TaxTMI 
TaxTMI 
2024 (10) TMI 1147
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....3,544/- to the total income of the appellant on account of adjustment in the As Length Price (ALP) of the international transactions. 2. In law and on facts and circumstances of the case, the L. CIT (A) has erred in considering certain companies as companies comparable to the Appellant on following grounds. 2a. Comparables have export turnover more than 10% of sales thus geographically different from Appellant. 2b. Comparables are functionally dissimilar to Appellant 3. In law and on facts and circumstances of the case, the Ld. CIT (A) has erred in not considering KLO India Ltd. as comparable to the Appellant despite the fact that net worth of XLO India Ltd has improved during the year 2010-11 4. In law and on facts and circumstances of the case, the Ld. CIT (A) has erred in not considering foreign exchange gain as operating income 5. Without prejudice to the above, and in law and on facts and circumstances of the case, the Ld. CIT (A) erred in not giving adjustment on account of high depreciation to the total cost in the case of the appellant. The Ld. CIT(A) ought to have given relief for the high cost of depreciation (10.57%) ....
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....Brakes India Ltd is having turnover around 39 times of the turnover of the Appellant, thus, should not be considered as comparable on account of huge size of operations as compared to Appellant 3C. Ld. CIT (A) after itself accepting the contention of the Assessee of rejecting companies having Advertisement marketing and promotion expenses (AMP) to sales ratio greater than 2% erred in considering Clutch Auto Ltd having AMP to sales ratio of 2.16% as comparable to the Appellant. 3D. Brakes India Ltd is dealing in different products than that of the Appellant. 4. Without prejudice to the above, and in law and on facts and circumstances of the case, the Ld. CIT (A) erred in not giving adjustment on account of high depreciation to the total cost in the case of the appellant. 5. Without prejudice to the above, and in law and on facts and circumstances of the case, Ld. CIT (A) erred in not considering Cash profits for the purpose of Transactional Net Margin Method in order to provide for excessive depreciation in the case Appellant vis-a-vis the comparable companies. 6. In law and on facts and circumstances of the case the appellant in the inte....
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....n are at arm's length. 4.1 The TPO during the TP proceedings after examining the TP study and considering the functional profile and FAR analysis issued show cause notice on 26/12/2014 to the Assessee. Ld. TPO accepted TNMM as the most appropriate method for bench marking the international transactions. During the TP proceeding the TPO sought updated margin of the comparables on single year data basis. Updated margin of the final set of comparables come at 3.93% of four comparables tabulated as under: - Sr. No. Company name OP/Sales(5) 1 Company Name Enkei Wheels (India Ltd.) 3.09 2 Mubea Suspension India Ltd. 0.31 3 XLO India Ltd. 2.94 4 Lumax DK Auto Industries Ltd. 9.37 5 average 3.93 4.2. Ld. TPO examined the comparables of the Assessee and found that two comparables namely XLO India Ltd. and ENKEI wheels India Ltd. are having negative net-worththerefore those comparables cannot be considered as good comparables for benchmarking. Accordingly, TPO proposed nine comparables which are upheld by the DRP in last assessment order and proposed them in the final list of comparables in the show cause. 4.3. The Details of....
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....ionally similar to the assessee, the same company was used in last year TP assessment and same was upheld by the Hon'ble DRP. 3 WABCO TVS (India) Ltd. 1) Export sales of the company is 13.25% of total sales comparing to no export income of the assessee 2) Functionally dissimilar 1) Contention of the assessee is rejected as discussed above. 2) The company is functionally similar to the assessee, the same company was used in last year TP assessment and same was upheld by the Hon'ble DRP. 4 Brakes India 1) Export sales of the company is 13.25% of total sales comparing to no export income of the assessee 2) Functionally dissimilar 1) Contention of the assessee is rejected as discussed above. ii) The appellant has also insisted for inclusion of XLO India on the ground that there is significant improvement in net worth of this company compared to last year. Ld TPO has considered this argument and was of the view that even afterthe end of the relevant financial year this comparable has negative net worth therefore, the appellant's contention was rejected. iii) The appellant has contended that some of the comparable companies are opera....
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....d 26/09/2016, dismissed the Appeal filed by the Assessee. Aggrieved by the order of the CIT(A) dated 26/09/2016, the Assessee preferred the present appeal on the Grounds mentioned above. 7. Ground No. 1 is general in nature, which requires no adjudication, accordingly Ground No. 1 of the Assessee is dismissed. 8. In Ground No. 2 and its sub Grounds, the Assessee contended that the CIT(A) has erred in considering Elofic Industries Ltd., WABCO TVS (India) Ltd. Brakes India Pvt. Ltd. and Clutch Auto Ltd. as comparable Companies. 9. The Ld. Counsel for the Assessee contended that the above Companies having export turnover of 10% and more, thus submitted the following details: Company Name Export turnover Assessment year in which ground raised Elofic Industries Ltd. 21.58% A.Y 2011-12 WABCO TVS (India) Ltd. 13.25% A.Y 2011-12 Brakes India Pvt. Ltd. 16.89% in A.Y 2011-12 & 19.43% in A.Y 2012-13 A.Y 2011-12 10. The Assessee's Representative argued that the export turnover filter was upheld by the Delhi Bench at 10% in Assessee's own case for Assessment Year 2010-11 and the Elofic Industries, WABCO and Bakers India were rejected on the sa....
