TaxTMI 
TaxTMI 
2019 (5) TMI 2055
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.... now take up the appeal-wise adjudication in the following paragraphs. ITA No.1609/PUN/2013 (By Assessee) 3. Briefly stated the relevant facts include that the assessee is a company and is engaged in the business of manufacturing and sale of packaging material, packaging machines and systems. The assessee filed the return of income declaring total income of Rs.6,64,950/-. Bringing our attention to the fresh assessment order dated 30.12.2011, ld. Counsel for the assessee submitted that this order was passed in connection with the revisional order made by the CIT-IV, Pune u/s 263 of the Act. Further, bringing our attention to the said revisional order, ld. Counsel submitted that the same was subject-matter of scrutiny by the Tribunal in assessee's own case vide ITA No.733/PN/2011 for the assessment year 2005-06 dated 18.11.2016. The said revisional order dated 29.03.2011 was contested by the assessee before the Tribunal and the Tribunal passed an order in this regard vide its order dated 18.11.2016 (supra). Bringing our attention to para 18 and 19 of the said order of the Tribunal (supra), ld. Counsel submitted that the CIT's direction in cancelling the assessment order....
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.... passed an order u/s 92CA(3) of the Act vide his order dated 30.09.2008. 8. During the proceedings before the TPO, the facts relating to the quantification of adjustments to be made quantified by the assessee at Rs.8,04,23,860/-. According to the assessee, list of 13 comparables were taken for its TP analysis. The TNM Method was considered as Most Appropriate Method (MAM) and the arithmetic mean of the PLI of the said 13 comparables is at 3.61%. The total amount of international transactions works out to Rs.2,21,01,33,656/-. In the TP study, the assessee considered the comparables which are functionally similar to that of the assessee. The TPO considered the above TP analysis of the assessee and considered it fit to disregard the said TP study of the assessee. The TPO issued a show-cause notice dated 28.08.2008 proposing to apply the turnover filter of Rs.100 crores and above. If the same is considered, the only two comparables qualifies the said Rs.100 crores turnover criteria such as (i) Bharat Box Factory Ltd. (Rs.106.71 crores) and (ii) Paper Products Ltd. (Rs.397.90 crores). Further, the TPO added two other comparables such as (i) Karur KCP Packaging Ltd. and (ii) Gayatri S....
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....y, technical services received, technical service provided and commission income are adjusted to the extent worked out above i.e. Rs. 35,79,98,665/- to arrive at the arm's length price of these international transactions. Assessee in annexures of form 3CEB has mentioned that having regard to arm's length price of its international transactions an adjustment of Rs.8,04,23,860/- is required to the total income of the assessee and that such adjustment is being offered to tax by filing the revised return. If the facts be so than the net adjustment as per this order would be of Rs.27,75,44,805/- {Rs.35,79,98,665/-(-) Rs.8,04,23,860/-}. Consequently this will result in increasing the income of the assessee further by Rs.27,75,44,805/-. " 9. Thus, the TPO recommended the total adjustments of Rs.35,79,98,665/- after considering the adjustments as suo moto quantified by the assessee amounting to Rs.8,04,23,860/-. The net adjustment recommended by the TPO worth Rs.27,75,44,805/-. Accepting the said adjustments of the TPO, the Assessing Officer passed an order dated 10.12.2008 determining the business profits after giving credit to the business loss and unabsorbed deprecia....
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.... machines provided to AMUL is neither operational nor extraordinary in nature. Ground 5 The AO is directed to provide adjustment on account of to the directions given in this Order. differential rate of depreciation after verification according Ground 6 The AO is directed to not to apply lower turnover filter of Rs 100 cr for the comparability. Ground 7 The learned AO is directed to exclude Bharat Box Factory Limited from the list of the comparable companies. Ground 8 The Ground is general in nature. The findings on this ground will be covered by the findings on the other Grounds of appeal. Ground 9 The AO is directed to include Bilcare Ltd and Karur KCF packaging Ltd and exclude Gayatrishakti Paper and Boards Ltd from the list of comparable companies. Ground 10 The AO is directed to use the financial data of the financial year in which international transaction was undertaken. Ground 11 Benefit of +/- 5 % may be given without granting standard deduction. Ground 12 The Ground of Appeal against initiation of penalty is pre- mature and is dismissed. Ground 13 The AO's decis....
