9911796707
TMI Blog2023 (2) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Liabilities/Provisions written back, iv)Miscellaneous income and v) Interest paid as non-operating in nature - HELD THAT:- We noted that the ld.AR of the assessee wanted to include/exclude the above 5 types of income/expenditure for calculating operating margin of the assessee. A similar issue has been decided by the coordinate bench of the Delhi Tribunal in the case of Bucher Hydraulics (P.) Ltd. [ 2020 (10) TMI 1147 - ITAT DELHI] - We remit this issue to the AO for de-novo consideration and the assessee is directed to produce necessary documents for substantiating his case. Custom Duty Adjustment - assessee has paid custom duty for which he sought to be excluded for the computation of operating margin - HELD THAT:- Given the fact that the assessee imported more raw materials for manufacturing, it is but natural that the corresponding sale price would also have been on higher side, thereby nullifying the effect of higher payment of Customs duty, forming a part of the Operating cost based on the overall basis. The situation would have been different if the assessee had paid Customs duty at a rate higher than that paid by its comparables, which would have called for adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails for computation of working capital adjustments. Cash PLI and alternatively depreciation adjustment - HELD THAT:- We noted that the assessee has sought for cash PLI and depreciation adjustments and submitted that being involved in manufacturing segment, which require huge capital outlay for setting up of plant and machinery. We also noted that in the financial years 2010-11 and 2011-12, the assessee has enhanced its production capacity and new Plant No.2 was also utilized by the assessee. The assessee is also involved in manufacturing segment before the AY 2003-04. In assessment year 2003-04, the assessee had sought for adjustment of cash PLI which has been rejected by the coordinate bench of the Tribunal in the assessee s own case in [ 2013 (1) TMI 86 - ITAT BANGALORE] - Thus following the above judgment, AO/TPO is directed to compute the adjustment in accordance with the above view taken by the coordinate bench in assessee s own case. TP adjustment to be restricted only to AEs transactions only - HELD THAT:- Considering the submissions from both sides, we observed that a similar issue has been decided by us in assessee s own case for the assessment year 2013-14 [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has not satisfied both the conditions, therefore, the assessee is not eligible for claiming depreciation on provisional basis. We also notice that from the above table the provision was made in the books of accounts for Rs.48.35 crores and even after expiry of 2 years the price was finalized only of Rs.6.44 crores and the assessee has reversed the provisions only. We also noted it from the order of the AO vide his letter dated 25/02/2016. Accordingly, we uphold the order of the lower authorities. The assessee admitted that there was excess claim of depreciation on the provisions created, which has been reversed subsequently. Considering the totality of the facts and circumstances of the case, we uphold the order of the revenue authorities. Accordingly, this ground is dismissed. Deduction u/s 40(a) - assessee has debited an expenditure towards payment of royalty - addition made u/s 92CA - revenue authorities noted that the disallowance was adjustment u/s 92CA towards the royalty payment, accordingly it was disallowed - HELD THAT:- DRP observed that the disallowance of Rs.57.53, which was a part of the disallowance made u/s 92CA in the previous assessment year, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee s case. Accordingly, the judgment relied on by the ld.AR is not acceptable in the present facts of the case. Accordingly we uphold the order of the AO and dismissed the ground raised by the assessee. The AO is also directed to give benefit for the subsequent assessment year. The AO has to keep in mind that while giving tax effect that it should not be taxed twice and necessary effect should be given to the assessee. TP Adjustment - RPT Filter as contested by the AR of the assessee as per his written synopsis - HELD THAT:- We direct the AO/TPO to calculate RPT ratio in above terms as per assessee s own case in the assessment year 2013-14 [ 2021 (9) TMI 12 - ITAT BANGALORE] considering the direction of the CIT (A), accordingly, this issue is allowed for statistical purposes. Not Providing Capacity Underutilization Adjustment - HELD THAT:- The appellant claims that the average industry utilization is 52.20% during the year whereas its own capacity utilization is 49.56%. However, in absence of data of capacity utilization in respect of comparables the revenue authorities have not granted capacity utilization adjustment. A similar case has been decided by the coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating as to why it was necessary and expedient to do so and without appreciating that being jurisdictional officer for all matters, he could not have referred the matter to the TPO. The DRP has erred in confirming the action of the Assessing officer. 3. The lower authorities have erred in: a. Making transfer pricing adjustment of Rs. 773,93,55,214/-; b. Passing the order without demonstrating that the Appellant had motive of tax evasion; c. Not appreciating that there is no amendment to the definition of income and the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and d. Not appreciating that there being no disallowance under section 40A(2) for royalty payment, adjustment under Chapter X ought not to be made. GROUNDS RELATING TO COMPUTATION OF ALP 4. The lower authorities have erred in : a. Rejecting M/s Hindustan Motors Ltd as a comparable, on the ground that the comparable company is engaged in only manufacture of Car and it is a persistently lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant had adopted the TNMM at the entity level, in which process, the royalty payment were considered as closely linked transaction and hence were subsumed into the expenditure and accordingly already considered; b. Not substantiating how the royalty payment were singled out of the many transactions to be tested on the basis of the arm's length principle; c. Not appreciating that once the net profit margin is tested on the touchstone of arm's length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length; and d. Comparing prices after completing the analysis of comparing margins. which process is unacceptable in law. 10. Assuming without admitting that the royalty is to be separately evaluated on the touchstone of arm's length principle, the lower authorities have erred in adopting the CUP without justifying how the same` is the most appropriate method in the case of the Appellant. 