TaxTMI 
TaxTMI 
2026 (8) TMI 880
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....ssion of data in the Telecommunication sector. Return of income for A.Y. 2021-22 e-filed on 07.03.2022 declaring loss (-) Rs. 16,34,35,670/-. Case selected for complete scrutiny through CASS for the following reason : "Large international transaction(s) with very low Profit before Interest & Taxes even after more than 5 years of incorporation for Manufacturing Industry Sector having large asset base (T.P. Risk Parameter)" 3. Valid notices u/s. 143(2) and 142(1) of the Act served upon the assessee. Since the issue involved international transaction, the case, referred to the ld. Transfer Pricing Officer (TPO) on 14.10.2022 who carried out the proceedings u/s. 92CA(3). Ld. TPO observed that the assessee has entered into international transaction with its Associated Enterprise (AE) which was mainly regarding the purchase of Preform Silica at Rs. 64.58 crore approx. from its AE and the total transactions for the year paid at Rs. 65.39 crore approx. and receipt of Rs. 0.70 crore. Ld. TPO noted that the operating profit/operating cost percentages (-) 6.97% and operating profit vs. operating Revenue is (-)7.49%. So far as the determination of the Arm's Length Price (ALP) of th....
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....ssment Order proposing the additions/adjustments as proposed by the ld. TPO. The assessee filed objections against the proposed draft order on 03.07.2024 before the Dispute Resolution Panel (DRP). However, the assessee failed to get any relief and the additions proposed by the ld. TPO have been confirmed by the ld. DRP pursuant to which the ld. Assessing Officer has passed the impugned assessment order u/s. 143(3) r.w.s.260 r.w.s.144B of the Act determining income of the assessee at Rs. 3,99,81,370/- arrived at after making upward adjustment for ALP of international transaction at Rs. 20,34,03,631/- and varition in respect of the issue of interest on delayed receivables at Rs. 13,409/-. 5. Aggrieved assessee is now in appeal before this Tribunal by raising the following grounds of appeal: "1. The learned Assessing Officer (AO), under the directions of the Dispute Resolution Panel (DRP), erred in law and on facts in completing the assessment by making additions of Rs. 20,34,03,631/- and Rs. 13,409/-on account of transfer pricing adjustments, and thereby determining a total income at Rs. 3,99,81,370/-as against the returned loss of Rs. 16,34,35,671/-, which is arbitrary, ....
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.... certain companies which were relied upon for the purpose but not confronted to the Appellant during the TP scrutiny though specifically asked by the Appellant. Hence the adjustment using TNMM is completely arbitrary and has to be rejected and deleted. 7. The Ld. TPO has erred in law and on facts in applying interest rate @ 5.186% on trade receivable alleging delayed receipt of payments resulting in notional addition of Rs. 13,409/-. The Appellant submits that all the payments were received within due date rather before the due date. Therefore, there is no delay in receipts and hence no deemed/ notional interest should have been added in the proposed addition. 8. That entire proceedings of assessment have been vitiated for want of serving the draft Assessment order under Section 144C of the Income Tax Act, 1961 (the Act) at the very first place. The non-compliance of statutory provisions of, inter alia, Section 144C is not curable. The impugned order having been passed in clear breach of statutory provisions is non-est and, therefore, unsustainable. The Hon'ble High Court of Bombay at Goa while passing the order dated 16.04.2024 referred and relied upon the ju....
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....mparable company is available on public domain and therefore it is not a fit comparable. 8. Ld. Counsel for the assessee submitted that the Average rate of procurement by the assessee company of Preform Silica Type D Fibre is $81.41 per kg and Type A2 Fibre is $130 per kg. He submitted that the product code for the Preform Silica imported by the company falls under HS code 70022090. He further referred to the Average procurement by the companies in India of import of Preform Silica Type D Fibre and Type A2 Fibre. As per the bills of entries/shipping bills filed with Indian Customs (External CUP) are at $88.87 per kg and $271.50 per kg which are much above the average rate of procurement price paid by the company. Apart from the External CUP, ld. Counsel for the assessee referred to the Internal CUP and stated that the assessee company procured the very same raw material- Type D Fibre from an independent unrelated party, i.e. Shin-Essu Chemical Company Limited during the period July to October, 2020 at a price of $113 per kg as against the rate of $81.41 per kg paid to the Associated Enterprise. So far as other raw material namely A2 Fibre the price of purchase from Associate Ent....
