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TMI Blog2018 (10) TMI 1950X X X X Extracts X X X X X X X X Extracts X X X X ..... RP has commented on the wastage in the months of July and August. 2007 at 49.17% and 23.58%, respectively, though it has gone down in subsequent months but in January, 2008 it was 21.56%, in February, 2008, it was 20.06% and in March, it was 20.47%. Hence, the total wastage of the year is to be taken into consideration for adjudicating the issue in hand. We find no merit in the stand of authorities below in not excluding the cost on account of extraordinary event during the year. Accordingly, we direct the Assessing Officer/TPO to take the margins of assessee after excluding wastage cost, which was extraordinary event of the year. MAM - While applying TNMM method which has been applied by both the Assessing Officer and TPO, percentage of margins of assessee is to be compared with the margins of comparables and the advisory fees paid by assessee cannot be taken at Nil especially ignoring the evidences filed by assessee during the course of proceedings. TPO has failed to come to a finding in this regard as to whether advisory services have been availed by the assessee or not but has gone to take the value of same at Nil. Where an expenditure or payment has been incurred for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HRI ANIL CHATURVEDI, AM Assessee by : Shri Ketan Ved Revenue by : Shri Rajeev Kumar, CIT ORDER PER SUSHMA CHOWLA, JM: The appeal filed by the assessee is against the order of DCIT, Circle-1(2), Pune, dated 26.11.2012 relating to assessment year 2008-09 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short 'the Act'). 2. The assessee has raised the following grounds of appeal:- 1. The learned DCIT pursuant to directions of the Hon'ble DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs.2,20,75,181 to the value of international transactions entered into by the Appellant with its Associated Enterprise with respect to receipt of advisory services. 2. The learned DCIT pursuant to directions of the Hon'ble DRP has erred on the facts and circumstances of the case and without giving any cogent reasons, by calculating arm's length price of advisory services as NIL. 2.1 The learned DCIT pursuant to directions of the Hon'ble DRP erred on the facts and circumstances of the case by calculating arm's length price of advisory services as NIL, without considering the evidences submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 4 relate to the transfer pricing adjustment of international transactions of provision of advisory services by the assessee to its associated enterprises. He further stated that ground of appeal No.5 relates to non granting benefit of +/- 5%. The ground of appeal No.6 raised by the assessee against initiation of penalty proceedings which is premature and the same is also dismissed. The additional ground of appeal raised by the assessee is to the extent that adjustment, if any, could be made only to the value of international transactions. 7. Briefly, in the facts of the case, the assessee was manufacturer of headliners, door panels, parcel trays, etc. The technical centre of assessee was at Viman Nagar, Pune and was providing design and drawing services using CA software and infrastructure set up. The assessee had entered into various international transactions with its associated enterprises having two segments i.e. Computer aided designing / Drawing & Design Segment, in which no adjustment was made by Transfer Pricing Officer (TPO) and second segment was Manufacturing Segment, wherein adjustment of ₹ 2.20 crores was made and the assessee is in appeal against same before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eflected. The TPO observed that The scrap generated as per the assessee is more than Rs.3 Crs for which adjustment is being asked for but there is no independent third party verification available for the same. The explanation of assessee that it had dumped the same since nobody bought it was not accepted as the assessee had failed to provide gate entry / exit registers entries. Another point noted by the TPO was that assessee had scrapped all the units at a cost of ₹ 781.68 and how the said cost was assigned and worked out was not explained, hence the cost asked for adjustment was not allowed by the TPO. Further, the TPO noted that total value of international transactions relating to manufacturing segment was ₹ 5,83,99,095/-, out of which major transactions were only on advisory services and the other transactions of FA was on capital account. The unadjusted margins of assessee worked out to (-) 11.56% and that of comparables were at 6.39%. The TPO observed that This means that the TNMM used for the benchmarking is not correct. In view of that it is held that the Advisory services are not at an ALP and hence taken at Nil. The arm's length price of transactions was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices as well as benefit received. The DRP observed that the TPO had clearly demonstrated that the assessee had not received any benefit through advisory services as it had earned negative margin of (-) 11.56% of manufacturing segment, whereas comparables had earned 6.39% positive margins. The DRP further observed that the assessee had not demonstrated anywhere in its documentation that their services were not available in house or in the country and for whatever services rendered by associated enterprises any third party would be ready to pay for such services in similar circumstances. The DRP concluded by holding that computation of arm's length price of advisory services at Nil price by following TNMM method was correct. In respect of three comparables rejected by the TPO, the DRP held the said concerns to be functionally not comparable and upheld rejection. The Assessing Officer thus, passed final order under section 143(3) r.w.s. 144C(13) of the Act making an adjustment of ₹ 2.20 crores, against which the assessee is in appeal before us. 9. The learned Authorized Representative for the assessee pointed out that adjustment has been made in the segment of advisory s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade before TPO. In respect of additional ground of appeal, the learned Authorized Representative for the assessee sought proportionate adjustment to international transactions with its associated enterprises. 