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....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 upgraded version of type 16/24 for disc brake validated and production ready for European Market. These devices are designed for high level of robustness against dust and water entry. (b) Automatic slack adjuster (ASA) with patented adjustment mechanism developed and validated for European market. (c) New Air Processing and Distribution Assembly (APDA) which was in promotion phase last year is now fully developed, validated and production ready. This product contributes to clean working environment for long life of pneumatic systems on vehicle. (d) Improved and redesigned D2 governor valve with patented sealing solution developed and validated for US market. (e) Design activity kicked off on fourteen valve devices for North American OEMs as part of market expansion strategy. These devices deliver best in class performance, capable of operating in higher temperature and corrosive environ....
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....castings, grey iron ad SG from castings which can be corroborated with Textual information 7 produced at Page No. 236 of the Paper Book. Further the sales of Brakes India is Rs. 2,64,262.62 lakhs whereas the sales of Assessee is Rs. 7,108.495 lakhs which is 37 times that of Assessee. It is the contention of the Assessee that the Brakes India sales are not only more than 37 times i.e. more than 10 times and also the Brakes India is operating in diversified segments. Considering the above facts and circumstances, as Brakes India Pvt. Ltd. is having diversified operations and diversified market, the Brakes India Ltd. cannot be proper comparable. Accordingly, we order to exclude Brakes India Pvt. Ltd. from the list of comparables. Accordingly, the Ground No. 2 of the Assessee is allowed. 15. In Ground No. 3 the Assessee contended that the CIT(A) has erred in not considering XLO India Ltd. as comparable to the Assessee as the net worth of XLO India has improved during the year 2010-11. XLO India Ltd. 16. The Ld. CIT(A) excluded XLO from the comparables as the same has negative net worth in following manners: - "Brakes India Ltd. :- Ld. AR has argued that as pe....
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....rth in the same year. The net worth of the said company has been improved from previous three years and it is not the case of diminishing returns, to substantiate the above claim, the Assessee produced the working at Annexure A-1 to the submission filed on 13/06/2024. 20. Considering the above facts and circumstances and also relying on the ratio laid down in the case of ACIT Vs. Gillette Diversified and Operation Pvt. Ltd. (supra) and Welspun Zucchi Textiles Ltd. Vs. ACIT (supra), we direct the T.P.O. to consider XLO India as comparable company. Accordingly, we allow Ground No. 3 of the Assessee. 21. In Ground No. 4 the Assessee contended that the CIT(A) has erred in not considering the foreign exchange gain as operating income. The Assessee contended before the CIT(A) that foreign exchange fluctuation is directly related to business transaction, therefore it is an operative item, therefore, the foreign exchange fluctuation should be considered as operating revenue. The Ld. CIT(A) while rejecting the said contention held as under: - "Findings: I have considered findings of the Ld. TPO and the arguments of Ld. AR. Ld. TOP has not treated foreign exchange inc....
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....harmonious interpretation of TP provision. As per the definition safe harbours Rule foreign exchange fluctuation as non-operating items. None of the Judicial pronouncement relied by the Ld AR as considered definition of safe harbour rule where foreign exchange fluctuation has been considered as nonoperating. In view of the above I hold that the None of the Judicial pronouncement relied by the Ld AR as considered definition of safe harbour rule where foreign exchange fluctuation has been considered as non-operating. In view of the above I hold that the foreign exchange fluctuation income /losses is not operating items accordingly appeal is dismissed." 22. The Ld. Counsel for the Assessee submitted that the foreign exchange fluctuation gain is closely linked to the business operation and did not constitute abnormal or extra-ordinary item. By relying on the order of the Assessee's own case for Assessment Year 2010-11, submitted that the CIT(A) has erred in not considering foreign exchange gain as operative income. 23. Per contra, the Ld. DR relied on the orders of the Lower Authorities and sought for dismissal of the Ground No.4. 24. Heard the parties perused the mat....
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.... 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." 25. By relying on the order of the Co-ordinate Bench in Assessee's own case for A.Y 2010-11 (supra), we direct to compute the operating margin of the tax payer, foreign exchange gain is to be considering the same as part of operating income for computing the operating margin as well as comparable companies. Accordingly, the Ground No. 4 of the Assessee is allowed. 26. The Ground No. 5 of the Assessee is not pressed, accordingly Ground No. 5 of the Assessee is dismissed. 27. In Ground No. 6 the Assessee contended that the Ld. CIT(A) erred in not considering cash profit/operating income as profit level indicator on account of high depreciation component in the Assessee's case. 28. The Ld. Counsel for the Assessee submitted that the above issue was considered by the Coordinate Bench of the Tribunal in Asses....
