AI Drafter 
TaxTMI 
TaxTMI 
2023 (2) TMI 1106
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....einafter referred to as Honorable DRP) ("AO "TPO" and "DRP" collectively referred as "lower authorities" for brevity)-are bad in law and liable to be quashed. GROUNDS RELATING TO TRANSFER PRICING - LEGAL ISSUES 2. The learned AO has erred in making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so and without appreciating that being jurisdictional officer for all matters, he could not have referred the matter to the TPO. The DRP has erred in confirming the action of the Assessing officer. 3. The lower authorities have erred in: a. Making transfer pricing adjustment of Rs. 773,93,55,214/-; b. Passing the order without demonstrating that the Appellant had motive of tax evasion; c. Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and d. Not appreciating that there being no disallow....
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....PO has erred in performing alternate TP analysis of Royalty payments and directing AO to make alternate adjustment if main adjustment is deleted without appreciating that there is no legal sustainable basis for . such alt' ernate analysis and role of TPO is restricted to computing ALP. 9. Without prejudice to the above, the lower income tax authorities have erred in: a. Not, appreciating that the Appellant had adopted the TNMM at the entity level, in which process, the royalty payment were considered as closely linked transaction and hence were subsumed into the expenditure and accordingly already considered; b. Not substantiating how the royalty payment were singled out of the many transactions to be tested on the basis of the arm's length principle; c. Not appreciating that once the net profit margin is tested on the touchstone of arm's length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length; and d. Comparing prices after completing the analysis of comparing margins. which process is unacceptable in law. 10.....
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....dopting data of FY 11-12 only for analysis, without appreciating that the business, commercial, economic and technological factors require consideration of multi-year data; and e. Not granting adjustment for superior quality of technology in case of Appellant vis-à-vis that of the comparables. 15. Assuming without admitting that the adjustment is to be made, the lower authorities have erred in not allowing the benefit of the +/-5% range prescribed in the proviso to section 92C(2). GROUND RELATING TO CORPORATE TAX 16. The lower authorities have erred in: a. Disallowing provision towards employee long term service benefit liability on the ground that such provision is contingent and not accrued; b. Not appreciating that the provision for employee long terms service benefit is in accordance with provisions of Accounting Standard (AS) 15 Employee benefit and based on actuary valuation, and c. Holding that employee long term service benefit liability has not crystallized nor has accrued. 17. The lower authorities have erred in: a. Disallowing a sum of Rs. 60,26,382/-, as excess depreciation claimed o....
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....fficer (TPO) to determine the Arm's length price. After receipt of reference with the prior approval of CIT(LTU), the ld.TPO started his proceedings and the assessee was asked to submit the documents mentioned in terms of sec.92D of the Act. The tax payer filed its TP documentation vide its letter dated 11.04.2014. A detailed notice dated 25/08/2014 was issued to the assessee proposing to make adjustments to the ALP in the manufacturing segments and specific queries with respect to manufacturing, marketing and trading intangibles also calling for details on payment of technical assistance fees, royalty and other intra group services. The tax payer filed its reply dated 28/09/2015 and other notices were also issued to the assessee. 3.1 The profile of the assessee company is as under:- As per the TP study report of the taxpayer, the Taxpayer, Toyota Kirloskar Motor Private Limited (TKML), is a subsidiary of Toyota Motor corporation, Japan (TM C), manufactures and sells multi-utility vehicles. Presently it: manufactures MUV's under the model name Innova "' and Fortuner. The passenger car under the model name Corolla TKML has obtained license to manufacture Inno....
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....4 the coordinate bench of the Tribunal directed the AO/TPO to compute the ALP at the NTT enterprises level by combining the trading and manufacturing segments and the decision is based upon the facts and circumstances of the case specifics and year specifics in particular case. 3.7 The TPO further observed in TP study report submitted by the assessee that he has made adjustment of custom duty. The assessee computed margin after excluding the custom duty paid. The assessee contended that its components of raw material is higher and, therefore, the corresponding custom duty expenses is also proportionately greater. This adds to the cost of import lowering the profit. The observation of the ld.TPO is as under:- "7. Determination of Arm's Length Price by the taxpayer in its TP study: 7.1 The tax payer has reported international transactions and specified Domestic Transactions in respect of 'Manufacturing segment. 7.2 The arm's length price of the international transactions in Manufacturing segment provided to the associated enterprises (AE) has been determined by applying Transactional Net Margin Method (TNMM), stating to be the most appropriat....
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....n. for preference for such filters is that limited number of companies which pop up on. application of filter may be analyzed throughtly and decision may be taken about their inclusion, or exclusion as uncontrolled comparable. As against it, if a filter excludes potential uncontrolled comparables they are lost forever and there will be no second occasion to review the potential of excluded companies to be considered as uncontrolled comparables. 10.1.2 After careful study, it is found, that the .following filters or criteria may lead towards selecting proper comparables functionally similar to that of the tested party: a) Use of current year data: As per Rule 1013 '4), it is mandatory to use the contemporaneous data, Le,, the data fin- the F. Y. 2013-14. The proviso to Rule 1013 (4) says that data for earlier two years can, also be used if it is shown that such curlier year's data had an influence in determining the current price. Further the use of earlier year data is in addition to the current year data, provided the conditions are satisfied. Reason for non consideration of the earlier year data TP study is a post event study. ....
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....other hand if the (limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. 'The Hon'ble ITA'I' has upheld the application of this Jilter by the TPO in its order in the case of M/s. & Supportsoft India Put. Ltd for AY 2005.06 in IT(TP,)A 13721B/I I & 20/2012 dated 28.3.2013 following its own decision in the case of M/s. Actis Advertisers Put. Ltd vide ]TA No.5277/Del/201 1 dated 12.10.2012 d Companies having negative PBIT were excluded from the list of comparable. e. Companies which are functionally riot comparable to the taxpayer were excluded. 10.2 Applying the above filters on comparables chosen by the taxpayer :" 3.8 The ld.TPO did not accept the adjustment made by the assessee in regard to custom duty and rejected the arguments after relying above judgments. 3.9 In the TP study report the assessee had taken the following 4 compan....
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....ted the same on the ground that it is persistent loss making company. The TPO also stated that the company is functionally different as it manufactures only one car "Ambassador", whereas the Appellant manufactures various cars (Pg No.90 of Appeal Papers). 2.2 Before the DRP, the Appellant submitted that that the observation of the TPO that Hindustan Motors Ltd manufactures only 'Ambassador' is incorrect as it manufactures various other cars, which directly compete with the cars manufactured by the Appellant. Thus, the Appellant submitted that the company is functionally similar. The Appellant also submitted that a company should not be rejected merely on the ground that it is persistenty making losses. (Pg No.1023-1035 of PB-III). The DRP held that persistent losses on year on year basis itself shows existence of exceptional and extreme circumstances and therefore a good reason for exclusion of the company from comparable set. The DRP did not adjudicate on the ground of functionality. (Pg No.29 of Appeal Papers) Submission before ITAT 2.3 In relation to functionality, the Appellant submits that Hindustan Motor Ltd launched sports utility vehicle (SUV) cal....
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....ftware India Pvt Ltd v ITO IT(TP)A No. 442/Bang/2011 held on similar lines [Pg No.1996 of Case Law Compilation] 2.8 Therefore, the Appellant submits that the company should be accepted as a comparable. Ground No.4b- Margin Computation of the Appellant 2.9 During the year under consideration, the Appellant had considered other income of Rs.1,37,04,40,000/- comprising of interest from banks, Claims received from insurance companies, Liabilities/provision written back and miscellaneous income as operating in nature. The Appellant also treated Finance cost of Rs.8,80,60,000/-as operating in nature. (Pg 147, 148 and 281 and of PB-I). Similar approach was also adopted while computing the margin of the comparable companies. 2.10 The learned TPO treated the other income and finance cost as non-operating nature without providing any reasons for the said treatment (Pg 70 of Appeal Papers). There is no discussion on these issues in the TP order. 2.11 With respect to treatment of above items, the Appellant submits as follow: Sl. No. Submissions before DRP and decision Submissions before ITAT 1. Interest received from Bank FD should be....
