TaxTMI 
TaxTMI 
2025 (8) TMI 1676
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....ense 2.5 Rejection of comparable companies selected by the appellant in its transfer pricing documentation. • Jay Ushin Limited • Shivam Autotech Limited • Delux Bearings Private Limited • Omax Auto Limited • Nexteer Automotive India P Limited 2.6 Non-Inclusion of new comparable companies identified by the Assessee based on the updated information available in the public domain at the time of Transfer Pricing Assessment proceedings. • Minda Vast Access Systems Private Limited • SAR Auto Products Limited • JMT Auto Limited 2.7 Non-rejection of comparable companies failing RPT filter • Kwangsung Brake India Private Limited • Joyson Anand Abhishek Safety Systems Private Limited 2.8 Incorrect determination of margins in respect of comparable companies - correct margins as per annual reports to be considered 2.9 Erroneous consideration of Entity level margins vis-à-vis Comparable Segment marginsof M/s ZF Steering Gear Limited as against the segmental margins of auto- component segment which is available in the audited financials. 2.10....
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....exures. The Ld. CIT-DR also advanced arguments and supported the findings of TPO / DRP. Having heard rival submissions and upon perusal of case records, our adjudication is as under. The core issues which fall for our primary consideration are: (i) Treatment of export incentives as operating income while computing the margin of Assessee (ii) Treatment of cash discount as operating income while computing the margin of Assessee (iii) Treatment of miscellaneous expenses as operating expense for comparable companies (iv) Considering segmental margin of ZF Steering Ltd (v) Inclusion of functionally similar comparable companies 3.3 The Ld AR indicated that the other grounds, being consequential in nature, do not require our indulgence, as they would become academic, if these issues are decided in favour of the Assessee. 4. Ground no.2.2: Treatment of export incentives as operating income while computing the margin of Assessee: 4.1 Brief facts of this issue as explained by the Ld AR is that the TPO while issuing the show cause notice to the Assessee had not proposed exclusion of this income from the margins of the Assessee. However, in....
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....ch cost is considered to be integral part of the business operations. While utilizing such components in manufacture of goods exported, the Assessee would be eligible for refund of some part of the duty paid on such imported raw materials utilized in manufacturing of goods for exports. This refund of duties is only shown under other income under the head "Export Incentives". While the duty paid on imports form part of integral cost of the business and it has been undisputedly accepted by the TPO as operating expense, however, the refund of the same is being considered as non-operating. The Ld AR contends that duty drawback is integral part of the business operations and cannot partake a different characterization. Therefore it is inextricably connected to the core business and as such it should be treated as operating income while computing the margins of Assessee as well as comparable companies (wherever applicable). 4.4 As regards the MEIS Income, the ld. AR submitted that the Primary objective of MEIS scheme is to offset infrastructural inefficiencies and associated costs involved in export of goods/products, which are produced/manufactured in India, especially those having h....
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....other. The Ld. DR relied on the decision of M/s. Good Year India Ltd in ITA No. 1516/Del/2015, wherein export incentives are excluded from computing the operating margins. Relevant extract of the ruling is produced below: "11.5. As regards the issue of reduction of export incentives from cost of goods sold is concerned, we find that the reasoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentives was available to the Assessee only after trading exports made by the Assessee. Global transfer pricing policy of the group company mentions cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global....
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....e assessee in the previous year in relation to the international transaction during the course of its normal operations but not including the following, namely (vii) other incomes not relating to normal operations of the assessee". From this definition it is clear that an income to form part of operating income it should be derived from normal operations. Undoubtedly in the instant case, the export incentive is derived during the course of normal operations. Apart from this definition, the Cost Accounting Standards elucidates the term Revenue from operations as under: "4.9 Revenue from operations: is the income arising in the course of the ordinary activities of an entity from the sale of goods or rendering of services. Revenue from operations represents income arising from the sale of goods or rendering of services and includes other operating revenue, such as sale of scrap, government subsidies, or incentives received. Revenue from operations is generally recognised at the net value excluding indirect taxes. Sometime, revenue is presented at the gross value including excise duty and the excise duty is presented as deduction from such gross valu....
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...., 3(3) and 3(5) of the Customs Tariff Act, 1975 and fee as per paragraph 3.18 of this Policy Objective of the Merchandise Exports from India Scheme (MEIS) is to promote the manufacture and export of notified goods/ products. 6. Therefore, one cannot have qualms about the nature of such export incentives and it forms part of the core business operation. Accordingly, the same will have to be treated as operating revenue in the hands of the Assessee while computing its margin for the purpose of Transfer Pricing benchmarking analysis with comparable companies. We also hold that merely because some of the comparables may not have such export incentive cannot debar the assessee from considering such income as operating revenue. Turning to the decisions relied on by the Ld DR. in the case of Sami Labs (Supra), we find that in the said decision it has been held in principle that export incentive is operating revenue, therefore this decision does not actually aid the contention of the Ld DR/DRP. The other decision which was considered by DRP and also emphasised by Ld DR in the case of Goodyear India Ltd (supra), the issue was whether export incentive and rebate should be reduced....
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.... 2012 held that both the DEPB as well as the depreciation are part of the operating income/expenses respectively. Thus, they have to be taken into account while arriving at the operating profit and total cost before determining the margin on adoption of TNMM method. (c) Being aggrieved, the Revenue carried the issue in appeal to the Tribunal. By the impugned order, the Tribunal held that so far DEPB benefit is concerned, the issue arose for consideration before it in the case of respondent assessee itself for Assessment year 2005-06 and 2007-08 and the Tribunal held that the same has to be included for the purposes of arriving at operating profit for the application of TNMM method. This on the basis that comparison should be made on like to like and similar to similar. So far as the depreciation is concerned, the impugned order of the Tribunal adopted the same reasoning which it had applied while holding that DEPB benefit is includable in arriving at the net profit in its order in the earlier assessment years 2005-06 and 2007-08 in the subject assessment year with regard to claim of depreciation. Therefore, the DEPB was includable in arriving at the operating profit and depreciatio....
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....iscount amounting to Rs. 1.82 crores on account of discounts offered by suppliers as a result of timely/early payment of bills raised towards purchase of materials/components. The ld. AR before us argued that the Assessee would have recognized the expenses in their books of accounts for the full amount due at the time of purchase of materials / components and upon earning the cash discount owing to payments made earlier than the due date, an amount of cash discount is recognized as an income component. Hence, if the expenses incurred are considered as operating, the cash discount earned in relation to such expenses shall also to be treated as operating in nature and cannot partake a different character. The Assessee had filed additional evidence presenting the accounting treatment. 8.2 In support of its arguments, the ld. AR placed reliance on the ruling of Jurisdictional tribunal in the case of M/s. Hyundai Motor India Limited vs ACIT - ITA No. 3912/Chny/2017 8.3 Per contra, the Ld. DR placed reliance on the observation of the DRP and also opposed admission of additional evidence at this stage as it is bereft of any reasons. In the rejoinder, the Ld AR contended that additio....
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....rred in considering commission / discount income, incentives and insurance income as non-operating income. Hence, we direct the ld. TPO to consider commission / discount income, incentives and insurance claim as operating income for the purpose of computing operating margin." 8.5 Following this decision, we direct so the TPO to re-determine the margin of the Assessee after including the same. Thus this ground of appeal is decided in favour of the Assessee. The grounds of appeal No.2.3 raised by Assessee is thus, allowed. 9. Next, coming to the issue raised by the Assessee by way of ground no. 2.5 in relation to treatment of miscellaneous expenses as non-operating expense. 9.1 Brief facts of this issue as explained by the Ld AR is that the TPO while issuing the show cause notice to the Assessee has not provided any reasons for proposed exclusion of Miscellaneous Expenses from the margins of the Comparable Companies. However, in the order of TPO, the margins of the comparable companies are adopted after exclusion of Miscellaneous Expense. The Assessee had objected the same before DRP and the DRP had adjudicated this issue (along with other expenses) but overall upheld the ac....
