TaxTMI 
TaxTMI 
2020 (12) TMI 1189
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Minda Capital Limited (owning 49% of shareholding) and Furukawa Electric Co. Ltd and Furukawa Automotive Parts Inc. (jointly owning 51% shareholding). The assessee operates as a manufacturer of wiring harness and supplies the same to its customers which are mainly original equipment manufacturers operating in Indian Automobile Industry. For the purpose of manufacturing, the assessee has a plant at Bawal in Haryana where wiring harness for four wheelers and other components related to wiring harness for example couplers, terminals, relay box, junction box and steering roll connectors etc. are manufactured. 2.1 The return of income was filed declaring a loss of Rs. 34,41,93,072/- which was subsequently revised to a loss of Rs. 36,18,55,901/-. The case of the assessee was selected for scrutiny and since the assessee had entered into international transactions during the year under consideration, a reference was made in terms of section 92CA(1) of the Income Tax Act, 1961 (hereinafter called the Act) to the Transfer Pricing Officer (TPO) for determining the Arms Length Price (ALP) of the international transactions undertaken by the assessee. The international transactions of the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., Circle - 6(1), New Delhi (hereinafter referred to as the "Learned AO") erred in assessing the loss of the Appellant for assessment year 2009-10 at Rs. 75,954,460 as against the returned loss of Rs. 361,855,901. 2. That the Hon'ble CIT (A) and Learned Transfer Pricing Officer ("Learned TPO") have failed to appreciate that the Appellant is a 51:49 percent Joint Venture between two unrelated parties (i.e. Furukawa group, Japan and Minda Capital Limited, India), and that all transactions undertaken by the Appellant are rationally driven with a view to protect the commercial & economic interest of the JV partners. 3. That the Hon'ble CIT (A) and Learned TPO have arbitrarily rejected the scientific transaction-by-transaction analysis carried out by the Appellant which was consistent with the Indian transfer pricing regulations prescribed under the Income Tax Act, 1961 and Income Rules 1962. Further the Learned TPO erred in law in re-determining a price of the impugned international transactions, without appreciating that the circumstances necessitating such re-determination as mentioned in sub-section (3) of section 92C did not exist. 4. Without prejudice, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and as a result its installed capacity / production lines were fully un-utilized during these months. The Hon'ble CIT (A)/Learned TPO failed to exclude fixed costs (amounting to INR 2 crores (approx.)) which could not be recovered due to a halt in production on account of such unforeseen circumstances and severe business exigencies. 8. That the Hon'ble CIT (A) and Learned TPO has grossly erred in restricting the quantum of adjustment warranted on account of abnormal expenses additionally incurred by the Appellant due to strike and labour unrest (such as excess offshore cost of production, rent for additional premises, legal expenses in relation to court proceedings for strike. other administrative and deputed personnel expenses etc.) to an ad-hoc 50 percent without giving any cogent basis for such determination. 9. That the Hon'ble CIT (A) and Learned TPO has erred in not giving due cognizance to the fact that during the subject year approximately 85 percent of the Appellant's purchases comprised of imports from AEs which were considered necessary and expedient by the Appellant to fulfill its contractual obligations even amidst such business exigency. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te the arm's length price of the international transaction of the Appellant using TNMM as the most appropriate method. 14. That the Hon'ble CIT (A) and Learned TPO have erred in not allowing benefit of 5 percent range as provided under the proviso to Section 92C(2) of the Act. 15. That the Hon'ble CIT (A) and Learned AO have erred in making an addition by disallowing the 10% of the staff welfare expenses on account of being excessive and high as compare to the previous year. However, such expenses have already been benchmarked by the learned TPO by considering the entire cost base of the Appellant including the staff welfare expenses, which has resulted in economic double taxation in the hands of the Appellant. 16. The learned AO has erred on facts and circumstances of the case by initiating the penalty proceedings under section 271(l)(c) of the Act against the Appellant, which is bad in law." 2.5 Likewise, in assessment year 2010-11, the return of income was filed declaring a loss of Rs. 2,87,03,378/- which was subsequently revised declaring a loss of Rs. 3,39,77,500/-. After a reference was made to the Transfer Pricing Officer, an adjustment of Rs. 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ial year 2008-09 which have a roll over effect in the current year as well. On this account, the Appellant has incurred certain exceptional expenditure (like emergency support service etc.) which needs to be eliminated while determining the financial profitability for the year. 6. The Hon'ble CIT (A) and Learned TPO has erred in not giving due cognizance to the fact that during the subject year approximately 64 percent of the Appellant's purchases comprised of imports from AEs which were considered necessary and expedient by the Appellant to fulfill its contractual obligations even amidst such business exigency. The Hon'ble CIT (A) and the Learned TPO failed to acknowledge that the Appellant incurred significant non-recurring costs (in the form of statutory levy on imported goods, such as basic customs duty and freight) which also need to be excluded while determining the net operating margin of the Appellant for the purpose of the transfer pricing analysis. 