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TMI Blog2016 (4) TMI 1306X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 124.82 crore and `Fees for technical & consultancy services’ at ₹ 15.50 crore have been capitalized by the assessee and hence cannot be considered for making transfer pricing adjustment under the TNMM. Since operating profit is computed by considering the items of operating costs alone, the value of these two items which are capital in nature and have been capitalized in the balance sheet, cannot be included in the base amount for applying the operating profit margin rate of the comparables for computing the amount of transfer pricing adjustment. Direct to exclude them from the base amount of ₹ 148.78 crore for applying the mean profit margin rate of the comparables to determine the amount of transfer pricing adjustment under the TNMM. TPO has considered these two items under the overall TNMM, as was wrongly done by the assessee also and then he went on to consider the value of these two transactions of capital nature for making transfer pricing adjustment. This approach of benchmarking these items of balance sheet under the TNMM, as done by the assessee and then followed by the TPO, is not appropriate, thus, calling for correction. No doubt, the stand of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the mandate of Rule 8D of the Income-tax Rules. Accordingly matter is restored to the file of the AO for making disallowance u/s 14A on some reasonable basis - ITA No.4242/Del/2010 - - - Dated:- 6-4-2016 - SHRI R.S. SYAL, AM SHRI C.M. GARG, JM Assessee By : Shri K.M. Gupta, Advocate Department By : Shri Amrendra Kumar, CIT, DR ORDER PER R.S. SYAL, AM: This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) on 28.6.2010 in relation to the assessment year 2006-07. 2. First issue raised in this appeal is against the addition of ₹ 23.76 crore on account of transfer pricing adjustment. 3. Briefly stated, the facts of the case are that the assessee, an Indian company, is engaged in manufacturing toughened glass, laminated glass and float glass. It is India s largest manufacturer of automotive safety glasses performing all the functions starting from purchase of raw material, processing it into final product till the stage of carrying out the marketing functions and providing aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit before tax and depreciation and Net profit/sales. On being called upon to clarify about the correct PLI, the assessee came out with OP/TC of the Float glass division, calculated at 3.88%. The TPO observed that in this calculation, the assessee did not consider depreciation as operating cost. The assessee revised the figure of OP/TC, after considering depreciation, at 3.39%, which has been reproduced in para 4.5 of the TPO s order. On a perusal of this calculation, it was observed that the assessee debited a sum of ₹ 1244.41 lac as Extraordinary items on the expenditure side of its Profit Loss Account with the note given in Schedule 14 that there was unrelenting rainfall in Maharashtra in July, 2005 which led to shutting down of its Float SBU plant from 26.7.2005 to 28.10.2005 due to extensive damage to assets/inventories and hence the expenditure was incurred on repair, power and fuel and utilities for resumption of operations, which was shown as extraordinary item in the Profit Loss Account. This expenditure was ignored by the assessee for calculating the ALP. The TPO refused to accept the assessee s contention for the exclusion of extraordinary cost at ₹ 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iting off of metal bath/HT panel amounting to ₹ 2.97 crore; Plant revival expenses for repair of plant damaged due to flood at ₹ 3.89 crore; and Power, fuel and utility consumption during unproductive period at ₹ 4.76 crore. The ld. AR fairly admitted that these expenses totaling ₹ 12.44 crore are otherwise revenue and not of capital nature. It was emphasized that since these are extraordinary operating costs incurred by the assessee, the same should have been removed from its operating costs in the calculation of profit margin. Sounding a contra note, the learned Departmental Representative argued that the TP provisions do not permit allowing of any adjustment from the calculation of profit margin of the tested party. He argued that adjustment, if any, can be made only in computation of profit margin of the comparables. Thus, the foremost question for our consideration is whether any adjustment on account of dissimilarity between the assessee and comparables, is warranted in the assessee s calculation of profit level indicator or that of comparables. 5.2. Chapter-X of the Act contains special provisions relating to avoidance of tax. Section 92, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings out that the net profit margin realized by the enterprise from an international transaction is to be computed in relation to a particular base. Sub-clause (ii) provides that the net profit margin realized by the enterprise from the comparable uncontrolled transaction is computed having regard to the same base. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, ..... which could materially affect the amount of net profit margin in the open market. It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under subclause (iii), which is used as benchmark for the purposes of making comparison with the profit margin realized by the assessee from its international transaction as per sub-clause (i). Sub-clause (iv) states that the net profit margin realized by the enterprise, as referred in sub clause (i), is established to be the same as the net profit margin referred in subclause (iii) of the comparables. Sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 5.5. A cursory look at this sub-rule indicates that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the international transaction and the comparable uncontrolled transaction or if such differences exist, then a reasonably accurate adjustment can be made to eliminate the material effects of such differences. A plain reading of sub-rule (3) of Rule 10B brings to the fore that this sub-rule is meant only for ascertaining whether or not a probable comparable uncontrolled transaction is fit for being treated as actual comparable. This is only an entry level judgmental provision for ascertaining the comparability of an otherwise broadly comparable uncontrolled transaction. In other words, if the broader comparable uncontrolled transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. VS. ACIT (ITA No.6148/Del/2015) dated February, 2016 and DCIT vs. Claas India Pvt. Ltd. (ITA No.1783/Del/2011) dt. 12.08.2015. Ex consequenti, it is held that such adjustment can be legally made only in the profit margin of the comparables, if otherwise factually warranted. 