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TMI Blog2022 (10) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... HELD THAT:- We remit this issue to AO/TP with a direction to consider the foreign exchange fluctuation adjustment for computing the ALP of the assessee. This ground is allowed in favour of the assessee for statistical purposes. Adjustment for customs duty - assessee imported 83.12% of its raw materials whereas the comparable companies imported only an average of 15.14% of their raw materials whereby the assessee incurred significant customs duty charges warranting an adjustment for TP comparison - HELD THAT:- We notice that the coordinate bench of the Tribunal in the case of M/s. Continental Automotive Components (India) Pvt. Ltd [ 2021 (11) TMI 1059 - ITAT BANGALORE] has considered the similar issue. Thus we are remitting this issue to the AO/TPO for fresh consideration. This is ground is allowed in favour of the assessee for statistical purposes. Re-computation of operating margins pursuant to the Mutual Agreement Procedure (MAP) resolution covering the transaction between the assessee and its AE Denso Corporation Japan (DNJP) - HELD THAT:- Keeping into consideration the entire conspectus of the facts and circumstances of the case and the additional ground raised, befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder u/s.154 by re-computing the TP adjustment of manufacturing segment to Rs.21,76,78,098/-. The TPO while arriving at the TP adjustment did not consider adjustments made by the assessee with respect to (i) Extraordinary expenses incurred in setting up new production line, (ii) Foreign exchange fluctuation, (iii) Customs Duty expenses and (iv) Under utilization of capacity. The TPO also made an adjustment towards interest. 3. The AO passed the draft order giving effect to the TP adjustment. Aggrieved, the assessee filed its objections before the DRP. DRP gave partial relief to the assessee. In respect of adjustment made towards interest paid and sustained the adjustment made towards manufacturing segment. The AO passed the final assessment order giving effect to the TP adjustment as per the directions of the DRP. 4. Aggrieved by the final order of the AO, the assessee is in appeal before the Tribunal. 5. The assessee raised seven grounds and one additional ground before us. Ground No.1 and 2 are general in nature and does not warrant separate adjudication and hence dismissed. The Ld.AR during the course of hearing did not press for ground 7 and hence the same is dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transactions amounting to INR 13,74,78,853 has to be reduced from the cost base while re-computing the operating profit margin of the Appellant. Alternatively the said amount could be added to the operating income of the Appellant as the same has been offered to tax in India pursuant to MAP resolution 6. In the course of hearing the Ld AR submitted a paper book with additional evidence supporting its claim for adjustment towards underutilization of capacity, Foreign Exchange Fluctuation and Customs Duty (Ground 3, 4 and 5) . The ld.AR prayed for admission of additional evidences before the Tribunal as these evidences when considered would substantiate the claim of the assessee that the international transactions of the assessee are at arm s length. With regard to various TP adjustments, the additional evidences now produced go the root of the issue and the core reason for not granting adjustment towards all the three adjustment by the lower authorities. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record. Adjustment towards under utilization of capacity (Ground 6) 7. The assessee in the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is permitted to eliminate any difference which materially affects the price or costs or profit arising from such transaction in the open market. The Ld.AR also submitted that as a result of underutilization of capacity the assessee was unable to recoup the fixed cost incurred as compared to the comparable companies thereby affecting the profit margin of the assessee and, therefore, an adjustment to eliminate effect of the underutilized capacity is warranted. The Ld.AR further submitted that the assessee had furnished all the details available in the form of capacity utilization data of 27 comparables companies before the lower authorities and that if further details are required for determination of adjustment the AO ought to have exercised power u/s.133(6) to collate the details. 10. The ld.DR relied on the written submissions. 11. We heard the rival submission and perused the materials on record. The assessee submitted the capacity utilization data of 35 companies (pages 26 and 27 of the additional evidence compilation) and from the details as submitted by the Ld AR, it is noted that the assessee is functioning at a capacity lower than the industrial average. It is also n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uced below- 7.3.1 We have considered the rival contentions and perused the material on record. It is a settled principle, upheld in the decisions of several Hon'ble Courts/Tribunals, that adjustment for under utilization of capacity can be granted; provided the under utilization of capacity viz-a-viz the comparable companies is established with evidence. In the case on hand, admittedly, the assessee has given the details of capacity utilization of the assessee and that of its comparable companies at Appendix-9 and 10 of its TP Study. The TPO has examined the same, in the course of proceedings referred to him under section 92CA of the Act and has apparently accepted the veracity of the members mentioned therein, as he has quoted from the above Charts/Appendix (supra). Since the TPO has himself accepted the figures/numbers stated in the Appendix-9 and 10, the figures stated therein cannot be doubted at this stage. 