AI Drafter 
TaxTMI 
TaxTMI 
2018 (7) TMI 2351
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....) of the international transactions. 2. In law and facts and circumstances of the case, Ld. Transfer Pricing Officer ('TPO')/ DRP erred in not considering foreign exchange gain as a part of operating income while computing the operating margins of the Appellant and the comparable companies. 3. In law and facts and circumstances of the case, Ld. TPO erred in computing the margins of the companies considered as comparable by it and also upheld by Ld. DRP for the purpose of Transactional Net Margin Method. 4. In law and facts and circumstances of the case, Ld. TPO/ DRP erred in considering certain ~ companies as comparable to the Appellant on the following grounds: a. Applying export turnover filter of less than equal to 30% of the sales and disregarding export turnover filter of less than equal to 10% of the sales applied by the Appellant in the transfer pricing documentation, without acknowledging the fact that Appellant in only dealing in domestic market and is having negligible export sales. Following companies does not qualify the export turnover filter of less than equal to 10% of total sales and thus should be rejected: i. ANG In....
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.... - 11,00,00,000 4. The taxpayer used to place orders to different AEs for import of proprietary parts for manufacturing products in India as per its requirement. Yutaka, Giken, Japan has assisted the taxpayer in setting up the manufacturing facilities and continuously to monitor the quality standards followed by the taxpayer. For braking systems, the taxpayer gets design and propriety paint from its AE and manufactures the product. Yutaka, Giken, Japan continues to monitor the quality standards observed by the taxpayer. The taxpayer in order to benchmark its international transactions compared its entity level margin (OP/Sales) with external comparable and computed its margin at 1.06% as against margin of the comparables at 2.34% and claimed its international transactions at arm's length. 5. The taxpayer by applying Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit / Sales (OP/Sales) as the Profit Level Indicator (PLI) for benchmarking at entity level, chosen six comparables using multiple years data and computed its average margin at 2.34%. However, during TP proceedings, the taxpayer updated its margin of six comparables wi....
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....s. 4,19,64,587." 10. It is also not in dispute that after the order passed by the ld. DRP adjustment in ALP of international transactions comes to Rs. 19,35,801/-. 11. The taxpayer, after raising different grounds, sought to consider foreign exchange gain as part of the operating income while computing operating margin of the taxpayer as well as the comparable companies; challenged computation of margin of the companies considered as comparables and also challenged inclusion of ANG Industries Ltd., Elofic Industries Ltd., WABCO - TVS (India) Ltd. and Brakes India as comparables on ground of export turnover filter and being into diversified operations. The taxpayer without prejudice also claimed to consider adjustment on account of high depreciation to the total cost in the case of the taxpayer and also claimed to consider cash profits for the purpose of TNMM in order to provider for excessive depreciation in case of taxpayer vis-à-vis comparable companies. We would discuss all the issues raised by the taxpayer under specific grounds as under. GROUND NO.1 12. Ground No. 1 is general in nature, hence does not require any specific adjudication. GRO....
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....to follow the rule of consistency. 18. In view of what has been discussed above, we are of the considered view that in order to compute the operating margin of the taxpayer, foreign exchange gain is to be considered as part of operating income for computing the operating margin of taxpayer as well as comparable companies. So, Ground No. 2 is determined in favour of the taxpayer. GROUND NO.3 19. The taxpayer by raising ground no3 sought to compute the margin of the company considered as comparable by the taxpayer for the purpose of TNMM. The taxpayer pointed out differences in margin in tabulated form as under :- S.No. Name of Company Margin as computed by the assessee (OP/Sales) Margins as per the order of the Ld. TPO (OP/ Sales) Annual Report copy reference to paper book 1 ANG Industries 15.33% 15.54% Annexure 37, Pg.619 to Pg. 651 2 Brakes India 8.14% 9.31% Annexure 38, Pg.651 to Pg. 705 3 Hindustan Composites Limited 3.02% 3.19% Annexure 41, Pg.812 to Pg. 821 4 Wabco India 20.15% 22.97% Annexure 40, Pg.764 to Pg. 811 20. When there are apparent discrepancies in the margin in OP/Sales comp....
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.... Pg. 637 of Paper Book 2 Elofic Industries 28.53 110.63 29.07 Annexure 38, Pg.651 to Pg. 705 3 WABCO - TVS 76.06 591.25 12.86 Annexure 41, Pg.812 to Pg. 821 4 Brakes India 289.74 1885.56 15.18 Annexure 40, Pg.764 to Pg. 811 24. TPO, on the other hand, rejected the companies having export sales more than 30% of the total sales as against 10% filters proposed by the taxpayer. So, the TPO has principally agreed with the contention raised by the taxpayer that in view of the provisions contained under Rule 10B(2)(d), companies operating in same geographical location and having similar size of markets can be compared. However, TPO rejected the contention of the taxpayer to reject the companies having export sales more than 10% of the total sales simply for the reason that by putting different income bar at 10% would lead to a very narrow set of comparables, hence used the filter to reject the company having 30% income from export. Ld. DRP also concurred with the view taken by the taxpayer. The taxpayer relied upon the decision rendered by the coordinate Bench of the Tribunal in case of Gharda Chemical Ltd. vs. DCIT - ITA No. 2....