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.... 6. Rejection of Bharat Box Factory Limited as a comparable company. Erred in rejecting Bharat Box Factory Limited from the set of comparable companies by making an incorrect observation that segmental information of the comparable segment for the aforesaid company is not available in the annual report. 9. Proposing the transfer pricing adjustment in connection with the international transactions of the Appellant based on the total operating income instead of adjustment attributable to the international transactions (without prejudice). Erred in proposing the transfer pricing adjustment to the income of the Appellant in connection with the international transactions with the Associated Enterprises (hereinafter referred to as 'AEs') based on the total operating income of the Appellant instead of transfer pricing adjustment attributable to the value of international transactions with the AEs." 15. The assessee filed additional grounds before us and the same are extracted as under :- "1] The assessee company submits that the adjustment made by it while determining the Arm's Length Price (ALP) of the international transactions e....
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.... Counsel listed out the same and the same is as under :- "a. Determination of the operating margin of the assessee company (PLI Related Adjustment). b. Selection of companies by applying turnover filter. c. Selection of companies on functional comparability. d. Allowance of working capital adjustment." A. PLI Related Adjustments 17. Referring to the first issue i.e. determination of the operating margin of the assessee company, ld. Counsel filed the following written submission and the same is extracted as follows :- "15] The assessee company had computed its operating margin at 1.82% in the Transfer Pricing Study Report. Kindly refer page 133 of the Paper Book. While computing the operating margin, the assessee had excluded certain expenses on the ground that they were extraordinary items. Further in the Transfer Study Report on page 111, it was stated that the assessee had given machinery of Rs.7,87,93,876/- to Amul free of cost. The assessee had stated that this was an extraordinary cost but on a conservative basis, it was considered as part of operating cost. Similarly, it was stated that the assessee had charged depreciation a....
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....er page 21) e. The learned CIT(A) has discussed this issue on page 11 of his order. According to him this additional depreciation provided cannot be considered as an extraordinary cost and hence, the claim of the assessee is not acceptable. f. The assessee submits that this additional depreciation is provided on account of change in the estimated useful life of the asset. This additional depreciation is basically on account of the lesser depreciation provided in the earlier years and hence, the same needs to be excluded as an extraordinary costs. Accordingly, the assessee requests that the amount of Rs. 25,25,561/- may kindly be excluded while determining the operating margin. 15.2] Adjustment on account of additional depreciation charged on land and building - α. In the transfer pricing study report, the assessee has also made an adjustment of Rs.69,45,000/- being additional depreciation charged on land and building at Itola. The relevant details are given on page 133 of the paper book. The assessee has given a detailed note in its balance sheet wherein it is stated that in the subsequent year it had entered into an MOU to sell its land an....
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....ckaging market in India as most of the Indian households were purchasing milk in unpacked condition or in plastic pouches. The assessee in order to tap huge potential in the milk market decided to supply two lines of filling machinery free of cost to Amul which is the largest supplier of milk and milk products in India. By providing the filling machinery, it served two main purposes for the assessee. Firstly, Amul would purchase packaging material from the assessee and secondly, once the industry leader uses the aseptic technology of the assessee, it would encourage other companies to also adopt the said technology. Accordingly, the cost of the free machinery of Rs.7,87,93,876/- provided to Amul was considered as an extraordinary cost by the assessee. b. The assessee has given the relevant details on page 111 as well as on page 201 of the Paper Book. The learned TPO has not accepted the claim of the assessee. The relevant discussion is on pages 28-31 of the order. According to him, the decision of providing two lines of filling machinery free of cost to Amul was a business decision and is nothing but business promotion expenditure of the assessee. c. The learned C....
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....m of the assessee. According to him, such adjustment is not justified. The relevant discussion is on pages 22-29 of the order. d. The learned CIT(A) has discussed this issue on pages 13-15 of the order. The findings are given in para 2.3.7 of his order wherein he has stated that such difference in the depreciation rates between the assessee and the comparable companies constitutes material difference for which adjustment should be made. Accordingly, he has directed to grant adjustment after proper verification. e. The assessee submits that similar adjustment was granted for A. Y. 2004-05 and the copy of the order passed by the learned TPO is on pages 203-211 of the Paper Book. On page 204 - 205, the learned TPO has accepted granting of adjustment on account of differential depreciation rates. The assessee further submits that the difference in depreciation rates as charged by the assessee and the comparables is very clear from the annual reports of the companies. For example, on page 482, the fixed assets Schedule of Karur KCP Packaging Ltd. is given wherein the rates charged are also stated. Similarly, in the case of Paper Products Ltd., the relevant details are ....
