TaxTMI 
TaxTMI 
2024 (5) TMI 1609
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.... grossly erred in determining an adjustment of INR 10,60,65,735/- with respect to the international transaction entered by the Appellant u/s 92CA of the Income-tax Act, 1961 ("the Act"). 2.2 The Learned AO/ Learned TPO/Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of subsection (3) of 92C of the Act. 2.3 The Learned AO/ Learned TPO/ Hon'ble DRP erred in rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters while determining the Arm's Length Price ("ALP"). 2.4 The Learned AO/ Learned TPO/ Hon'ble DRP erred in not considering the financial data of the preceding two years in case of the comparable companies wherein the data for the current year is unavailable, while determining the ALP. 2.5 The Learned AO/ Learned TPO/ Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies. 2.6 The Learned AO/ Learned TPO/Hon'ble DRP erred in the manner of computing the related party transaction filter for selecting the comparable compani....
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.... the fact that the trade payables to AES was greater than trade receivables and hence the net interest position should be arrived at post setting off the payables with receivables. 2.16 Without prejudice to the above, the Learned AO and Learned TPO grossly erred in determining an adjustment of INR with respect to interest on delayed receivables u/s 92CA of the Act thereby: a. Erred in not considering that receivables cannot be considered as an international transaction and it does not fall within the purview of capital financing as stated by Section 92B of the Act. b. Erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the normal provisions. c. Erred in not appreciating the fact that transfer pricing adjustment cannot be made on a hypothetical and notional basis unless there is material on record that there has been under charging of real income. d. Erred in imputing interest on delayed receivables without giving cognizance to the fact that the primary transaction of manufacturing has been tested by the Learned TPO and the receivables are arising out of the primary transa....
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....28,815/- Reimbursement of Expenses paid/payable RS. 1,57,53,815/- Recovery of expenses RS. 5,04,06,544/- Accepted to be at arm's length Purchase of finished goods for trading RS. 135,20,41,513/- Accepted to be at arm's length. 4.2 MANUFACTURING SEGMENT A. ANALYSIS OF THE TP STUDY OF THE ASSESSEE AND THE TPO: A.1 Net mark-up on cost earned by the Assessee as computed by the TPO: Operating Revenue * Rs. 393,09,70,000/- Operating Cost Rs. 373,47,35,629/- Operating Profit (Op. Revenue - Op. Cost) Rs. 19,62,34,371/- Operating/Net mark-up (OP/OR) 4.99% Note: The TPO excluded an amount of Rs. 2,64,23,000/- being other income, from the operating revenue. If the said sum is included, as done by the Assessee in its TP study, the Assessee's margin would stand at 5.06%. A.2 Comparison of the TP studies done by the Assessee and TPO: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/OR OP/OR Database used PROWESS & CAPITALINE NEO PROWESS Comparables selected 15 28 Period for which data used FYs 2014-15 to 201617 ....
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....perating revenues - excluded. 4. Companies which have more than 25% related party transactions of the sales - excluded. 5. Companies having positive net worth- selected. A.6 Comparables selected by TPO and the median of weighted average of PLIs of the companies: Sl. No. Name of the Company Mark-up on Total Costs (WC-unadj) (in %) 1. Ralli Engineering Ltd. 0.95 2. Matrix Tools & Metaplast Pvt. Ltd. 1.46 3. Swalka Tools and Machines Pvt. Ltd. 3.15 4. A A C K Technocraft Toolings Pvt. Ltd. 4.18 5. Electronica India Ltd. 4.43 6. Vishwa C N C Technologies Pvt. Ltd. 5.45 7. Sunikh Components Pvt. Ltd. 5.60 8. Esab India Ltd. 6.34 9. Total Tools & Equipments Pvt. Ltd. 6.35 10. Dee Tee Industries Pvt. Ltd. 7.65 11. Lunar Enterprise Pvt. Ltd. 7.83 12. I T L Industries Ltd. 7.95 13. Dynamatic Technologies Ltd. 8.02 14. Lakshmi Machine Works Ltd. 8.29 15. T Square Tools Pvt. Ltd. 8.49 16. Marshall Machines Ltd. 8.72 17. Hind Tools (India) Pvt. Ltd. 8.97 18. Swanand Sales & Services Pvt. Ltd. 9.20 ....