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....vs. Deputy Ld. Commissioner of Income-tax, 7(3)(1), Mumbai [2018] 92 taxmann.com 88 (Mumbai)[06-03-2018. 3. Radhasoami Satsang vs. Commissioner of Income-tax [1992] 60 Taxman 248 (SC)/[1992] 193 ITR 321 (SC)/ [1991] 100 CTR 267 (SC)[15-11-1991] 4. Benetton India (P.) Ltd. vs. Deputy Commissioner of Income-tax [2025] 174 taxmann.com 542 (Delhi - Trib.) [23-04-2025] 5. Lubrizol India (P.) Ltd. vs. Additional Commissioner of Income-tax, LTU, Mumbai [2020] 113 taxmann.com 3 (Mumbai)[20-11-2019] 6. Principal Commissioner of Income-tax vs. Willis Towers Waston India (P.) Ltd. [2024] 166 taxmann.com 455 (Punjab & Haryana) [12-08-2024] 10. The other submissions of the assessee stating that CUP method is the most appropriate method and that the final comparable selected by the ld. TPO for calculating the Arm's Length Price as per Transacrtional Net Margin Method is not a correct comparable because Aksh Optifibre Limited is engaged in many other business activities and that segmental data is not available. These submissions are summarised as under : "B. THE ASSESSEE IS A COMPANY WITH 50:50 HOLDING BETWEEN UNIVERSAL CABLES LIMITED AND FURUKAWA E....
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.... 33. The commercial and financial relationship between the Company and its associated entities owned by any one of the partners, whether it is supply of Preform of Silica or supply of Optical Fibre or payment of royalty would all be governed on commercial basis arising out of prolonged negotiations and cannot be said to be differing from those, which would be made between independent parties. For e.g. if any raw material is supplied by an equal JV partner to JV, he would supply at the prevailing market price as he would have done to any customer and if, in case he supplies at a price more than market price, it will be a disadvantage for other equal JV partner and it will not be acceptable to that partner. Similar would be the case vice versa a lower than market price will not be acceptable to the supplier of JV partner. 34. Hence, prima facie the transaction so entered by the Company with the AEs are bound to be at arm's length. 35. During FY 2020-21, the Assessee has undertaken various International Transactions with its AEs. The chart showing international transactions are as under: S. No. Associated Enterprise International transactions Am....
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....pendent unrelated uncontrolled comparable transactions have been considered for comparing with the said transaction. Therefore, TPO rejects this benchmarking and the TP study in this regard. TPO also rejects the CUP method as the Most Appropriate Method used by the taxpayer. 5.3 Due to the rejection of CUP method used by the taxpayer, there is a need to carry out fresh benchmarking analysis. The ALP as per the Transfer Pricing regulations in India is arithmetic average or median of the prices of the uncontrolled comparables. In view of the same, due to rejection of method, the consequent Arm's Length price would also stand rejected." 39. From the above paragraph, the assessee submits that the TPO being unable to find any infirmity in the detailed submissions filed by the assessee as well as the comparisons submitted by the assessee, has just moved with a predetermined mind to make the variation/addition in the case of assessee. The details submitted and the data relied upon by the assessee to justify the arm's length price with regard to purchase of Preform of Silica from AE is re-iterated as under:- i. The purchase price of Preform of Silica from....
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....form of Silica D Fibre $ 88.87 per kg Preform of Silica A2 Fibre $ 271.50 per kg ix. Therefore, the transaction is fully justified as at arm's length price also as per the external CUP data made available by the assessee. x. Further, the Company also procured the raw material i.e. Preform of Silica for manufacture of D Fibre' from an independent unrelated party i.e. Shin-Etsu Chemical Co. Ltd., Japan during the period from July to October 2020 at a price of $ 113 per Kg, whereas transaction of purchase with AE is carried out at an average price of $81.41 per Kg. The Company also procured other grade of Preform of Silica which is for manufacture of 'A2 Fibre' from this unrelated party at a price of $ 130 per Kg. as against purchase from AE at a price of $ 130 per Kg. (to note that this is the agreed price with AE being the main supplier of Preform of Silica, ensuring steady supply with high and consistent quality). The invoices for import of Preform of Silica from the independent and unrelated party M/s Shin-Etsu Chemical Co. Ltd., Japan are also enclosed (refer page no. 622 To 627 of paper book). This is an additional direct internal....
