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2021 (9) TMI 1467
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....-16, the tax impact is Rs. 1,32,99,188. 2. The TPO has erred in rejecting the Comparable Uncontrolled Price ("CUP") Method adopted by your appellant as the most appropriate method for the determination of the Arm's Length Price and wrongly adopting Transaction Net Margin Method. The DRP has erred in upholding this rejection of CUP method and disregarding prices quoted by London Metal Exchange ("LME") which is a global bench mark for commodity pricing 3. The TPO has erred in not considering the under utilization of manufacturing capacities of your appellant and the resulting idle costs which have been wrongly ignored while computing your appellant's margins. The DRP has erred in upholding the action of the TPO. 4. The TPO has erred in the application of functional similarity filter while selecting 5 wrong comparable companies, whose business and operations have nothing in common with that of your appellant. The DRP has erred in upholding the same. 5. The TPO has erred in failing to apply the imports filter and by selecting companies which have NIL or minimal imports as comparable to your appellant who had major imports during the year. 6. Withou....
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....tion. 7. Ground No.2 is regarding rejection of Comparable Uncontrolled Price (CUP) method adopted by the assessee Price and wrongly adopting Transaction Net Margin Method (TNMM) disregarding prices quoted by London Metal Exchange ("LME") which is a global benchmark for commodity pricing. 8. The ld. AR submitted that as per the Guidance note on Transfer Pricing issued by the Institute of Chartered Accountants of India, typical transactions where CUP method can be used are as follows:- a. Transfer of goods b. Provision of services c. Intangibles d. Interest on loans 9. Typical transactions where TNMM may be adopted are: a) Provision of services b) Distribution of finished products where resale price cannot be adequately applied c) Transfer of semi-finished goods 10. The major international transaction undertaken by the appellant with its AE is with respect to Transfer of goods. Hence, CUP is the MAM to be adopted since TNMM is not applicable in the case of transfer of goods. In case of commission for marketing services, the appellant had used TNMM as MAM. 11. The ld. AR submitted that the OECD in its Transf....
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....from the transaction will not be an appropriate method to determine whether the international transaction is at arms' length. Reason behind selecting London Metal Exchange ['LME'] Prices as the Comparable Uncontrolled Price 16. According to the assessee, the LME is the world centre for the trading of industrial metals. The LME is the de facto price formation venue for industrial metals. The prices available on the LME platforms are used as the global reference and basis for physical trading as well as in valuation of portfolios. LME prices are trusted because the LME is the most liquid and the most traded industrial metals market in the world and its global network of warehouses ensures the price is truly effective of supply and demand. 17. The Company's business is in products manufactured out of copper and copper alloy metals, which are commodities. The prices of copper which is the base metal for such products are determined based on market prices and the commodity stock exchange. Accordingly, the prices on the LME have been considered. The AE sources the raw material such as Copper Cathode from the metal traders and uses this for manufacturing the final product whi....
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....TPO and DRP. This is available in Pages 275 to 294 of the Paperbook. Prices charged by AE 22. It was submitted that Wieland India is engaged in commercial slitting of copper and copper alloy coils as per customer specifications. The Company also markets semi-finished metal products manufactured by its holding company and other group companies. The activities and functions of the AE includes sourcing of raw materials, i.e., the metal, manufacture of copper/ copper alloy coils, carrying out quality tests and finally exports the copper/ copper alloy strips to the appellant. It thereafter slits the copper alloy strips as per customer specifications and despatches it to the end customer. 23. As mentioned in the Transfer Pricing Documentation, the basis of pricing is given below: * The price charged by the AE for the material imported by Wieland India consists of 2 elements, viz., 'Metal Price' and 'Fabrication Price'. * Metal Price = Alloy metal value based on the prevailing LME rate + Premium + Melting loss of 2%. * 'Premium' is the addition in price over and above the cash seller settlement price published on a daily basis by the LME paid by metal f....