7. The Hon'ble CIT (A)/Learned TPO erred in computing the operating margins of the Appellant and has erroneously considered certain item of income/ expenses arising from the ordinary course of business, as non....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Maruti, the assessee had no option but to source the supply of wiring harness from the associated enterprises and, therefore, the required supplies had to be imported for the purpose of supply to Maruti. It was further submitted that the non supply of wire harness would not only have meant complete loss of credibility of the assessee but would have also required the assessee to compensate Maruti for the loss borne by it due to non supply of wiring harness on time. It was submitted that, accordingly, the assessee had to incur excess costs such as purchase at a higher cost, air freight, custom duty etc besides incurring abnormal costs on account of labour unrest and strike. 3.1 It was submitted by the Ld. AR that due to various reasons, if the operating margin of the assessee was to be calculated then due adjustment on account of each such factor needed to be quantified and allowed. It was further submitted that if it is not so done, then the operating margin of the assessee would not be a true indicator of the assessee's transfer price. It was submitted that it was due to these reasons that the assessee preferred the use of the AE as the tested party. 3.2 It was submitted that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as allowed only @ 50% which has no basis. It was submitted that even the Ld. CIT (A) had not dealt with the assessee's submissions in the correct perspective and that he had chosen to ignore the detailed submissions made by the assessee in this regard. 3.5 The Ld. AR also drew our attention to another chart at page 4 of the written submissions wherein it has been depicted that the excess import duty paid by the assessee due to increased imports was at Rs. 1,98,14,011/-. The said chart is also being reproduced herein under for ready reference:- Particulars Amount (Rs) Basic custom duty paid by the appellant (A) 2,37,96,210 Imported goods as % of total raw material consumption in case of appellant (B) 85% Imported goods as % of total raw material consumption in case of comparable companies (C) 14.22% Adjusted import duty (D = A*(C/A) 39,82,198 Excess import duty paid (A-D) 1,98,14,011 3.6 Likewise, the Ld. AR submitted that due to strike and labour unrest the assessee had to incur excessive costs on freight and as per the assessee's calculation the assessee had to incur an excess expenditure of Rs. 6,57,98,823/- with respect to freight on air....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sions having a reject/accept matrix wherein it has been stated that 7 companies were having high related party transactions, 13 companies were having insufficient information for undertaking the required analysis, one company was a persistent loss making company and 74 companies were having non-comparable products. The Ld. AR submitted that in assessment year 2010-11, i.e. the subsequent assessment year, the TPO had selected only 5 companies as comparables as against 99 companies selected for this year. 3.10 The Ld. AR also submitted that the assessee should be allowed the benefit of working capital adjustment. 4.0 With respect to ITA No. 5445/Del/2016 for assessment year 2010-11, the Ld. AR submitted that the arguments advanced by him for assessment year 2009-10 would also apply mutatis mutandis in assessee's appeal for assessment year 2010-11 and that for the sake of brevity, the arguments were not being repeated. The Ld. AR submitted that the issues in assessment year 2010-11 being identical to issues in assessment year 2009- 10, a similar view may be taken in both the appeals of the assessee. 5.0 In response, the Ld. CIT (DR) drew heavy support from the observations an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing entities shall be selected as the tested party for the purpose of undertaking benchmarking analysis. The relevant extract of the OECD Transfer Pricing Guidelines is as under: "3.18 ........The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. " 6.1 We note that the TPO has not pointed out any deficiency in either the functional analysis undertaken by the assessee for the purpose of selection of tested party or in the reliability of data furnished by the assessee for undertaking benchmarking analysis taking the associated enterprise as the tested party. Accordingly, no cogent reason has been provided by the TPO for rejection of the associated enterprise as the tested party. From a perusal of Rule 10B(l)(e) it is seen that the Rules do not give priority to the selection of either the assessee or the associated enterprise as the tested party. The OECD guidelines ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... xxx 11. After due consideration of all the facts, we agree with the view that gross margins of DCIL need to be compared with gross margins of comparable uncontrolled transactions or unrelated enterprises entering into such transactions " 6.5 Further, the Delhi Bench the Tribunal in the case of Ranbaxy Laboratories Ltd. vs. Addl. CIT (ITAT Delhi) 299 ITR 175, too, has held that tested party should be the one which is least complex in the international transactional transaction, as under: "58. We have also given careful thought to the other submissions of Shri Vohra. The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one parly to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or....