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....Commissioner of Income-tax 7(2), Mumbai vs. Sonata Software Ltd. [2013] 29 taxmann.com 144 (Mumbai)/[2013] 55 SOT 533 (Mumbai)[29-08-2012] 3. Assistant Commissioner of Income-tax, Circle 1(2), Hyderabad vs. Ckar Systems (P) Ltd. [2013] 29 taxmann.com 145 (Hyderabad Trib.)/[2012] 20 ITR(T) 817 (Hyderabad - Trib.)/[2013] 55 SOT 553 (Hyderabad - Trib.)[19-10-2012] 4. Assistant Commissioner of Income-tax, Circle-11 (1), Mumbai vs. Viacom 18 Media (P.) Ltd. [2019] 109 taxmann.com 233 (Mumbai)[08-02-2019] 5. Elara Securities (India) Pvt Ltd [TS-14-ITAT-2020 (Mum)-TP] - January 06, 2020 6. Rohm and Haas India Pvt Ltd [TS-926-ITAT-2019(Mum)-TP] - September 25, 2019 ITAT: Adopts CUP-method, accepts comparable data from Customs Department's Database for benchmarking imports/exports 7. Toll Global Forwarding India Pvt Ltd [TS-383-ITAT-2014 (DEL)-TP] - November 18, 2014 ITAT: Adopts realistic & purposive interpretation to 'price' under CUP; 6th method u/r 10AB retrospective 8. Knorr-Bremse India Pvt. Ltd. (TS-700-ITAT 2012 (DEL) -TP) October 31, 2012 44. In view of the above, assessee submits that the approach of Ld. TP....
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.... accordingly Optical Fibre Cable manufacturer are customers for the Company and not competitor/peers. 51. Therefore, the assessee submits that the 1st step and fundamental step in the search process, which is the basis for all the further exercise, itself is not relevant and therefore the subsequent search process cannot be applied in the case of assessee. 52. At 4.1 para, Ld. TPO (refer page No. 73 of paperbook) says that "the Taxpayer has reported international transactions in relation to manufacturing activity primarily with regards to purchase of silica preform required in production of optical fibre cables" whereas the Company is manufacturing Optical Fibre only & not cables, this is a material difference. 53. Further in para 7.1.1 of Ld. TPO order (refer page no. 77 of paperbook), the Ld. TPO mentioned that "The search process in Prowess Database was carried based on keywords relevant to the manufacturing of items such as "fibre optics and optical fibre cables". These items are manufactured by the taxpayer company, as mentioned in the TP study report." This is also factually incorrect as in Company's TP report, we have mentioned that the Company....
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....at from the Functional Profile - as reproduced by the TPO itself that - Aksh is manufacturing Optical Fibre, Optical Fibre Cables and FRP & not only Optical Fibre whereas the assessee is manufacturing only Optical Fibre. The product mix detailing and the revenues and financials of individual product line have not been shared by the Ld. AO nor available in public domain. Therefore, as can be seen from above the it is clear that Aksh Optifibre Limited is a public limited company engaged in the manufacturing and selling of Opticle Fibre, Opticle Fibre Cable, Fibre Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and ophthalmic lens as well as provided E Governance and FTTH services. Therefore, Aksh is not a proper comparable as it is engaged in various businesses as enumerated above, and the assessee, on the other hand, being engaged in manufacturing only Optical Fibre." 10.2 Reliance placed on the following judicial precedents: 1. Adidas Technical Services (P.) Ltd. vs. Deputy Commissioner of Income-tax, Circle 1 (2), New Delhi [2016] 69 taxmann.com 401 (Delhi - Trib.)[15-02-2016] Global Procurement Constant Ltd. (GPCL) 2. Labvantage Solutions (P.)....