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....RP rejected the submissions of the Appellant on the ground that same does not arise in normal course of business (Pg 30 of Appeal Papers) Miscellaneous income should be considered as operating in nature. The breakup of miscellaneous income is given at Pg 1044 and 1045 of PB-III. These incomes relate to reimbursement/recovery of expenses, letting out of space to onsite suppliers, duty drawback income and other income. These should be taken as operating in nature for the following reasons: * The above incomes have direct link or nexus with business activity of the Appellant * Expenses incurred in relation to above incomes are debited to P&L account and are considered as part of operating cost. * If these incomes are considered as non-operating, then even the expenses attributable to these incomes will have to be excluded from the operating cost. 5 Interest paid should be considered as operating expense. The learned DRP has not made any discussion on the same Interest paid should be considered as operating expense both for the appellant and the comparables. Automobile industry is capital intensive. An entity may be funded by debt or equity and intere....
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.... this aspect in the TP order. 2.18 Before DRP, the Appellant made detailed submissions on why it should be granted Thai flood adjustment (Pg 1074 to 1079 of PB-III). The Appellant detailed supporting documents including working of extra cost and invoices. The learned DRP rejected the submission of the Appellant (Pg 32 to 34 of Appeal Papers). 2.19 The Appellant submits that its substantial imports are from Thailand. In comparison, the comparables have very minimal imports (Pg No. 1049 of PB-III). In July 2011, flood caused extensive devastation in Thailand. As plants in Thailand were shut, Toyota Group had to cut production in several parts of the world. (Please refer News reports at Pg No.948-956 and 1336 of PB-III]. 2.20 The Appellant is highly dependent on Thailand for its imports (68% of imports in AY 12- 13, Thailand Import chart is at Pg No. 1364 of PB-III). The disaster resulted in major disruptions in supply chains of Appellant causing shortage of components for automobile manufacturing. During such period, the appellant had to procure these parts and components at higher price and incur substantial additional cost. Vehicle price list for before, ....
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....e Appellant undertook substantial expansion by setting up Plant II in FY 10-11 and FY 11-12. Comparable companies are comparatively old in the industry and operate with depreciated plant and machinery. This results in higher depreciation for Appellant at 3.84% vis-à-vis for comparables at 2.76%. Therefore, Cash PLI should be adopted and depreciation should be excluded from operating cost for the Appellant and the comparables. This will bring all entities at par. In the alternative and if Cash PLI is not accepted, depreciation adjustment should be given as given by the TPO in AY 03-04. 2.29 The Appellant relies on the following decision in support of its contention: * PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) - [Para 7 & 8 at Pg 2120 of Case Law Compilation]. The Karnataka HC directed to exclude depreciation from operating cost. * In AY 03-04, the ITAT in appellant's own case cash PLI was rejected- [Para 19.4.1 to 19.4.3, Pg 1466 of Case Law Compilation]. However, the Tribunal observed that the TPO himself has given depreciation adjustment for difference in the level of depreciation cost with reference t....
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....8 of PB-I). The Appellant filed detailed submission before TPO as to why royalty payment should not be benchmarked separately (Pg No.417 to 494 of PB-I). The learned TPO rejected the submission of the Appellant and benchmarked the royalty separately. The TPO rejected the above stand of the Appellant and proposed to benchmark the royalty transaction separately by comparing the royalty and R&D expenditure to net sales in case of comparable vis a vis that of royalty to Local Value Addition (LVA) in case of the Appellant. The TPO has computed TP adjustment of Rs.154,54,32,070/- in respect of royalty transaction. (Pg 117 of Appeal Papers). 2.36 However, the TPO has held that TNMM approach at entity level includes royalty also and therefore separate adjustment for royalty is not required. The TPO has stated that only in a case where adjustment at entity level does not hold good at appellate level, the learned AO may resort to adjustment on account of Royalty on standalone basis. 2.37 Before DRP, the Appellant reiterated it stand by filing detailed submissions against the analysis of TPO (Pg 1102 to 1221 of PB-III). The DRP rejected the submission of the Appellant and up....
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....the learned AO disallowed the provision on the ground that it is contingent in nature (Pg 120 of Appeal Papers). 3.2 Before the DRP, the Appellant made detailed submissions wherein it was submitted that the provision was created in line with the Accounting Standard. As per the mandate of Companies Act and Income Tax Act. As per section 145(2), the Appellant is under obligation to follow AS-1. AS-1 mandates observance of concept of prudence in preparation of accounts. Further, AS-29 provides that provision should be made if there is probability of outflow of resources embodying economic benefits. The Appellant further submits that AS-15 dealing with "Employee Benefits" provides for recognition as a liability of other long-term employee benefits (page 970 and 971 of Paper Book III). The Appellant submits that the liability is an existing liability and estimation is reliable as per Actuarial valuation. The learned DRP disallowed the claim of the Appellant by holding that the same is contingent in nature (Pg 38 of Appeal Papers). 3.3 The Appellant submits that it adopts mercantile system of accounting. The provision was made in compliance with the Accounting Standard-....
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....itions to the fixed assets. Out of the above Rs. 683.10 Crores was invested towards additions to Plant & Machinery. 3.10 In some cases, the vendors supplied and installed the machineries before the close of the financial year and were unable to submit the bills before close of financial year because of pending price negotiation and finalization. In view of this, the Appellant made provision in the books for certain assets based on the purchase orders, as asset were put to use. Portion of provision (Rs.48.34 crores) was subsequently reversed. In the year of reversal, relevant WDV and depreciation were reversed completely. Therefore, instant disallowance by the AO is resulting in double disallowance. 3.11 The Appellant adopts mercantile system of accounting and the capitalisation is in accordance with AS-10. The liability is estimated on fair basis. When the assets were put to use, actual amounts were not available and therefore capitalisation was done on estimation basis [Extract of AS-10 is at Pg 1256-1257 of PB-III]. The Appellant submits that its claim is in accordance with the mercantile system of accounting and disallowance should be deleted. Ground N....
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.... (case law filed during the hearing). Ground No.19- Price Reduction of Purchases 3.18 The Appellant follows annual price for various parts being supplied by different manufacturers and suppliers. Part prices are renegotiated on an annual basis. Initial price negotiation with Denso Kirloskar Industries Pvt Ltd was completed in Dec 2011. However, the supplier and the Appellant had multiple discussions to confirm the effective period of revision, the quantity and revised prices for the parts supplied. Based on mutual consensus, supplier issued credit note amounting to Rs.1,34,40,305/- for the difference in price due to price reduction 'for various parts supplied during the period from April 2011 to Dec 2011. Though the credit note was dated 31.03.2012, it was communicated/issued by the supplier to the Appellant on 25.05.2012 (Copy of the credit note along with e-mail communication is at Pg No 371 & 372 of PB-I). Since the income accrued in FY 12-13 and also books of accounts of the Appellant were audited and financial statement for FY 2011-12 was approved by the Board on 07.05.2012, the Appellant accounted this credit note in the next year viz FY 2012-13 and offe....
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....facturing Innova, Fortuner Cororal, Cambry 90 - Etios Sedan and Liva vehicles. The ld.AR contended that it is clear from the annual reports that Hindusthan Motors Ltd., is engaged in the manufacturing of various other cars, which directly compete with the cars manufactured by the assessee. He further submitted that from the annual report, it is clear that the Hindustan Motors ltd. is manufacturing other cars also which is clear from the report and it was submitted before the TPO at para No.4.1 to 4.20, placed at paper book page nos.915 to 926, which is as under. "In March 2012, the Company launched a state-ofthe art sports utility vehicle (SUV), called Pajero Sport and a seven seater upgraded version of the Mitsubishi Outlander both from its Chennai Car Plant under license from Mitsubishi Motors Corporation, Japan. Pajero Sport has been well received in the market. The Company also started production of CNG driven Winner from its Pithampur Plant during the year. These new products are expected to receive favourable response in the market." It is clear from the above, the company is functionally comparable. Further, he submitted that the persistent loss company can also ....
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....crores for the year ending 31-3-2010, however, it had made profit of (+) Rs. 0.01 crore for the year ending 31-3-2009. It is the claim of the assessee before us that the lower authorities had erred in stamping the aforesaid comparable company as a persistent loss making company for three years. It is in the backdrop of its aforesaid claim, that the ld. A.R had tried to impress upon us that the authorities below were in error in excluding the aforesaid comparable from the final list of comparable companies while benchmarking its international transactions. On the contrary, we find, that the A.O in the assessment order had observed that the difference in the working of the margins had arisen because the assessee had considered write off (bad debts) as a non-operating expense. It was observed by the A.O had that after treating the bad debts as an operational expense, the margin of the aforesaid company was negative for all the three years. At this stage, we may herein observe that the assessee had neither rebutted the said observation of the A.O before the lower authorities nor any contention to dislodge the same had been made before us by the ld. A.R. 8. We have deliberated ....
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.... from the financial statements for the relevant assessment year at paper book page no.14, that the company has launched new vehicles in the month of March 2012 only. From its annual report we have observed as under:- Sale of Company's vehicles during the year was 5139 numbers compared to 10097 numbers in the previous financial year. The Company operates in niche segments only. The decline in number of vehicles sold was mainly due to the Company not having any BS-IV compatible diesel engine thus losing sale in major markets, decline in order from government customers, higher petrol prices, increased interest rates, delay in launch of Pajero Sport due to disruption in operation of Mitsubishi plant in Thailand caused by flood and shortage of working capital. The adverse fluctuation in foreign exchange severely affected the profitability of Chennai Car Plant despite reduction in kit prices by the collaborator Mitsubishi Motors Corporation, Japan in the second half of the year. The Company took measures like value engineering and cost reduction initiatives etc. 6.5 We noted that M/s. Hindustan Motors Ltd. was producing one Ambassador Car and in the month of March, 2016, ....
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.... at Note No.30 of Rs.1056.06 and Rs. 9680.53 respectively, which is as under:- 2010-11 2011-12 Exceptional items Surplus on Sale of non- Current investments 5260.16 3269.18 Surplus on sale of Land and buildings 4420.37 6786.88 ....
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....here would be some debtors pertaining to earlier years, but they would be limited and would be counter balanced by creditors. In the said company same was not happening and there were significant debtors from previous year which though were not affecting the normal OP/TC of the company but were affecting working capital adjusted OP/TC so significantly that it was clear that said company did not have a sustainable business model. Further, it was found that as per the Annual Report there appeared to be different export percentages as per different portions of the annual report and the figures did not appear to be reliable. Said Company has thus not been taken as a comparable. 16. The ITAT found that the sales of said company were on falling trend. In the year ending 31.3.2008, it made sales of Rs.88.12 crore which in the next year stood reduced to Rs.77.2 crore and in the year under consideration to Rs.37.38 crore, with a further slide to Rs.17.69 crore in the next year. "Review of Operations and Outlook" given in the Director's Report made it explicit that: "The company has not recovered from the burden of the heavy loss incurred by takeover of some companies as briefed....
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....The ld. AR reiterated to the written synopsis quoted supra and in addition, he further submitted that the details were provided to the revenue authorities. 7.2 The ld.DR relied on the order of the lower authorities and submitted that the AO/TPO has rightly considered for computation of operating margin of the assessee to those transactions which have direct relation for determining the operating profit, in case of provision of return back and insurance claim received. He submitted that only the normal business transaction can be considered for calculating the operating profit. In case of interest income/expenditure, it cannot be considered as a normal business income expenditure of the assessee and in case of miscellaneous income, it has not arised in the course of normal business activity of the assessee and the assessee was unable to prove that these were closely linked with the international transactions undertaken by the assessee during the year. 7.3 After hearing both the sides and perusing the material available on record, we noted that the ld.AR of the assessee wanted to include/exclude the above 5 types of income/expenditure for calculating operating margin of the ass....
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....r book No.3 and DRP also rejected the contention of the assessee. 8.1 The ld.AR reiterated the submissions made before the lower authorities and on the written submissions quoted supra. He submitted that the import components contain 53.22%, which is a higher custom duty paid in comparison to the comparable companies and he also referred to page No.1050 of the paper book. He also stated that in assessee's own case for the assessment year 2003-04, which is placed at paper book page No.1463 to 1465, the matter has been remanded back to the AO/TPO for fresh consideration. He also relied on the judgment of M/s Skoda Auto India Pvt. Ltd., Vs. ACIT [2009] 30 SOT 319 (Pune). 8.2 On the other hand the ld.DR supported the order of the lower authorities and he submitted that the authorities below has rightly analyzed the case of the assessee and Sony India Pvt. Ltd., Vs. DCIT, 114 ITD 448 and Skoda Auto India Pvt. Ltd., Vs. ACIT [2009] 30 SOT 319 (Pune). The ld.DR submitted that the decision whether to import or purchase locally is a commercial decision, as the method adopted is TNMM, which is tolerant of minor functional differences, adjustments cannot be made for each and every item ....
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....as compelled to import these components from AE situated outside India. * During the year under consideration, the Assessee had a considerable import component in its consumption as against comparables. The total value of imported raw materials as to total raw material consumed amounted to 53,22 %. In comparison, the comparable companies have negligible import content possibly due to the indigenization of materials required for production over a period of time. * Import of goods attracts levy of customs duty. The inclusion of the customs duty skews the material cost upward and therefore the margins decline. In turn, this puts the Assessee at a disadvantage when compared with other comparable companies. * To localize engines and/or transmissions with such huge investments, a large volume of units should be produced as a minimum so as to achieve economic viability of localizing manufacture of such parts. Assessee has clear intention to focus and achieve localization to bring down cost. The customs duty is payment to government. It has no bearing on the price charged in the International Transactions, Gwen the fact that sale price is market driven, ....
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.... (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); v) the net profit margin thus established is then taken into account to arrive at an Ann's Length Price in relation to the international transaction ss[or the specified domestic transaction Since, the adjustment has to be made on the comparables not on the tested party and the Taxpayer has failed to demonstrate similar expenses in the comparables, Taxpayer's plea of excluding Custom Duty is rejected. 3. Hon'ble ITAT has ruled in the favour of Revenue and has held that adjustment cannot be made to the Tested party. Haworth India Pvt ....
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....nable. Argument on account of Custom Duty is incorrect for the following reasons. 1. The customs duty is paid on the parts and components imported from its AlEs. So, it forms part of the cost of purchase of material. Even in the case of independent parties, the same would form part of cost. It is a commercial decision to import or to purchase locally. As the method adopted is TNMM which is tolerant to minor functional differences, adjustment cannot be made to each and every item of expenditure. 2. The Taxpayer argues that by paying customs duty, it is placed at a disadvantage position vis a vis other comparable companies. But, the Taxpayer is selling Toyota Brand vehicles in India and established its business in India knowing well before hand what are the customs duties to be paid imports. It is a commercial decision of the Taxpayer to import in semi-imports. It is a commercial decision of the Taxpayer to import semi knocked down and completely knocked and completely knocked down kits of vehicles for assembly in India and then sell them in local market. Similarly, in the case of comparable companies, there are various costs which also fluctuate so as to have disad....
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....ssions on this objection and the same has been, considered. In brief the objection of the assessee is that it has not been provided with custom duty adjustment, adjustment on account of flood in Thailand and working capital adjustment. The same are discussed as follows: a) The assessee has argued for an adjustment on account of custom duty paid by it on the imports relating to its purchases of raw material. The assessee relied upon the decision of ITAT in the case of S/coda Auto India ('P) Ltd v. AGIT (2009) 122 ?7'J 699. The submissions of the assessee have duly been considered. The issue has been discussed by the TPO in para 7 of his order. In case of M/s Mobis India Limited ITA. No. 21121W.0011 (AY? 2007-08), while discussing the order of ITAT Pune in Skoda Auto India (i) Ltd. v. ACIT (supra), the Chennai bench of ITAT observed as follows in relation to custom duty adjustment sought by the assessee: "30 ......................that higher import content of ran' material itself did not warrant cm adjustment in operating margins. For getting the benefit of any such adjustment, assessee should be able to demonstrate that higher import content W(IS necess....
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....e order of the TPO cannot be faulted with. Considering above, the objection of the assessee is not accepted." 8.4 On perusal of the above orders, the ld.TPO has decided the issue as cited supra and he has also dealt the assessee's own case for assessment year 2003-04 as cited by the ld.AR. 8.5 On going through the financial statement schedule no.34, we find that it has details of consumption and purchases. The schedule No.34b which contains details of value of import and indigenous materials consumed. The details are as under:- Year 2010-11 2011-12 Raw materials Imported 53% 56% Indigenous 47% 44% Stores and spare parts Imported 3% 7% Indigenous 97% 93% 8.6 Further on perusal of the notes to the financial statements at schedule no.21 capital and other commitments. The company has obtained various licenses to import Capital Goods under the Export Promotion Credit Guarantee (EPCG) Scheme from the Ministry of Commerce and Industry, Government of India, during the year. The Company is required to fulfi ll the export obligat ion as per Export-Import policy in force and has been approved to I port capital goods free of Custom....
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.... 1962. The facts apropos this issue are that the assessee submitted before the TPO that it had made 53.22% import of raw materials and components in comparison with comparables importing at 10.88%. It was urged that the increased cost of raw materials having the effect of Customs duty element, should be proportionately scaled down so as to bring the assessee at par with the comparables. The TPO rejected such a contention which however, met with concurrence in the first appeal. After considering the rival submissions and perusing the relevant material on record, it is observed that the claim of assessee for exclusion of Customs duty is based on the premise that it made more imports with the resultant increased cost of production because of higher incidence of Customs duty as against the comparables paying less amount of Customs duty. In our considered opinion, this argument is devoid of merits. The ld. AR could not brought any cogent material in regard to rate of custom duty. Whether the assessee has paid higher rate compared with comparable companies. It is just fundamental that if a person uses better quality raw materials, obviously, the corresponding sale price also goes up and ....
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.... to Rs.42.74 crores. The calculation is placed at page No133 of the paper book. He also submitted that the assessee had to pay additional cost for hand carry of parts due to temporary discontinuation of C segment. Therefore, he submitted that the additional cost of Rs.42.74 crores incurred by the assessee should be considered as extraordinary in nature and excluded from the operating cost. The comparables did not incur similar cost as they do not have hire import components. The ld.AR also requested that the matter may be remitted back to the AO for a fresh consideration and he has sufficient material to prove that there was a substantial increase in the price, therefore, the assessee has to incur extra cost of 42.74 crores. 9.2 The ld.DR relied on the order of the lower authorities and he submitted that the assessee should not be granted further adjustment towards Thai Floods. The assessee had made agreements with the suppliers of the components and without the mutual consent, the supplier cannot charge extra price from the purchasers. The assessee is unable to substantiate with any cogent material for any price revision between the assessee and the suppliers. 9.3 After cons....
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.... of better comparability. (a) Swiss Re Global Business Solutions India (P.) Ltd. v. DCIT [2020] 116 taxmann.com 716 (Bangalore - Tribunal) (b) Maxim India Integrated Circuit Design Pvt. Ltd. v. DCIT [IT(TP)A No.1573/Bang/2017 dated 02.11.2020. 9.4 In view of the above judicial pronouncements, we hold that the CIT(A) is justified in directing the AO to grant working capital adjustment. It is ordered accordingly. 9.5 Therefore, ground Nos. 5 and 6 are allowed. 10.4 Respectfully following the above decision, we allow this issue and the assessee is directed to provide requisite details for computation of working capital adjustments. 11. Ground No.6(a)(b) relates to the cash PLI and alternatively depreciation adjustment 11.1 The ld.AR submitted that the lower authorities had not given cash PLI, whereas in manufacturing activities required to use capital outlay on fixed assets. He further submitted that during the financial year, the assessee undertook substantial expansion by setting up of plant No.2 in financial year 2010-11 and 2011-12. The comparable companies selected by the TPO are old in the industry and operate with depreciated plant and machinery. This....
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....case in ITA No.828/Bang/2010 vide order dated 22/11/2012for the assessment year 2003- 04. The relevant part is as under:- "19.4.1 We have heard both parties and carefully perused and considered the material on record including the judicial decisions cited on both sides. There are varying opinions among experts whether depreciation should be taken into account for working out profits of an enterprise. One view is that it is not revenue deduction at all. As per that view, depreciation is only an annual loss in the cost / value of the capital assets due to factors like age of assets, their usage etc. and therefore allowance of depreciation, being capital in nature, should find no place in the computation of profits. The opposite view is that depreciation, though a capital loss, needs to be deducted, to replace the value of assets to the extent it has depreciated. Be that as it may, in the present case, ALP of the transactions to be determined by comparing the profits of the assessee with that of the comparable companies. There are no express statutory provisions which indicate that deduction for depreciation is a must. Depreciation, which can have varied basis and is allowed ....
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....in view of the finding of the Mumbai ITAT in the case of Fiat India Pvt Ltd (supra) in which the assessee therein is in the asset intensive automobile industry, as is the assessee in the present case, that cash PLI or PBDIT to sales is not the appropriate PLI and also note that the TPO has given depreciation adjustment for differences in relative level of depreciation cost with reference to sales. We, therefore, dismiss this ground raised by the assessee." 11.4 Respectfully following the above judgment, AO/TPO is directed to compute the adjustment in accordance with the above view taken by the coordinate bench in assessee's own case. 11.5 Accordingly, this ground is allowed for statistical purposes. 12. Ground No.7 In this ground the assessee stated that the TP adjustment should be restricted only to AEs transactions only. The TPO rejected the request of the assessee as well as the ld. CIT (A) also. The ld. AR relied on his written submissions. The ld. DR relied on the order of the lower authorities. Considering the submissions from both sides, we observed that a similar issue has been decided by us in assessee's own case for the assessment year 2013-14 in ITA No.2016/Bang....
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....s transaction. 10.6 Accordingly, ground Nos.7 and 8 are rejected." 12.1 Respectfully following the above judgment, we also direct AO/TPO to decide the issue on above terms. 13. Ground No.8 to 15 Relating to royalty adjustments: In addition to the written synopsis the ld.AR submitted the assessee adopted TNMM at the entity level, in which process the royalty has been considered as a closely linked transaction as a part of operating cost. Therefore a separate adjustment for royalty is not required. The AR of the assessee relied on the judgments of assessee's own case for the assessment year 2005-06 in ITA No.350/Bang/2014 vide order dated 21/02/2022, in para nos.5 to 13, wherein held as under:- "Ground Nos. 10-12: 5. The Ld.AR submitted that assessee selected TNMM as the most appropriate method and operating margin at entity level after including royalty was compared with comparable companies. The operating margin of the assessee are at arm's length as concluded by the Ld.TPO. 6. The assessee submits that once the operating margin at segment or entity level is at arm's length, separate analysis of Royalty is not required. This is for the fo....
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....ng the international transactions that have been considered in the process of arriving at the Net Profit are also at arm's length, and under such circumstances, it is impermissible to select another method to examine an individual transaction of a segment already considered and evaluated. 9. In support of this contention the Ld.AR relied on the judgment of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v CIT reported in [2015] 55 taxmann.com 240 (Delhi) which explains the terms "closely linked transaction" and under what circumstances a "bundled approach" can be adopted. The judgment also overrules ITAT Special Bench decision in the case of L.G. Electronics India Pvt. Ltd v. ACIT reported in [2013] 29 taxmann.com 300 (Delhi - Trib.) (SP) that rejected 'bundled approach'. 10. The Ld.AR thus submitted that its manufacturing activity and payment of royalty are closely inter-linked, interdependent and flow from a common source. He at the cost of repetition reiterated that once the net profit margin is determined to be at arm's length, it pre-supposes that the various components of income and expenditure cons....
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....ated 4-1-2013, the Tribunal examined the question as to whether the TPO can determine the ALP at nil on the ground that no services Page 15 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 were rendered. The Tribunal, on the above issue followed the decision of the Mumbai Bench of the ITAT in the case of Castrol India Ltd. v. ACIT in ITA No.3938/MUM/2010 dated 14.09.2012 wherein it was held that it was incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil. The Tribunal also referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., ITA No.1068/2011 dated 29.03.2012. In the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the knowhow/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not ....
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....ibunal further clarified that when margins at entity level were accepted, the matter of dwelling into ALP at transaction level was irrelevant. "21. In this M.P., the Revenue after referring to paras 50, 51 and 48 has submitted as follows:- "5. The above para reads to mean that the TPO is to recomputed the ALP in accordance with the methods laid down in the Act and also sates that the Assessee's stand is accepted opening it to a reading that the appeal has been allowed in favour of the Assessee as well as that of it being set aside for the TPO to do it in accordance with the methods recognized under the Act. 6. The Tribunal was also pleased to set aside the matter to the file of the TPO for AY 2008-09 when read with para 51 leads to a belief that the TPO is to recomputed the ALP. 7. Therefore, it is requested that the Hon'ble ITAT may clarify and adjudicate the above issue." 22. The ld DR reiterated the stand of Revenue as contained in the petition. We have considered the contentions in the petition and are of the view that the same are devoid of any merit. The addition by way of adjustments to the ALP has been deleted by the Tribunal in para 47 of....
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....h marking the transactions. This has been fortified by the clarification given in a Miscellaneous Petition filed by the department which is also reproduced hereinabove. This view is also supported by various decisions of Coordinate Benches of this Tribunal as well as various High courts. Cojoint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. Accordingly, ground nos. 10 to 12 raised by assessee stands allowed. " 13.1 The ld.DR relied on the order of the lower authorities and he submitted that since the assessee has adopted TNMM and the TPO has also accepted the methods for calculation ALP, the TPO has not made separate adjustment in regard to payment of royalty, therefore, this issue should not be raised by the assessee. 13.2 After hearing both the sides, we observe from the order of the TPO, he has calculated the ALP in regard to royalty payment determined under TNMM of Rs.154.54 crores however, no separate adjustment of royalty has been....
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....bunal as cited by the ld.AR. The observations are as under:- "3.4 We have heard rival submissions and perused the material on record. It is an admitted fact that the assessee is following mercantile system of accounting. As per the mandate of Accounting Standard-15 (AS-15), the assessee is required to make the provision in the books of account towards future liability accruing to the employees who are in service but not yet completed 10 years duration to be eligible for memento. The assessee had engaged the services of actuary in order to determine the extent of provision to be made in accordance with AS-15. The actuary certified that as on 31.03.2013 (i.e. for the relevant assessment year under consideration), a sum of Rs.46,60,033 needs to be provided based on certain actuarial assumptions. A copy of the actuary valuation is placed at page 1221 of the paper book filed by the assessee. The AS-15 dealing with "employees benefits" defines the term "employees benefits" to include "other long term employee benefit". The extract of the Accounting Standard reads as follow:- "(c) other long-term employee benefits, including long-service leave or sabbatical leave, jubile....
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....18 days in year. The earned leave / vacation leave could be accumulated up to 240/126 days maximum and the same could be encashed subject to the ceiling limit of 240/126 days. The taxpayer, in the case considered by Hon'ble Supreme Court, made provision for meeting the liability to the extent of entitlement of the officers and staff to accumulate earned vacation leave subject to ceiling limit of 240/126 days as might be applicable, and claimed that provision as deduction. The Tribunal held that the taxpayer was entitled to such deduction. The High Court, on the basis of the reasoning that the liability would arise only if an employee might not go on leave and instead would apply for encashment, held that the provision for accrued leave salary was a contingent liability and, therefore, was not a permissible deduction. The Hon'ble Supreme Court reserved the Hon'ble High Court's conclusion by observing as above. 8 3.4.3 Therefore, taking into account the judicial pronouncements and the AS-15, we hold that if the liability is an known liability and the estimation of liability is reliable, the provision made for the relevant assessment year cannot be stated to be a contingent l....
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.... of accounts on mercantile system of accounting and financial statements have been prepared following the accounting standard applicable to the company. During the financial year, the assessee invested for capital asset of Rs.904.93 crores out of which, Rs.683.10 crores were invested in addition to plant and machinery. During the financial year, the suppliers have supplied the machineries before the close of the year and bills were not submitted in some cases because of the pending price negotiations and finalizations. Therefore, as per AS 10, the assessee was bound to make provision for the outstanding liabilities and he also submitted that the assets were put to use during the year, therefore, the assessee is eligible for depreciation. 15.2 The ld.DR relied on the order of the lower authorities and submitted that the depreciation cannot be claimed on provisional basis and there is no scientific method adopted by the assessee for creating provisions. Accordingly, he submitted that the order of the lower authorities should be upheld. 15.3 After hearing both sides, we observe from the submission made by the AR of the assessee in the paper book page no.1254 to 1260 that the ass....
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....clear whether the ownership of the assets were transferred to the assessee because there was no price fixed by the suppliers as stated by AR of the assessee. The assessee has not satisfied both the conditions, therefore, the assessee is not eligible for claiming depreciation on provisional basis. We also notice that from the above table the provision was made in the books of accounts for Rs.48.35 crores and even after expiry of 2 years the price was finalized only of Rs.6.44 crores and the assessee has reversed the provisions only. We also noted it from the order of the AO vide his letter dated 25/02/2016. Accordingly, we uphold the order of the lower authorities. The assessee admitted that there was excess claim of depreciation of Rs.60,26,382/- on the provisions created, which has been reversed subsequently. Considering the totality of the facts and circumstances of the case, we uphold the order of the revenue authorities. Accordingly, this ground is dismissed. Ground No.18 - Claim u/s 40(a) 16. The AR reiterated the submissions made before the lower authorities and also the written synopsis filed by it. 16.1 During the assessment year 2011-12, the assessee has debited a....
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....le expenditure by claiming that the tax at source has been deducted on it during the y6ar under consideration. As such there is no double disallowance in the year under consideration and the objection is not accepted." 16.3 The ld.AR submitted that the royalty adjustment made by the authorities as per sec.92CA has been decided by the Tribunal in favour of the assessee, therefore, the addition made by the AO by stating that it is an amount of adjustment made u/s 92CA does not survive. The ld.AR also submitted that while filing the income-tax return for the assessment year 2011-12, the assessee perse made disallowance u/s 40(a) and subsequently the TDS was made on the same amount in the following assessment year. Therefore, the assessee is eligible for claim of deduction in the following assessment year as per sec.40(a) of the Income-tax Act. He relied on the order of ITAT Pune Bench in the case of Eaton Technologies Pvt. Ltd., in ITA No.1621/PN/2011 vide order dated 11-01-2013, wherein at para 14.3 it was held as under:- "14.3 From the above, it is clear that the allowance of any expenditure arising from an international transaction shall also be determined having regard....
