TaxTMI 
TaxTMI 
2024 (5) TMI 587
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.... Income Tax Act, 1961 ('the Act') to the extent prejudicial to the Appellant, is bad in law and is liable to be quashed. 2. On the facts and in the circumstances of the case and in law, Hon'ble Panel erred in upholding the action of the learned Transfer Pricing Officer ('Ld. TPO') / Learned Assessing Officer ('Ld. AO') in proposing an adjustment of INR 3,33,61,422 to the international transactions pertaining to purchase of raw materials / finished goods by the Appellant to its Associated Enterprises ('AEs'). 3. On the facts and in the circumstances of the case and in law, Ld. AO / Ld. TPO / Hon'ble Panel has erred in including companies in the comparable set which are not comparable to the Appellant's functions, asset base and risk profile, viz., (a) Cera Sanitary Ware Limited and (b) HSIL Limited. 4. On the facts and in the circumstances of the case and in law, Ld. AO / Ld. TPO / Hon'ble Panel has erred in considering certain cost elements as non-operating in nature while computing operating margins of tested party and comparable companies. 5. On the facts and in the circumstances of the case and i....
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....e Appellant's functions, asset base and risk profile, viz., (a) Cera Sanitary Ware Limited and (b) HSIL Limited. 5. In this regard, the ld. AR has drawn our attention to the order of DRP and our attention was drawn to Para 2 to 2.22. which is to the following effect : 2.1.1 It is contended by the assessee that HSIL Limited is not comparable to the assessee company as HSIL Limited is engaged in manufacture diversified products such as sanitary ware, faucets, kitchen appliances, wellness products such as massage tubs, multi-functions, shower panels, shower enclosures, tiles, extractor fans, glass containers, PET bottles, etc. It was also pleaded that if at all, only the building product division which is engaged in manufacture of sanitary tiles is comparable. It was further argued that the company has not provided the segmental results for its building product division and the packing product division in its annual report, and therefore, in the absence of such information, this company cannot be considered as comparable. The assessee also pleaded that the company has incurred substantial R&D expenditure, and whereas the assessee company did not incur any such expendit....
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.... the net turnover taken in the consolidated financial results (refer tables above). The segmental results reported in the consolidated financial statement reflects the financial performance of the divisions of the company HSIL. We further note as per information given (at page 179 and 180 of the annual report of this company for F.Y. 2014-15, information at page 168 of annual report for F.Y. 2013-14 and information at page 152 of annual report for F.Y. 2012-13), the subsidiaries pertaining to the Building product division have very meagre operational income of rupees one crore or less during these years (i.e., F.Y. 2012-13 - Rs. 86.39 lakh, Rs. 93.61 lakh for F.Y. 2013-14) and have also shown substantial losses in all these years. These information further strengthens our view that the segmental results given in the consolidated financial statement pertain to the building division of the company HSIL and can be reliably taken for the comparable analysis. Even otherwise, considering the low operating turnover and losses of the subsidiaries, and their corresponding impact in reducing the profit margin of HSIL, at the consolidated level, we note that the assessee is not adversely affe....
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....sactions need to be broadly similar, significant product diversity and some functional diversity between the controlled and uncontrolled parties are acceptable". Thus, it is an admitted position that product diversity is tolerant under TNMM. In view of these, we do not find merit in the pleas raised. With regard to the plea of R & D expenditure, we note that the TPO has brought on record as to the expenditure incurred by the assessee towards technology by way of royalty payment and thus, there is no functional difference in regard to comparability on account of R & D spend. Accordingly, we uphold the selection of this company as comparable." 6. The ld. AR further submitted that in the first round, the Tribunal vide its order in ITA No.2378/Hyd/2008 dt. 15.09.2021 has remanded back the issue to the file of DRP with the following directions. "4. Learned department representative fails to dispute that the DRP herein has nowhere taken into consideration the assessee's detailed objections quoting functional similarity, lack of the relevant segmental financials and engagement of the said twin entities in R & D activities, whilst declining the impugned objection in a crypt....
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....om 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 HSIL Ltd., also. He submitted that when the figures relating to consolidated financial results are correlating with the figures in the financial statement standalone, such figures relating to consolidated financial results are reliable and clue can be had from such figures for the comparability of this entity. Further, as observed by the learned DRP, for the suitability of TNMM as MAM, assessee itself said in their TP study report that under the TNMM, comparable transactions need to be broadly similar, significant product diversity and some functional diversity between the controlled and un-controlled parties are acceptable. Here in this case, what all the assessee pleaded is only some degree of product diversity, but little functional diversity. 22. We have gone through the record in the light of the submissions made on either side. It cannot be disputed that HSIL Ltd., under th....
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....umber 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 others are mentioned, to say that the assessee does not deal with cullets and quartz/feldspar. Firstly, cullets and quartz/feldspar are useful only in packing division and we are not considering it now. There is no material to show that the other material that is used has nothing to do with the sanitaryware production. Even if some fraction of it is used, ultimately, the learned DRP while referring to the consolidated financial results held that the segmental results reported therein are agreeing with the figures in the financial statement (standalone) and reflect reliable financial performance of the divisions. When the functions are broadly agreeing with each other, it is not possible to count the differences in the description of the products and to eliminate the entity. Though the terms used are generic in nature giving an impression that the company is engaged ....
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....d 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. 9. On the basis of the above and also on the basis of the financials of the Cera Sanitary Ware Limited for the assessment year under consideration, it was pointed that there is no change of facts and our attention was drawn to Page 643 of the paper book wherein the Revenue from Operations was mentioned at Rs. 6,63,69,23,780/- vide Note No.20. It was submitted that quite similar to A.Y. 2015-16, the cost of Materials consumed was mentioned at Rs. 64,91,40,425/- vide Note 22. 10. It was submitted that since the Cera Sanitary Ware Limited is dealing in various verticals including the Faucet manufacturing including facilities like manufacturing tiles etc and therefore, this compan....