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....ral countries across the world, including India, imposed strict lockdowns to control the spread of Covid-19 pandemic. This has severely impacted Company's Optical Fibre production and Sales. Accordingly, the capacity utilization of the Company dropped to around 30% for the whole of FY 20-21. Even the world-wide economic activities were impacted by various variants of Covid-19 & dampened the market conditions in that period. During this time, the demand of Optical Fibre from Company's customers decreased substantially. 61. Accordingly, the Loss incurred by the Company during the FY 2020-21 is not attributable to the price of Preform but mainly due to lower capacity utilization. As evident from the financial statements of FY 2020-21, there is margin in manufacturing activity but only due to lower capacity utilization, the margin from manufacturing activity is not able to recover fixed cost of the Company hence Company incurred loss in the FY 2020-21. Further the Company is manufacturing Optical Fibre, which is high technology driven product & require highly skilled employees/manpower. The Company has not laid off key workers and employees even though the capacity uti....
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....r page No. 714 to 716 of paperbook), their average purchase price of Preform of Silica for 'D Fibre' during FY 2020-21 is USD 102.9 per kg. as against average purchase price of USD 81.41 per kg from AE. 66. Considering the higher purchase price of Preform of Silica as compared to the Company's purchase price of Preform of Silica and technology wise, the Company's plant is highly advanced with Japanese technology as compared to Aksh, we are sure that Aksh would have incurred losses in standalone manufacturing of Optical Fibre but this loss is off-setted with the profits earned in Optical Fibre Cables & FRP manufacturing business. 67. The Ld. TPO itself has quoted ITAT decision in sub-para iv of para 12.14 (refer page No. 87 of paperbook), "The ITAT in the case of M/s Chiron Behring Vaccines Pvt Ltd (2011-TII-30-ITAT-Mum-TP) has held that TNMM requires comparison of net margin realized from International Transaction and not comparison of operating margin of the enterprise as a whole. According to the ITAT, transaction by transaction approach has to be adopted." 68. As Aksh is engaged in manufacturing of several products, including Optical Fi....
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....anically affirmed the variation/addition proposed by the Learned TPO. The conclusions of the DRP are purely based on conjecture, surmise and assumptions, and not on any objective findings or cogent reasoning as mandated under law. 72. The observations of the DRP appearing at Page 6 of its order are reproduced below: "Further, the import-export data used or provided by assessee company is having different grade and specifications. Therefore, the assessee company should have made adjustment on these accounts. However, the assessee company has used this data without making any adjustment on accounts of Geographical differences, grade and specification of product, mode of freight etc. Hence, the external CUP data as provided by assessee company cannot be relied upon as a valid benchmark." 73. In this regard, the assessee respectfully submits as under: A. No Finding Recorded by DRP - Order is Non-Speaking 74. The Learned DRP has made a sweeping assertion that the import data submitted by the assessee pertains to different grades, different specifications, and different geographies. However, the DRP has not recorded a single finding, example, ....
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....st differences The assessee submits as under: 83. Assessee's Price Is Lower Than Internal CUP - No Profit Shifting Possible 84. The DRP itself admits that the assessee's purchase price from its AE is lower than prices under internal CUP (DRP itself (Pg 6) states assessee enjoys Discounted Pricing & therefore, has lower purchase price). Once the AE price is lower than the uncontrolled price: There is no possibility of profit shifting to foreign jurisdiction, and No transfer pricing adjustment is warranted, as held in multiple judicial precedents. 85. Thus, on this ground alone, the adjustment should have been deleted. 36. Findings Recorded by DRP Are Merely on its own Conjecture and Surmises (i) Economies of Scale / Bulk Purchases 87. The DRP alleges that the AE enjoys bulk discounts due to large order volumes. 88. However, Aksh, an uncontrolled party that also imports in bulk from the Japanese supplier (Shin-Etsu), pays a higher price (USD102.92) compared to the assessee (USD81.41). 89. Thus, bulk purchase adjustments actually support the assessee, not the Revenue. (ii) Purchase Patter....
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....voice/from the date of Airway bill. The details of invoices and payments received are submitted to the Ld. TPO in the desired format (refer page no. 717 of paperbook). From the details, the Ld. TPO has failed to appreciate that all the payments are received within due date rather before the due date. Therefore, there is no delay in receipts and hence no deemed / notional interest can be charged. 96. There was a delay of only 3 days in one of the small invoice that too has been compensated from making early payment against other invoices. Complete details for the same were submitted to Ld. TPO and the Hon'ble DRP. 97. The Ld. TPO statement at para 12.17 (refer page no. 88 of paperbook) mentioned that "The Taxpayer also failed to show that the delay in payment of receivables was compensated by the AE through a set off in any other transaction" is also wrong. From the table submitted to Ld. TPO, it's clear that the delay in payment under one invoice is set-off from making early payment against other invoice and the overall no interest is receivable from Furukawa Electric Co., Ltd, Japan. 98. Without prejudice, the interest rate @ 5.186% taken by TPO ....