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....fact these comparable prices are the prices which are the basis of prices at which the international transactions have been entered into with the associated enterprises. The only variation, which was between 2% to 6%, in these prices is the mark up factor and that mark up is attributed to the costs of ' significant service in procuring the raw material' and 'freight and insurance which is paid by the associated enterprise'. There is no dispute about this position as evident from the observations made by the Transfer Pricing Officer himself. It is not even the case of the revenue authorities that the consideration paid by way of this mark up is excessive or unreasonable vis-à-vis, to use the words of the Transfer Pricing Officer, 'significant services provided in procuring the raw material' and 'freight and insurance costs'. One of the objection taken by the Transfer Pricing Officer is that the service charges charged by the AE from other uncontrolled transactions is not available but then it is nobody's case that the AE is engaged in providing similar services to unrelated enterprises. The external CUP, by way of London Metal Exchange prices, is the basis....
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....l transactions are entered into are arm's length prices, it is hardly relevant whether or not the AE has ensured that the assessee makes reasonable profits. As much as hypothetical independence of the transactions it does not permit artificially low profits by manipulating prices at which transactions are entered into by the associated enterprises, it does not also require that the transactions must also be entered into such a manner as to ensure that the assessee must make reasonable profits. The question of reasonableness or profits is relevant only when transaction profit methods are applied, but such a situation arises only when standard or traditional methods fail. That is not the situation before us. We are in sesisn (sic) of a situation in which traditional method is not properly faulted with and the parameters necessary for application of the same are available. The consideration about lower profits having been earned by the assessee, even if that be so, are not at all germane to the occasion. 26. It is also submitted that CUP (based on LME prices) was accepted as MAM in AY 2014-15 by the TPO. Considering that there are no changes in facts in the current year, the TPO ou....
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....rials consumed 6232,97,320 Changes in inventories of metal alloy scrap 11,02,660 Employee Benefit Expenses 127,12,880 Finance costs 4,25,572 Depreciation and Amortization Expense 108,06,113 Other Expenses 333,40,777 Total Expenses 6816,85,322 Profit/ (Loss) before tax (191,41,599) 30. The financials of the taxpayer for the F.Y. 2014-15 as worked out by TPO are as under:- Particulars Amount (INR) Revenue from operations 6615,72,437 Operating Income 6615,72,437 Total Expenses 6816,85,322 Less: Financial Cost 425572 Operating Expenses 6812,59,750 Operating Profit (196,87,313) OP/OR -2.98% 31. Accordingly, the TPO made adjustment with regard to manufacturing segment as follows:- Manufacturing Segment Particulars Formula Amount (INR) Taxpayer's operating revenue OR 66,15,72,437 Taxpayer's operating cost OC 68,12,59,750 Taxpayer's operating profit OP -1,96,87,313 Taxpayer's PLI PLI=OP/OR -2.98% (+)3% of the Taxpayer's margin A=[(100+PLI)*1.03]-100 -0.07% Mean Margin of comparable se....
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....ia Private Limited has no role in this function. Manufacture of material strips and sale to Wieland Metals India Pvt. Ltd. Wieland Werke AG has invested in state of art production technology and quality testing systems in order to ensure high quality products. The entire process of manufacture and quality testing of the copper and copper alloy strips is undertaken by the Wieland Werke AG invoices and exports the copper and copper alloy strip Master coil to Wieland Metals India Private Limited on DAT Incoterms 2010, ICD Bangalore basis. The process of receipt of imported goods such as clearing and forwarding at the Customs in India is undertaken by Wieland Metals India Private Limited by engaging customs agent. The copper and copper alloy strip master coils so purchased from Wieland Werke AG are subject to slitting process by Wieland Metals India Private Limited and then sold to end customers. Activities relating to manufacture and export of goods mentioned in the purchase order The Wieland group has manufacturing facilities in Germany, Austria, Great Britain, USA and Singapore. The activity of manufacture of product and export of products to the customers in accordan....
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....P of international transactions entered into by the assessee with AE. We do not find any infirmity in the order of the DRP on this issue and the same is confirmed. 34. Ground No.3 is that the TPO has not considered the underutilization of manufacturing capacities and the resulting idle costs while computing the assessee's margins. 35. The ld. AR submitted that assessee's request for adjustment of capacity utilization while computing operating margins under TNMM has not been considered by the revenue authorities. The TPO has ignored the fact that operations were started about 2 years ago and had not reached its full capacity utilization. During FY 2014-15, the company was operating at 33.62%. Thus, the idle capacity was 66.38%. This had to be adjusted to the fixed infrastructure related costs and semi-variable costs. Detailed computation in this regard was submitted to the TPO which was not considered (Page 209 of Paperbook). Since the company was operating only 33.62% of its installed capacity, the company was not in a position to absorb its entire fixed costs in terms of infrastructure related costs. According to the ld. AR, the summary of fixed costs that must be considered....
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....le capacity adjustment as a 2 year old company like the appellant. 38. Further, The TPO and DRP erred in ignoring the fact that it is not possible for the appellant company to get details of the capacity utilization of the comparable companies selected by the TPO to make a comparison / adjustment possible, which are not available in public domain. In such a scenario, the TPO and DRP could have either sought information from such companies based on the powers vested in them or ought to have made certain reasonable approximations / assumptions to consider the adjustment sought by the appellant rather. Outright rejection of the adjustment is against the basic interest of justice. 39. The ld. AR submitted that several Benches of the Tribunal time and again looked at this issue and has directed the TPO/AO to allow adjustment for fixed costs on account of lower capacity utilization as follows:- a) In the case of Ariston Thermo India Ltd ([2013] 36 taxmann.com 501 (Pune - Trib.), the Pune Bench of the Tribunal, while delivering the judgment, highlighted the actual objective of comparability analysis and adopting the Most Appropriate Method which was to determine ALP of the ....
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....er ...................................." (Emphasis supplied) c) In the case of Tasty Bites Eatables Limited [[2015] 59 taxmann.com 437 (Pune - Trib.), the ITAT, Pune Bench held as follows:- "33. So far as the adjustment on account of capacity underutilisation is concerned, it is the submission of the Ld. Counsel for the assessee that capacity utilisation of the assessee works out to 15% whereas capacity utilisation of the comparable company was 53%. Therefore, the difference between the two is significant and material to impact the profit margin of the assessee and the comparable company's ability to absorb the fixed overheads like depreciation, salary and wages, power, repair etc. is less where capacity utilisation is low and this would lead to increased cost and lower profit. 36........ we are of the considered opinion that the assessee should be given the benefit of low capacity utilisation. ......" (Emphasis supplied) d) In the case of Mando India Steering [2014] 45 taxmann.com 160 (Chennai - Trib.), the Chennai Tribunal held as under:- "We are of the considered view that under-utilization of production capacity in the initial ....
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....ot a full-fledged manufacturing process unlike the companies selected by the TPO which are full-fledged manufacturing companies. All the companies selected by the TPO are established players in the market. These companies have been operating in India since a long time (5 to 50+ years) unlike the assessee which set up its slitting centre in India only since Sept 2012. So it is only natural that these companies are earning much higher profits than the appellant who is still in the process of recovering the set up and infrastructure costs. The years of experience of the companies selected by the TPO is given below, based on information available in the public domain and their websites:- Name of the Company Established since Years of experience in 2015 Gupta Metals Sheets Limited 1989 26 Rachna Metal Industries Pvt. Ltd 1978 37 Multimetals Limited 1962 53 Metals United Alloys & Fusion Product Ltd 2006 9 Madhav Copper Limited (Part of Madhav Group) 2010 5 45. The other objections raised before TPO and DRP were as under:- Sl no. Name of the Company Remarks / Reason for rejection as comparable 1 Gupta Metal Sheets Ltd....
