TaxTMI 
TaxTMI 
2023 (2) TMI 1106
X X X X Extracts X X X X
X X X X Extracts X X X X
....rities" 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 disallowance under section 40A(2) for royalty payment, adjustment under Chapter X ought not to be made. GROUNDS RELATING TO COMPUTATION OF ALP ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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. Assuming without admitting that the royalty is to be separately evaluated on the touchstone of arm's length principle, the lower authorities have erred in adopting the CUP without justifying how the same` is the most appropriate method in the case of the Appellant. 11.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uthorities 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 on the basis of year end provision which were reversed in subsequent years; b. Disregarding accounting methodology adopted by the Appellant and not appreciating that amount capitalized was based on fair estimates made for work already completed but. for which final bills were pending; and appreciating that the assets were acquired and put to use during the year under consideration. d. Not appreciating the fact that reversal amount....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing 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 Innova TM, Corolla TM and Fortuner from the TMC, which owns these brands. Fortuner was launched during the year with the technology provided by the TMC. TKML also imports Camry TM and sports utility vehicle (SUV) Land Cruiser Prac.io, Prius and LC 200 Tm as Completely Built Units (CI3U) and sells the same in the Indian market. The CBUs are stored at a warehouse in Mumbai. TKML commenced its manufacturing operations in November 1999. The manufacturing plant consists of Press shop, Weld Shop, Paint Shop and Assembly sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d, 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 appropriate method in the facts and circumstances of the case. The operating profit to operating cost ratio has been taken as the profit level indicator (PLI) in TNMM analysis. 8. Selection of comparables by the taxpayer in the TP study 8.1 It is seen that the taxpayer has selected 03 companies as comparables for Manufacturing segments respectively, on. the basis of search conducted in the public databases, namely Prowess, 8.2 The search criteria and the acceptance/rejection matrix applied by the company for screening the initially identified cases Jar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. It is a study aimed at determining whether a transaction conducted sometime earlier was at arm's length. At the time of conducting a transaction, it& price will be fixed according to the market conditions prevailing at that time, It is only when some extraordinary event influences (like fire, lockout, management's decision to reduce the price to increase the turnover etc.,) pricing that support may be taken from earlier years' data of' the company, External factors will anyway influence pricing across board since all companies would be equally affected by external market conditions. The Indian statute provides for ave....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A 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 companies as comparables, out of which the ld.TPO did not accept the Hindustan Motors Ltd., the accept/reject matrices is as under:- 3.10 The TPO observed that in the case of Hindustan Motors Co. Ltd., it is not functionally comparable because it is manufacturing only one car i.e Ambassador whereas the tax payer is manufacturing Innova, Fortuner Cororal, Cambry 90 - Etios Sedan and Liva cars. The company is also a persistently loss making company, therefore, the TPO rejected stating that it is not a comparable company. The TPO finally computed the average PLI and adjustment as under:= 3.11 Accordingly, the TPO made adjustment after applying TNMM at entity level for the determination of PLI of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-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) called Pajero Sport and a seven-seater upgraded version of the Mitsubishi Outlander during the financial year. The Appellant submits that that both Mitsubishi Pajero and Outlander vehicles are in direct competition to the Appellant's vehicles namely Innova and Forunter. Further, Ambassador and Mitsubishi Cedia are in the passenger car segment. The Appellant, therefore submits that the TPO's reason of rejection (Hindustan Motors Limited has only one car namely Ambassador) is factually incorrect. The products manufactured and sold by Hindustan Motors are similar to that of the Appellant and therefore Hindustan Motors is functionally comparable to the Appellant. 2.4 Further Hindustan Motors has been selected as a comparable consistently by the Appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncome 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 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 30 of Appeal Papers) Interest received from Bank FD should be considered as operating income. The Bank FD have their origin in business funds due to efficient resource management strategy, Just-in-time approach and prudent business practice. (Pg 1039 and 1040 of PB-III) In support of above, the Appellant relies on the decision of Snam Progetti S.P.A. v ACIT 132 ITR 70 [para 13 and 14 at Pg 1782 and 1783 of Case Law Compilation]. 2. Liabilities/Provisions written back of Rs.27,71,30,000/- should be considered as operating income. The learned DRP rejected the claim of the Appellant on the ground that it is dependent on number of factors in relation to bu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 interest paid reflects financial risk borne by the enterprise. (Pg 1046 and 1047 of PB-III) Ground No.5 and 6 - Adjustments Custom Duty Adjustment 2.12 The Appellant in its TP study had made custom duty adjustment while computing the operating margins (Pg 268 of PB-I). The Appellant in its submissions before TPO requested to grant custom duty adjustment (Pg 893 to 904 of PB- II). The TPO denied custom duty adjustment by stating that it is the business decision of the Appellant and it does not impact the comparability (Pg 85 to 89 of Appeal Papers). 2.13 Before DRP, the Appellant made detailed submissions on why it should be granted custom duty adjustment (Pg 1048 to 1073 of PB-III). The learned DRP rejected the submission of the Appellant and upheld the action of TPO. (Pg 30 to 32 of Appeal Papers). 2.14 The Appellant submits t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or 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, during and after floods is at Pg No 1338 of PB-III. Price comparison of parts before, during and after floods at Pg No 1339 to 1363 of PB-III. The price was normalised post Thai floods. 2.21 The Appellant therefore submits that the additional cost incurred by it of Rs. 42.74 crores (calculation at Pg No 1332 of PB-III) should be considered as extra-ordinary in nature and excluded from the operating cost. The comparables did not incur similar costs as they do not have higher import component. Working Capital Adjustment 2.22 The Appellant in its submissions before TPO provided working capital adjustment computation and requested the TPO to grant such adjustment (Pg 940 PB-II). The TPO did not grant working capital adjustment and has not made any discussion on this aspect in the order (Pg 96 to 98 of Appeal Papers). 