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....ools (India) Pvt. Ltd. 17. Swanand Sales & Services Pvt. Ltd. 18. Mitsubishi Heavy Inds. India Precision Tools Ltd. 19. Solitaire Machine Tools Ltd. 20. Aashapuri Engineering Pvt. Ltd. 21. Lokesh Machines Ltd. 22. Ind-Sphinx Precision Ltd. 23. United Drilling Tools Ltd. 24. Emkay Taps and Cutting Tools Ltd. 25. Groz Engineering Tools Pvt. Ltd. 4.5 FINAL ASSESSMENT ORDER: The AO passed the final assessment order in which the TP adjustment stood reworked at Rs. 10,60,65,735/- (Rs. 10,44,84,834/- being towards manufacturing segment). 4.6 GROUNDS OF APPEAL BEFORE THIS HON'BLE TRIBUNAL: Briefly, the ld. A.R. submitted the grounds in the appeal which are being pressed as follows: a) The TPO erred in selecting companies like T Square Tools Pvt. Ltd., Swanand Sales and Services Pvt. Ltd., Mitsubishi Heavy Industries Precision Tools Limited, Ind-Sphinx Precision Ltd., United Drilling Tools Ltd., Emkay Taps and Cutting Tools Ltd., and Groz Engineering Tools Ltd. in the final list of comparables; (Ground No. 2.7). b) That the TPO erred in not including Birla Precision Technologies Ltd., and Jainex Aamcol Ltd.,....
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....on of the Mumbai Bench of this Hon'ble Tribunal in the case of Hope India Polishing Works (P.) Ltd. v. DCIT (reported in [2015] 54 taxmann.com 195 (Mumbai - Trib.)), wherein the Hon'ble Tribunal held that an entity undertaking job work is not comparable to a manufacturing entity (para 5). - Fails manufacturing income filter. 7.1.3 He submitted that the Company's income from manufacturing activity is 73.75% and therefore, the Company fails manufacturing income filter of 75% as applied by the TPO. Particulars 2017 Income from engineering goods Rs. 2,77,78,243/- Total income from operations Rs. 3,76,67,143/- % on revenue 73.75% 7.1.4 Therefore, he submitted that T Square is not comparable to the Assessee and ought to be excluded from the final list of comparables. 7.2 The ld. D.R. submitted that the assessee has requested for exclusion of this company based on the following reasons ⮚ functionally different ⮚ Fails manufacturing income filter 7.2.1 He submitted that as per the Annual report of the company, the company is into manufacture of Pattern equipments, dies, Press tools, rubber moulds and plastic mould....
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....nly, that TPO had not brought on record any entity that was doing only job work, that he made some adjustment in the comparables furnished by the assessee. In these circumstances, the basic issue before us is what can be the most appropriate method to determine the ALP for the transactions carried out by the assessee with the AE. It is found that the assessee was getting rough diamonds from the AE and after processing them was sending back to the AE, that it was entitled to recover processing charges only. We find that the assessee had filed a letter on with regard to the directions issued by the TPO on, but he had not considered the same. From the facts available on record it is evident that the assessee is only a job worker or a contract manufacturer who is entitled for processing charges based on its cost incurred and not based on the value of material supplied by its AE. In such a situation, the comparables chosen by the assessee of the full-fledged independent manufacturers cannot be prima facie considered for the purpose of comparability analysis. We have compared the audited accounts of the assessee for the current years with the accounts for the last year. It is fo....
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.... be rejected. 7.4.2 We have heard the rival submissions and perused the materials available on record. The main contention of the assessee's counsel is that it fails positive networth filter and cannot be considered as a comparable. In our opinion, it is appropriate to remit the issue to the file of AO/TPO to once again analyse financials of this comparable and if it passed the positive networth filter, then only be considered as comparable. Ordered accordingly. c) Mitsubishi Heavy Industries India Precision Tools Ltd. (Mitsubishi): - Functionally dissimilar 7.5 The ld. A.R. submitted that the Company is engaged in the business of manufacturing gear cutting tools and broaches. The manufactured goods sold by the Company include gear hobs, gear shaping and shaving cutters and broaches which are not comparable to hard metal products manufactured by the Assessee. Therefore, he submitted that Mitsubishi ought to be excluded from the final list of comparables. 7.6 At the time of hearing, the ld. D.R. submitted that this is not challenged before the ld. DRP. Hence, it need not be considered for adjudication. 7.7 We have heard the rival submissions and perused the materia....
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.... facts to be required to be examined at the end of AO/TPO. Accordingly, this issue is remitted to the file of AO/TPO for reconsideration. e) United Drilling Tools Ltd. (United Drilling): - Functionally dissimilar 7.11. The ld. A.R. submitted that the Company is primarily engaged in the manufacture and sale of casing pipes, wireline wrenches, gas lift valves and stabilizers. Further, the Company is engaged in the global oil and gas industry with a license from American Petroleum Institute. The principal business activity of the Company is casing pipe. The Company is engaged in sale of products as a dealer and distributor, which shows that this company is a retailer. - Presence of patents and intangibles 7.11.1 He submitted that United Drilling has patented some of its products and technologies which indicate that it is a full-fledged risk bearing entity and proprietary manufacturer of its products. The Assessee on the other hand undertakes manufacturing and does not own any patents/trademarks. The presence of patents also contribute to an increased recognition and quality among customers which in turn result in difference in terms of pricing and margins ea....