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.... Ltd. [20 Taxmann.com 715 (Bang)] has applied the turnover filter at Rs.10 Crs. Accordingly, the dept, in its appeal has challenged the decision of CIT(A) in lowering the turnover filter from Rs. 100 crs. to Rs. 10 crs. 2] The assessee submits that while selecting the comparables, various parameters are to be considered. In fact, size as a criteria for selection of comparables is also recommended by OCED in its Transfer Pricing guidelines. The observation of OCED in para-3.43 of the Chapter on guidelines reads as follows; "Size criteria in terms of sales, assets or number of employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability". 3] However, OECD has further stated in para 3.38 of the said guidance note that identification of potential company has to be made with the objective of finding the most reliable data, recognising that they will not always be perfect. For instance, independent transactions may be scares in certain markets and some industries. A pragmatic solution is to be found on a case by case ....
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.... be strictly applicable to the case of assessee company. As already clarified that number of companies involved in the line of food packaging business are not many and therefore, the turnover filter should be broadened in order to find out the comparables. In fact, Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Put. Ltd. DCIT [376 ITR 183] has held that merely because a company has much higher turnover then the tested party, is not a reason to exclude the same unless there is evidence to prove that high turnover has materially affects the price or cost. 8] On page 841 of the paper book, the assessee has given the details of the companies selected by it in the Transfer Pricing Study Report. From the perusal of the operating margins of the said companies, it would be noticed that there is standard pattern that companies with higher turnover has higher margins. In fact, General Metallizers Ltd. with a turnover of Rs.28.11 crs. has the highest operating margin of 12.08 %. Thus, in the present case, there is no evidence that difference in turnover has affected the operating margins of the comparable companies. Accordingly, it is submitted t....
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....ducts Ltd. as a comparable entity. In respect of the 12 companies which are rejected by him, M/s. Bharat Box Factory Ltd. is rejected on functional basis while remaining 11 companies were rejected on turnover filter. 17.2] The learned TPO further added Bilcare Ltd., Karur KCP Packaging Ltd. and Gayatrishakti Papers and Boards Ltd. as comparable entities. The assessee objected to the inclusion of all these three entities before the learned CIT(A). The contention of the assessee was accepted in respect of Gayatri Shakti Papers and Boards Ltd. and the learned CIT(A) held that it is functionally not comparable with the assessee. However, the objections of the assessee with respect to Bilcare Ltd. and Karur KCP Packaging Ltd. have been rejected by the CIT(A) and he has held that these two companies are functionally comparable with the assessee company. 17.3] Now, the assessee is objecting to the inclusion of Bilcare Ltd. and Karur KCP Packaging Ltd. as comparable entities and rejection of Bharat Box Factory Ltd. as a comparable entity. Further, the dept, has objected to the decision of CIT(A) of holding that Gayatrishakti Papers and Boards Ltd. is functionally not comp....
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....y include films, foils and wraps. f. The assessee is manufacturing packaging material for food products while Bilcare is manufacturing for pharmaceutical products. The assessee submits that considering the above facts, Bilcare is to be rejected as a comparable entity. g. The assessee further submits that in the subsequent years, Bilcare has suffered huge losses. The copy of the balance sheet of Bilcare for F.Ys. 2014-15 and 2015-16 are given on pages 843 to 910 of the Paper Book. It is to be appreciated that on a turnover of Rs. 401.35 Crs. for F.Y. 2013-14, Bilcare incurred a loss before tax of Rs. 157.34 Crs. Further, for F.Y. 2014-15, on a turnover of Rs.331.33 Crs., it has incurred a loss of Rs.212.06 Crs. The relevant P & L Account is on page 851 of the Paper Book. Similarly, for F.Y. 2015 - 16 on a turnover of Rs.255.97 Crs., Bilcare incurred a loss of Rs. 175.46 Crs. Kindly refer page 887 of the Paper Book. This issue is also important to decide the comparability of Bilcare since in the subsequent years, it has incurred huge losses while the assessee has increased its profit over the years. 17.5] Karur KCP Packaging Ltd. a. The learned TPO....
