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2019 (4) TMI 412 - AT - Income TaxTPA - Comparable selection - HELD THAT - Assessee is engaged in the business of manufacturing and marketing of Crushers and Screeners and also provided business support and engineering design services to its Associated Enterprises (AEs)Companies functionally dissimilar with that of assessee need to be deselected from final list. Adjustment on account of capacity utilization - HELD THAT - Capacity adjustment is not limited to depreciation and repair of machinery. In a business entity, there are certain fixed overheads such as rent, administrative expenses etc., which have to be incurred irrespective of the percentage of capacity utilization. There are variable expenditures which are in direct proportion to the production i.e. the capacity utilized. The net margin of an entity will vary with that of another entity in case there is a difference in the capacity utilization. If there is higher capacity utilization, then the fixed overheads get spread over such higher capacity utilization with the result that the net margin of such entity will be much higher as compared to the another entity where the capacity utilization is low and as such there is a higher proportion of fixed overheads which get allocated to such lower capacity/production. Thus, the right method is to identify all the fixed expenses including depreciation and to adjust the same in the ratio of the capacity utilized. We direct the TPO to exercise his powers under section 133(6) of the Act and to call for the information on capacity utilization of comparable companies. After obtaining the information, he will share the details so obtained with the assessee and give an opportunity to the assessee and grant adjustment for capacity under-utilized. Addition on account of Foreign Exchange Loss - addition u/s 43A - HELD THAT - Any difference arising consequent to a change in the Rate of Exchange after the acquisition of such asset, the difference is adjusted against actual cost/written-down value of such asset. Thus, the condition for applicability of this section is that the capital asset is acquired from a country outside India. In the present case, the assets were purchased in India and not acquired from the country outside India. Thus, DRP was correct in holding that provisions of section 43A, proposed by the AO in the draft assessment order, are not applicable. This issue, as rightly stated by the Ld. DRP, is covered by the judgement of Hon ble Supreme Court in the case of Woodward Governor India Private Limited 2009 (4) TMI 4 - SUPREME COURT . Adjustment on account of non-cenvatable custom duty on imports made by the assessee company while computing margin of the Manufacturing segment - HELD THAT - In case non-cenvatable custom duty on import made by the assessee company is materially affecting the transaction vis- -vis the comparables being considered by the TPO then the same needs to be eliminated. Since, this issue has not been considered by the TPO and considering the fact that we have remitted the matter back to AO for allowing adjustment on account of capacity utilization, we deem it fit to restore this issue also to the TPO. The TPO will examine whether non-cenvatable custom duty on imports paid by the assessee is materially affecting the PLI of the assessee company and if he finds that this payment of non-cenvatable custom duty is materially affecting the transaction with that of the comparables then he will suitably make adjustment thereof. Adjustment for abnormal foreign exchange fluctuation while computing margin of the Manufacturing segment - exclusion of the foreign exchange loss on account of restatement of loan liability - HELD THAT - In the present case, the admitted fact is that this relates to restatement of loan liability. Such expenditure, though, may be allowable as business expenditure while computing the taxable income but the fact that such expenditure is of extra-ordinary nature cannot be ignored. Therefore, we are of the view that this exchange loss needs to be excluded while computing the PLI of the assessee. We are also in agreement with the contention of the Ld. AR that only the Foreign Exchange loss pertaining to the Manufacturing segment needs to be considered while computing margin of the Manufacturing segment. Accordingly, we direct the AO to also exclude Foreign Exchange loss pertaining to other segments while computing the margin of the Manufacturing segment. Value of consumption of the raw material purchased from associate enterprise - HELD THAT - It is undisputed fact that the assessee has made purchases of ₹ 105,55,16,000/- during the year out of which material worth ₹ 41,34,29,000/- was not consumed during the year and, therefore, the impact on the margin, if any, in respect of such purchases during the year is only of the material consumed and not of the material purchased and which is lying unutilized at the end of the year as closing stock. The purchase cost debited in respect of such raw material and the valuation of such material as closing stock is at same cost. Considering this fact, we direct the TPO that in case any adjustment is required to be made after giving effect to the adjustment on account of capacity and other issues decided by us in this appeal the same is to be restricted to the material purchased from the AE and consumed during the year.
Issues Involved:
1. Adjustment of Arm’s Length Price (ALP) for international transactions. 2. Exclusion of certain comparables in the Business Support Segment. 3. Exclusion of certain comparables in the Engineering Design Services (EDS) Segment. 4. Capacity utilization adjustment in the manufacturing segment. 5. Adjustment on account of non-cenvat-able custom duty. 6. Adjustment for abnormal foreign exchange fluctuation. 7. Restricting TP adjustment to the value of consumption of raw material. 8. Deletion of addition on account of Foreign Exchange Loss. 9. Initiation of penalty proceedings under Section 271(1)(c) of the Act. Detailed Analysis: 1. Adjustment of Arm’s Length Price (ALP) for International Transactions: The TPO proposed adjustments on three accounts: Business Support Segment (?18,24,354), Technical (Engineering Design) Support Service (?1,20,99,788), and Purchase of raw material (?12,93,90,068). The AO, in the draft assessment order, made these additions and also added amounts for Foreign Exchange Loss (?2,04,92,202) and provision for warranty (?1,97,33,000). The Ld. DRP provided partial relief, leading to a revised adjustment by the TPO. 2. Exclusion of Certain Comparables in the Business Support Segment: The Ld. DRP excluded Global Procurement Consultants Ltd., determining it was not functionally comparable due to its involvement in World Bank-funded projects. The tribunal upheld this exclusion, noting the company's different functional profile and government-related services. 3. Exclusion of Certain Comparables in the Engineering Design Services (EDS) Segment: The Ld. DRP excluded Certification Engineers International Ltd., RITES Ltd., and REC Power Distribution Company Ltd., citing differences in functional profiles and government-related services. The tribunal upheld these exclusions, emphasizing differences in turnover and service revenue ratios. 4. Capacity Utilization Adjustment in the Manufacturing Segment: The assessee argued for capacity utilization adjustments due to underutilization (41.18%) of installed capacity. The Ld. DRP directed the exclusion of depreciation and machinery repairs instead of allowing capacity utilization adjustments. The tribunal directed the TPO to obtain data on capacity utilization of comparable companies and make necessary adjustments, emphasizing the need to account for fixed overheads and variable expenditures. 5. Adjustment on Account of Non-Cenvat-able Custom Duty: The assessee argued that non-cenvat-able customs duty impacted margins due to a higher ratio of imported raw materials. The tribunal remanded the issue back to the TPO to examine if the customs duty materially affected the PLI and to make necessary adjustments. 6. Adjustment for Abnormal Foreign Exchange Fluctuation: The tribunal agreed to exclude foreign exchange loss (?2,04,92,202) related to loan liability restatement for capital assets from the operating margin. It also directed the exclusion of foreign exchange loss pertaining to other segments while computing the margin of the manufacturing segment. 7. Restricting TP Adjustment to the Value of Consumption of Raw Material: The tribunal directed that any adjustment should be restricted to the material purchased from the AE and consumed during the year, not the total purchases, considering the unutilized closing stock. 8. Deletion of Addition on Account of Foreign Exchange Loss: The Ld. DRP deleted the addition, relying on the Supreme Court judgment in CIT vs. Woodward Governor India Private Limited, which held that such loss is revenue in nature. The tribunal upheld this deletion, noting the assets were purchased in India and Section 43A was not applicable. 9. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act: The tribunal dismissed this ground as premature, noting that penalty proceedings initiation was not ripe for adjudication. Conclusion: The tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing necessary adjustments and remanding specific issues back to the TPO for further examination and appropriate action.
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