TaxTMI 
TaxTMI 
2021 (10) TMI 727
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 the Assessing Officer/ TPO erred on facts and in law in making the aforesaid addition withou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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. 4. That the assessing officer erred on facts and in law in disallowing an amount of INR 33,92,861 on account of alleged non-payment of excise duty liability. 4.1 That the Assessing Officer er....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 benchmarking non-exclusion of expenditure incurred towards tools exclusively purchase related party, applying additional filters for selection/rejection of the comparable and wrong rejection of certain comparables selected by assessee; not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 143,870,308 Proportionate cost (%) H=G/E 3.25% Proposed Adjustment u/s 92CA I=F*H 5,650,353 6.4 Before the learned DRP, the assessee contested inclusion of comparables by the learned TPO, however, the learned DRP rejected objections of the assessee and retained the comparables selected by the Learned TPO. 6.5 Before us, the Learned Counsel of the assessee challeng....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 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 considering sale of tool as non-operating and depreciation as operating in nature by the learned TPO, the learned DR relied on finding of DRP and submitted that profit on sale of fixed assets is not part of revenue operations and therefore learned TPO is justified in excluding the same as non-operating items whereas the depreciation has been rightly considered as operating in view of the decision of the Hon'ble Karn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urred 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) 1,00,21,562 Futaba Industrial Co. Ltd. (Technical Services) 1,13,95,386 Total 2,14,16,948 (*The above amount has been capitalized by FMI) 4.2.1 Functions performed In respect of availing of technical services, the overall scope of services is determined by FMI in consultation with Futaba, who is responsible for recruiting and training the necessary technical people who may be required to render technical services to FMI. For the purpose of executing the above mentioned technical services, personnel of Futaba may be r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cilities 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 and components by charge Inspection including testing of performance of products and parts by charge Dispatch of the Technical Qualified Staff and support staff of parties in accordance with the Agreement. Training of technical personnel of parties. Technical assistance in solving problems in the process/ manufacture of Products from time to time. For the services received, FMI remunerates YMP in the following manner: A Despatch fee shall be the amount equivalent to the below amount each per day/one Technical Qualified Staff and support staff for the number of working days elapsed from (and including) the date of Arrival in India ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 for any identified shortcomings in its product delivery to third parties. YMP also bears the service liability risk to the extent of the technical services provided by it to FMI not resulting in the desired results for FMI. 4.4 Import of spares, raw materials, finished goods and other consumables During FY 2015-16, FMI imported certain spare parts, finished goods and consumables from STC in respect of its manufacturing plant. The value of spares and consumables imported are given below: Associated Enterprises Amount(INR) Shimla Trading Company Ltd. 53,24,543 4.5 Payment of Royalty FMI entered into an agreement with Futaba for grant of a nonexclusive license for the use of Proprietary Information for the engineering, manufacturing and sale of products and the trademark of Futaba for use on the products, packing, adve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es 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 respect of availing of support services, the overall scope of services is determined by FMI, and Futaba is responsible for recruiting the necessary qualified people to render support services to FMI. The payment of service fee made by FMI to Futaba is denominated in Japanese Yen. Hence, FMI is exposed to the inherent foreign exchange risk arising due to fluctuation in the exchange rates. The value of transaction involving availing of professional services by FMI is given below: Associated Enterprise Amount (INR) Futaba Industrial Co. Ltd. 19,322,582 6.8 The assessee has benchmarked its international transaction on aggregate basis under Transactional Net Margin Method (TNMM) as most appropriate method. This method has been accepted by the learned TPO. The learned TPO has also allowed working capital adjustment to the margin (PLI) sought by the assessee. The dispute is regarding selection of comparables by the learned TPO. According to the learned Counsel of the assessee, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arable is 16 times to that of the assessee's turnover. In general that the turnover filter is adopted to avoid selection of high-end companies with that of minnows in a similar line of business. The range cannot be fixed and how to adopt the filter depends on the facts of each case. High turnovers cannot be rejected prima facie while low turnovers are accepted when it suits to the parties without objections from either of the sides. An acceptable range would be the turnover of the taxpayer and the range of the upper limit at ten times as well as the lower limit at ten times (1/10) with a margin of variation may be considered as a right comparable. Since, in this case the turnover is 16 times which is well beyond the margins for a right comparison and eliciting correct results. Hence, we hold that BIPL may not be considered as a comparable in the instant case. 5. Munjal Showa Ltd.: The company is engaged in the manufacturing of shock absorbers, struts and rear cushions. Since, the product line is different the profits cannot be comparable and hence cannot be considered as a right comparable. 6. Foundation Brake Manufacturing Pvt. Ltd.: The company has been showing losses con....