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....ssee and has held that Gayatrishakti is not comparable with the assessee. He has discussed this issue in para 2.7.2.2.1. The learned CIT(A) has accepted the claim of the assessee that the said company is engaged in manufacturing paper and not engaged in manufacturing packaging material. Accordingly, he has held that the said entity is to be excluded from the final list of comparables. The relevant submission to the TPO on this issue is given on page 195 of the Paper Book. 17.7] Bharat Box Factory Ltd. - a. The learned TPO has rejected this company on the ground that it is functionally not comparable with the assessee. In para 8(ii), pages 10 and 11 of the order, he has discussed regarding Bharat Box Factory Ltd. According to him, Bharat Box is engaged in manufacturing of printed, duplex and corrugated cartons. According to the TPO, the cartons are manufactured are used for packaging. He has stated that while manufacturing cartons, Bharat Box does not use paper as its raw material and it is the corrugated paper board which is used. Hence, the TPO has rejected this company as a comparable. b. The learned CIT(A) has discussed this issue in para 2.5.1 to 2.5.....
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.... Put. Ltd.) [2567/PN/12] b. ITO Ward 2(3), Pune v. Nevis Networks (India) Put. Ltd. [55 Taxmann.com 519]." Scenarios 24. Further, ld. Counsel for the assessee submitted that the comparables such as Bilcare Ltd. and Karur KCP Packaging Ltd. with less than 30 crores turnover can be excluded from the list of comparables finalized by the TPO. Further, the comparables i.e. Bharat Box Factory Ltd. should be included considering the functional test and of-course the turnover basis tests too. If the same is adopted, the first scenario with the 6 of the comparables such as (i) Paper Products Ltd .; (ii) Packaging Industries Ltd .; (iii) Gayatrishakti Papers & Boards Ltd .; (iv) Bharat Box Factory Ltd .; (v) Khemka Containers Ltd. and (vi) Twenty First Century Printers Ltd. shall be final list of comparables based the tests and the average arithmetic mean of the PLI worked out to 6.83% with that of the assessee company @ 4.89% is very much in the ALP. 25. Explaining the another scenario with 30 crores turnover filters, ld. Counsel submitted that the Bilcare Ltd. and all the other companies with whose turnover is less than 30 crores can be excluded and included the Bharat Bo....
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.... in size could be removed by an quantitative adjustment to the margins or price being compared if it is possible to do so reasonably accurately. The size as one of the selection criteria has also been approved by various benches of the Income-tax Appellate Tribunal, in the following cases; a. DCIT Vs Quark Systems Put. Ltd., 38 SOT 307 b. M/s Egain Communications Put. Ltd., Vs ITO 118 TTJ 354.(ITAT, Pune) c. M/s Sony India (P) Ltd., Vs DCIT 144 ITD 448 (ITAT Delhi) d. DCIT Vs Indo American Jewellery Ltd., ITA No.6194 (ITAT, Mum.) e. M/s Philips Software Centre Put. Ltd., 26 SOT 226 f. ALIT Vs NIT 10 Taxman.com 42 3. Size as criteria for selection of comparables is also recommended by OCED in its TP guidelines. The observation of OCED in para-3.43 of the Chapter on guidelines reads as follows; "Size criteria in terms of sales, assets or number of employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability Thus, the TPO has applied an appropriate turnover rang....
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....ny turnover filter while selecting 13 comparables whose average arithmetic mean of the PLI works out 13.42% against the assessee's PLI 3.61%. 29. TPO's study/AO's study : Rejecting the assessee's TP study and considering the assessee's turnover of Rs.300.58 crores, the TPO applied turnover filter. The TPO/Assessing Officer was of the view that the benchmarking of Rs.300 crores turnover to the comparables with Rs.100 crores turnover onwards should be reasonable. Applying the same, the TPO worked out the PLI of the comparables 13.42%. The TPO also adjusted the operational cost of the assessee in order to decrease PLI of the assessee and fixed rate 1.51% i.e. how the TPO quantified the adjustment at Rs.27.75 crores after considering the adjustments suggested by the assessee [Rs.8.04 crores (rounded off)]. 30. The CIT(A)'s decision : During the first appellate proceedings, in principle, the CIT(A) partly confirmed the views of the TPO/Assessing Officer applying the turnover filter to the present case. However, the CIT(A) did not agree with the range of Rs.100 crores and above to the turnover filter said by the TPO. The CIT(A) held that the turnover of Rs.1....