7.3.2 In our view, the only difference between the contentions of the assessee and the TPO was on whether the mean average of capacity utilization should be adopted or whether the capacity utilization of only Motors should be adopted. In the factual matrix of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO for fresh consideration based on merits. The TPO/AO is directed accordingly after giving a proper opportunity of being heard to the assessee. Adjustment for foreign exchange fluctuations (Ground 4) 16. The next ground argued by the assessee is the adjustment for foreign exchange fluctuation not granted by the TPO. The assessee imports a considerable amount of raw material for undertaking the manufacturing operations in India in order to meet the stringent quality requirements. During the financial year 2010-1, 83.12% of the raw materials were imported by the assessee. The assessee enters into contract with its customers in India which is reviewed and revised year on year while negotiating the price. One of the aspects that is taken into consideration is the cost of materials to be imported from Japan for manufacture in India during the financial year 2009-10. When the assessee negotiated the price with its customers and YEN remained stable and therefore the assessee could not negotiate for higher price however subsequent to commitment of the sale price with the customers rupee depreciated significantly and therefore the assessee had to add in additional cost on purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DRP considered the objection of the assessee related to rejection of Orbit Industries as a comparable and held that the assessee has not given any cogent reason for change in the new search process which was essential to have current year data and the filters applied earlier need to be applied now to maintain consistency in approach. The DRP further held that abnormal losses indicate that it was not a normal loss because financial analysis was triggered for FAR and this comparable fails at the very first step. In view of cogent reasons recorded by the TPO and DRP, we are unable to see any infirmity and perversity in these findings in rejection of Orbit Industry as a comparable. On the issue of adjustment of exchange fluctuation, loss incurred by the assessee, we observe that it is a well accepted principle of Transfer Pricing regulations to compare like with like and eliminate the differences if any, by suitable adjustment. The said principle clearly provides for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of comparables or between the enterprise entering into in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rules/provisions that any difference which is likely to materially affect the net profit margin (NPM) in the open market has to be eliminated. The revenue authorities and TPO are duty bound to know that the TNMM visualizes the undertaking of a thorough comparability analysis and elimination of the differences through the requisite adjustments. 22. In the case in hand, admittedly, the average exchange rate of Thai Bhat during October, 2005 to March 2006 was 100 Thai Bhat equivalent to ITA No.5297/Del/2011 INR 110 and after consideration of said average exchange rate, price of sale of goods had to be agreed upon with the customers. The DR has not disputed the point that during April 2006 to September 2006 at the time of purchase, the exchange rate of Thai Bhat was substantially increased and the average exchange rate of Thai Bhatt was increased to 100 Thai Bhat = INR 119. Accordingly, we can not rule out and ignore this factual matrix emerged from the fluctuation of foreign exchange rates that while prices of purchases and import made by the appellant have increased, the sale price of exported goods remained on the lower side which is an important element to materially affec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive (P.) Ltd. (supra) in 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 consideration. 40. Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision. 22. Considering the judicial precedence and the mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes Components (India) Pvt. Ltd. v. DCIT (supra) dated 4.1.2012 in ITA No.120/PN/2011, which is as follows : 37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). It is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. In principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Coordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits. Additional Ground 30. During the year under consideration, the assessee entered into international transactions with its AEs situated in Japan and in countries other than Japan. The TPO determined an aggregate adjustment of Rs.21,76,78,098 in respect of the entire international transaction of the assessee. In the meantime, the assessee applied for MAP with Japan to eliminate the impact of double taxation and a resolution was arrived at by the Competent Authorities of India and Japan. Under the resolution out of the total adjustment the amount of Rs.14,54,87,775 which was the adjustment in respect of the transaction with the AEs in Japan, stood reduced to Rs.13,74,78,853 granting a relief of Rs.80,08,922. Now through additional ground the assessing is praying that the segmental margin of the assessee needs to be recomputed taking into the account the adjustment determined under MAP. 31. The Ld AR submitted that as a result of MAP resolution, the assessee s loss stands reduced to the extent of Rs.13,74,78,853 and this has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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