5.6. The foregoing discussion brings us to the next issue of granting adjustment in the calculation of profit margin of comparables on account of extra ordinary costs/loss incurred by the assessee due to rains, if permissible. First and the foremost condition for granting any adjustment is that an assessee must prove existence of some material differences between the international transaction undertaken by it and comparables. In this regard, we find that the ld. AR has not demonstrated in any manner that the comparables finally chosen did not suffer such extra-ordinary operating loss. It is trite that under the transfer pricing provisions, onus is always on the assessee to furnish necessary particulars for claiming any adjustment. If necessary particulars are not filed, then there can be no question of the TPO suo motu allowing any adjustment. In the absence of the ld. AR showing non-incurring of any extr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that the TPO while computing transfer pricing adjustment at ₹ 31.61 crore, considered base amount of ₹ 148.78 crore for applying arm s length profit margin of comparables at 24.49%. Referring to such base amount of ₹ 148.78 crore, the ld. AR submitted that this comprises of transacted value of four international transactions as discussed above, that also include Purchase of capital goods for a sum of ₹ 124.82 crore and payment of `Fees for technical consultancy services at ₹ 15.50 crore which was in respect of capital work-in-progress capitalized in the balance sheet. The ld. AR submitted that since these two items belong to balance sheet of the assessee and were not routed through the Profit Loss Account, there was no occasion for applying profit margin of the comparables on these two transactions as well. This was opposed by the ld. DR. 6.2. Having heard the rival submissions and perused the relevant material on record, we find that there are four international transactions which have been considered by the TPO for the purposes of benchmarking. Transaction of `Import of tin bath blocks and machinery spares and `Import of clear float ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM, as was wrongly done by the assessee also and then he went on to consider the value of these two transactions of capital nature for making transfer pricing adjustment. This approach of benchmarking these items of balance sheet under the TNMM, as done by the assessee and then followed by the TPO, is not appropriate, thus, calling for correction. No doubt, the stand of the assessee seeking exclusion of these two transactions of capital nature from the base amount for calculating transfer pricing adjustment under the TNMM is justified, but, at the same time these transactions of capital nature are required to be benchmarked by considering CUP as the most appropriate method. The ld. AR during the course of hearing admitted this position. Since the TPO has not done benchmarking in a proper manner as discussed above, we set aside the impugned order and direct the TPO/AO to benchmark these transactions of capital nature under the CUP method independent of other transactions under the TNMM. III. Selection of comparables 7.1. The next issue raised in this appeal is against selection of certain comparables. The assessee initially selected five companies as comparable. During th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... glass division under consideration is ₹ 258.94 crore, leaving the remaining amount for Automotive division. In so far as the difference in turnover as the relevant criteria for inclusion or exclusion of a company is concerned, we find that this issue is no more res integra in view of the judgment of the Hon ble jurisdictional High Court in the case of Cryscapital Investment Advisors (India) (P) Ltd. vs. DCIT (2015) 376 ITR 183 (Del) in which it has been held that high/low profit and high/low turnover cannot be a ground to exclude an otherwise comparable company. Similar view has been reiterated by the Hon ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 279 CTR 441 (Del). The reliance of the ld. DR on a recent judgment of the Hon ble Delhi High Court in ST Microelectronics Pvt. Ltd. vs. CIT 2016-TII-15-HC-DEL-TP is misconceived. It can be noticed from para 11 of the judgment that the assessee argued that the Tribunal did not consider the principal contention about the functional profile of the comparables chosen, which was different from that of the assessee. Setting aside the Tribunal order and restoring the matter for a fresh consideration, the Hon ble H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.89 crore which was after write back of interest and transfer of debenture redemption reserves to the Profit Loss Account. While discussing the comparability of Bharat Glass Tube Ltd. above, we have observed that the Hon ble jurisdictional High Court has held that a lower or a higher profit rate/turnover cannot be a criteria for exclusion of a company. Unless it is shown that there were losses due to extraordinary circumstances which were only case specific, a probable comparable company cannot be excluded from the list of comparables. As there are no extraordinary reasons for incurring of loss of Triveni Glass Ltd. for the year and this company is not a consistent loss making company, we hold that the same cannot be excluded. We order accordingly. (iii) Gujarat Guardian Ltd. 10.1. The TPO included this company in the list of comparables by noticing that it was one of the manufacturers of float glass. The assessee s objections that it was earning dividend income and was also having cheaper power supply, were found to be unconvincing. The TPO observed that while computing the margin of this company, income from dividend, being a non-operational income, was liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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