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.... are excluded for Assessee as well by applying the parity principle. In our view, the approach of the Revenue is fundamentally flawed. We believe the correct approach to determine whether an expense is operating or non-operating would be heavily dependent upon the character of such expense and its proximity to the normal business operation. Viewed from this angle, we feel that Miscellaneous Expense is part of any normal business operation. In fact as per Section 37 of the Act, the same is allowed as business expenditure, accordingly taking a cue from the corporate tax provisions it could be safely inferred that Miscellaneous expense is operating in nature. Therefore Miscellaneous expense incurred by every company in its usual course of business cannot be said that they have no nexus with normal operation of business. The view expressed is supported by the decision of the Delhi Tribunal in the case of ITO vs E Value serve.com (2016) 75 taxmann.com 195 (Delhi - Trib) wherein it is held that miscellaneous expenses ought to be treated as operating expenses for Assessee as well as comparable companies. Relevant para of the order is produced below: "47. Ground no. 6: The main co....
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....n-comparable segment). Therefore, the ld. AR pleaded that the results of Auto component segment alone be considered. In support of his claim, the ld. AR relied on the judgment of Jurisdictional Tribunal in the case of M/s. CMA CGM Shared Service Centre (India) (P.) Ltd vs DCIT IT(TP)A No.76/Chny/2016. The Ld. AR further submitted that the above issue is squarely covered in the own case of Assessee for AY 2021-22 wherein TPO has accepted the segmental results and has considered only the Auto Component segment as comparable in the TP order while determination of arm's length results. Relevant findings of the TPO are at para 6.4.3 of the TPO order dated 12.10.2023 for AY 2021-22. 10.3 Per contra, the ld. DR, supporting the order of lower authorities, pointed out that 95.6% of the revenue earned by ZF Steering Gear Ltd is from Auto component segment and only 3.7% of revenue is from the renewable energy segment. Since, the company earns more than 95% of the income from core comparable activity, the ld. DR objected to compute the margins at segmental level. 10.4 We heard the rival submissions and gone through relevant material. We find merit in the Assessee's above submission t....
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....ccepted the same and ultimately considered only the comparable segment. Since the issue is squarely covered in the own case of Assessee, we deem it appropriate to direct the AO/TPO to consider only the Auto component segment of ZF Steering Gear Ltd while benchmarking the international transaction. Accordingly, Ground No.2.10 is allowed. 11. Next, in relation to ground of appeal no.2.6, at the time of hearing, the ld. AR has limited his argument for inclusion of the following 3 comparable only: (a) Jay Ushin Limited (b) Shivam Autotech Limited (c) Omax Autos Limited Jay Ushin Limited ("Jay Ushin") Functionally dissimilar 11.1 The ld. AR submitted that Jay Ushin is engaged in the manufacture of auto ancillary products ranging from security systems, switches, body parts, Fuel Units and Heater control panels. The business of Jay Ushin viz., manufacture of security systems for automotive industry is similar to that of the Assessee, which is engaged in the manufacturing of occupant safety products for automotive industry. The ld. AR pointed out that fuel units and heater control panels manufactured by Jay Ushin are similar to the business of Talbros Au....
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....company, and the said company has bene accepted by the TPO. Auto International is engaged in manufacture of suspension shock absorbers, radiators, silencers, exhaust pipes and it is on the same line that of Shivam Autotech which manufactures transmission shafts, spline shafts, plunger, brakes, gear boxes etc., Since, Auto International has been accepted as comparable company, TPO ought to have also included Shivam Autotech also as a comparable company. Therefore, we direct the TPO to include the same in the final set of comparable companies. Omax Autos Limited ("Omax Auto") Functionally dissimilar 11.7 The Ld.AR submitted that Omax Auto is engaged in the business of manufacturing auto components for the automotive industry such as steering shafts, axle shafts, piston, Gear Shifter Shaft Assembly, etc. The Ld. AR pointed out that the business of Omax Auto and that of the Assessee is broadly similar. The Assessee is also engaged in the manufacture of Pinion Steering Gear and steering gear systems which are broadly similar to steering shafts and Gear Shifter Shaft Assembly manufactured by Omax Auto. The Ld. AR pointed also pointed out that the steering shafts, axle shafts, pisto....