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TMI Blog2021 (9) TMI 1467X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as well as comparable price. Since these international transactions are closely linked and rather inter-dependent having a bearing on each other, therefore, for the purpose of determining the ALP it is appropriate to take composite transaction and apply TNMM as the most appropriate method. CUP is no doubt a preferable method of determining ALP as it leaves no scope of any possible variations in the process of computing ALP. When transactions are relatable and interrelated, then if a particular transaction out of the composite transactions cannot be tested under CUP method, then it is not proper to apply separate methods for determining the ALP for each of the transaction, particularly when international transactions are closely linked and inter-depending having direct bearing on the price of each other. Therefore, we are of the considered opinion that in the given facts and circumstances of the case, the TNMM would be the most appropriate method for determining the ALP of international transactions entered into by the assessee with AE. We do not find any infirmity in the order of the DRP on this issue and the same is confirmed. TPO not considered the underutilization of manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow that these expenses actually crystallized during the current year, except invoices from its AE. No evidence for negotiations or finalization of terms is produced. We don t find any such negotiations are required for the sharing of expenditure as much of the expenses are in the nature of Information Technology services made available to the assessee in India. Apparently, no TDS was effected. There is no dispute that these expenses are related to earlier period and there is no substantiation that these are crystallised during the current AY except for the raising of invoices by the AE which is within the ambit of the assessee. Accordingly, the expenditure is not relatable to this year, as the same is crystallized this year. Hence we confirm the directions of the DRP. X X X X Extracts X X X X X X X X Extracts X X X X ..... Your appellant craves leave to add, amend, alter, vary and/ or withdraw any or all of the above grounds of appeal. NA 9. For these and other grounds that may be adduced at the time of hearing, it may be directed that the order of the learned ITO as upheld by the Hon'ble DRP be modified to the extent appealed against. NA Total tax effect Rs.1,56,49,589/- 3. The assessee company is engaged in the business of commercial production of slitting of Copper Alloy Coils as per customer specifications w.e.f. September 2012. The company is also engaged in the marketing of products made of Copper alloys manufactured by the holding company and other group companies. 4. The assessee filed its return of income on 30.11.2015, declaring a loss of Rs.2,37,34,753/-. During scrutiny assessment, the case was also referred to the Transfer Pricing Officer ("TPO") who passed an order u/s 92CA of the Income tax Act, 1961 ("the Act") proposing a transfer pricing adjustment of Rs.4,09,89,945/-. Consequently, the AO passed a draft assessment order on 03.12.2018 after making a corporate tax adjustment of Rs.72,44,263/- in addition to the transfer pricing adjustment of Rs.4,09,89,945/- proposed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between AEs. The guidelines have broadened the applicability of the CUP method and have alleviated the arm's length determination for commodity transactions. Para 2.19 of the guidelines asserts, "Under the CUP method, the arm's length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price". 13. The steps involved in the application of this method are: i. Identify the price charged or paid in comparable uncontrolled transactions; ii. The above price should be adjusted for transaction level differences on the basis of functions performed, assets used and risks taken (FAR) analysis and enterprise level differences if any; iii. The adjusted price is the arm's length price; 14. Reasonable and accurate adjustment can be made for differences in: a. Type and quality of products b. Delivery terms c. Volume of sales and related discounts d. Product characteristics e. Contractual terms f. Risk incurred g. Geographical factors 15. TNMM method will be applicable to transactions that involve the provision of services or distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... despatch date. As LME prices are independent and are determined based on market factors, the same has been considered for the purpose of determining the arm's length price of the transactions. 19. The AE charges non-associated enterprises also based on the LME rates. LME rates are accepted worldwide and all trades are initiated based on LME rates only. LME provides the most reliable price at which uncontrolled comparable transactions are entered into since it is an independent organisation. Thus, the external CUP, by way of LME prices, was chosen as the basis of determination of the transaction price in the instant case. Computation of LME as considered in the TP documentation 20. The price available on the LME website is the price of the base metal. These prices are available for the four base metals viz., Copper (Cu), Zinc (Zn), Tin (Sn) and Nickel (Ni). Historical data of LME prices are available for a cost on the website of LME. However, this is available readily on the website of the AE of the appellant. (www.wieland.com/Metalinfo). 21. These prices are then used by the AE in arriving at the prices of alloys which is manufactured and sent to the Indian company. There are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the TP documentation. This was only to establish that adequate margins were earned by the appellant on these transactions. The Company had also submitted a few sample invoices raised by Wieland Germany on other unrelated parties for sale of similar materials to them (Pages 295 to 304 of the Paper book). As can be seen from it, the prices charged to the Company and the other unrelated parties are on similar terms (Delivery at Terminal). The Appellant places reliance on judgements in the case of Hindalco Industries Ltd. Vs ACIT ([2015] 62 taxmann.com 181 (Mumbai - Trib), LME prices were considered as a benchmark and CUP was accepted as MAM for purchase of Copper concentrates. In this case also, treatment charges were charged by the AE. Similarly it was held in ACIT Vs MSS India Private Limited (ITA No. 393/PN/07). The relevant observations are as follows:- "24. In our considered view, once it is not in dispute that the billing by the AE for raw materials supplied to the assessee is done on the basis of the London Metal Exchange prices plus certain mark up, there is no further need of the internal comparables since London Metal Exchange, being an independent organization enterin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2% to 6%, for such factors, cannot be said to be unjustified. ……………………… As long as the assessee has entered into raw material purchase transaction with the AE at an arms length price, it is of no consequence whether or not the assessee makes sufficient profits on manufacturing products from such raw material. There are a number of factors governing the profits that the assessee earns in its business and merely because the assessee's business results are not showing profits, or showing lesser profits than industry averages, such profits per se cannot lead to the conclusion that purchase of raw material is not at an arm's length price. On the given facts, particularly when the comparable uncontrolled prices of the raw materials are readily available, it is not at all necessary to jump to TNMM method. The only factor which has prevailed on the Transfer Pricing Officer in rejecting the method adopted, or canvassed, by the assessee is the fact that the assessee has incurred loss in the relevant previous year, but, in our humble understanding, such a consideration is wholly irrelevant. The Transactional Net Margin M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s totally different product. Hence, there are multiple variables like the type of metals mixed, ration of metal and fabrication process and the metal prices cannot be compared with alloy prices. In view of the above, it was submitted that the DRP rightly upheld the TPO's method of adopting Transactional Net Margin Method (TNMM) as the most appropriate method. 28. We have heard both the parties and perused the material on record. As per the documentation furnished for the assessment year under consideration, the assessee company has entered into the following international transactions with its Associated Enterprises (AEs):- Particulars Amount(INR) Method Purchase of materials - import (including goods in transit ) 5028,12,442 CUP Income from sale of scrap 90,89,789 CUP Navision software implementation service 65,44,074 CUP Marketing services commission 126,89,937 TNMM Compensation/ fee charged for Corporate guarantee 2,85,451 Other method Investment in equity share capital (including securities premium) 231,00,000 Other method IT Maintenance, Support & Services 85,90,787 Other method Reimbursement of expenses incurred on behalf of the company 1,45,210 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchase orders on the associated enterprises. An order confirmation is given by Wieland Werke AG and other AEs after receipt of each purchase order. Sourcing of materials Wieland Metals India Private Limited imports majorly Master coils for slitting them into customer required widths which are packed in special packing material (using moisture inhibiting material and Euro Pallets) and supplied to customers. When customer requirement is very small and not regular, in this case strips as per customer required width is imported and sold from stock. Both are procured from Wieland Werke AG and other AEs. As far as Wieland Metals India Private Limited is concerned, these are semi-finished goods that can be sold to end customers after further processing i.e. slitting, in case of Master Coils. The final finished goods i.e. slit copper and copper alloy strip are sold to the end customers who are not associated enterprises and are located in India. The entire process of sourcing and transportation of raw materials, needed for producing the strips, to AE's premises is carried out by Wieland Werke AG. Wieland Werke AG will manufacture the required materials based on customer requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transactions in respect of import of raw material has direct bearing on export of goods. The TPO has applied TNMM by taking entire turnover of the assessee and then proposed an adjustment being the difference between the net margin of assessee as well as comparable price. Since these international transactions are closely linked and rather inter-dependent having a bearing on each other, therefore, for the purpose of determining the ALP it is appropriate to take composite transaction and apply TNMM as the most appropriate method. CUP is no doubt a preferable method of determining ALP as it leaves no scope of any possible variations in the process of computing ALP. However, when transactions are relatable and interrelated, then if a particular transaction out of the composite transactions cannot be tested under CUP method, then it is not proper to apply separate methods for determining the ALP for each of the transaction, particularly when international transactions are closely linked and inter-depending having direct bearing on the price of each other. Therefore, we are of the considered opinion that in the given facts and circumstances of the case, the TNMM would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated with Plant and Machinery, etc., continue to be incurred regardless of the volume or production at the factory. Thus, it is common knowledge that profit margins can be earned only if the business operates at an optimum level of activity. Since the company had under-utilised its capacity during the FY 2014-15 due to business reasons, adjustments should have been made while computing its Operating Profit Margins. 37. It was submitted that the TPO and the DRP have erred in rejecting this adjustment sought by the appellant on the contention that sufficient data pertaining to the capacity utilization of comparable companies should be available to see if any material differences exist between the assessee and comparable companies and that in the absence of such data, it is not possible to grant any adjustment. The TPO and the DRP ignored the very basic fact that impugned AY was only the second full year of the slitting operations of the company, whereas the comparable companies selected by the TPO were already established players in the industry. Hence, it was grossly incorrect to even assume that those companies would also require idle capacity adjustment as a 2 year old company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffered on account of unabsorbed fixed operating costs incurred in the initial year. The aforesaid factors, in our view, warrant an appropriate adjustment to the operating margins of the assessee to facilitate a meaningful comparison with the comparable uncontrolled transactions." b) In the case of Global Turbine Services (ITA No, 3484/Del/2011 - Pages 754 to 757) the ITAT Delhi Bench held as follows:- "10. We have heard the rival contentions and perused the material available on record. The suitable adjustment for non-utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by coordinate Bench in the case of the Amdocs Business Services Private Limited (Supra) and various other cases as cited here in above. 11. In the given facts and circumstances it was required on the part of the lower authorities to have given due effect to under capacity utilization of the assessee which has not been done TPO for adjustment for ALP determination. In view of the facts and circumstances we are inclined to set aside the matter ………………………&helli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l operations only is grossly incorrect. 41. The ld. DR submitted that DRP held that as pointed out by the TPO sufficient data pertaining to the capacity utilization of comparable companies should be available to see if any material differences exist between the assessee and comparables. In the absence of such data it is not possible to grant any adjustment. Therefore, the directions of the DRP are to be upheld. 42. We have heard both the parties and perused the material on record. The assessee has not furnished sufficient data pertaining to capacity utilisation of comparable companies so as to determine the material difference existing between the assessee and comparable. Hence, we remit this issue to the file of TPO with a direction to the assessee to furnish necessary data pertaining to capacity utilisation of comparable companies and for fresh adjudication of the issue by the TPO. 43. Grounds 4 to 6 is with regard to selection of comparables by the TPO and application of filters. Manufacturing activities filter / Functional similarity filter 44. It was submitted by the ld. AR that assessee company is a slitting centre which is not a full-fledged manufacturing process unlik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing company engaged in casting, annealing, drawing and finishing of copper base, Nickel base, tin base and Zinc base alloys and not similar to the slitting operations carried out by the assessee company • Their products are enamelled wire and rods • No import of raw materials 5 Multimetals Limited • Has a wide range of products including cast, extruded and drawn tubes, pipes and wire • Imported raw materials is only about 29.85% of total purchases 46. The ld. AR submitted that thus, it is very clear that these companies are not comparable to the assessee who is in the business of slitting of Copper Alloy Coils as per customer specifications. However, the TPO and DRP has rejected all these contentions. 47. The ld. AR submitted that the adjusted OPM for AY 2015-16 will be as follows:- Particulars Amount (Rs.) Amount (Rs.) Revenue from Operations ("OR") (A) 66,15,72,437 Total Expenses 68,16,85,322 Less: Finance Costs (4,25,572) Less: Idle costs due to non-utilisation of capacity (1,75,09,830) Less: IT Maintenance, Support and Services (discussed in detail in Grounds 7 and 8 below) (72,44,263) Operating Costs ("OC") (B) 65,65,05,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re manufacturing company. The company is engaged in manufacture of wires of various copper-based alloys both in round and flat profiles. It is reiterated that TNMM does not require strict product comparability such as the difference in thickness of the copper and copper alloy products produced. The import filter objection has been dealt with in detail. In view of the above discussion, the objections of the taxpayer are rejected, and the company is retained as a comparable. Multimetals Ltd. The company is a manufacturer of seamless extruded copper, copper alloy products in the form of hollows, sections, profiles and rods as per customers' requirements, high performance copper alloy wires, etc. The company's manufacture of a wide range of copper alloy products does not make it functionally incomparable to the taxpayer. As discussed above, TNMM does not require strict product comparability such as the difference in thickness of the copper and copper alloy products produced. The import filter objection has been dealt with in detail. In view of the above discussion, the objections of the taxpayer are rejected, and the company is retained as a comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a businessman by deciding that the prudent assessee should have instead procured the material locally to keep its costs lower. It was submitted that if it is to be accepted that the business models of the assessee and comparable companies were the same, it is very clear that it was on account of initial stages of business that the unusually high costs were incurred by the assessee company vis-a-vis its actual operations. The following case laws were relied on in support of the assessee's contentions:- (i) In the case of ACIT Vs Genesys International Corp Limited (26 taxmann.com 102 (Mum.), the Mumbai ITAT held that it was necessary to find possible differences with reference to geographical location of the parties chosen for comparison. In the case of companies engaged in export of goods or services to its AEs outside India, the Income tax department has always applied the export turnover filter of 75%. i.e. only companies having export business of 75% of its total turnover were accepted as comparable companies. This rationale is to be applied in the case of import transactions. Since the appellant company's purchases are 100% from outside India, a foreign currency expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Support and Maintenance charges as prior period expenses even though the liability to pay the expenses crystallised only during the year based on invoices received from the vendor in the current year. 59. During the year, the Company had incurred a cost of Rs.91,31,333/- towards IT Maintenance, Support and Services. This includes Rs.72,44,263/- being expenses relating to services provided in earlier years now accounted after detailed negotiation process of such costs with the holding company. Since the liability to pay the expenses to the party was crystallised during the year, the expenses accrued in the books of the Company during FY 2014-15. Thus, the same cannot be treated as a prior period expenses since it arose during the year. 60. In this connection, the detailed ledger extract of the expenses, the copy of the invoices for these expenses were filed with the TPO vide submissions dated 16-11-2018 (Pages 670-710 of Paper book) and before the DRP. It was submitted that a perusal of the same shows that all the invoices were raised during FY 2014-15 (relevant to AY 2015-16) after the costs were negotiated and finalized. Reliance was placed on the following judicial precedent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years". Thus, prior period items are those that occur due to any errors or omissions in the preparation of financial statements of earlier years. In the instant case, there was no such error or omission as the liability to record the IT service / maintenance expenses as an expenditure crystallised only in AY 2015-16 upon receipt of the invoices from the vendor and the same could not have been provided for on an estimate basis in the earlier years. 63. Without prejudice to the above submissions, it was brought to our attention that these expenses were considered as that relating to the current year by the TPO while computing the net operating margins of the assessee. Consequently, the Transfer pricing adjustment proposed in the order u/s 92CA is also higher to this extent. Hence, these expenses should not be treated as prior period expenses. 64. The ld. DR relied on the orders of lower authorities. 65. We have heard both the parties and considered the rival submissions. The AO disallowed the claim of expenditure to the tune of Rs. 72.44,263 relating to the earlier years. There is no dispute with regard to the fact that these expenses pertain to the earlier years. The assessee con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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