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TMI Blog2013 (11) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP grossly erred in rejecting the Internal Comparable Uncontrolled Price Method for determining the arm's length price of the assessee's export of finished goods to its AEs. 3. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in rejecting the Transactional Net Margin Method (TNMM) analysis undertaking by the assessee without any proper basis. 4. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in selecting Madras Aluminium Co. Ltd. (MALCO) as a comparable company while determining the arm's length price of the assessee's transactions with its AEs without taking into account that MALCO was not a comparable company on the basis of the FAR analysis of MALCO. 5. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in not considering all the objections raised by the assessee during DRP proceedings in respect of the adoption of MALCO as a comparable company while determining the arm's length price of the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessee to submit its transfer price study report. The assessee had submitted its report with TPO on 22.08.2011. The ld. AR drew our attention to pages 223 to 284 of the assessee's paper book which was a copy of the Transfer pricing documentation. It was the submission that in the said report the assessee had taken into consideration ten companies. It was the submission that the assessee had shown its margin representing the operating profits to the operating expenses of 10.69 as against the arithmetical mean of the eleven companies selected for the transfer price study at 7.07%. Consequently the assessee had requested that no adjustments to the assessee's pricing in the international taxation with its AE's were called for. However, the TPO rejected the assessee's transfer price documents filed on the ground that on verification of the financials and business description of the assessee it was noticed that the assessee had accepted as comparables companies having sales turnover as low as Rs.28.98 crores and the highest being that of 298.81 crores where as the assessee had a turnover of nearly 732 crores. Consequently the AO had held that the filter for the companies was to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts is used for roofing, flooring in buses and therefore the value realisaiton is much lower in comparison to Properzi Rods. The assessee was also not manufacturing Properzi Rods. It was the further submission that out of the total sales of MALCO the export sales was only Rs.21.73 crores being only 3.96% of its turn over whereas domestic sales was 96.04% of its turn over. It was the submission that in the assessee's case more than 50% of the total sales are derived from exports. The ld. AR submitted that this submission of the assessee was overridden by the DRP by stating that the assessee's case was getting almost time-barred due to non-compliance of the assessee on several occasions as well as to verify the veracity of the assessee's claim. An independent analysis was carried out on capitaline database wherein the assessee's claim of non-existence of the comparables having turnover between Rs.500 crores - Rs.1500 crores was found to be incorrect. The objections of the assessee were not considered by the DRP at all. It was the further submission that even though the assessee had specifically objected to the non-providing of the details of MALCO by the AO the same was rejected by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement discussion analysis of MALCO wherein under the head "Raw material" it has been specifically mentioned that the primary raw material, bauxite continued to be sourced from the captive leased mines of the company at Yerced and Kolly Hills. It was also submitted that thus the DRP fell into error in assuming that MALCO was not extracting bauxite from the mines where the lease had expired. It was the further submission that MALCO had its own integrated power generation facility which fulfils most of its power requirements whereas the assessee did not have such facility. The ld. AR drew our attention to page 387 of the paper book as also page 432 of the paper book to show that MALCO generates its own electricity and MALCO had also sold part of the power generated by it. It was the further submission that MALCO was also debt free company and the only debt was Rs.21.77 crores whereas the assessee has substantial borrowings amounting to Rs.184.crores and consequently the cost of finances was high in the case of the assessee. It was the submission that the interest in financial charges in respect of MALCO was only Rs.77 lakhs as against the net interest expenditure in the case of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 9.91%. It was the submission that even this transfer price study was not considered. It was the further submission that however, for the immediately succeeding assessment year being the Assessment year 2009-2010 the operating margin of the sales in the case of assessee remaining nearly the same no adjustments has been adopted by the TPO and the TPO has accepted the Transfer price study for the assessment year 2009-2010 accepting the companies as considered in the transfer price study dated 22.05.2012 placed by the assessee. It was the submission that MALCO was not considered for the assessment year 2009-2010 as comparable. It was the submission that the addition has been made by the AO in respect of the arms length price on the basis of the DRP's order be deleted in its entirety. 6. In reply the ld. DR drew our attention to the order of the DRP. It was the submission that the DRP had taken into consideration of the objections as raised by the assessee and had found no error in the action of the TPO in adopting MALCO as comparable with the assessee. It was the submission that the TPO had also replied to all the objections raised by the assessee in the Remand Report filed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving questioned the assessee in respect of the adoption of MALCO. Thus there is a clear violation of the principles of natural justice as has been claimed by the assessee in respect of the TPO's order. Now coming to the order of the ld. DRP, a perusal of the same shows that before the DRP the assessee has specifically challenged the comparison of the assessee's company with MALCO. Though the DRP recognizes that the assessee produces, manufactures a product that is different when compared to that manufacture by MALCO, the same has been rejected on the ground that under TNMM product comparable is not so strict as it is in the case of CUP and CPM method. The DRP has held the view that as long as the products belong to the same group of products TNMM can be applied. Here a perusal of the products manufactured by MALCO shows from the schedule 12 forming part of the accounts of MALCO that out of the total sales Rs.494 crores, Rs.433 crores is of Properzi Rods, Rs.36.1 crores is of aluminium ingots, Rs.45.9 crores is of rolled products and Rs.1.8 crores of power. Further as per schedule 11 the installed capacity of MALCO for manufacture of aluminium ingots is 12,500 Metric tones as agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... except for the aluminum coil sheet no product of the assessee and MALCO are identical. When comparing the aluminium coil MALCO itself recognizes that the Properzi wire rods has higher realization and MALCO is relatively small compared to other domestic majors. In the case of the assessee, substantial portion of its production is in aluminium coils and other items. Thus we find that on this ground alone MALCO cannot be treated as comparable to the assessee. Here we may mention that in the case of MALCO the identical product which is being used for comparing MALCO to the assessee being aluminium rolled product represents just about 8% of the total turnover of MALCO. In the circumstances we are of the view that MALCO cannot be used as comparable for determining the arms length price in the case of the assessee. 7.1 Coming to the next objection of the assessee that MALCO has captive mines for extraction of its raw material whereas the assessee has to procure the raw material from the open market. We find that the ld. DRP has rejected this argument by holding that in the report of MALCO it has been mentioned that the lease has expired over the mines. However, it is noticed that the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the various other objections raised by the assessee. Coming to the submissions of the ld. CIT(DR) we may mention here that MALCO has only invested in the equity of India Foils Ltd. The loss of India Foils Ltd has not been absorbed by MALCO. Consequently it would not affect the profitability of MALCO in any manner. In the circumstances the finding of the DRP holding that the MALCO is comparable for the purpose of adjustments to be made on the arms length price in respect of the transactions of the assessee with its Associated Enterprises stand cancelled. Consequently the addition made by the AO representing the adjustment made by the TPO on the basis of the direction of the DRP stand deleted. 8. In ground No.7 and 8 it was fairly agreed by both the sides that the issues in respect of the disallowance u/s 35AC of the IT Act and the addition on account of donation was liable to be restored to the file of AO for readjudication. As it is noticed that the details of the claim of the deduction u/s 35AC of the Act also the donation have not been verified by the AO, we are of the view that this issue requires to be restored to the file of AO for readjudication after giving opportunity t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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