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TaxTMI 
TaxTMI 
TaxTMI 
2019 (5) TMI 2034
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....acts and circumstances of the case and in law, the DRP erred in directing the TPO/ AO to recomputed the profit margin of the assessee after treating forex gain/loss as nonoperating in nature when the assessee itself has treated the forex fluctuation as operating in nature in its TP study. 3. That the order of the DRP is erroneous and is not tenable on facts and in law." 2. In the cross objection assessee has raised grounds pertaining to rejection of internal CUP Method in respect of the international transactions. 3. The facts in brief are that the assessee company was incorporated as Fiamm Minda Automotive Ltd. as a joint venture between Fiamm SPA Italy and N.K. Minda Group in July, 2004. However, in the Financial Year 2009-10, i.e., the year under consideration, the Joint Venture Agreement between the parties was terminated w.e.f. 4th August, 2009 and all the shares held by Fiamm SPA were transferred to the Indian Partners i.e. N. K. Minda Group. There is no dispute on these primary facts. The assessee is engaged in the business of manufacturing, assembly and sale of non-core automotive products, i.e., horns such as, trumpet horns, air horns and disc horns, etc. The fact tha....
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....ed the TPO to exclude 11 comparables out of 12 comparables challenged by the assessee on the reasoning that the FAR analysis was different because such comparables were core auto manufacturers. The DRP further directed that only proportionate adjustments need to be made in relation to AE transactions, that is, international transactions with the AE and not at the entity level. The DRP also upheld the contentions of the assessee that under the TNMM method adjustment cannot be made for both sale and purchase transactions. Since sales transactions with the AE were higher, therefore, adjustments if any were directed to be restricted only to sales transactions that too to be on proportionate basis. The DRP also directed to treat the forex-loss gain as non-operating both for assessee (tested partly) and comparables. 5. The issue of proportionate adjustment only on AE transactions is not in dispute before us. Similarly, revenue has accepted the order of DRP pertaining to the issue that double adjustment on sales as well as purchases cannot be made when TNMM is applied. 6. Before us, Ld. CIT (DR) submitted that the DRP has grossly erred in excluding the comparables merely on the basis of....
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....here DRP has allowed relief by following safe-harbour rules. The Ld. Counsel relied upon the judgement of Hon'ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd. Vs. CIT 377 ITR 533 (Delhi) to submit that differences in high end services and low-end services leads to substantial differences in FAR and the same is true about core and non-core which is akin to high end and low-end services. Explaining the difference between core and non-core activities in auto industries, the Ld. Counsel comparing the car with human body, submitted that brain and heart can be compared with core body parts whereas the eyes and ears can be compared with non-core body parts. If a man is brain dead or heart dead it is of no value whereas a man without eyes or no hearing system can still survive. Same is true about core parts and non-core parts in automotive sector. Core parts are such that without which an automobile cannot run or function but a non-core part, even if it is an essential part, cannot bring a vehicle to standstill. 10. As regards the treatment of foreign exchange gain/loss, the AR of the assessee submitted that no doubt the assessee has treated the same as operating in na....
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....ned DR, the DRP has erroneously treated these 3 comparables as manufacturer of core items and exclusion of 3 comparables is not as per the prescribed rules and law. As regards treatment to the forex loss, the learned CIT DR submitted that there are various judgments which are being rendered by various judicial bodies treating the FOREX gain or loss as operating income or loss although undoubtedly the safe harbour rules have included this item as non-operating in nature. 12. We have considered the rival submissions and perused the relevant finding given in the impugned orders as well as material referred to before us. The international transactions under dispute are with regard to purchase of raw material and sale of financed goods to AE. From the perusal of the TPO order, it is seen that the TPO had rejected most of the comparables of the assessee and had selected mostly new comparables and finally he has taken 18 comparables and out of them 12 of comparables were disputed by the assessee before the DRP which are almost the subject matter of dispute before us. Before the DRP the assessee has submitted that 10 out of 12 comparables brought by TPO were engaged into core auto compone....