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....eeping in view the facts and circumstances of the case and by following the order passed by the coordinate Bench of the Tribunal, we are of the considered view that all the four comparable companies viz., ANG Industries Ltd., Elofic Industries Ltd., Wabco- JVS (India) Ltd. and Brakes India having export sales of 29.73%, 29.07%;, 12.86% and 15.18% to the total sales are not even near to the taxpayer which is having a meager export sale of 0.17% and since the comparable companies are operating in entirely different geographical market, the same cannot be a valid comparable vis-à-vis the taxpayer. 28. Moreover, the companies which are otherwise not comparable cannot be taken as comparable merely on the ground that it will lead to very narrow set of comparables. More so, the Revenue in taxpayer's own case for AY 2012-13 has accepted the turnover filter of 25% of sales for identifying the comparable companies and has rejected ANG Industries and Sundaram Brake Linings Ltd. which are also comparable during the year under assessment vide order passed by ld. CIT (A) for AY 2012-13 made available by the taxpayer at page 195 of the paper book. 29. The ld. AR for the taxpayer furt....
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....JVS (INDIA) LTD. (WABCO) 34. The taxpayer also challenged the inclusion of WABCO on ground of failing the export income filter and on the ground that it is catering to after-market segment and the company is carrying out significant research and development activities. Annual report, relevant page 772, shows that WABCO has commissioned 156 authorized service centers at strategic locations across the country, to provide quicker and better service on air brake aggregates. Further, to improve availability of quality service in rural areas, the company also commissioned 145 certified workshops. These initiatives would result in improved service practices, availability of genuine parts and generate additional revenue for the company. Furthermore, annual report at page 769 of the paper book shows that WABCO is carrying out significant research and development activities in specific areas and is deriving benefits from R&D activities as under :- "B. TECHNOLOGY ABSORPTION Research & Development (R & D) 1. Specific areas in which R & 0 is carried out by the company. Existing activities: (a) Double diaphragm spring brake actuator (DDSBA) type 20/24 and u....
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....elded significant benefits. (n) Significant effort at cost reduction through transferring production of brake chambers from Europe to India with locally developed parts, which are fully validated to global customer standards. " 35. Aforesaid facts, provision of catering to after market segment by WABCO and carrying out significant R&D activities benefiting the company makes it incomparable to the taxpayer which is a routine manufacturer. So, we order to exclude WABCO. So, ground no.4 is determined in favour of the taxpayer. GROUND NO.5 36. Without prejudice, the taxpayer challenged the order passed by TPO/DRP in not providing adjustment on account of high depreciation to the total cost in the case of the taxpayer. The ld. AR for the taxpayer contended that it is the second year of production whereas all the companies selected by the TPO are very old/senior in the business and claimed depreciation to the total cost. The taxpayer brought on record complete data showing depreciation rate with respect to sales in the year under assessment as under :- S.No. Company Name Sales (in cr.) Depreciation (in cr.) Depreciation / Sales % 1 Hind Composites L....
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....ping in view the fact that in taxpayer's own case for AY 2009-10, difference in capacity in which the taxpayer is operating and the capacity in which comparable companies are operating were recognised, we are of the considered view that the issue is required to be sent back to the TPO to decide in the light of the revenue's own order in taxpayer's own case for AY 2009-10 and in view of the decisions rendered by the coordinate Benches of the Tribunal (supra). So, ground no.5 is determined in favour of the taxpayer for statistical purposes. GROUND NO.6 42. The taxpayer challenged the order passed by the TPO/DRP in not considering cash profits for the purpose of TNMM in order to provide for excessive depreciation in case of the taxpayer vis-à-vis comparable companies. The taxpayer provided the analysis of the cash profit earned by it as under :- Particulars Actual Cash Profits Amount in Rs. Amount in Rs. Sales 545,703,341 545,703,341 Other Operating income Sundry balances W/off 1,910,317 1,910,317 Claim received 111,661 111,661 Job work charges 40,589 40,589 Foreign exchange gain 1....
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....transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions quoted above that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. "Net profit" used in r. 10B can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the learned CIT(A). But depreciation in such profit on commercial principles as to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations....