assessee's appeal is regarding adjustment for abnormal foreign exchange fluctuation while computing margin of the Manufacturing segment. 3.9.1 It was contended by the Ld. AR that during the year under consideration, the assessee has incurred foreign exchange loss amounting to Rs. 9.79 crores. Out of this, an amount of Rs. 2,04,92,202/- was on account of restatement of loan liability on account of capital asset/s purchased. Therefore, the amount of Rs. 2,04,92,202/- should be excluded for the purpose of computing the operating margin of the assessee company for t....
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....as submitted that, thus, while computing the margin only the figure of actual consumption during the year needs to be taken and that the adjustment is to be restricted to the amount of actual consumption of the material purchased from the AE and not to the total amount of the purchases from AE as has been done by the AO. It was contended by the Ld. AR that it will not be correct to make the adjustment of the entire purchases and still value the closing stock lying unutilized as on the last date of the year at cost without reducing such cost by the adjustment being made on account of arm's length price determined by the TPO for such purchases from the AE. It was submitted by the Ld. AR that the impact on the profit in respect of such material which is lying as closing stock will be reflected in the profits of the assessee company only in the year in which the said raw material is utilized. Therefore, even if an adjustment has to be made to the profit of the assessee company, the same has to be restricted to the extent of raw material consumed during the year by the assessee company. The Ld. AR also submitted that in case such adjustment is to be made on the entire purchases then suc....