10. The learned Departmental Representative for the Revenue in reply, pointed out that the assessee was engaged in two lines of activities and the manufacturing activities were in the nature of car interiors. He referred to the order of TPO at page 9, wherein he has disturbed advisory services. He also made reference to the TP study report but could not explain the order of TPO in rejecting the claim of assessee. However, he pointed out that if certain aspects need to be looked into, then the matter may be sent back to the file of TPO. In respect of comparables selected, the learned Departmental Representative for the Revenue pointed out that they were functionally different and hence, not comparable. Coming to the next stand of assessee i.e. adjustment of PLI on account of wastage and scrap, he referred to the orders of TPO and DRP and pointed out that there was no third party evidence. The learned Departmental Representative for the Revenue then referred to case laws relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to manufacturing segment. The case of assessee before us is two-fold - that advisory fees related to drawing and designing segment and also the manufacturing segment and once no adjustment has been made in the drawing and design segment, then adjustment of ₹ 2.20 crores, if any, to be made in the manufacturing segment has to be proportionately made. The second issue which is raised before us is in relation to adjustment on account of excess wastage during the year. 13. The assessee had established a unit at Chennai, where in the initial period, there was wastage and the assessee pointed out that it was extraordinary cost, which had to be reduced while computing margins of assessee. However, the case of Revenue was that the margins of tested party could not be adjusted, only the margins of comparables could be adjusted. The assessee claimed that it was an economic adjustment to an extraordinary cost, which is one time non-recurring and needs to be excluded while computing its margins. The learned Authorized Representative for the assessee before us has refuted each of the comments of TPO in this regard. We will deal them one by one. The first allegation made by Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Authorized Representative for the assessee placed heavy reliance on the decision of Pune Bench of Tribunal in HOV Services Ltd. Vs. JCIT (2016) 73 taxmann.com 322 (Pune - Trib.), wherein the Tribunal while determining PLI of tested party had laid down the proposition that extraordinary expense incurred by assessee such as expenses on account of GDR issue, buy back of shares, restructuring options like ESOP, etc. were to be granted adjustment while determining arm's length price. The Pune Bench of Tribunal in turn, relying on the ratio laid down by the Hon'ble High Court of Delhi in Marubeni India (P.) Ltd. Vs. DIT (2013) 354 ITR 638 (Del), held as under:- "39. We find merit in the submission of the Ld. Counsel for the assessee that the expenditure incurred on account of GDR issue, buyback of shares and restructuring options like ESOP etc. amounting to Rs.1,02,17,339/- should be considered as nonoperating expenses while determining the operating margin of the assessee. Similar is the case with rejected tax refund claim written off since the said expenditure was not related to providing of services to its AEs. As regards the expenses of accounting and MIS process is con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprise is not allowed to interfere in such decisions which are administrative in nature. The payment of compensation for closure of the Indian units was an abnormal item of expense and therefore, ought to have been excluded from the operating costs while arriving at the ALP of the international transaction. The case made out by the income tax department was that since the assessee is a captive unit of its associated enterprise, it was actually the latter which undertook the entire risk, that the associated enterprise was paying the assessee at the rate of cost plus 10 percent that if the Indian units are closed then the operating costs would correspondingly be reduced and therefore, the compensation paid would form part of the operating costs and would thus be relevant for arriving at the ALP. 18. The aforesaid issues were considered by the Tribunal. It noted that despite a specific direction issued by the CIT(Appeals), the assessee was unable to adduce any documentary evidence to show that the decision to close the Indian units was taken by the assessee independently and without being influenced by the associated enterprise. The Tribunal thus appears to have doubted the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, because the compensation would directly depend or vary according to the quantum of the costs. In such case it would be relevant to consider whether the compensation paid for closure of the Indian units would amount to normal or abnormal expense. But as rightly pointed out by the counsel for the assessee, the assessee is being compensated by a fee or commission which has no connection with the costs incurred. This has been referred to even in the assessment order at paragraph 6.3 as follows:- "For the agency and market support services, MIPL has received two kinds of remuneration. a. handling commission - which varies from transaction to transaction and depends on the product, volume etc.; (during the proceedings the assessee was asked to give transaction wise break up of commission received but inability in this regard was expressed as it was stated that the transactions were numerous and could not collated); b. Services fees - fixed fees for rendering marketing support in form of market survey etc." The CIT (Appeals) proceeded to decide the issue on the basis that the assessee was unable to produce any document to show the circumstances under which the decision to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Transwitch India Pvt. Ltd. (Supra) has held that the expenditure incurred on relocation of its office by the assessee, additional rent paid for two months and salary paid for unproductive/idle hours should be considered as non-operating expenses. 42. Since the assessee in the instant case has given full details of the various expenses justifying its treatment as non-operating expenditure, therefore, considering the totality of the facts of the case and in the light of the decisions cited above, we hold that the assessee was fully justified in adjusting the above expenses for computing its operating margin. Therefore, we set aside the order of the CIT(A) on this issue and direct the AO to compute the operating margin of the assessee company by adjusting the above expenses. Grounds raised by the assessee on this issue are accordingly allowed." 15. The learned Authorized Representative for the assessee also pointed out that similar ratio has been laid down by Mumbai Bench of Tribunal in Pangea3 & Legal Database Systems (P.) Ltd. Vs. ITO (2017) 79 taxmann.com 303 (Mumbai - Trib.), wherein it was held that where a material difference had arisen in case of assessee due to abnormal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng at operating margins of assessee and the same would work out to 7.13%. 18. Now, coming to rejection of three comparables by the TPO. The assessee was engaged in auto ancillary units, wherein the assessee was manufacturing headliners, door panels, parcel trays, etc. The concern K.R. Rubberite Ltd. which was selected by assessee was also engaged in production of auto parts and hence, the same could not be rejected as not being functionally comparable. 19. Similarly, the concern Lifelong India Ltd. was engaged in the manufacture of auto parts i.e. Air cleaner assembly, handle assembly, moulded parts and aluminum die-casting, which get covered under the term 'auto ancillary' i.e. segment in which the assessee is operating. Hence, the same is functionally comparable to the assessee. 20. Now, coming to the third concern i.e. Bright Autoplast Ltd., which is wholly owned subsidiary of Sintex Holdings BV, Netherlands and the related party transactions were very high. In view of comparable not fulfilling RPT filter, the said concern cannot be selected as comparable. Accordingly, we direct the Assessing Officer to re-compute mean margins of comparables after including K.R. Rubberite Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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