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.... core products. Core-products sector is different from non-core products sector. This distinction has been recognized even in safe harbour rules. Hence, its FAR being dissimilar, it is rejected as comparable. 7. Remsons Industries Ltd. 'Core' products include Gas guard Auto control cables It has engineering centre at Gurgaon with modern testing and validation equipments It is engaged in manufacturing of core products. Core-products sector is different from non-core products sector. This distinction has been recognized even in safe harbor rules. Hence, its FAR being dissimilar, it is rejected as comparable. 8. Roots Industries India Ltd. Products diverse in nature - Xray parts Scanning machines Horns Engaged in R&D activities Abnormally high gross profit ratio Perusal of financials of the company shows that its product range is quite diverse but segmental are not available. Its gross profit margin (47.79%) is quite higher than average (31.82%) gross profit margin of comparables taken by TPO and its cost of consumption (40.53%) is substantially on lower side as compared to average (61.74%) cost of consumption in case of comparables. FAR of the company seems to be not ....
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....les selected by the TPO holding that these comparables were manufacturing core products which cannot be compared with the assessee which is purely into production of noncore auto components mainly various types of horns. From the perusal of the definition of 'core auto components' as given in the Rules, it can be inferred that core auto components are crucial part of automobile that requires sophisticated technology for manufacturing and such components are very lifeline like the heart and brain of automobile which are vital for power performance, actual running and stability of the automobile. Like engines and engine parts are inextricably link with the performance of the vehicle, without which vehicle cannot move; transmission system which assists in running of car; steering and steering systems, gears and clutches; axels and wheels; suspensions which balances the vehicle; breaks, etc. In other words, without the core part neither the automobile can run nor can it function. Whereas non-core auto components which are not covered under the core components could be like accessories, equipment, vehicle parts such as head lights, wipers, dash board equipment, horns, etc., which are us....
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.... the comparable companies as discussed by the DRP, like, Imperial Industries Ltd. it is seen that it is mostly engaged in manufacturing of radiator and heater hoses, fuel and vacuum hoses, fuel injection tubes, CRDi tubes, hydraulic tubes, EGR and Belfows. It manufactures various parts of engine, transmission system, breaks etc. which all form part of the IC engine part which is known as fluid transmission products used for internal combustion. These products are the core part of any auto components for running and transmission and therefore without these products, the vehicle cannot perform or run. 17. Similarly with regard to other four comparables namely, Saks Ancilliaries Ltd., Motherson Sumi System Ltd., Minda Sai Ltd., Tata Yazakin Antocomp Ltd. are mostly engaged in manufacturing of wiring harness. Wiring Harness connects the various parts of the engine with the other parts of vehicle like blood vessels to the heart because it transmits the electric power created by the ignition to the various engine components and transmit power to the vehicle. Wiring harness is the network of electric system connected to the battery with engine and other parts used by electric power and a....
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....s recognised this difference and has been introduced in Safe Harbor Rules, though brought from prospective date. But such a distinction can always acts like a guide in deciding the difference in FAR and comparability analysis. The reasoning given by the DRP for rejecting this comparables are based on sound principles and are thus upheld. Accordingly, the transfer pricing adjustment made by the TPO based on such comparables cannot be sustained and hence same are directed to be deleted. 21. Coming to the DRP's direction to recompute the profit margin of the assessee after treating forex loss as non-operating in nature, before us Ld. Counsel has submitted that assessee had itself revised the PLI by treating the forex gains/loss as non-operating item both for the tested party as well as the comparables which have been rejected by the TPO. Before the DRP assessee has contended that the forex should be treated as non-operating item both for the comparables and the tested party. DRP after examining the facts of the case, various judicial pronouncements and also referring to the safe harbor rules had directed the TPO to recompute the profit margin of the assessee finally after treating fo....