2.23 Before DRP, the Appellant made detailed submissions on why it should be granted working ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 to sales. 2.30 Therefore, based on above, the Appellant requests your honour to direct TPO to adopt Cash PLI or to grant Depreciation adjustment. Ground No.8 - TP Adjustment should be restricted to AE transactions 2.31 The Appellant submitted before the TPO to restrict the TP adjustment, if any only to the AE transactions. The Appellant submitted that out of total expenses it had entered into only 45.93% of the transaction with AE's, whereas the balance expense transactions were undertaken with third parties (Pg 565 to 572 of PB-II). However, the learned TPO did not accept the contention. There is no discussion on this aspect in the order. 2.32 Before DRP, the Appellant submitted to restrict the TP adjustment, only to the AE transactions. The Appellant submitted that out of total expenses it had entered into only 42.72% of the transaction with AE's whereas the balance expense transactions were undertaken with third parties (Pg 1094 to 1099 of PB-III). The DRP rejected the submission o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gainst the analysis of TPO (Pg 1102 to 1221 of PB-III). The DRP rejected the submission of the Appellant and upheld the action of TPO (Pg.39 to 43 of Appeal Papers). 2.38 The Appellant submits 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. 2.39 The above view has been accepted by the Honourable Bangalore Tribunal in Appellant's own case for AY 2013-14 [ITA No.2016/Bang/2018, dated 18.08.2021] [Para 11.4 at Pg 2170 of Case Law Compilation]. Further, the Appellant relies on the decision rendered by the Honourable Bangalore Tribunal in its own case [IT (TP) A No.1315/Bang/2011 for AY 2007-08] wherein the Tribunal held that the royalty payments made by the Appellant are at arm's length (Para 48 to 51 at Pg 1390 of Case Law Compilation). Reliance is also placed on, among others, para 101 of Delhi High Court decision in the case of Sony Ericsson Mobile Communications India v ACIT 55 Taxmann.com 240. 2.40 The Appellant also submits that the methodology adopted by TPO is not correct. The TPO comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rovision was made in compliance with the Accounting Standard-15 and as per actuarial valuation report. The Appellant submits that the liability is an existing liability and estimation is reliable. 3.4 The Appellant relies on the decision on the decision of Honourable Supreme Court in the case of Bharat Earth Movers vs CIT [2000] 245 ITR 428 (SC) wherein it was observed that merely because a liability is to be discharged at future date does not convert an accrued liability into a conditional one. Accordingly, the Supreme Court held that provision made for meeting leave encashment liability proportionate with the entitlement earned by the employees is an deductible expenditure. 3.5 Further, in Appellant's own case for AY 2013-14, the Honourable Bangalore Tribunal has held that estimation of liability is reliable and provision is not towards contingent liability. The ITAT has remanded the matter back to the file of AO to verify the scientific basis of the provision [ITA No.2016/Bang/2018, dated 18.08.2021] [Para 3.4 to 3.4.3 at Pg 2149- 2152_of Case Law Compilation]. 3.6 Reliance is also placed on the decisions in the case of CIT v Eveready Industries India Ltd (2018) 98 taxm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....No.18- Double Disallowance of Royalty 3.12 In AY 2011-12, the Appellant had incurred Rs. 179.98 crores towards royalty. Out of this, Rs. 57.53 crores was provision made on 31.03.2011. With respect to provision of Rs. 57.53 crores, the Appellant had not remitted TDS within the stipulated time and same was disallowed in return of income for AY 2011-12 u/s 40(a)(i). The TDS was remitted subsequently and the Appellant made a claim of Rs.57.53 crores, while filing return of income for AY 2012-13 (TDS remittance details at Pg No 1262 of PB-III and challans at Pg No 1321-1322 of PB-III). 3.13 The learned AO in the draft Order, has disallowed the claim u/s 40(a)(i) of Rs.57,53,23,147/. On the ground that said amount pertains to Rs. 107,98,91,825/- which was disallowed under section 92CA in AY 2011-12. (Pg 122 of Appeal Papers). 3.14 Before, the DRP, the Appellant made detailed submissions (Pg No.1262-1270 of PB-III). The learned DRP disallowed the claim of the Appellant and upheld the action of AO (Pg 45 of Appeal Papers). 3.15 The Appellant submits that for AY 11-12, the learned TPO determined TP adjustment for royalty at Rs. 107,98,91,825/- out of total royalty expenditure of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessment order, the AO has held that the price reduction from Denso Kirloskar Industries Pvt Ltd amounting to Rs. 1,38,79,923/- has to be accounted during AY 12-13 (Pg No 122 and 123 of Appeal Papers). 3.20 Before, the DRP, the Appellant made detailed submissions (Pg No.1270-1285 of PB-III). The learned DRP disallowed the claim of the Appellant and upheld the action of AO (Pg 45 of Appeal Papers). The Appellant also submitted that amount of credit note from Denso Kirloskar Industries Pvt Ltd towards price reduction is at Rs. 1,34,40,305/- and figure adopted by the AO is incorrect. The DRP upheld the action of the AO. However, the DRP directed to rectify the amount of addition. (Pg No 45 and 46 of Appeal Papers) 3.21 The Appellant submits that as per AS - 9, under accrual method, revenue recognition is to be postponed when there is inherent doubt on ultimate collection with reasonable certainty (AS 9 at page 1941-1953, para 10 at page 1947). The Appellant submits that in the instant case the income did not accrue till the communication of the credit note by the vendor. The Appellant had no debt due in its favour. The income is offered to tax in subsequent year and addition in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee company. 6.1 He stated that the Hindustan Motors Ltd., was consistently considered by the assessee from the assessment year 2002-03 onwards as a comparable and the Department has accepted in certain years therefore, it should not be rejected. In regard to persistent losses, the criteria for comparability or the economic parameters like functions performed, assets employed, risks assumed and it should not be only on the financial results of the parameters. He also referred on the judgments as quoted in his written synopsis. 6.2 The ld.DR strongly supported the order of the TPO/DRP and submitted that the TPO has rightly rejected Hindustan Motors Ltd., on the basis that it is not functionally comparable and to which the ld.DRP also confirmed. He further submitted that where a company was persistent loss making company for continuously three years and net worth is continuously decreasing and the company is selling its other capital assets, which cannot be considered as comparable companies. The ld.DRP has relied on many judgments, which are squarely applicable in the present facts of the case. In support of this, he relied on the decision of Mumbai Tribunal in the case of GCO....