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....inistration 78,923,208 78,923,208 Bank charges 2,245,939 2,245,939 Depreciation 53,402,064 Total operating expenses 540,757,823 487,355,759 Operating Profit 8,727,769 62,129,833 Non Operating Income Interest received 35,410 35,410 Depreciation 53,402,064 Non Operating expenses Interest on loan 19,258,549 19,258,549 PBT (10,495,370) (10,495,370) OP/Sales 1.60% 11.39% 43. The taxpayer relied upon the decision rendered by the coordinate Bench of the Tribunal in cases of ACIT vs. Gates India (P) Ltd. - ITA No.75/Del/2011 order dated 31.07.2017 and Schefenacker Motherson Ltd. vs. ITO - 123 TTJ 509 (Delhi). 44. The ld. DR for the Revenue supporting the order passed by the TPO/DRP contended that the taxpayer is required to choose one of the method provided u/s 92C of the Act for computing the ALP under TNMM and the mandate for determining the ALP under TNMM as given as per Rule 10B(1) of the Act and further contended that the cash profit cannot be used in place of net operating profit for the purpose of TNMM in order to provid....
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.... Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons." 47. When the taxpayer has brought on record the complete analysis of cash profits earned by the taxpayer to be compared with complete analysis of cash profit earned by the comparable companies extracted in the preceding paras, we are of the considered view that the issue is required to be decided afresh by the TPO in the light of the decision rendered by the coordinate Bench of the Tribunal in ACIT vs. Gates India (P) Ltd. and Schefenacker Motherson Ltd. vs. ITO (supra). So, ground no.6 is allowed for statistical purposes. 32. By respectfully following the ratio laid down above in Assessee's own case for Assessment Year 2010-11,we direct the TPO to decide the issue afresh in the light of decision rendered by the Co-ordinate Bench of the Tribunal in the case of ACIT Vs. Gates ....
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....5,83,99,716/-. Thus, export sales are 11.42% to total sales, which can be corroborated from the documents in the paper book submitted by the Assessee. The Co-ordinate Bench of the Tribunal while rejecting the comparables having export sales of more than 10% in Assessees own case for A.Y 2010-11 in ITA No.1807/Del/2015 held as under:- "25. Coordinate Bench of the Tribunal in case of Gharda Chemical Ltd. (supra) observed that for the purpose of comparability, factors like location of parties, available of raw material, demand & supply and acquisition are also necessary to be considered. Operative part of the order is extracted as under :- "16. ..... The importance of the "similar circumstances" cannot be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions can be judged by the quality, grade and quantity of the material. In addition, the factors like the location of the parties, availability of raw material; demand and supply equation a....
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.... dismissed as not pressed. 43. In Ground No. 5 the Assessee contended that the CIT(A) erred in not considering the cash profits for the purpose of transactional net margin method in order to provide for excessive depreciation in the case of the Assessee vis-à-vis the comparable Companies. 44. The Ld. Counsel for the Assessee submitted that the above issue regarding consideration of cash profits for the purpose of transactional net margin methods has been considered by the Coordinate Bench of the Tribunal in Assessee's own case for AY 2012- 13 and remanded the matter to the file of the TPO, thus sought for similar direction. 45. Per contra the Ld. DR relied on the order of the Lower Authorities and sought for dismissed of the Ground No. 5. 46. The similar issue has also been consideration for AY 2011-12, and the issue has been remitted to the file of the TPO to decided the same afresh in the light of decisions rendered by the Co-ordinate Bench of the Tribunal in ACIT Vs. Gates India Pvt. ltd. and Schefenacker Motherson Ltd. Vs. ITO. Following the principles of consistency, the issue involved in the Ground No. 5 of the Assessee is restored to the file of the TPO fo....
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....essee's own case for A.Y 2010-11, we find no error or infirmity in the order of the CIT(A) in excluding ANG Industries Ltd. from comparables. Faiveley Transport Rail Technologies India Ltd. 53. The Ld. CIT(A) while directing the A.O/TPO not to include the above company in final list of comparables held as under: - "(a) The main contention of the appellant is that the company is engaged in manufacturing and supplying of equipment's for the railway industry and has earned revenue from multiple activities such as energy and comfort, brakes and safety, access and information and services. Only 26% of it's revenue is derived from brakes and safety segment. Moreover, it incurs 4% of its sales in selling and marketing expenses in comparison to 0.06% incurred by the appellant. (b) In view of the above I agree with the appellant that the functional profile of the above mentioned company is different from that of the appellant and hence it should not be included in the final list of comparables. 54. Considering the fact that the Faiveley Transport Rail Technologies India Ltd. has revenue from comparable segment 26% and it has AMP expense ratio of 4% which is hi....