TaxTMI 
TaxTMI 
2021 (7) TMI 711
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....ng them at the ALP. In this appeal, we are concerned only with four transactions clubbed by the assessee under the 'Manufacturing activity' segment consisting of Import of raw materials/components at Rs. 3,63,04,44,799; Sale of manufactured goods at Rs. 27,26,41,460; Payment of technical license fees/royalty at Rs. 5,65,23,382; and Payment of one time technology transfer fees at Rs. 62,07,978. Other transactions reported by the assessee were accepted by the TPO at ALP. The assessee applied the Transactional Net Marginal Method (TNMM) as the most appropriate method for proving the above international transactions, under the overall Manufacturing activity segment, to be at ALP. The assessee computed its own Profit Level Indicator (PLI) of Operating Profit/Revenue at (-)6.87%. Two companies were chosen as comparable with their average PLI of (-)0.82%. The differential amount in the above two percentages was suo motu offered by the assessee as transfer pricing adjustment amounting to Rs. 20,87,02,606. The TPO added two more companies and computed the average PLI of finally selected four comparables at 2.99%. The gross amount of transfer pricing adjustment was accordingly worked....
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.... the safe harbour rules. It has been held in several decisions rendered by the various courts of the country including the Hon'ble Delhi High Court in Pr. CIT Vs. BC Management Services Pvt. Ltd. (2018) 403 ITR 45 (Delhi) that foreign exchange gain or loss should be considered as operating in determining the operating margin. 4.4. Adverting to the facts of the instant case, it is seen that the assessee treated foreign exchange fluctuation loss as non-operating and thus computed its operating margin accordingly. Such treatment has been accepted by the TPO also. Once the forex loss has itself been treated and accepted as non-operating for self and the comparables, the same become neutral qua the computation of operating margin, leaving no room for any further adjustment. We, therefore, reject the claim of the assessee. The ground fails. B. ADJUSTMENT TOWARDS EXCESS CUSTOM DUTY 5.1. The issue raised by the assessee is for the removal of the effect of excess custom duty paid on imports by it vis-à-vis the comparables. There is no discussion in the order of the TPO. It was for the first time that the assessee raised this issue before the DRP contending that the excess cust....
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....ived and rather supports this point of view only. That was a case in which the difference arose on account of varying rates of custom duty paid by the assessee vis-à-vis the comparables, which resulted in the grant of suitable adjustment inasmuch as the assessee therein paid additional import duty also whereas the comparables paid only basic custom duty. Relevant discussion has been made in para 9 of the Tribunal order dated 28.11.2019. As admittedly, there is no difference in custom duty rate paid by the assessee and its comparables, there can be no question of allowing any reduction in the profit margins of comparables on this score simply because the assessee's percentage of import to total materials purchased is higher than that of the comparables. This ground is therefore, dismissed. C. COMPARABLES 6. The next issue raised through ground Nos. 3 and 6 is against the inclusion of BEML and JCB India Limited in the list of comparables by the authorities below for determining the Arm's Length Price (ALP) of the Manufacturing segment of the assessee. The TPO added two more companies in the list of comparables, namely, JCB Ltd. and BEML and computed the average PLI o....
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....w of the above position, we hold that the authorities below were not justified in including BEML in the list of comparables. The same is, therefore, directed to be excluded. II. JCB India Limited 8.1. The TPO proposed to include this company in the list of comparables. The assessee objected to its inclusion. Unconvinced, the TPO went ahead. The assessee remained unsuccessful before the DRP. 8.2. The ld. AR argued for the exclusion of JCB India Ltd. on the ground of its functional dissimilarity. He submitted that the assessee had international transactions under the Manufacturing segment and also the Trading segment. Both the segments were separately benchmarked by the assessee and the TPO did not dispute the correctness of the ALP determination of the Trading segment. The ld. AR pointed out that JCB India Limited was engaged in Manufacturing, Trading & Design services and its accounts were maintained on a consolidated basis and thus the TPO went wrong in considering JCB India Ltd. as comparable on entity level with the lone Manufacturing segment of the assessee. 8.3. It is seen that JCB India Ltd. was included by the TPO in the list of comparables for the A.Y. 2011-12 also. The....