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....kay Taps does not have segmental financials which would clearly bifurcate between the results from manufacturing and job work activities. Therefore, the Assessee is unable to determine the impact of such job work expenses on the overall profitability of Emkay and thus, submits that Emkay should be rejected as a comparable. 7.14.2 He placed reliance in this regard on the decision of the Mumbai Bench of this Hon'ble Tribunal in the case of Hope India Polishing Works (P.) Ltd. v. DCIT (supra), wherein the Hon'ble Tribunal held that an entity undertaking job work is not comparable to a manufacturing entity (para 5). - Different industry 7.14.3 He submitted that the Company serves the automobile and electrical industry. Further, the product base of Emkay is more in the nature of taps and cutting tools which are more related to the electrical goods industry. On the other hand, the Assessee is engaged in the automobile sector and manufactures machine tools and hard metal products. 7.14.4 At the outset, the Assessee submitted that this company was rejected on the grounds of functional dissimilarity by the DRP in the assessment year 2018-19 in the Assessee's own case. As t....
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....y different ⮚ Substantial income from export sales 7.19 He submitted that the comparable company is into manufacturing of fuel pumps, machine tools, accessories and Engineering Tools. Therefore, ld. DR submitted that the company is functionally similar. As regards, the export sales, the TPO has not applied export sales filter, only the functional similarity/dissimilarity is being considered in this ground of objection. Since the company is functionally similar this ground of objection is to be rejected. 7.19.1 We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that this company is functionally dissimilar to the assessee's case as it manufactures engineering goods, small tools and works on B2C model. In our opinion, it is appropriate to remit this issue to the file of AO/TPO to undertake fresh study with reference to functionality. Ordered accordingly. 8. In ground No. 2.8, the assessee wants inclusion of following two companies as comparables: (a) Birla Precision Technologies Ltd. (b) Jainex Aamcol Ltd. a) Birla Precision Technologies Ltd.(Birla): 8.1 The ld.....
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.... Hence, he submitted that it is functionally different from the assessee. It also fails the persistent losses filter as it has recorded losses in the FY 2017-18, 2016-17 and 2015-16. Accordingly, he submitted that the plea of the assessee to include this comparable is to be rejected. 8.3 We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that this company is earning profit in 2 years out of 3 assessment years functionally comparable. More so, in the assessment year 2014-15, the ld. TPO himself has included this company as a comparable. For this purpose, he relied on the judgement of the order of the Tribunal in the case of CIT Vs. Welspun Zucchi Textiles Ltd. dated 6.1.2017 passed by the Hon'ble Bombay High Court in ITA No. 1286/2014. In view of this, we remit this issue to the file of ld. AO to reconsider the same in the light of above observations. b) Jainex Aamcol Ltd.(Jainix): 8.4 The ld. A.R. submitted that the company came to be rejected by the TPO for the reason that the same fails the persistent loss filter. The DRP upheld the action of the TPO for the reason that the Company is making loss....
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....cost 3,756,978,000 % of international transactions to operating cost 28.37% 10.1 Therefore, he submitted that the TP adjustment, if any, ought to be restricted to the value of the international transaction. Further, the TPO in the TP order in Assessee's own case for the assessment years 2014-15 (refer pages 9 and 10 of the order) and 2018-19 (refer page 21 of the order) has restricted the TP adjustment to the proportion of cost of international transactions to total operating cost. In any event, the TP adjustment, if any ought to be restricted to the value of international transactions. Reliance in this regard is placed on the decision of this Hon'ble Tribunal in the case of Continental Automotive Components (India) Pvt. Ltd v. ACIT (Reported in [2022] 139 taxmann.com 187 (Bangalore - Trib.) 10.2 In view of the above, he submitted that the TP adjustment in the manufacturing segment, if any, ought to be restricted to the proportionate value of international transaction to total operating cost. 10.3. The ld. D.R. relied on the orders of lower authorities. 10.4. We have heard the rival submissions and perused the materials available on record. Similar issue came f....
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....ano (India) Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was correct in directing the AO to restrict the determination of the ALP to transactions with the AE rather than on the entire turnover of the Company. Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE." 50. The Hon'ble Bombay High Court on the above questions of law held as follows:- "5. With the assistance of the learned counsel for respective parties, we have considered the submissions and the judgment of the Tribunal. The Tribunal in para 7 of its order has observed as under:- "7. We have heard both the parties and their contention have carefully been considered. So far it relates to gri....
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....ional Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered to with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act. 5. In the above view, as the provisions of the Act in respect of transfer pricing are self-evidence, Question No. (a) as proposed does not give rise to any substantial question of law. Thus not entertained." The ITAT Bangalore in the case of Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT [IT(TP)A No. 1401/Bang/2010 held as under:- "Taking into consideration of these factors, we accept the first fold of submission made by the learned counsel for the assessee and direct the Assessing Officer to confine the adjustment, qua the purchases made by the assessee from....
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....n profits are being shown. Further, the transactions with non-AEs can be presumed to be at arm's length as there is no reason to earn lesser profit. But in case of transactions with AEs, there is always a likelihood of earning lesser profits as transactions are controlled and decisions are influenced by AE. Thus the overall profits on account of transactions with AE as well as non-AE gets suppressed." 51. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT (A) that transaction with non- AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 52. We have considered the rival submissions. The reasoning of the CIT (A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw m....
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.... to ground No. 2.11 the ld. A.R. submitted that the TPO, while computing the margin of the Assessee erred in not considering other income of Rs. 2,64,23,000/- which comprises of lease rentals, commission on order-based sales, facility charges from fellow subsidiary, support services charges from fellow subsidiaries and export incentives. While the Assessee had included the same in the computation of margin in its TP study, the TPO had reduced the same. Pertinently, it is submitted that the TPO reduced the other income from the operating income, while taking in the operating cost base, the costs incurred by the Assessee in earning the other income. He submitted that the above income is operating in nature and ought to be included in the operating income. 11.1 As regards the lease rentals, he submitted that during the year, the Assessee had received lease rentals from its fellow subsidiary Kennametal Shared Services Private Limited ("KSSPL") for leasing its business premises. The costs relating to depreciation, repair and maintenance cost and upkeep costs of the premises and machinery were initially incurred by the Assessee and was forming part of Assessee's cost base in its ....
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....ITA No. 1286/2014); - Reitzel India Private Limited v. DCIT (Reported in [2020] 119 taxmann.com 401 (Bangalore - Trib.); 11.5 As regards the commission on order-based sales, he submitted that the Assessee has a dedicated sales team whose predominant role is to expand the sales portfolio of the Assessee. As part of this role, the sales team also assists its group entity, i.e., Kennametal Satellite Inc., in the sale of products manufactured and sold to independent customers. As part of this activity, the sales team had incurred certain cost in relation to the sale of products made by Kennametal Satellite Inc., which were closely connected to the primary activity of manufacturing and sale of machine tools. Considering the overall nature of activity and the quantum to the total operations, the said activity is forming part of the manufacturing segment's cost. Therefore, he humbly submitted that the relevant commission income should also be suitably factored (either to be included in revenue or excluded from cost base, as appropriate) while computing the operating profit of the Assessee, for transfer pricing purposes. This would also be in line and consistent with the 'match....
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....sis 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 depreciation was includable while arriving at the total costs of the respondent assessee as the same is not excluded in arriving at the profits of the comparable companies. (d) We find that so far as exclusion of DEPB benefit in arriving at the operating profit of the respondent assessee is concerned, the order of the Tribunal for the assessment years 2005-06 and 2007-08 were appealed by the revenue to this Court. Mr. Suresh Kumar, learned Counsel appearing for the Revenue very fairly states that this very issue was raised by the Revenue in its appeal before this Court for the earlier assessment years being Income Tax Appeal No. 1827 of 2013 relating to AY 2005-06 and Income Tax Appeal No.&nbs....
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....eated out of a loan transaction. In view of the above, the ld. A.R. submitted that the delayed receivables cannot be treated as an independent international transaction. 13.2 In any event, he submitted that the said amounts were outstanding with the AEs as well as Non-AEs for a period exceeding the credit period purely because of business reasons. He submitted that the Assessee has not charged any interest for the receivables outstanding even from Non-AEs, which is apparent from the financial statements. He placed reliance in this regard on the decision of the Hon'ble Bombay High Court in case of CIT V. Indo American Jewellery Ltd. (Order dated 08.01.2013 passed by the Hon'ble High Court of Bombay in ITA(L)No. 1053/2012) (para 5) wherein the Hon'ble High Court upheld the decision of Hon'ble Tribunal in deleting the notional interest on trade receivables considering the fact that the taxpayer has not charged the interest in case of trade receivables from both AEs as well as Non-AEs. 13.3 Moreover, he submitted that the Assessee had outstanding payables to its AEs, the impact of which the lower authorities failed to consider. Pertinently, the Assessee has not paid any interest ....