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....ere is no separate adjustment for royalty u/s 92CA, no addition can be made during the year because the assessee has complied the provisions of section 40(a). Considering the facts of the case we are remitting this issue to the AO for verification. This ground is allowed for statistical purposes. 16.6 Ground No.19 relates for price reduction of purchase of Rs.1,34,40,305/- which was offered to tax in subsequent AY. During the impugned assessment year, the assessee received credit note for the year ending 31/03/2012, it was communicated/issued by Denso Kirloskar Pvt. Ltd. The annual accounts were adopted by the board of management of the company on 7th May, 2012, which is prior to information received from the supplier company. Accordingly, the assessee did not offer any income for the assessment year 2012-13. In draft assessment order, the AO did not accept the explanations of the assessee and on filing objections before the DRP, the ld.DRP also confirmed the action of the AO. The AO passed the final assessment order by holding as under: - "During the course of assessment in the case of Dcnso kirloskar who is one of the suppliers to the assessec , it was found that the ....
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....s, we have considered the rival submissions and observed that the assessee received credit note on 25/05/2012 for the year ending 31/03/2012. The books of accounts were adopted by the board of management on 07/05/2012. The assessee filed return of income on 28/11/2012. The assessee could have offered it as income for the impugned assessment year because there was a certainty to receive the income. While computing taxable income for the relevant assessment year, the real income theory is applied for the income-tax purpose. No doubt the books of accounts of the assessee were closed on the date of filing of the return of income but to receive the income was certain. It is well-settled that the Act levies charge of incometax on the total income as per section 4. Section 5 of the Act defines the scope of total income. The provisions of section 145 (1) define that income chargeable under the head 'Profits and gains of business or profession' or 'income from other sources' shall, subject to the provisions of section 145 (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. From the reading of section 145, in ....
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....hould not be taxed twice and necessary effect should be given to the assessee. 17. In the result, the ground No. 19 raised by the assessee is dismissed. 18. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. ITA No.320/BANG/2019 - Assessment Year: AY 2014-15 19. The assessee has raised following grounds of appeal:- "GENERAL GROUND 1. The Order of the learned Commissioner of Income Tax (Appeals)-1 (hereinafter referred to as CIT-(A)) to the extent prejudicial to the Appellant is bad in law. 2. The learned CIT(A) has erred in confirming the action of the AO and TPO in: a. Making a reference for the determination of the Arm's Length Price of the international and specified domestic transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. b. Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in....
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....to be made to put all comparables on a level playing field; d. Not providing working capital adjustment; and e. Not providing capacity underutilization adjustment; 7. The learned CIT(A) has erred in confirming the action of the AO and TPO in: a. Not considering Cash Profit Level Indicator ('PL') in the case of the Appellant and the Comparables for the purpose of TP analysis even though in the facts and circumstance Cash PLI was more appropriate; b. Without prejudice, in case Cash PLI is not adopted, depreciation adjustment was required to be granted in the facts and circumstances of the case. 8. The learned CIT(A) has erred in confirming the action of the AU and TPO in applying the modified PLI to all expense transaction including expenses incurred with nonassociate enterprises and Specified domestic transaction and thereby making an adjustment in respect of transactions with non-associate enterprises and SDT also. 9. The learned CIT(A) has erred in confirming the action of the AO and TPO in not appreciating that section 92BA(i) of the Act is omitted without any saving clause by Finance Act 2017, which has retro....
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.... of AY 2012-13 & AY 2013-14 for making TP' adjustment, without considering the facts and circumstances applicable to the year under consideration; b. Making TP adjustment by taking blanket Royalty Rate at 6% without appreciating that Royalty Rate varied with the products manufactured and sold; c. Adopting inconsistent denominator by applying ratio of royalty and R&D expenditure to net sales in the case of comparables vis-à-vis that of royalty to LVA instead of net sales in the case of the Appellant; d. Adopting single year data for analysis, without appreciating that the business, commercial and technological factors mandate adoption of multi-year data. e. Not granting adjustment for superior quality of technology in case of Appellant. GROUND RELATING TO CORPORATE TAX (LONG TERM BENEFIT): 15. The learned CIT(A) has erred in confirming the action of the AO in: a. Disallowing provision of Rs. 28,42,112/- towards employee long term service benefit liability on the ground that such provision is contingent and not accrued; b. Not appreciating that the provision for employee long terms service benefit is i....
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....6,575/-. Subsequently, the assessee revised his return of income on 28/11/2014 declaring loss of Rs.102.87 crores and admitting loss under book profit u/s 115JB of Rs.185.94 crores. The case was selected for scrutiny and statutory notices were issued to the assessee. From the documents submitted by the assessee, it was noticed that the assessee has entered into several international transactions with its AEs, accordingly after obtaining approval from the competent authority, the matter was referred to the TPO. The TPO stated that the assessee for computing ALP of its international transaction, he adopted the TNMM as a most appropriate method, the financial/international extracted from the TPO's order are as under:- 21. A detailed show cause notice dated 07/09/2017 was issued to the tax payer, the tax payer furnished his response to the show cause notice vide letter dated 28/09/2017. The TPO observed that the assessee had selected 3 companies as comparable for the manufacturing segments, out of which the Force Motors Ltd., and Ashok Ltd., was accepted by the TPO and ESML Isuzu Ltd., was rejected by observing that this company does not pass RPT Filter. The TPO had selected the fiv....
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....on to the above, the assessee has filed written synopsis, which is as under:- Ground No.3 and 4- Rejection of Companies based on RPT Filter 2.41 The Appellant applied 25% RPT filter wherein companies having related party transactions (income transactions plus expenses transactions) in excess of 25% of sales were rejected as comparables (Pg 210 of Paper Book I). The Appellant rejected Tata Motors Limited, Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd as comparables based on said RPT filter (Pg No.232 & 233 of Paper Book I). 2.42 However, the learned TPO selected Tata Motors Limited, Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd by holding that these companies qualify RPT filter (Pg 99 and 100 of Appeal Papers). The Appellant submits that the TPO has applied 25% filter but there is no discussion in the Order under section 92CA whether the said filter has been applied by aggregating both income and expense transactions or has been applied separately for both income and expense transactions (Pg 85 of Appeal Papers). The Appellant also requested the TPO to provide RPT computation of the aforesaid comparables vide letter dated 02.11.2017 and 05.....
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....ng in nature. The Appellant also treated Finance cost of Rs.58,04,60,000/-as operating in nature. Further Provision for PF of international workers was treated as non-operating in nature as it is only an anticipated liability and major part of the provision pertained to earlier years (Pg 236 of Paper Book I). Similar approach was also adopted while computing the margin of the comparable companies. 2.48 The learned TPO treated the other income and finance cost as non-operating nature and Provision for PF as operating in nature without providing any reasons for the said treatment (Pg 75 of Appeal Papers). There is no discussion on these issues in the TP order. 2.49 The Appellant submits as follow: Sl. No. Submissions before CIT(A) and decision Contentions 1. Interest received from Bank FD should be considered as operating income. The learned CIT(A) has upheld the action of the TPO in treating interest income as non-operating in nature (Pg 17 and 18 of Appeal Papers) Interest received from Bank FD should be considered as operating income. The Bank FD have origin in business funds due to efficient resource management strategy, Just-in-time approach a....