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....rds break-up of Opening stock, Purchases, Sales and Closing stock given in the schedules by the company showing separate figures of Spare parts and components. 8.5. We have gone through such figures which decipher that the revenue from Spare parts and components stood at Rs. 752.58 crores as against closing stock at Rs. 57.09 crores. On the other hand, opening stock of Spare parts and components was Rs. 65.37 crores with Purchases amounting to Rs. 331.07 crores. On perusal of these figures, it becomes apparent that as against the combined Opening stock and Purchases totaling Rs. 396.44 crores, combined Sales and Closing stock of Spare parts and components comes to Rs. 809.67 crores, leaving difference of Rs. 413.60 crores which is 104% of the combined amount of Opening stock and Purchases. For manufacturing Spare parts and components, one needs to make the requisite purchases also. The above narration of figures relating to Spare parts and components shows that 104% of sales is nothing but the cost of their manufacturing except purchase of material and also the profit margin on their sale. The ld. AR failed to point out anywhere from the Annual report of this company that the Spar....
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.... of such differences." 8.8. On going through the prescription of the above rule, it transpires that an uncontrolled transaction shall be comparable to an international transaction if the differences, if any, between the two are not likely to materially affect the price charged or paid or reasonably accurate adjustment can be made to eliminate the material effects of such differences. The case under consideration is a typical example which fits within the prescription of rule 10B(3) inasmuch as JCB India Limited is otherwise functionally similar to the assessee company to the extent of 99.13% of its business operations. 8.9. In Mercer Consulting (supra), one of the filters was that the export revenue should not be less than 75% of total turnover. One of the comparables chosen by the assessee had export revenue to turnover at 74.45%, which got excluded by the TPO on the basis of this filter. The Tribunal ordered its inclusion by accepting that a deviation of 0.55% was immaterial. When the matter came up before the Hon'ble High Court, it approved the view point of the Tribunal by holding that: 'the case could not have been rejected merely because there was a deviation of 0.5....
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.... the segments separately by considering distinct comparables with varying margins. The TPO accepted the ALP under the Trading segment, thereby assigning finality to that. Now, the assessee cannot turn around at this juncture and claim clubbing of the two, which would entail the doing of the entire transfer pricing exercise all over again by the assessee (including preparing a new Transfer pricing study report with altogether new process of selecting comparables) and also the TPO doing everything ab initio. It is because of the difference in the precise nature of Manufacturing and Trading activities having different functions, assets and risks that we have directed hereinabove that suitable adjustment should be made to the profit margin of JCB Ltd. on account of the infusion of its proportionately infinitesimal Trading and Services activities in the Manufacturing activity. Since the assessee's revenue from the Manufacturing segment at gross level, as given on page 24 of its Annual report, is Rs. 788.40 crore and from the Trading segment is Rs. 99.46 crore (which is more than 12% of the Manufacturing segment), such two segments cannot be clubbed. The position would have been diff....
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....St.). Similar view has been taken by the Hon'ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefore, direct the AO/TPO to restrict the transfer pricing addition to the extent of international transactions under the segment of 'Manufacturing activity'. 12.1. The assessee has raised the following additional ground, which reads as under: Ground of appeal 10 - Recomputation of losses to be carried forward in case resultant transfer pricing adjustment is less than voluntary adjustment offered in turn of income The Appellant requests your Honors to direct the learned AO/TPO to recomputed losses to be carried forward in case resultant transfer pricing adjustment after adjudication of all other grounds of appeal is less than voluntary transfer pricing adjustment offered in return of income. 12.2. The Hon'ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC) has observed that "the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordanc....