TaxTMI 
TaxTMI 
2023 (9) TMI 543
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.... year 2015-16, the assessee has undertaken various international transactions, mainly in the nature of purchase of raw material, purchase of finished goods and sale of finished goods with its associated enterprises. 3. By adopting the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and applying OP/OR as Profit Level Indicator (PLI), assessee determined its operating margin as 4.36%. Having considered the comparability of the entities picked up by the assessee and also by conducting fresh search, finally the learned TPO prepared the list of comparables with Asian Granito India Ltd., Orient Bell Limited, Somaney Ceramics, Murudeshwar Ceramics Limited, Lexus Granito, HSIL Ltd., Kajaria Ceramics Limited and Cera Sanitary ware Limited. Out of these eight entities, all the entities chosen by the assessee except Schablona India Limited are included. By applying OP/OC as PLI, learned TPO arrived at the margins of the comparables at 7.17% and on that basis proposed an upward adjustment of Rs.76,94,075/-. Accordingly draft assessment order was passed on 06/12/2018. 4. Aggrieved, assessee filed objections before the learned DRP. While such proceedings before the ....
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....faucets (Prima, Star, Gem), fixing toolkit (Rondo and Mistrel), urinal partition, PVC signal flush etc. Under Elegance Brand, it manufactures apart from other things, Cabinets, Table Tops, Table tops with Vanity Basins, Cabinet with the mirror, concealed cisterns, concealed cisterns plate etc. 8. Coming to ground No. 3, in respect of HSIL Ltd., learned TPO recorded that this company is a producer of premium arrange tiles and sanitaryware under the brand name 'Hindware' along with similar associated products. Assessee objected to the inclusion of this entity on the ground that this company is not functionally comparable, as the company offers sanitaryware, faucets and glass bottles; and the company's segment include building products, division and the packaging products division-whereas the assessee is mainly into the production of vitrified tiles. It was further submitted that it incurs considerable R&D expenditure whereas the assessee does not incur any expenditure towards R&D and also that segmental reporting is not available in the annual report. Learned TPO observed that though the assessee claims to have been dealing exclusively in tiles and sanitaryware unlike HSIL Ltd.,as p....
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....roduct division deals with manufacture of tiles and allied products and the financials of this company show that as on 31/03/2015, the sales of sanitary products were Rs. 963.71 crores and profit there from was Rs. 177.89 crores. On a perusal of the standalone financial statement vis-a-vis the consolidated financial results, learned DRP found that the segmental results reported in the consolidated financial statements reflects the financial performance of the divisions of HSIL Ltd., and such figures could be reliably taken for consolidated analysis. Learned DRP directed the learned TPO to take 19.47% as the margin pertaining to the building product division of HSIL Ltd. In respect of R&D expenses, learned DRP found that the R&D expenses of HSIL Ltd., constitute only 0.04% of its gross turnover for the financial year 2014-15 whereas the assessee paid 3% of sales towards royalty for technical know-how and technology upgradation and, therefore, R&D expenditure is no reason to set apart this HSIL Ltd. from comparison. 11. In respect of Cera Sanitaryware Ltd., learned DRP found that both Cera Sanitaryware Ltd., and the assessee are in the business of manufacture and trading of ceramic ....
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.... which help conserve water and has been awarded the WEP-I star certification by International Association of Plumbing and Mechanical Officials (IAP MO); that these products help them garner premium pricing in the market. 13. He further submitted that faucet manufacturing company cannot be compared to ceramics manufacturer, faucets and bathroom fittings cannot be compared to the ceramics/tiles/sanitaryware industry; that the raw materials required, the technology involved and investment requirements, etc. for faucet manufacturing is very different from ceramics industry; that the main raw materials for faucets and bathroom fittings are metals/alloys such as brass, stainless steel, zinc alloy, etc., whereas the assessee has consumed raw materials such as ball clay, soda feldspar, China clay, zirconium silicate, etc. which are used for manufacturing of ceramics/sanitaryware; that in the absence of segmental results in the standalone financial statements between the abovementioned different businesses of HSIL Ltd., most of which are not comparable to the assessee, it ought to be held as functionally incomparable to the assessee and hence should be excluded from the final set of compar....
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.... involved and investment requirements, etc. for faucet manufacturing is very different from ceramics industry; and that the main raw materials for faucets and bathroom fittings are metals/alloys such as brass, stainless steel, zinc alloy, etc. 17. He further submitted that from Note 22 of the financial statements of Cera Sanitaryware Ltd., cost of materials consumed that, during assessment year 2015-16, it has consumed "Brass ingots and components" worth Rs. 36.57 crores, namely, 51.60% of total cost of material consumption, whereas the key raw materials used by the assessee revolves around sand and related products, namely, ball clay, soda feldspar, china clay, zirconium silicate, etc., which are used for manufacturing of ceramic products, which shows that the assessee is not engaged in selling faucet ware and bathroom wares which is a completely different business, not functionally comparable to that of the assessee, who is engaged only in ceramics industry. 18. He further submitted that in the absence of segmental results between the abovementioned different businesses of Cera Sanitaryware Ltd., most of which are not comparable to the assessee, it ought to be held as functiona....
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.... functionally both HSIL Ltd., and Cera Sanitaryware Ltd., are similar to the assessee and merely by enumerating the differences emanating from the use of generic terms in the website, giving an impression that the HSIL Ltd., and Cera Sanitaryware Ltd., into diversified business, assessee cannot escape from the core business of these three entities. He submitted that when compared to the expenditure met by the assessee for securing the benefits of new technology, the other two entities are spending very small amount. R&D is undertaken by those two entities directly whereas assessee outsourced the same. Since the assessee is spending 3% on this pursuit, assessee cannot say that because the other two entities conduct R&D on their own cannot be compared to it, when such an expenditure is 0.03% or 0.13% by others respectively. Lastly he submitted that comparison of functions is different from comparing the variety of products that result in the similar function. He submitted that the manufacture of faucets and glasses by other two companies is miniscule and as a matter of fact, as rightly observed by the learned DRP in their order segmental information is very much available for the HSI....
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....contrary material is placed before us. We, therefore, find it difficult that for non-availability of segmental information in the financial statement (standalone), this entity needs to be eliminated from the list of comparables. The approach of the learned DRP is reasonable and correct and a very pragmatic one. By this approach, learned DRP segregated the margins of packing division and culled out the margins of sanitary products. 24. Coming to functional aspect, the submission of learned AR that the annual report shows that HSIL Ltd., is manufacturing 3.8 million pieces sanitaryware and 3 million pieces of faucets and, therefore, significant amount of material that goes into faucet manufacturing. We are not prepared to agree with this approach. Functional comparability cannot take place like this. For every piece of sanitaryware, there would be equal or more number of nuts and bolts or some other thing making the sanitaryware meaningful. That does not mean that such other allied things will constitute the significant portion. With reference to the figures, learned AR took us to Note 25 in the significant accounting policies, where clay, soda ash, cullets, quartz/feldspar and othe....
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....f this entity from the list of comparables. 26. Unlike in the case of HSIL Ltd., in this case, the consumption of raw material suggests the proportions of different activities of this entity, but without any clue about the proportionate revenues. In the case of HSIL Ltd., learned DRP was able to draw figures of sale and profit in respect of sanitaryware division and packing division, but it is not so in this case. Considering this aspect vis-à-vis the financials of the company, we are of the considered opinion that in the absence of such information, it would not be safe to compare the assessee with this entity to draw the correct margins. We, therefore, direct the learned Assessing Officer/learned TPO to exclude this company from the list of comparables. With these observations, we allow ground No. 3 in part. 27. Coming to ground No. 4, learned DRP found in its directions that segmental details in respect of Murudeswar Ceramics are available and, therefore, vitrified tiles segments is comparable to the assessee. Learned DRP accordingly directed the learned TPO to adopt the vitrified segmental results of the company for the purpose of comparable analysis and margin computa....