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....mparables. (Pg 18 and 19 of Appeal Papers) Miscellaneous income should be considered as operating in nature. The breakup of miscellaneous income is given at Pg 754 and 755 of Paper Book III. These incomes relate to reimbursement/recovery of expenses, letting out of space to onsite suppliers, duty drawback income and other income. These should be\ taken as operating in nature for the following reasons: * The above incomes have direct link or nexus with business activity of the Appellant * Expenses incurred in relation to above incomes are debited to P&L account and are considered as part of operating cost. * If these incomes are considered as non-operating, then even the expenses attributable to these incomes will have to be excluded from the operating cost. 5 Interest paid should be considered as operating expense. The learned CIT(A) has upheld the action of the TPO in treating interest expenses as non-operating in nature (Pg 17 and 18 of Appeal Papers) Interest paid should be considered as operating expense both for the appellant and the comparables. Automobile industry is capital intensive. An entity may be funded by debt or equity and in....
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....65 of Paper Book III). Higher imports results in higher custom duty. Higher customs duty increases the cost of raw materials (table at Pg 766 of Paper Book III). Since sale price is market driven, higher material cost impacts net margin. Comparables procure components from local manufacturers, who levy excise duty. However, input is available for excise duty. So, in order to eliminate the impact on margins due to duty differential, custom duty should be excluded from operating cost. 2.58 In support of the above arguments the Appellant relies on the following decision: * Appellant's own case for AY 03-04 - Page 1189-1190, findings at para 18.4. The ITAT remanded the matter back to TPO for fresh consideration. * M/s Skoda Auto India Pvt Ltd v ACIT [2009] 30 SOT 319 (Pune) - [Pg 1238 and 1239 of Case Law Compilation] 2.59 Therefore, based on above, the Appellant requests your honour to direct TPO to grant custom duty adjustment. Capacity Under Utilization Adjustment 2.60 The Appellant in its TP study had claimed capacity underutilization adjustment while computing the operating margins (Pg 216 of Paper Book I). In AY 2013-14, the A....
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....ropriate adjustments cannot be made to the uncontrolled transaction due to lack of data then to read the provision of transfer pricing regulations in harmony, adjustments should be made on the tested party [Para 28 at Pg 1270 and 1271 of Case Law Compilation]. 2.66 Therefore, based on above, the Appellant requests your honour to direct TPO to grant capacity adjustment. Cash PLI/Depreciation Adjustment 2.67 The Appellant in its TP study had adopted Cash PLI (Pg 215 of Paper Book I). The Appellant in its submissions before TPO requested to adopt Cash PLI or to grant depreciation adjustment (Pg 551 to 560 of Paper Book II). However, the learned TPO did not accept the contention. There is no discussion on this aspect in the order. 2.68 Before CIT(A), the Appellant made detailed submissions on why cash PLI should be adopted (Pg 832 to 848 of Paper Book III). The learned CIT(A) rejected the submission of the Appellant and upheld the action of TPO (Pg 28 to 29 of Appeal Papers). 2.69 The Appellant submits that manufacturing activities require huge outlay on fixed assets. The Appellant undertook substantial expansion by setting up Plant II in FY....
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.... dated 18.08.2021], the Honourable Bangalore Tribunal has upheld the action of CIT(A) in directing the TPO to restrict TP adjustment to AE transactions (Para 10.5 at Pg 1127 of Case Law Compilation). Relevant extract of the same is produced below: 10.5 In View of the above judicial pronouncements, we hold that the Cit(A) has correctly directed th AO/ TPO to restrict the TP adjustment to AEs transaction 2.75 Further, the Appellant relies on the following decisions: * CIT vs Keihin Panalfa Ltd (Del HC-TS-474-HC-2015) (Para 12); and * CIT vs Tara Jewels Exports (P) Ltd [2017] 80 taxmann.com 117 (Bombay). 2.76 Based on above the Appellant requests your honour to direct the TPO to restrict the TP adjustment to AE transactions. Ground No.10 to 14- Royalty Benchmarking 2.77 The Appellant had adopted the TNMM at the entity level, in which process, the royalty payment is considered as closely linked transaction and part of operating cost (Pg 150 to 153 of Paper Book I). The TPO rejected the above stand of the Appellant and proposed to benchmark the royalty transaction separately as per the methodology adopted in AY 2012- 13 and ....
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....tion]. CORPORATE TAX GROUNDS Ground No.15- Provision for Employee Long Term Service Benefit Liability 3.24 During the year under consideration, the Appellant had a program wherein all the employees who complete 10 years of service with the Appellant were awarded with mementos in the form of a 10-gram gold coin. As per the mandate of Accounting Standard-15 (AS-15), the Appellant made a provision of Rs.28,42,212/- in books of accounts towards future liability accruing to other employees, who are in service but have not yet completed the 10 years duration to be eligible for the memento and the same was claimed in the return of income. The provision was based on the Actuarial Valuation (Pg 1069 to 1081 of Paper Book III), which suggests only incremental amounts to be provided for in the books of accounts. The learned AO disallowed the provision on the ground that it is contingent in nature (Para 6 at Pg 60 and 61 of Appeal Papers). 3.25 Before the CIT(A), the Appellant made detailed submissions wherein it was submitted that the provision was created in line with the Accounting Standard. As per the mandate of Companies Act and Income Tax Act. As per s....
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....ruction of basic civil structure for water purification Plant, Promotion of Japanese Language and supply of water purifier cum cooler. The said expenditure is forming part of Miscellaneous expenditure reported under Note 30 'Other Expenses' of Financial Statements (Pg 123 of Paper Book I). The learned AO rejected the submission of the Appellant and disallowed the same by alleging that the same has not been incurred for the purpose of business (Pg 60 of Appeal Papers). The learned CIT(A) held that the above expenditure is not incurred for the purpose of business and on adhoc basis allowed 50% of the expenditure incurred for promotion of Japanese language only. (Pg 38 to 39 of Appeal Papers). 3.31 The Appellant has its manufacturing plant at Bidadi Industrial Area which is in Ramanagar Taluk. Close to 20% of the Appellant's permanent/contract production team members hail from the Manchanayakanahalli and nearby villages. The Appellant constructed civil structure for water purification plant at Bidadi and Manchanayakanahalli Village located around 2.5 Km away from the Appellant's manufacturing plant and also supplied water purifiers cum coolers for benefit of its employees and....
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.... for all the comparable companies. The learned AR has argued that the TPO in order to retain Tata Motors Ltd. and Maruti Suzuki India Limited has deviated and adopted a new mechanism for computing RPT ratio. On a query from the Bench how RPT ratio has been calculated for other comparables, the learned AR has unable to point out the same. The RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales. The said position was adopted by the Revenue in the past years. In this regard, the TPOs order in assessee's own case for assessment year 2007- 2008 has been placed on record. A perusal of the same it is clear that RPT ratio has been calculated taking both RPT income transactions plus RPT expenses transactions on aggregate basis. On the facts of this case, it is not clear how RPT ratio has been calculated for Tata Motors Limited vis-à-vis other comparable companies. Therefore, this issue is restored to the files of the A.O. The A.O. is directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Moto....
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....efore the lower authorities and they have not granted under utilization capacity adjustment. 32.2 From the paper books filed by the assessee for the AY 2012- 13 at page No. 893 to 897, the relevant part is as under (A) para No. 2.2 as under: The assessee submits that it was setup in India to manufacture and sell Multi Utility Vehicle ( hereinafter referred as "MUV"for sort), Sports Utility Vehicle ( hereinafter referred as "SUV" under the model name Innova TM and SUV under the model name FOrtuner TM and passanger Car under the model name CorollaTM. During financial year 2010-11 the assessee started a second plant to manu8facture and sell Etios versions of cars (Etios (Sedan) and Liva ( hatchback)). Further Etios sedan (diesel) with D,VD and VXD variants & Liva Hatchback (diesel) with GD & GD (SP) variants were launched in September 2011. During the year under consideration, in order to optimize the production capacity utilization, the assessee shifted manufacturing of Corolla TM vehicle from Plant 1 to Plant 2. 2.9 Till FY 2009-10 the assessee was achieving a sales volume of less than 1,00,000 units per annum, During end of the FY 2010-11, the assessee commence....
