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TMI Blog2017 (4) TMI 1585X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Nos. 2 & 3 are dismissed as not pressed. 3. Ground No.4 is with regard to disallowance of customs duty payment. The contention of the ld.A.R is that the Transfer Pricing Officer (TPO) erred in including 30% of the customs duty as part of the operating cost of the assessee to determine the ratio of operating profit to sales. 4. The facts of the issue are that from the facts of this case it is made clear that the assessee in its initial years of manufacturing operations, the import content of raw materials was as high at 99%. Secondly, GUI is procuring a product which, as already undergone a very key process of Calendaring. The raw material is not just polymer or rubber. Local Vendors in India do not have the capability of undergoing this process of calendaring and this process requires huge investments plant and machineries. This processed and 'calendared' material is received by GUI in refrigerated containers and has a limited shelf life and is packed accordingly with liners etc, which has a cost to it. GUI has to use the best technology since these products are consumed by auto manufacturers. These business factors, constrained GUI and GUI had to import all of its raw materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their installed capacity whereas the comparables had achieved only 66% (on average) of their capacity utilized. When an explanation is called for, the assessee had submitted that some of the production process are carried out by AE itself and their capacity utilization is only 53%. The higher production of the assessee company than that of the comparables would also be one of the reasons for such price reduction since normally any company would not like to store the goods for longer time, which will affect their working capital. The fact that the assessee company had imported the calendared product from their AE has to be taken into account in this regard. 4.5. Even though the assesse company argues that their profitability had reduced due to the sales factors, actually it is not so. The assessee has not submitted any valid documentary evidences to substantiate their claim. Hence, the TPO rejected the claim of assessee. 4.6. The DRP observed that the assessee submitted the computation of the ratio of operating profit to sales to arrive at the profit level indicator of the assessee. In the same, the assessee excluded the customs duty of Rs. 4.31 crores as this was a variation wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- "No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the light of our above observations." 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto." Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP." Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the isuse to the file of AO for fresh consideration. 6. The second ground is with regard to excluding Forex gain from the Profit Level Indicator (PLI) by the assessee. 6.1 The facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the operating income of assessee, both to be excluded from the operating expenses as well as operating income respectively in view of the Order of Tribunal in the case of Motonic India Automotive Pvt. Ltd., in ITA No.741/Mds./2014 for assessment year 2009-10 vide order dated 17.08.2016 wherein held that:- "9. We find force in the argument of the ld. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. V. ACIT in ITA No.5297/Del/2011 for the assessment year 2007-08 and DHL Express (India) Pvt. Ltd. V. ACIT in ITA No.7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accordingly, this issue is remitted to the file of AO for fresh conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idences if the issue was sent back to CIT(A) for fresh examination after considering the decision of Tribunal in case of Serdia Pharmaceutical (india) (R) Ltd. (supra). We, therefore, admit the additional .evidences filed by the assessee and the issue is restored to the file of CIT(A) for passing a fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee." 10. After hearing both the parties, we are of the opinion that if the product of the comparables selected by the TPO is not comparable with the assessee's product, it cannot be considered. In the case of Gujarat Reclaims and Rubber Products Ltd., the raw material used by the assessee is a re-cycled from worn out tyres and tread peelings. Being so, the product of that comparable is inferior to the assessee's product, hence it cannot be compared to the assessee's case. 10.1 Regarding Victor Gaskets India Ltd., the assessee wants to include it. Its annual report shows that the company exited out of asbestos based products in totality at its manufacturing location, thus completing a strategic plan to go asbestos free. Being so, it cannot be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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