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....tments amounting to Rs.8.02 crores stand withdrawn and argued in favour of withdrawing the same. 33. Further, referring to the scenario no.1 i.e. exclude Bilcare Ltd. and Karur KCP Packaging Ltd. and all comparables having turnover of less than 30 crores and include Bharat Box Factory Ltd. (10 crores), ld. Counsel submitted that with the working capital adjustments the assessee's PLI of 4.99% is very much within the acceptable range of the PLI of the comparables. Similarly, referring to scenario no.2, i.e. include Bilcare Ltd. and Karur KCP Packaging Ltd. and all comparables having turnover of less than 30 crores and exclude Bharat Box Factory Ltd. (10 crores), ld. Counsel submitted that with the working capital adjustments granted the assessee's PLI of 4.98% is within the range of the PLI of the comparables. He further mentioned that these features may be verified at the level of the Assessing Officer/TPO after giving the finding of fact on the turnover filer ranges. Further, referring to scenario no.3, i.e. exclude Bilcare Ltd. and include Bharat Box Factory Ltd. along with other companies applying turnover of 10 crores and above, the ld. Counsel submitted that the ass....
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....the ALP transactions, the turnover filter is an essential and the same is relevant within the Income Tax Rules, 1962. Further, criticizing the Assessing Officer's own TP study, ld. DR argued stating that there is no need for 13 comparables as identified by the assessee without applying any turnover filter. 39. The assessee opines that there is no need for turnover filter in this case as it is difficult to find good comparables for TP study of the assessee who is engaged in the packaging material manufacturer involving aseptic technology. However, assessee landed up in finalization of 13 comparables. On the other hand, the TPO and the CIT(A) applied the turnover filter and also discovered good number of comparables. It is argument of the ld. Counsel for the assessee that application of turnover filter does not help in any meaningful TP study. On observing that the assessee will get a relief even if turnover filter is applied, the ld. Counsel for the assessee did not press this issue. On finding the above diversion stands of the parties, we are of the opinion the provisions of the Act and Rules permits the adopting of filters in general and the turnover filter in particular. I....
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.... favour of exclusion the comparables with turnover of Rs.30 crores from the purview of identification of the good comparables for benchmarking the international transactions. However, ld. AR did not advocate for restrictions on the upper side of the turnover filter. It is in this background, the assessee furnished various scenarios and the list of comparables, their PLI margins etc. The list of comparables exceeding the turnover of Rs.30 crores and above is one such scenarios. Considering the above, we find that the scenario with turnover of Rs. 10 crores needs to be dismissed. Thus, we dismiss the TP study without any turnover filter and also the study with turnover filter of Rs. 10 crores and above. 41. We shall now proceed to examine if turnover filter with Rs.30 crores and above should be appropriate or not. We have discussed that the assessee's turnover is around Rs.300 crores. It is settled legal proposition on the turnover filter issue that high-end comparables or giant companies or large companies or 'minnows' companies should be avoided for benchmarking the transaction with AEs. In fact, it is so held by the Jurisdictional High Court in the case of Pentair W....
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....en as upper and lower limits. In certain cases, the ITAT also accepted turnover filter of 1 Crore to 200 Crores. But the range cannot be fixed, as the facts may vary from case to case. Simply a comparable can not be excluded on upper turnover limit when infact in number of cases Assessee do not raise any objection on inclusion of companies with very small turnovers. The 200 Crores upper limit also cannot be considered in a case whose turnover is, say 300 Crores. Therefore, instead of a fixed 1cr - 200 Crore range, what one has to consider is the turnover/receipts of Assessee and range of upper limit at ten times and lower limit also ten times .. i.e., one tenth. Thus, for example the range for a 300 Crores company can be from 30 Crores (1/10th) to 3000 Crores (Ten times). Even this has some limitations." 42. Thus, the assessee's proposition in matters of turnover filter for considering the turnover of Rs.30 crores and above should be considered appropriate subjected to the upper limits mentioned in the para above. Accordingly, the TPO's proposition of Rs.100 crores turnover or the CIT(A) proposition in favour of Rs.10 crores stands altered pro tanto. We also proceeded to....
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.... company also engaged in the manufacturing of polypropylene bags, which are required in the cement industries. The TPO considered this is a good comparable merely on the ground that the same is engaged in the packaging industries and ignored the fact that the packaging by the said company is for storing of cement. In this regard, ld. Counsel brought our attention to page 464 of the Paper Book and demonstrated the difference in the packaging material and uses of such material by the respective industries. He mentioned that the said company is engaged in manufacturing of polypropylene bags PP & FIBC bags etc. They are not certainly made for preservation of potable cool drinks industries based on the aseptic technology specially developed for the preservation of the perishable cool drinks by the consumers. In this regard, ld. Counsel submitted that the same cannot be a good comparable. We find merit in the case of the assessee and directed the TPO/Assessing Officer to exclude the same from the list of the comparables. 46. Bharat Box Factory Ltd. : Assessee considered this as a good comparable; whereas the TPO rejected the same on the ground that it is not functionally comparable to....