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....ence of data of capacity utilization in respect of comparables the revenue authorities have not granted capacity utilization adjustment. A similar case has been decided by the coordinate bench of Tribunal in the case of IKEA India Pvt. Ltd. vs DCIT in IT(TP) A No. 2192/Bang/2017 order dated 17.09.2018 relied by the ld. AR placed at paper book page No. 1256 to 1294 , the relevant part of the order is as under:- 22. We have heard the submissions of the assessee and the ld. DR on the issue raised by the assessee in ground No.7. We shall first see the statutory provisions relevant to the issue. Rule 10B(1)(e) of the Rules states that adjustments should be made to account for: "...the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market" 23. Rule 10B(2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. One such factor is conditions prevailing in the markets ....
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....mstances of the parties, and the business strategies pursued by the parties." Further, Para 2.74 of the OECD Guidelines while laying down the comparability criteria to be adopted while applying the transaction net margin method states as follows: "..... Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied) 27. US transfer pricing Regulations on this aspect is as follows:- In addition, the US transfer pricing regulations, u/s 482 of the Internal Revenue Code (hereinafter referred to as 'the US regulations') also support the above. Regulation 1.482-1(d)(2) of the US regulation states as follows: "In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it p....
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....costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment." (iii) In the case of Biesse Manufacturing Company Limited (IT(TP) A Nos. 97 & 493/Bang/2015) for AY 2010-11, the Tribunal held as follows: "10.4.1. We have heard the rival contentions and perused and carefully considered the submissions made and material on record; including the judicial pronouncements cited. The issue for consideration is whether adjustment for under-utilisation of capacity is allowable in the case on hand and if so, the manner of computation thereof and the quantum of adjustment ...... .................. 10.4.5 In the above cited case of the Mumbai Tribunal i.e. Petro Araldite P. Ltd. (supra), the Tribunal has upheld the principle that adjustment for capacity underutilisation can be granted .............. Following the decision of the ITAT, Mumbai in the case of Petro Araldite P. Ltd. (supra), we hold that any adjustm....
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.... of similar nature. The regulations don't restrict or provide that the adjustments cannot be made on the results of the tested party. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of rule 10B(1)(e) of the Rules itself. The absence of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. The above view has also been upheld in the following decisions:- * Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) * Demang Cranes & Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 32. As far as data of comparable companies on capacity utilization being not available in public domain is concerned, it is practically not possible to obtain data on capacity utilization of comparable companies and consequently compute adjustment on the comparable companies, the operating cost of the tested party is adjusted for capacity utilization adjustment. 33. The assessee has under-utilized capacity during th....
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.... the comparable companies such as - * Installed Capacity, * Actual Production in Units, * Break-up of Fixed Cost and Variable Cost; * Segmental/ product wise information, if any. 36. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Ground No.7 is decided accordingly. Respectfully following the above judgement, we also remit this issue to the lower authorities in above terms. Ground No. 6 (e) is allowed for statistical purposes. 34. Ground No.7 (a) & (b) - Not Providing Cash PLI/Depreciation Adjustment : A similar issue has been decided by us in assessee's own case for the assessment year 2012-13 at para No.11 to 11.5 and the result mutatis mutandis shall apply to assessment year 2014-15. 35. Ground No.8 - TP Adjustment should be restricted to AEs Transactions : A similar issue has been decided by us in assessee's own case for the assessment year 2012-13 at para No.12 and the result mutatis mutandis shall apply to assessment year 2014-15. 36. Ground No.9 is general in nature and doe....
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....of the assessee is partly allowed for statistical purposes. 44. In the combined results, both the appeals filed by the assessee are partly allowed for statistical purposes. A common order passed, be placed in respective case files. Order pronounced in the open court on 2nd December, 2022. ============= Document 1 International Transaction Particulars Sale of spare parts Sale of prototypes and trial parts Purchase of OE Parts (imports) Purchase components of parts and Payment toward purchase of Payable Receivable Method 77294732 TNMM 24340596 TNMM 2362226 TNMM 43592764277 TNMM spares for repairs and trial parts 6231850 TNMM Sale of manufactured CBU 11886436980 TNMM Sale exports transmission OE 9367659598 TNMM Sale exports Others 1617326140 TNMM Purchase of CBU 234513488 TNMM Sale of fixed assets 497716 TNMM Purchase of capital goods 576110873 TNMM Payment towards Royalty CBU and spares 2957587147 TNMM Payment towards Royalty Accessorica 39897040 TNMM Purchase of intangible asset represented technical assistance fees Technical assista....
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.... 135690.69 Profit before tax -1815.44 Document 6 Reconciled Profit and Loss account as per TPO Particulars Income Total Income Less: Other income Total Operating Income Expenses Total Expenses Less: Finance cost Less: Loss on sale of fixed assets (net) Total Operating Expenses Operating Profit Amount(in Millions) 133875.25 1717.49 132157.76 135690.69 580.46 0.64 135109.59 -2951.83 OP/OC OP/OR -2.18% -2.23% Document 7 St. Particulars по 1 Remarks of the TPO Financial information/data not This is an appropriate filter. contemporaneous. 2 Functionally different. This is an appropriate filter. 3 No income from operation. This is an appropriate filter. 4 Related Party Transaction. This is an appropriate filler. 5 Insufficient information. Tested Party. This is an appropriate filter. This is an appropriate filler. Document 8 St. Name of the TPO's Comments No Company 1 23 Force Motors Ltd Ashok Leyland Ltd SML ISUZU Ltd Accepted Accepted RPT>25%, hence rejected. Document 9 Step Description 1 ....
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....manufactured CBU Sale exports transmission OE Sale exports Others Payable Receivable Method 77294732 TNMM 24340596 TNMM 2362226 TNMM 43592764277 TNMM 6231850 TNMM 11886436980 TNMM 9367659598 TNMM 1617326140 TNMM Purchase of CBU 234513488 TNMM Sale of fixed assets 497716 TNMM Purchase of capital goods 576110873 TNMM Payment towards Royalty CBU and spares 2957587147 TNMM Payment towards Royalty Accessories 39897040 TNMM Purchase of intangible asset represented technical assistance fees 84367372 TNMM Technical assistance support 4308813 TNMM Document 14 expenses Payment towards sales promotion expenses and publicity 5995949 TNMM Payment towards sales promotion expenses 2363905 TNMM Payment towards advertisement 595359 TNMM expenses Payment towards training and development, R and D expenses and software expenses Payment towards 228808816 TNMM software expenses 993907 TNMM Other income 78690296 TNMM Reimbursement of warranty claims received 224350973 TNMM Reimbursement of ....
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....change in stock 1080950000 Expenditure on employees 7432760000 Operating and other expenses 11272070000 Finance cost 580460000 Depreciation 5476120000 43857310000 Less: Lose on sale of assets 640000 Less: Provision for PF 1167170000 Less: Capacity adjustment 679609476 Less: Interest on TDS delay .etc 2140000 1849559476 129849188628 Net expenses Net Operating Profits 4026061372 Cash Profits 9502181372 Operating Profit on Sales 3.10% Cash Profit on Sales 7.19% Document 17 4.1 Profit and Loss account as per TP study: Profit and Loss account as per TP Study Particulars Amount(in INR) Income Sales (Gross) 160623980000 Less: Indirect taxes (Excise, etc) 28466220000 132157760000 Other Operating income 1717490000 Total income 133875250000 Expenses Cost of materials consumed and purchases 91883380000 Less: Custom duty 4041941896 87841438104 Purchase of stock in trade 18014950000 change in stock 1080950000 Expenditure on employees 7432760000 Operating and other expenses 11272070000 Finance cost 580....