TaxTMI 
TaxTMI 
2021 (10) TMI 727
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.... declared by the appellant in the return of income for the relevant assessment year. 2. That the Assessing Officer/ TPO erred on facts and in law in making addition to the returned income of the appellant of INR 56,50,353 on account of alleged difference in arm's length price and actual value of the international transactions undertaken by the appellant during the relevant assessment year. 2.1 That the Assessing Officer/ TPO erred on facts and in law in arbitrarily rejecting the benchmarking analysis undertaken by the appellant for benchmarking its international transaction by applying Transactional Net Margin Method ('TNMM'). 2.2 That the Assessing Officer/ TPO erred on facts and in law in making the aforesaid addition without appreciating the correct FAR analysis of business of the assessee. 2.3 That the Assessing Officer/ TPO erred on facts and in law in not appreciating that while applying TNMM with external comparables, in order to satisfy comparability criteria provided under Rule 10B(2) of the Income-tax Rules, 1962 ('the Rules') companies engaged in providing identical business only ought to be considered as comparable. 2.4 That ....
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....owance without specifying the legal provisions under which such disallowance is being made. 3.4 That the Assessing Officer erred on facts and in law in making the aforesaid disallowance by merely comparing the quantum of profit/ expenditure earned/ incurred by the assessee in relevant assessment year vis a vis the preceding assessment year, which is illegal and unsustainable in nature. 3.5 That the Assessing Officer erred on facts and in law in making the aforesaid disallowance without there being any legal mandate available with the Assessing Officer for doing so. 3.6 That the Assessing Officer erred on facts and in law in making the aforesaid disallowance without appreciating that the books of accounts of the appellant are duly audited by the statutory auditors and tax auditors of the company without pointing out any adversity/ irregularity therein. 3.7 That the Assessing Officer erred on facts and in law in making the aforesaid disallowance without appreciating that the expenses debited by the appellant in profit & loss account for the relevant assessment year were allowable as deduction under the provisions of section 37( 1) of the Act. ....
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....submission of evidence of excise duty paid before due date of filing of return of income (Rs, 33,92,861/-) and disallowance out of expenses (Rs. 16,87,95,310/-). The learned DRP vide order dated 15/02/2021 upheld the draft order of the Assessing Officer and rejected objection of the assessee. Pursuant to the order of the learned DRP, the Assessing Officer has passed impugned final assessment order. Aggrieved with the said order, the assessee is before the Tribunal raising the grounds as reproduced above. 4. Before us, the parties appeared through Video Conferencing facility and filed paper-book and other documents physically as well as through email. 5. The ground No. 1 (one) and 1.1 of the appeal are general in nature and, therefore, we are not required to adjudicate upon specifically. 6. The grounds No. 2 to 2.1 of the appeal relate to transfer pricing adjustment. The assessee has challenged the transfer pricing adjustment mainly on rejection of the benchmarking analysis of the assessee, not appreciating FAR ( functions carried out, assets employed and risk undertaken) analysis of the business of the assessee, wrong selection of comparables by the learned TPO, while benc....
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....ts Ltd. 4.33% 4. Auto Ignition Ltd. 4.41% 5. Minda Industries Ltd. 4.41% 6. Munjal Auto Inds. Ltd. 4.63% 7. Rane T R W Steering Systems Pvt. Ltd. 4.81% 8. India Nippon Electricals Ltd. 6.49% 9. Setco Automotive Ltd. 6.77% 10. R A C L Geartech Ltd. 7.90% 11. J B M Auto System Pvt Ltd. (Merged) 8.66% 12. Sakthi Auto Components Ltd. 9.54% 13. Indi Schottle Autoparts Pvt. Ltd. 12.90% 35th percentile 4.41% Median 4.81% 65th percentile 6.77% 6.3 The transfer pricing adjustment of Rs. 56,50,353/- has been worked out by the learned TPO as under: Operating Revenue of Assessee A 4,462,034,405 Arm's Length Margin (OP/OR) (%) (As proposed by your goodself) B 4.81% Arm's Length Operating Profit C=A*B 214623855 Arm's Length Operating Cost D=A-C 4,247,410,550 Actual Operating Cost of the assessee E 4,421,042,264 Difference F=E-D 173,631,714 Amount of International (excluding transaction pertaining to payment of interest on external commercial borrowing and reimbursement of expense to AEs) G 14....
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....cluded as part of fixed assets for calculation of depreciation. The tools were used and then sold to Maruti Suzuki, the depreciation booked in respect of such tools and the profit from sale of such tools booked required adjustment to the PLI of the assessee. The assessee, accordingly, reduced profit on sale of the fixed assets from operating income and depreciation in respect of such tools from operating expenses. However, the learned TPO, while determining operating margin of the assessee, treated profit on sale of tools as non-operating and depreciation as operating in nature. The learned Counsel contended that if depreciation ( Rs. 3,13,78,409/-) is considered operating, profit on sales (Rs. 4,04,14,752/-) should also be considered operating and if the profit on sales is considered nonoperating, the depreciation on those tools should also be considered non-operating as well. 6.6 On the contrary, Learned DR relied on the order of the lower authorities and submitted that each and every comparables has been added by the Learned TPO after careful analysis of their FAR, which has been upheld by the learned DRP and, therefore, transfer pricing adjustment must be upheld. Regarding c....