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....due to non-utilisation of capacity (1,75,09,830) Less: IT Maintenance, Support and Services (discussed in detail in Grounds 7 and 8 below) (72,44,263) Operating Costs ("OC") (B) 65,65,05,657 Operating Profit Margins ("OP") (A)- (B) 50,66,780 OP/OR 0.76% 48. Without prejudice to the contention that TNMM is not applicable in the case of the appellant company and CUP is the MAM, it was submitted that from the above, the OPM of the Company is 0.76% as against -2.89% computed by the TPO and upheld by the DRP. The average margin of the comparable companies selected by the TPO is 3.22%. The OPM of the company is well within the +/-3% range allowed by Sec 92C(2) of the Act and accordingly requires no adjustment. 49. We have heard both the parties and perused the material on record. We have gone through the following observations of the TPO:- Gupta Metal Sheets The company is engaged in manufacturing and sale of copper and copper alloy sheets/strips. The company's manufacturing plant is located in Rewari (Haryana) with an installed capacity of 14,500 tonnes per annum as on March 31, 2015. ....
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.... not make it functionally incomparable to the taxpayer. As discussed above, TNMM does not require strict product comparability such as the difference in thickness of the copper and copper alloy products produced. The import filter objection has been dealt with in detail. In view of the above discussion, the objections of the taxpayer are rejected, and the company is retained as a comparable. 50. We do not find any infirmity in the findings of the DRP and the same is confirmed. Application of Foreign currency expenditure filter / Imports filter 51. The ld. AR submitted that the TPO had selected 5 companies as comparables to the assessee, even though they had nothing in common to the company or its functioning. While doing so, the TPO had applied wrong filters in selecting the comparable companies. None of the companies selected by the TPO are comparable since none of them are fully dependent on imported materials for their manufacturing activities. In 4 cases, there were no imports at all and in one case, the imports are only 29.85%. Thus, there is wide disparity in the functioning of the assessee visà- vis the functioning of these companie....
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....the case of companies engaged in export of goods or services to its AEs outside India, the Income tax department has always applied the export turnover filter of 75%. i.e. only companies having export business of 75% of its total turnover were accepted as comparable companies. This rationale is to be applied in the case of import transactions. Since the appellant company's purchases are 100% from outside India, a foreign currency expenditure / imports filter of 75% should be applied while selecting the comparable companies. Hence, none of the companies selected by the TPO and approved by the DRP are comparable to the appellant on account of this filter. ii) In the case of Gates Unitta India Company (P) Limited Vs Dy. CIT (2017- 84 taxmann.com 69), the Chennai Bench of ITAT had held that the business model of an automotive belt manufacturer, having 99 percent import content in raw material, normally could not be same as that of comparable companies which were having import content of 29%. iii) In the case of Skoda Auto India (P) Limited Vs Asst CIT (2009- 30 SOT 319), the Pune Bench of ITAT noted that year in question was first full year of assessee's operation in ....
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....g the year. 60. In this connection, the detailed ledger extract of the expenses, the copy of the invoices for these expenses were filed with the TPO vide submissions dated 16-11-2018 (Pages 670-710 of Paper book) and before the DRP. It was submitted that a perusal of the same shows that all the invoices were raised during FY 2014-15 (relevant to AY 2015-16) after the costs were negotiated and finalized. Reliance was placed on the following judicial precedents:- (i) In the case of SMCC Construction India Limited (38 taxmann.com 146), the Delhi High Court held that the prior period expenses are eligible for deduction during the current year provided the liability was determined and crystallized during the relevant year. It was held as under:- "The expenditure of Rs. 31,55,228 has not been crystallized during the year 2001-02 relevant to the assessment year 2002-03, such prior period expenses should have been disallowed is not based on any material that had come to the knowledge of the Assessing Officer. The Assessing Officers has placed reliance on the notes to the accounts that were available at the time of the scrutiny assessment. But the notes also states that....