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....nsidered M/s Aksh Optifirbe Ltd. as comparable company which is functionally different from the assessee. Aksh Optifibre is manufacturing Opticle Fibre, Opticle Fibre Cable, Fibre Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and ophthalmic lens as well as provided E Governance and FTTH services whereas the assessee is manufacturing only Optical Fibre. As submitted above, as per custom data available (refer page 714 to 716 of paper book), their average purchase price of Preform of Silica for 'D Fibre' during FY 2020-21 is USD102.9 per kg. as against average purchase price of USD 81.41 per kg from AE. Considering the higher purchase price of Preform of Silica as compared to the Company's purchase price of Preform of Silica and technology wise, the Company's plant is highly advanced with Japanese technology as compared to Aksh, we are sure that Aksh would have incurred losses in standalone manufacturing of Optical Fibre but this loss is off-setted with the profits earned in Optical Fibre Cables & FRP manufacturing business. vi. The Loss incurred by the Company during the FY 2020-21 is not primarily attributable to ....
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....method has been accepted by the ld. TPO and no adjustment has been proposed. For the year under consideration, ld. TPO has rejected the CUP method and applied Transactional Net Margin Method and has only selected one final comparable namely Aksh Optifibre Limited. 13. We will first move on to examine whether ld. AO/TPO erred in applying the TNMM inspite of the fact that there have been no change in the facts and nature of business of the assessee company and the purchase transactions of very same product took place in the past and ALP has been calculated as per the CUP method but still ld. TPO has adopted a different method as the Most appropriate method. We note that the average rate of procurement by the assessment company of Preform Silica Type D Fibre is at $81.41 per kg and Type A2 Fibre is at $130 per kg. Majority of purchase of Preform Silica are made by the assessee from its Associated Enterprise. However, the imports of the very same raw material is also made from independent unrelated parties during the year which is Shin-Etsu Chemical Company Limited, Japan. 14. We note that the CUP method is a Traditional Profit technique used to evaluate whether the price charged....
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....y the assessee from its Associate Enterprise is at Arm's Length Price. Now once a method namely CUP has been consistently being followed by the assessee in the past and there being similar nature of transaction as well as the parties and there being no change in the asset base of the assessee and such method have been consistently accepted by the Revenue authorities for calculating ALP, rejection of the CUP method followed by the assessee and application of another method namely TNMM cannot be held to be justified as the ld. TPO has not followed the Rule of Consistency. 17. We observe that in the case of Lubrizol India Pvt. Ltd. Vs. ACIT reported in (2020) 113 taxmann.com 3 (Mumbai), the Coordinate Bench, Mumbai Bench held that when there is no change in facts and law, changing of consistently applied TNMM Method to CUP Method is not justified. 18. Hon'ble Punjab and Haryana High Court in the case of Pr.CIT Vs. Willis Towers Waston India (P) Ltd. reported in (2024) 166 taxmann.com 455 has concurred with the view taken by the Tribunal holding that when for the previous assessment years the Tribunal held the CUP method to be the most appropriate method and the factual matrix re....
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.... by selecting Aksh Optifibre Limited. For selecting a comparable under TNMM method the precondition is that the comparable company should be engaged in similar type of business activity. Now the assessee in the instant case is manufacturing Optical Fibre whereas Aksh Optifibre Limited is a Public Limited company engaged in the manufacture of Optical Fibre, Optical Fibre cable, Fibre reinforced plastic rods, Impregnated Glass roving Reinforcement and Opthalmic lens and also providing E-governance FTTS services. We further notice that as per the Audited financial statement of Aksh Optifibre Limited placed in the paper book, there is no segmental data of the Revenue generated from various activities as well as the profit margin for a particular segment. In the audited balance sheet only the figure of Gross Revenue is mentioned. It is also not in dispute that the assessee is a Private Limited company and the comparable company is a Limited company having huge turnover. Taking into consideration all these aspects and also that the comparable company is engaged in many more business, in our considered view the alleged comparable is not functionally comparable with the assessee's profile ....