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.... For the services received, FMI remunerates Futaba in the following manner: Technical Service Fee in the form of: Daily advisory fee for dispatching personnel in the amount of JPY 72,000 per day per person for those who are managers or hold other title senior to managers, and 48,000 Yen per day per person for all others; Sum of JPY 12,000 per working day per personnel for the technical training provided by Futaba to the personnel of FMI Reimbursement of the following costs incurred by Futaba in relation to the dispatch of the personnel on a temporary basis to FMI's plant: business class round air fare from Japan to India; actual inland transportation expenses within Japan and India; boarding expenses in the amount of Japanese Yen ("JPY") 5,500 per day per person for the days on which Licensor's dispatched personnel travel from Japan to India and stay in India to give such technical advice and guidance and travel for return direct to Japan; and actual accommodation expenses within India; The value of the transaction is as under: Associated Enterprise Amount(INR) Futaba Industrial Co. Ltd. (Tools & Jigs Design) 1,0....
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....s (Thailand) Co. Ltd. for granting technology, technical assistance and technical knowhow for manufacture and sales of automotive parts to each other. The scope of services includes the following: Technical assistance for the scope, areas and/or items that parties judges as possible from time to time during the term of this Agreement to manufacture and fabricate Products at the Site. Parties would assist by providing the necessary Technical Information for the manufacture of products and more particularly: Furnishing of the Technical Information in respect of the installation of the production facilities and operation thereof, and the manufacture of the Products; Supply of production engineering information and documents, such as method, process, and process layout for fabrication and assembly of Products and component. Supply of concept drawing or, design drawing for die, equipment, jig, C/F, and etc. which are required for process and assembly of Products and components by charge. Supply by charge of necessary assembly equipment, jig, C/F, die setting and supply of inspection standard for parts and components Supply of parts a....
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....part of Capital Assets) 4.3.1 Functions performed In respect of availing of technical services, the overall scope of services is determined by FMI. For the purpose of executing the above mentioned technical services, personnel of YMP may be required to make visits to India. Expenses pertaining to travel, accommodation other allowances of these personnel are borne by FMI. However, these people only make intermittent visits and continue to be employed by YMP. 4.3.2 Risk Analysis FMI bears the market/ business risk in relation to manufacture and selling of products in India for which the technical services have been availed as it may be subject to adverse market conditions. YMP's business risk is limited to the extent of work or services provided to FMI The payment made by FMI to YMP is denominated in US dollars. Hence, FMI is exposed to the inherent foreign exchange risk arising due to fluctuation in the exchange rates. However, since YMP is receiving payment from its AE, it bears limited credit and collection risk vis-a-vis independent service providers. FMI also bears the service liability risk as it is liable to litigation ....
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.... During FY 2015-16, FMI has paid the following amount as royalty to its AE: Associated Enterprise Amount (INR) Futaba Industrial Co. Ltd. 15,175,180 4.6 Payment of Service Fee FMI has entered into an agreement with Futaba for secondment of personnel for providing technical services, including but not limited to, managerial, technical, production, marketing, purchasing, and administrative services to FMI. The import terms and conditions of the agreement are given below: The scope of work performed by personnel includes provision of technical inputs, advice, guidance, supervision, execution, etc, in whole or part. The Personnel work for FMI on full time basis during their respective dispatched period. These personnel, during their stay in India, work under the supervision and control of FMI. For their services, FMI pays a service fee to Futaba on a lump sum fee per month per employee basis, which, effectively, only includes the cost of the personnel such as salary and other benefits. During the employment with FMI, the Personnel are subject to the employment policies, rules, regulations, and code of conduct of FMI. In re....
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....res of the assessee company. Hence, it was argued that it cannot be a right comparable. Further, the comparable incurred expenditure on R&D activities whereas the assessee company doesn't have any R&D centre in India. We find that the brake shoes manufacturing which is a core auto components consists of 28.97% of the total turnover of the company which is approximately Rs. 270 crores. Hence, the turnover is not an impediment for comparative study. We also find that the R&D expenditure incurred by the ASK Automotive Pvt. Ltd. is very minimal which would not alter the comparison to a considerable extent. Hence, we hold that ASKAPL may be considered as a correct comparable. 3. Gabriel India Ltd.: This company is primarily into manufacturing of front forks and shock absorbers. Since, they are non-core auto components owing to the difference in the products manufacturing it cannot be treated as a right comparable. 4. Brakes India Pvt. Ltd.: The product line is similar to that of the assessee. However, the turnover of this comparable is 16 times to that of the assessee's turnover. In general that the turnover filter is adopted to avoid selection of high-end comp....