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... engaged in manufacturing of 'power train components' under engine parts. Regarding 'JBM Auto Systems Private Limited' the assessee has claimed before the Learned DRP that it was engaged in manufacturing of sheet metal components and tools and dies for automobiles, which falls in the nature of non-core components. The Learned DRP has accepted 'Auto Ignition Ltd' as functionally comparable on the ground that it is engaged in manufacturing and export of heavy duty auto Electric components for commercial vehicles, tractors off-road vehicles etc. The company "Rane TRW Steering Systems Private Limited" has been retained by the Learned DRP on the ground that company is engaged in manufacturing of suspension systems, Valve train components, Viction metal products, die-casting product any steering gear valve. The company "Minda Industries Ltd." has been observed as engaging manufacturing of switches, lightning, batteries and blow moulding products for two wheelers as well as four wheelers. The company "India Nippon Electricals Ltd." has been retained as comparable on the ground that it is engaged in manufacturing of electronic ignition system for two wheelers, portable engines for three wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee merely by way of averments, without providing evidence of decline in sales on account of economic factors which forced any such underutilization of its installed capacity. There is also no evidence vis-a-vis the comparables whether such factors resulted in any such simultaneous effects on the working of the comparables. The tabular chart which has been filed in the synopsis before the Panel is merely based on presumption without any proof or documentary evidence. It is not clear as to how the assessee has worked out the tested party margins after the so-called capacity adjustments in the absence of relevant data. These adjustments are not routine and cannot be claimed on the basis of presumptions and surmises. The law in this regard was explained by the Bangalore Bench of the Hon'ble ITAT in Tavant Technologies India (P) Ltd v DCIT [2017] S3 taxmann.com 105 (Bangalore - Trib.) in the following words "7. Having considered the rival submissions as well as the relevant material on record, we note that the assessee has claimed the adjustment on account of under-utilisation of capacity and particularly >n account of cost of employees and cost of rental which remained unu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Machinery (P.) Ltd. {2019} 106 taxmnmann.com 309 (Karnataka)." 6.14 Since sale of asset is not part of regular revenue operation in the case of the assessee and, therefore, profit generated on same cannot be part of revenue operation of the assessee. In our opinion, the Learned DRP has correctly held the profit on sale of a set as non-operative item. As far as the depreciation on operative expense is concerned, the learned DRP has held to be operative in view of assets used for the purpose of the business, and thus depreciation is part of expenditure connected with business operation of the assessee. The depreciation is also justified as operating expense, because profit earned on employing the tools in the business is part of profit earned on manufacturing process which is part of operating revenue. We do not find any error in the order of the Learned DRP on the issue and accordingly, we reject this contention of the assessee to refer this matter back to the learned TPO. The grounds No. 2.4 and 2.8 of the appeal are accordingly dismissed and other grounds from 2.1 to 2.10 except ground No. 2.4 and 2.8 are allowed for statistical purposes. 7. The ground No. 3 to 3.7 of the appeal....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... exclusively incurred for the purpose of business in terms of section 37. The evidence of expenditure is required to assert in whether the expenditure has been incurred at all and if yes, what is the extent or quantum of that expenditure. The question of its being incurred wholly and exclusively for the purpose of business arises at a stage subsequent to that. That stage has not readied in this case. The Panel, therefore, is not inclined to interfere with the order of the AO, in the absence of evidence in support of expenditure. The objection stands rejected accordingly." 7.2 Before us, the Learned Counsel of the assessee referred to page 301 of paper-book, Volume 2 (schedule of other expenses) and submitted that there is a loss on foreign currency transaction of Rs. 4,52,88,087/- which is main reason of low net profit rate in the year under consideration and this aspect has not been examined properly by the learned Assessing Officer. The Learned Counsel relied on the decision of the Hon'ble Supreme Court in the case of PCIT Vs RG Buildwell Engineers, Reported in (2018) 99 taxman.com 284(SC) and submitted that no ad-hoc disallowance is permitted. 7.3 On the other hand, the Learne....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... if the same is 'actually paid" on or before the due date as specified in section 139 of the Act. Accordingly, any tax which is actually paid on/before the due date of furnishing the tax return as specified u/s 139 of the Act shall be allowable as deduction. Further as per the provisions of excise laws, the liability of excise duty may be discharged by payment in cash well as through adjustments from the input credits available and permissible under law. The term "Actual payment" shall also include the adjustment of ex.ise duty from the input credit balances available. Reliance is placed on Eichier Motors Ltd. v Union of India [1999] 106 ELT 3 (SC) and ITAT Delhi Bench decision in the case of CIT v Kaiser Industries Ltd. Accordingly, it is submitted that the AO be directed to consider the amount of excise duty as paid and delete the disallowance as stated in para 6.1 & 6.2 of the draft assessment order. 3.2.7.2 The Panel has considered the submission In the case, there is no evidence of payment of excise duty or any evidence of credit of CENVAT and related reconciliation in this regard The Supreme Court decision in Etcher Motors Ltd, followed in Kaiser Industries Ltd by the I....