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the projection of the aforesaid comparable company viz. M/s Cather Consultancy Services Pvt. Ltd by the assessee as a profit making company during the financial year 2009-10. As observed by us hereinabove, the assessee had tried to wriggle out of the fact that the aforesaid comparable company was a persistent loss making company by treating bad debts as a non-operational expenditure. In our considered view, the writing back of bad debts being a normal incident of a business operation which is carried everywhere in accounts to have a true picture of profits of the relevant party, thus, cannot be held to be a non-operational expenditure. Accordingly, we do not find any justification for exclusion of the bad debts written off by the aforesaid comparable company in its accounts, for the purpose of computing its margins for the aforesaid three years. To sum up, the margins of the aforesaid comparable viz. M/s Cather Consultancy Services Pvt. Ltd. after excluding the bad debts as a non-operating expenditure by the assessee cannot be accepted. Our aforesaid view is fortified by the order of the ITAT, Hyundai Motor India Engg. (P.) Ltd. v. Dy. CIT [2018] 100 taxmann.com 483 and Kenexa Tec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngaged in only one segment for production of Ambassador car. We hold that it is engaged in more than one vehicle manufacturing activity. Therefore, M/s. Hindustan Motors Ltd. company is functionally similar with the assessee company. We reject the observation of the Ld. AO/TPO/DRP on this issue. Further, the lower authorities have observed that the company is persistent loss making company. We have gone through the financial statements and Director's report. The Director's report placed at paper book page no.2151 is as under: From the above financial years, for 3 years, the company is continuously suffering loss. 6.6 We have also taken extract from the Director's report to the share holder, which is placed at page No.2156, which is as under:- "The revenue account shows a loss of Rs. 29.96 Crore after providing Rs. 21.79 Crores for depreciation & amortisation expense and taking credit of Rs. 3.44 Crores for deferred tax net of other taxes. There was a deficit of Rs. 47.76 Crores in the Statement of Profit and Loss in the last year. After considering the results of the year under review, there is a deficit of Rs. 77.72 Crores in the Statement of Profit and Loss as at the end of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp; 9680.53 10056.06 ======== ======== From the above Financial statement, it is clear that the company is selling its non - current investments and land and buildings. The net worth of the Hindustan Motors ltd. is also going down. The net worth in FY 2010-11 was Rs. 4080.32 Lakhs and in the FY 2011-12 it has come down to 2876.70 lakhs even after selling of non - current investments and land and buildings. 6.8 The company which is continuously incurring losses for three years cannot be considered as a comparable. From the TP study the assessee has taken it as a comparable, whereas the AO/TPO/DRP have rejected this company as comparable on....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... incurred loss of Rs.15.77 crore in relevant year and Rs.21.30 crore in the preceding year. It held that persistent losses coupled with declining turnover over the period indicated abnormal functional circumstances, which rendered it non-comparable and justified the exclusion of such a company from the list of comparables. 17. Factually, it has been found that said company Quintegra Solutions Ltd. was an abnormal company; as on one hand, sales were declining, receivables and write-offs were increasing. Debtors of earlier years were affecting the working capital adjusted OP/TC of the company significantly. Said company was regularly incurring losses. Persistent losses coupled with declining turnover over the period indicated abnormal functional circumstances, which rendered it non- comparable and justified the exclusion of such a company from the list of comparables. Consequently, exclusion of Quintegra Solutions Ltd. was in order and cannot be interfered with. 18. In view of the above findings, this Court is of the opinion that no substantial question of law arises. The appeal is dismissed. 6.9 In the above judgment, the Hon'ble Delhi High Court has held that the persistent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i - Trib.), wherein it was held as under:- 19. Now, coming to the grounds raised by the assessee in respect of computation of PLI. First such ground of appeal no. 3, wherein, the assessee aggrieved by certain income side items not considered as operating income by Ld. AO/DRP/TPO, which are as under:- ? Commission received on direct sales made by AE in India- Rs.54,973/-:- Compensation paid by the AEs to the assessee in consideration of direct sales affected in the assessee's specified territory i.e. to any third party customer in India. ? Insurance claim recovered Rs. 7,774/-:- Recovery of insurance claim on lost laptops and testing devices. 20. Vide ground of appeal no. 4, the assessee is aggrieved as DRP directions were not followed by Ld. AO/TPO regarding treatment of certain expenses as non-operating expenses. We are of the view that both these issues raised vide ground of appeal nos. 3 and 4 needs to be looked into by the AO/TPO and decide the issue after affording reasonable opportunity to the assessee. Hence allowed. 7.4 Respectfully following the above decision, we also remit this issue to the AO for de-novo consideration and the assessee is directed to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er submitted that the decision in the case of the Skoda Auto India Pvt. Ltd., is not applicable in the present facts of the case because it was first year of the case of the Skoda Auto India and the ITAT has given a clear finding that it is in assembling of cars, whereas the comparable companies were in manufacturing sector and it is a full pledged manufacturer with sufficient localization as evident from the documents. He submitted that higher import content does not warrant an adjustment, as it is a commercial decision. He further submitted that the case law relied by the ld. AR is not applicable in the present facts of the case of the assessee. Therefore, he requested the adjustment for custom duty should not be given to the assessee. 8.3 After going through the rival contentions, we observe that the assessee is a manufacturer as well as trader of Toyota motors of different products. During the impugned assessment year, the assessee has paid Rs.4187.32 million of custom duty for which he sought to be excluded for the computation of operating margin. In this regard, we want to reproduce the order of the TPO as well as the DRP, which is as under:- Customs Duty adjustment In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r concrete Machines P Ltd v DCIT TS-239-17AT-2014(PAN)-TP. 7.1 TPO's Comments: Adjustment for difference on Custom Duty. The TPO has studied the submission of the Taxpayer as submitted above in detail and discussed with the AR of the Taxpayer and Senior Officials of the company. The following conclusions are drawn as below: 1. Importing of parts, CBU, SKI) and other material from AE is a business decision of the Taxpayer for the commercial expediency and business requirements of Toyota Brand and to maintain the standards and high quality. This reason cannot be accepted for low margins because it is the business model of the Taxpayer. 2. Import of goods attracts Custom Duty which is a part of the total cost of the goods imported. The price of goods imported are inclusive of Custom Duty. As any other Importer of goods a profit markup is decided with Customs valuations as a part of the cost. The sale price with markup is decided considering the Custom Duty along with the import price. Therefore, Custom Duty is an integral part of the value of the goods imported. The Taxpayer's claim of Custom Duty as a non-operating expenditure and same to be excluded from th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....argin of the Taxpayer. The ITAT held that adjustment is only possible to the comparables as per rule 10(B)(e)(iii). 4The case laws relied upon by the-Taxpayer i.e ,M/Skôda7uito7ndia Put Ltd v ACIT [2009130 SOT 319 (Pune), 1)Demag Cranes & Components (India) (P.) Ltd. v DCIT [2013] 30 taxmann.corn 364 (Pune - Trib.) and Putzmeister Concrete Machines P Ltd v DIT TS-239-ITAT-2014PAN)-TP. 7.1.1. TPO's comments on case laws relied upon by the Taxpayer: In the above mentioned case laws Hon'ble ITAT, Pune Bench in the case of M/s Skoda Auto India Put Ltd v AC'IT [2009] 30 SOT 319 (Pune) and Demag Cranes. & components (India) (P.) Ltd. v DCIT [2 01 3] 30 taxmann.com 364 (Pune - Tub.) has set aside the issue of Custom Duty adjustment back to the file of TPO for reconsidered and fresh adjudication. No relief has been granted by the Hon'ble Tribunal oil issue. 7.1.2.. Judicial Precedence in Taxpayer's own case inAY2oo-o4. Hon'ble ITAT in the AY 2003-04 in the Taxpayer's own case has remanded back to the TPO whether Custom Duty adjustment is to be allowed or not. The TPO was directed to examine the contentions of the Assesse on custom duty adjustment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... companies. 4. This issue is also settled in favour of Revenue by the decision of ITAT Delhi in the case of Sony India Pvt. Ltd Vs. DCIT 114 lTD 448 which held that import duty forms part of the cost in comparability analysis relevant part of the Hon'ble ITAT's ruling is reproduced below: "136. As regards the Taxpayer's claim for adjustment to the operating margins of the comparables on account of higher amount of Custom Duty paid on imported components viz. the comparables, it is noticed that the working of such adjustment sought by the Taxpayer is given oil no. 365 and 356 of the Taxpayer's paper book. A perusal of the said working shows that it is mainly based on proportion of imported components and the duty paid oil imported components. In our opinion, this basis adopted by the Taxpayer for seeking the adjustment on account of excess Custom Duty before by it is not correct in as much as consideration of duty payment alone would not justify such adjustment and it would be necessary to take into account the cost of components imported along with the Custom Duty paid thereon for the purpose of comparison with the corresponding indigenous components consumed by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the value of local components in these vehicles shows decreasing trend from initial years and it further decreased in FY 2012-13. Importing various parts for manufacture of vehicles in India is a business model of the assessee and sale price has thus been decided accordingly. Thus, this is a commercial decision taken by the assessee. The reliance of the TPO on the decision of ITAT in the case of Sony India FyI Ltd is DCJT 114 lTD 448 is also well placed. Although the assessee has relied on the decision of ITAT in the case of Skoda Auto India (P) Ltd. v. ACJT ('Supra) and tried to distinguish its own case from the case of Sony India Pvt. Ltd vs DCIT(Supra), however, both these decisions support the order of the TPO. In Skoda Auto India (F) Ltd. v. ACIT (Supra), the ITAT observed that it was assessee's first full year of operation and the assessee had 98.55% of import content as compared to comparables which had import in the range of 26% to 56.83%, and that is why the case was different from that of the Sony India FyI Ltd('Supra). The JTAT further observed that the case of Skoda"supra, was virtually that of an assembly job of imported knocked down- kits and its busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ors 22.28% Hindustan Motors 56.53% Swaraj Mazda 3.57% 8.8 During the impugned assessment year, the assessee sold 57,500 units of Innova vehicles and 11,500 units of Fortuner vehicles. Till the financial year 2009-10, the assessee was achieving sales volume of less than 1 lakhs units per annum. During the end of financial year 2010- 11, the assessee commenced the second plant to manufacture of Etios, Cedan and Etios Liva version. In financial year 2012-13, the assessee increased its production capacity from 2,10,000 units to 3,10,000 units. We also observe from the financial statements that the turnover of the assessee has also been increased by 48% (114522.06 - 77241.26 = 37280.08 Rs.in million (net of excise duty compared to the previous assessment year. ) 8.9 In the assessee's own case for the assessment year 2007-08, 2008-09 and 2010-11 no such adjustment have been sought for, whereas the business model of the assessee is same. We noted that the assessee had paid custom duty for importing raw materials from its AEs, which is part and parcel of the total cost of the imported goods as well as for the part of the total production cost. Even if the materials are imported from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h the assessee is claiming exclusion of extra custom duty on the strength of its higher quantum and not the higher rate of Customs duty. In case of comparable companies, there are various costs which also fluctuate so as to have disadvantageous position viz., to the taxpayer. These differences would not have material effect on net margins that's why the TNMM method is adopted as a MAM. 8.11 Further during the course of hearing, the ld.AR could not substantiate that there is a variation in the rate of custom duty paid by the assessee in the imported goods for consumption of raw materials, the quantum of imported materials of the assessee company as well as the comparable companies are immaterial. Considering the facts and circumstances of the case, we direct the assessee for providing rates of custom duties paid by the assessee company as well as the comparable company to the AO/TPO and if the assessee could prove that the custom duty of assessee is higher than the comparable company's custom duty rate for the import of goods, then the assessee would be eligible for claiming adjustment. Accordingly, this ground is remitted for fresh consideration by the AO/TPO for ascertaining the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ital adjustment. The ld.DRP also upheld the action of the TPO and held that the assessee did not demonstrate how working capital levels have impacted the margins. 10.2 The ld.DR relied on the order of the lower authorities. 10.3 Considering the rival submissions the assessee has placed working capital adjustments. The working capital adjustment is an accepted adjustment and this issue has also been decided by various High Courts in favour of the assessee. A similar issue has been decided by the coordinate bench of the Tribunal in assessee's own case in ITA No.2016/Bang/2018 order dated 18/08/2021 for the assessment year 2013-14, wherein it has been held as under:- "9. The assessee had provided the working capital adjustment computation and requested the TPO to grant such adjustment. The TPO did not grant working capital adjustment. There is no discussion on this aspect in the TPO's order. 9.1 Before the CIT(A), the assessee made detailed submissions why the working capital adjustment be granted. The CIT(A) requested for remand report from the TPO on this issue. In the remand report the TPO submitted that the working capital adjustment should not granted. The assessee filed a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee. The ld.DRP has discussed this issue in detail. He further submitted that the assessee company is working in India before the assessment year 2003-04 and it is also engaged in the manufacturing segments. Therefore, the plant and machinery used by the assessee has also become old. Therefore, the comparable companies are using old plant and machinery for their manufacturing which are not tenable. He further submitted that during the financial years 2010-11 and 2011-12, the assessee has enhanced his production capacity and the assessee started a second plant to manufacture 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 vehicle from Plant 1 to Plant 2. Therefore, the assessee has no ideal capacity, and therefore, the cash PLI and depreciation adjustment should not be granted to the assessee. 11.3 Considering the rival submissions, we noted that the assessee has sought for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profits are / were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by the IT regulations. There is no way to dislodge the claim of the tax payer. The context and purpose of legislation and facts of the case overwhelmingly approve adoption of cash profit only." This case was relied upon by the assessee in support of its proposition that cash PLI or PBDIT is the appropriate PLI. 19.4.3 We find that the above finding of the Tribunal was given as the case of revenue was not clear and the TPO had rejected cash PLI without assigning any reasons. Subsequently, the Mumbai, ITAT, in the case of Fiat India Pvt Ltd (supra) held that in an asset intensive industry where assets are the key drivers, excluding depreciation would not lead to any meaningful outcome and P....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... authority. Before the CIT(A), the assessee filed detailed submissions why TP adjustment should be restricted to AEs transactions. The CIT(A) requested for a remand report from the TPO on this issue. The TPO submitted a remand report by stating ALP should be calculated on entity level. The assessee filed a rejoinder. The CIT(A) accepted the submissions of the assessee and directed the TPO to restrict the TP adjustment to the transaction it had entered with its AEs, alone. 10.2 Aggrieved, the Revenue has raised this issue before the Tribunal. The learned Departmental Representative relied on the order of the AO / TPO. 10.3 The learned AR, on the other hand, submitted that in assessee's own case for assessment year 2003-2004, the Bangalore Bench of the Tribunal had accepted that the TP adjustment is to be restricted only to the transaction assessee had entered with its AE. Copy of the order of the Bangalore Bench of the Tribunal in assessee's own case for assessment year 2003-2004 is placed on record. 10.4 We have heard rival submissions and perused the material on record. For assessment year 2003-2004 in assessee's own case the Bangalore Bench of the Tribunal had accepted t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the transaction level or the enterprise level. It is submitted that the adjustments are also made for difference in the accounting methodology. TNMM makes a comparison at the entity / global / segment level and not at the transactional level. He assailed that the merit of this method is that, it is resilient to minor functional differences. As a result of this characteristic, examination is not made at the individual component level of income or expenditure that has been reckoned in arriving at the net profit but at the entity level. The Ld.AR emphasized that when comparison is made at the macro (global) level, where multiple intertwined transactions exist, it is not possible to identify or pinpoint the contribution of each facet or transaction to the earning of net profit. 8. He submitted that in the process of adopting the TNMM, the assessee adopted the Net Profit as the starting point, and in arriving at its net profit, the assessee considered and factored the royalty payments. The Ld.AR submitted that, royalty is integral to and inseparable to its dealings in the business segments. It is submitted that being a relevant aspect of dealings, it would be impractical and also ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....015 and A.Y. 2013-14 in ITA Nos. 2016 & 1972/Bang/2018 the Coordinate Bench of this Tribunal in assessee's own case has analysed that the royalty payment has been made by assessee towards the license to manufacture items on exclusive basis. It is also been submitted that in the sister concern's case being Toyota Kirloskar Auto Parts for A.Y. 2007-08 in IT(TP)A No. 1356/Bang/2011, this Tribunal has taken similar view. We note that for A.Y. 2007- 08, this Tribunal in assessee's own case for A.Y. 2007-08 reported in [2014] 48 taxmann.com 380 has considered the issue of separately bench marking the royalty as under. "48. On the issue whether the TPO can come to a conclusion that the ALP of an international transaction is nil because no services were rendered or that the assessee did not derive any benefit from the AE for which payments were made, we have considered the submissions of the learned counsel for the assessee. This issue is purely academic because we have already held that the conclusions of the TPO/DRP that the trading and manufacturing segment of the Assessee are distinct and not inter related warranting combined transaction approach is not correct and that a IT(T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India's tax jurisprudence. The Hon'ble Court held that it is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same. In light of the aforesaid decisions, we are of the view that the stand taken by the assessee in this regard deserves to be accepted. It is clear from the decisions referred to above that the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act. He is not competent to hold that the expenditure in question has not been incurred by the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arious High Courts as well as decision of this Tribunal. Admittedly, the assessee has treated royalty to be closely interlinked with the transactions, which was rejected by the revenue authorities. Reliance has been placed on following decisions in respect of above proposition. a) DCIT vs. Air Liquide Engineering India P Ltd. reported in [2014] 43 taxmann.com 299 (Hyderabad Tribunal) b) Dell International Services India Pvt. Ltd. vs. JCIT in IT(TP)A No. 130/Bang/2014 & IT(TP)A No. 121/Bang/2014 dated 22.12.2021 c) McCann Erikson India Pvt Ltd vs. ACIT - ITA No.5871/Del/2011 d) M/s. Thyssen Krupp Industries India Pvt Ltd V ACIT - ITA No. 7032/Mum/2011 e) Lumax Industries Ltd v ACIT TS-152-ITAT-2013(DEL)-TP. f) Hindustan Unilever Limited v Ad CIT ITA No. 7868/Mum/2010 g) DCIT v CMA CGM Global India (P) Ltd ITA No. 5979/Mum/2010 h) Yokogawa India Limited v ACIT ITA No. 1329/Bang/2011 13. We note that assessee's margins have been computed including royalty payment which is higher than the margin of the comparables. It is also not disputed by the revenue that the comparables in case of the comparables, the royalty, margins are computed after including royal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the employees who have completed 10 years of service are presented with mementos in the form of gold. Therefore, the liability has been provided in the books of accounts. The AO noted that neither the liability was crystallized nor accrued accordingly, he disallowed. On objection before the DRP, he confirmed the objection no. (i) to (iii) and in case of objection no.4, the actual amount debited was Rs.1,01,88,674/-. In this regard the assessee has filed rectification application, accordingly, after verifying the records, the addition was reduced to Rs.1,01,88,674/- Accordingly, he partly allowed. 14.1 The ld.AR reiterated the submissions made before the lower authorities as well as the written synopsis quoted supra and submitted that the provision was made as per accounting standard 15 of Rs.1,01,88,674/- towards future liability accruing to other employees, who are in service for 10 years. The provision was based on the actuarial valuation and the assessee is adopting mercantile system of accounting and he further submitted that similar issue has been decided in assessee's own case by the coordinate bench of the Tribunal in ITA No.1972/Bang/2018 for the assessment year 2013-14 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r this system, the effects of transaction and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in financial statements the period to which they relate. 3.4.2 The Hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 112 taxman 61 (SC) had held if business liability has definitely arisen in the accounting year, then the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, it was held by the Hon'ble Supreme Court that the liability is not a contingent one and the liability is in praesenti though it will be discharged at a future date. It was further held by the Hon'ble Supreme Court that it does not make any difference if the future date on which the liability shall have to be discharged is not certain. The Hon'ble Supreme Court was considering a case where the assessee company had ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o prove before the A.O. the scientific basis for creating a provision for Rs.46,60,033. For this purpose, the issue raised in ground No.11 is restored to the files of the A.O. with the above directions. It is ordered accordingly." 15. Ground No.17 - Excess claim of depreciation The assessee had capitalized some capital assets on provisions basis, the assets were acquired. Subsequently, in the next financial year it was reversed. Before the AO vide letter dated 25/02/2016, the assessee submitted that it was only because of the price negotiations with the vendors was not finalized, therefore the assessee claimed depreciation on the basis of liability, which has neither been quantified nor crystallized. On the same letter the assessee admitted that there was excess claim of depreciation of Rs.60,26,382/- has been claimed on provisions created and it was reversed subsequently. The explanations were not accepted by the AO and he added it into the total income of the assessee. On objections raised before the DRP, the assessee submitted detailed submissions. The ld.DRP observed that the assessee has not adopted any scientific approach for claiming depreciation on provisions and the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g at the purchase price. Examples of directly attributable costs are: (i) site preparation;( (ii) initial delivery and handling costs; (iii) installation cost, such as special foundations for plant; and (iv) professional fees, for example fees of architects and engineers. The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors." 15.6 As per the above accounting standard the fixed assets are to be capitalized if it is ready for use, the cost components includes all relevant costs which are directly attributable cost of bringing the assets to its working conditions for its intended use. The assessee submitted that the assets were put to use during the impugned assessment year to which the revenue authorities have not disputed merely the ld.DRP did not accept the claim of the assessee that the assessee has not adopted any scientific approach. Now the sec.32 for claiming depreciation on the following two conditions must be satisfied. (i) It should be owned, wholly or partially by the assessee and (ii) it should be used for the purpose of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....penditure relating to royalty. However, in relation to above amount, the assessee had not complied with the provisions of section 40(a) in respect of an amount of Rs .57,53,23,147/-. So, as per assessee, this amount was disallowed in the computation of income. So effectively an amount. of Rs 122,44,96,561/- was claimed as expenditure on account of royalty by the assessee for AY 201142. The TPO determined the ALP of royalty at .Rs 71,99,21,883 and accordingly recommended adjustment of Rs 1.07,98,91,825/- to the assessing officer. This adjustment constituted of two parts: The amount on which tax at sourc Deducted : Rs 50,45,68,678/- The amount on which tax at source not deducted : Rs 57,53,23,147/- Total adjustment: . . Rs107,98,91,825L 6.6 Thus, the adjustment re.comrne1ed by the TPO and that made by the AO included the amount on which tax at source was not deductc1 by the assessee. Even if the assessee had deducted tax at source on this amount of Rs 5045,68,678/-, the amount would not have been allowed as expenditure in the AY 2011-12 due to above adjustment. So, deduction of tax at source on this amount subsequently will not alter the situation, as the amount itself is,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ounds raised by the assessee are allowed." 16.4 The ld.DR relied on the orders of the lower authorities. 16.5 Considering the submissions from both the sides, the amount of Rs.57.53 crores was disallowed by the assessee in the assessment year 2011-12 while computing taxable income and the assessee submitted before us that the TDS has been made in the following assessment year and the details are placed in the paper book. The ld.DRP observed that the disallowance of Rs.57.53, which was a part of the disallowance made u/s 92CA in the previous assessment year, therefore, it cannot be allowed/disallowed as per sec.40(a)/37(1) of the Act. The addition made u/s 92CA cannot be correlated with the disallowance u/s 40(a)/37(1) of the Act. Therefore, we do not find substance on the submissions of the ld. AR. The case law relied by the ld. AR is not applicable on the present facts of the case. The ld. AR submitted that the ITAT has decided this issue in favour of the assessee for the AY 2011-12 wherein it has been held that if the assessee has applied TNMM at entity level then no separate adjustment can be made for Royalty payments u/s 92CA, but no copy of the order was produced before us ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laims that the balance was accounted for in FY.2012-13. Hence, the balance amount of Rs. 1,38,79,923/- is to be reduced from the purchases during this year to reflect the correct taxable income. This amount is accordingly added to the total income. It is to be noted e credit note for this amount was received by the assessee on 25/5/2012 much before the filing of Return of Income. However, this has been admitted by the assessee only upon persistent enquiry by the undersigned." 16.7 Aggrieved from the above addition, the assessee filed appeal. 16.8 The ld.AR reiterated the submissions made before the lower authorities as well as he relied on the written submissions cited supra. 16.9 The ld.DR relied on the order of the lower authorities and he submitted that the lower authorities have rightly passed the order on this issue. The income was accrued to the assessee in the impugned assessment year. For the purpose of computation of income, the assessee should have taken it as income for the year because the credit note was received well before the date of filing of return of income on 28/11/2012. The AO assessed it as income for the impugned assessment year on the basis of real incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... accrual is a matter to be decided on commercial belief, having regard to the nature of business of the assessee and character of the transaction. Accordingly, for the purpose of determining whether there has been accrual of real income or not, recourse is to be made to the business character of the transaction. No doubt, the Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipts but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though the book keeping entry is made about hypothetical income which does not materialize. In the case on hand, the right to receive income was certain and merely the assessee had adopted its books of accounts in the annual general meeting which is prior to the receipt of information from Denso Kirloskar Industries Pvt. Ltd. Therefore, the facts of the case law relied by the ld.AR are different from the assessee's case. Accordingly, the judgment relied on by the ld.AR is not acceptable in the present facts of the case. Accordingly we uphold the order of the AO and dismissed the ground raised by the assessee. The AO is al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the RPT ratio to be adopted for applying the filter. 5. The learned CIT(A) has erred in confirming the action of the AO and TPO in: Ca Inappropriately computing the operating profit margin of the comparables. b. Inappropriately computing operating margins of the Appellant by considering i) Interest received; ii) Liabilities/Provisions written backs iii) Miscellaneous income; and iv) Interest Paid, as non-operating in nature. On parity of reasoning these should be considered as operating in nature even in case of comparables; c. Inappropriately computing operating margins of the Appellant by considering Provision for PF of International Workers as operating in nature without appreciating that these expenses should be treated as non-operating in nature. 6. The learned CIT(A) has erred in confirming the action of the AU and TPO in: a. Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies; b. Ignoring the business, commercial and industry realities and economic circumstances applicable to the Appellant vis a vis the comparables; c. Not providing Customs Duty adjustment, which was req....
X X X X Extracts X X X X
X X X X Extracts X X X X
....epresents a recurring payment for a one-time transfer of technology; and b. Technology for some models was received during the year whereas technology for other existing vehicles had been received in earlier years. 13. The learned CIT(A) has erred in ignoring the submissions made by the Appellant and confirming the action of the AO and/DO with respect to: a. Not considering external CUP transaction for computing ALP; b. Ignoring the fact that the ratio of R&D expenses of TMC was much higher than the effective royalty rate of the Appellant; c. Ignoring the fact that the Technical Assistance Agreements were approved by Government authorities and therefore royalty payment should be considered as at arm's length; and d. Ignoring the fact that, the CIT(A), DRP and ITAT in earlier years have accepted both factum as well as quantum of royalty as at arm's length for the preceding assessment years. 14. Without prejudice to above, the learned CIT(A) has erred in confirming the action of the AO and TPO in: a. Relying on TP analysis of AY 2012-13 & AY 2013-14 for making TP' adjustment, without considering the facts and circumstances applicable to the year un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TO INTEREST 19. The learned CIT(A) has erred in confirming the action of the AO in levying a sum of Rs 56,75,09,089/- and Rs.46,99,520/- as interest under section 234B and 234D respectively. On the facts and in the circumstances of the case, interest charged under section 234B and 234D is excessive and Appellant denies its liability to pay the same. The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. 20. The assessee filed its return of income for the assessment year 2014-15 on 27/11/2014 declaring a loss of Rs.99,54,32,619/- under the normal provisions of the Act and admitted loss under book profit u/s 115JB of Rs.1,85,94,46,575/-. 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 noti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessment order was forwarded to the assessee but the assessee did not file objections before the DRP vide his consent dated 30/01/2018. Accordingly, the AO passed final assessment order on 14/02/2018 and the AO computed assessed income as under:- Loss income as declared by the assessee Rs.(102,87,25,711) Add: TP Adjustment Rs.4960627952 Add: Disallowance on Misc. Expenditure Rs.1732194 Add: Provisions for long Service Rs.2842112 Total Assessed Income Rs.3936476547 23. Aggrieved from the above assessment order, the assessee filed appeal before the CIT(A) and the CIT(A) partly allowed the appeal of the assessee. 24. Aggrieved from the order of the CIT(A), the assessee filed appeal before the Tribunal. 25. The ld.AR of the assessee reiterated the submissions made before the lower authorities and he also reiterated the arguments advanced for the assessment year 2012-13 as noted supra, whichever is applicable. In addition 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e basic taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Motars Ltd. and Maruti Suzuki India Limited. 2.46 Therefore, based on above the Appellant submits that the RPT ratio should be applied on an aggregate basis to ensure that only uncontrolled transactions are compared as per mandate of Section 92F(ii). The Appellant submits that Tata Motors Ltd, Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd should be rejected as a comparable on ground that they fail RPT filter. Ground No.5 - Margin Computation of the Appellant 2.47 During the year under consideration, the Appellant had considered other income of Rs.1,71,74,90,000/- comprising of interest income, provision written back and miscellaneous income (lease rent, scrap sales etc) as operating 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed as nonoperating in nature as it is only an anticipated liability. Further, out of total provision of Rs.116.72 crores, Rs.101.50 crores pertains to earlier years. Further entire provision has been disallowed while computing the total income of the Appellant [Pg 136 of Paper Book I]. The Appellant relies on the following decisions wherein it is held that expenses disallowed should be excluded from operation cost: * Haworth (India) (P.) Ltd vs DCIT [2011] 11 taxmann.com 76 (Delhi); * Marubeni India (P.) Ltd vs ACIT [2013] 33 taxmann.com 687 (Delhi-Trib.) 4 Miscellaneous income should be considered as operating in nature. The learned CIT(A) rejected the submissions of the Appellant on the ground that similar breakup of miscellaneous income is not available in case of comparables. (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 followin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Paper Book I). The Appellant in its submissions before TPO requested to grant custom duty adjustment (Pg 522 to 547 of Paper Book II). The TPO denied custom duty adjustment by stating that it is the business decision of the Appellant and it does not impact the comparability (Pg 90 to 95 of Appeal Papers). 2.56 Before CIT(A), the Appellant made detailed submissions on why it should be granted custom duty adjustment (Pg 764 to 798 of Paper Book III). The learned CIT(A) rejected the submission of the Appellant and upheld the action of TPO. (Pg 21 to 22 of Appeal Papers). 2.57 The Appellant submits that it has higher import component (46.72%) vis-à-vis the comparables average rate of 8.96% (table at Pg 765 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 operat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Appellant also declared lockout due to labour unrest. This resulted in slow production levels and even there was complete halt of production. 2.64 For the aforesaid reasons there was underutilization of capacity when compared to the comparables. So, an idle cost adjustment is to be given for the unutilized capacity in excess of industry unutilized capacity i.e. 7.64% (50.44% - 42.80%) capacity. 2.65 The Appellant relies on the decision of Honourable Bangalore Tribunal in the case of IKA India Pvt Ltd vs DCIT [TS-1049-ITAT-2018Bang-TP] wherein it is held that capacity utilization adjustment has to be given and it is also held that in case appropriate 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 requ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t in the order. 2.73 Before CIT(A), the Appellant detailed submission on why TP adjustment should be restricted to AE transactions (Pg 844 to 854 of Paper Book III). The CIT(A) rejected the submission of the Appellant and upheld the action of TPO (Pg No.29 to 33 of Appeal Papers). 2.74 The Appellant submits the in its own case for AY 2003-04, the Honourable Bangalore Tribunal has accepted that TP adjustment has to restricted to AE transactions (Para 22 at Pg.1194 to 1195 of Case Law Compilation). Further, in Appellants own case for AY 2013- 14[ITA No.2016/Bang/2018, 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). ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d AY 2013-14 was not correct. In AY 2012-13 and AY 2013-14, the TPO compared 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 instead of net sales (Pg 577 to 602 of Paper Book II). In Appellant's own case for AY 2013-14 [ITA No.2016/Bang/2018, dated 18.08.2021], the ITAT has held that net sales should be adopted as denominator for the comparable and the Appellant [Para 11.5 at Pg 1131 of Case Law Compilation]. 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 Valuat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2021] [Para 3.4.3 at Pg 1110 of Case Law Compilation]. 3.29 Reliance is also placed on the decisions in the case of CIT v Eveready Industries India Ltd (2018) 98 taxmann.com 90 (Calcutta High Court) - para 11) wherein provision for medical benefit of its employees was allowed as deduction. Ground No.16 & 17- Miscellaneous Expenses 3.30 During the year under consideration, the Appellant incurred a sum of Rs.17,32,194/- towards construction 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 Bid....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee as per his written synopsis. A similar issue has been decided by the coordinate bench of the Tribunal in assessee's own case in ITA No.2016/Bang/2018 vide order dated 18/08/2021 for assessment year 2013-14 by holding as under:- "7.4 We have heard rival submissions and perused the material on record. There is nothing on record to suggest how RPT ratio has been calculated 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roduction capacity from 2,10,000 units to 3,12,000 units and produced only 1,54,627 units, therefore, the appellant raised this issue for adjustment of under capacity utilization . The ld. AR relied on his written synopsis and ld. Dr relied on the order of the lower authorities. Considering the arguments from both sides, we observed that this issue was also raised before 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 launche....
X X X X Extracts X X X X
X X X X Extracts X X X X
....further stated that "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. The appellant claims that the average industry utilization is 52.20% during the year whereas its own capacity utilization is 49.56%. However, in absence 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 transacti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the circumstances 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....I.T.A. No.: 4620/De1/2011), it was held that:- "5. ..... Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit 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 Tribu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne as to whether or not, the values stated for the international transactions are at ALP i.e., whether the price charges is comparable to the price charges under an uncontrolled transaction 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 co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) 35. Accordingly, we direct the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of 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 ....