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.... (f) ............ (g) ............ (h) "non-core auto components" mean auto components other than core auto components; 6.11 Further, in table below Rule 10TD(2), safe harbour limit of operating profit margin for core auto components and non-core auto component has been listed at serial No. 10, 11 and 12% and 8.5% respectively. Thus, it is evident that the CBDT has identified difference in operating profit margin of the companies engaged in manufacturing of the core components vis-à-vis non-core components. In such circumstances, in principle, the companies engaged in manufacturing of core components cannot be compared on FAR analysis with companies engaged in manufacturing of non-core components. However, on perusal of order of the lower authorities, we find that few comparable companies are engaged in manufacturing of core components whereas other are engaged in manufacturing of non-core components. The assessee itself has submitted before the Learned DRP that the company "Setco Automotive Ltd" is engaged in production of 'drive transmission and steering parts', which is one of the core components. The Learned DRP has noted that assessee is also e....
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....factured by comparable companies and verify whether same falls under core component or non-core component and thereafter decide the comparability on verification of components manufactured by the assessee. The Learned AO/TPO may also examine other objections of the assessee of research and development activities carried out by the comparable companies in accordance with law. 6.12 As far as arguments of Learned Counsel of the assessee on the issue of denial of capacity utilization/excess depreciation adjustment is concerned, we find that Learned DRP has observed as under: "3.2.5 It is also argued by the assesses that during the year, the assessee had idle capacity due to which the entire fixed costs such as depreciation could not be absorbed. It is stated that depreciation cost of the assessee is significantly higher than comparable companies who may have utilized their capacity in an effective manner leading to effective utilization of fixed costs. Accordingly, it stated that the profit margins of the comparable companies needed to be adjusted on account of capacity utilization. 3.2.5.1 The Panel has considered the submission. It is noticed that this claim has ....
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....s far as issue of incorrect computation of operating margin of the assessee in view of considering profit on sale of the tools as non-operative and depreciation of all those tools as operative is concerned, the Learned DRP has adjudicated as under: "3.2.4 The assessee has raised a contention that the TPO has excluded depreciation and profit on the sale of its assets while calculating the operating profit. It is stated that the assessee purchased certain tools exclusively for Maruti, which were included in fixed assets for calculation of depreciation. These tools were sold to Maruti by the end of the year at a profit. The profit and depreciation on such sale was reduced by the TPO while computing the assessee's profitability during the year. 3.2.4.1 The Panel has considered the submission. Since the profit on sale of its assets does not pertain to the revenue side the TPO has rightly excluded the same. Further, there is no question of allowing depreciation either on such fixed assets and the TPO has taken a consistent and legally correct view. As far as depreciation is concerned, the matter is covered against the assessee by the judgment of the Hon'ble Karnataka Hi....
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....: S. No. FY 2015-16 FY 2014-15 i. Consumption of stores Rs. 1,55,98,131/- Rs. 11,88,52,947/- Ii Consumables Rs. 13,55,43,387/- Rs. 11,88,52,947/- iii Repair & Maint. (Building) Rs. 39,81,240/- - iv. Rates & Taxes Rs. 14,58,979/- Rs. 6,19,802/- v. Selling & Distribution Rs. 60,30,866/- Rs. 52,01,414/- vi. Miscellaneous expenses Rs. 61,82,707/- Rs. 51,91,306/- Total Rs. 16,87,95,310/- 3.3.3.1 In that view of the matter, the Panel holds that there is no evidence in respect of expenditure or other reasons to justify a decline in NP Ratio and the AO has rightly made an addition of Rs. 11,03,93,150/- on that account. Any claim of expenditure is to be supported by necessary evidence as required by the Assessing Officer in the absence of which mere entries of these expenses in the books of account and audited by a chartered accountant do not obviate tire requirement of furnishing supporting evidence in respect of such expenses; or curtail, restrict or delimit the power of the Assessing Officer to call for supporting evidence as by doing so he is not going into the q....
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....rrency transaction loss during the year under consideration. The grounds of the appeal are accordingly allowed for statistical purposes. 8. The ground No. 4 to 4.2 of the appeal relates to nonpayment of excise duty liability. 8.1 The Assessing Officer disallowed the claim of payment of the excise duty of Rs. 33,92,861/- in view of the comment of the auditor in tax audit report that it was not possible for him to give the date of payment of excise duty. The learned DRP upheld the disallowance observing as under: "3.2.7.1 The assessee submits that the balance of excise duty unpaid as at the end of the previous year amounting to INR 33,92,861/- was paid subsequent to the year-end through the credit of CENVAT and no amount was paid in cash. The adjustments were made on different dates subsequent to the year-end but before the due date of filing of the tax return under Section 139 of the Act and accordingly a particular date of payment could not be ascertained Reference should also be made to the Tax Audit report wherein the tax auditor has reported NIL outstanding balance but has not provided any certain date of payment. It is further stated that as per section 43B of th....