11. The lower authorities have erred in: a. Concluding that the Appellant has not received any economic benefit from know-how received from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92C(2). GROUND RELATING TO CORPORATE TAX 16. The lower authorities have erred in: a. Disallowing provision towards employee long term service benefit liability on the ground that such provision is contingent and not accrued; b. Not appreciating that the provision for employee long terms service benefit is in accordance with provisions of Accounting Standard (AS) 15 Employee benefit and based on actuary valuation, and c. Holding that employee long term service benefit liability has not crystallized nor has accrued. 17. The lower authorities have erred in: a. Disallowing a sum of Rs. 60,26,382/-, as excess depreciation claimed on the basis of year end provision which were reversed in subsequent years; b. Disregarding accounting methodology adopted by the Appellant and not appreciating that amount capitalized was based on fair estimates made for work already completed but. for which final bills were pending; and appreciating that the assets were acquired and put to use during the year under consideration. d. Not appreciating the fact that reversal amount is reduced from opening WDV on gross basis thereby even reversing the depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or details on payment of technical assistance fees, royalty and other intra group services. The tax payer filed its reply dated 28/09/2015 and other notices were also issued to the assessee. 3.1 The profile of the assessee company is as under:- As per the TP study report of the taxpayer, the Taxpayer, Toyota Kirloskar Motor Private Limited (TKML), is a subsidiary of Toyota Motor corporation, Japan (TM C), manufactures and sells multi-utility vehicles. Presently it: manufactures MUV's under the model name Innova ' and Fortuner. The passenger car under the model name Corolla TKML has obtained license to manufacture Innova TM, Corolla TM and Fortuner from the TMC, which owns these brands. Fortuner was launched during the year with the technology provided by the TMC. TKML also imports Camry TM and sports utility vehicle (SUV) Land Cruiser Prac.io, Prius and LC 200 Tm as Completely Built Units (CI3U) and sells the same in the Indian market. The CBUs are stored at a warehouse in Mumbai. TKML commenced its manufacturing operations in November 1999. The manufacturing plant consists of Press shop, Weld Shop, Paint Shop and Assembly shop. TKML manufactures using world r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher and, therefore, the corresponding custom duty expenses is also proportionately greater. This adds to the cost of import lowering the profit. The observation of the ld.TPO is as under:- 7. Determination of Arm's Length Price by the taxpayer in its TP study: 7.1 The tax payer has reported international transactions and specified Domestic Transactions in respect of 'Manufacturing segment. 7.2 The arm's length price of the international transactions in Manufacturing segment provided to the associated enterprises (AE) has been determined by applying Transactional Net Margin Method (TNMM), stating to be the most appropriate method in the facts and circumstances of the case. The operating profit to operating cost ratio has been taken as the profit level indicator (PLI) in TNMM analysis. 8. Selection of comparables by the taxpayer in the TP study 8.1 It is seen that the taxpayer has selected 03 companies as comparables for Manufacturing segments respectively, on. the basis of search conducted in the public databases, namely Prowess, 8.2 The search criteria and the acceptance/rejection matrix applied by the company for screening the initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng proper comparables functionally similar to that of the tested party: a) Use of current year data: As per Rule 1013 '4), it is mandatory to use the contemporaneous data, Le,, the data fin- the F. Y. 2013-14. The proviso to Rule 1013 (4) says that data for earlier two years can, also be used if it is shown that such curlier year's data had an influence in determining the current price. Further the use of earlier year data is in addition to the current year data, provided the conditions are satisfied. Reason for non consideration of the earlier year data TP study is a post event study. It is a study aimed at determining whether a transaction conducted sometime earlier was at arm's length. At the time of conducting a transaction, it price will be fixed according to the market conditions prevailing at that time, It is only when some extraordinary event influences (like fire, lockout, management's decision to reduce the price to increase the turnover etc.,) pricing that support may be taken from earlier years' data of' the company, External factors will anyway influence pricing across board since all companies would be equally affected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 following its own decision in the case of M/s. Actis Advertisers Put. Ltd vide ]TA No.5277/Del/201 1 dated 12.10.2012 d Companies having negative PBIT were excluded from the list of comparable. e. Companies which are functionally riot comparable to the taxpayer were excluded. 10.2 Applying the above filters on comparables chosen by the taxpayer : 3.8 The ld.TPO did not accept the adjustment made by the assessee in regard to custom duty and rejected the arguments after relying above judgments. 3.9 In the TP study report the assessee had taken the following 4 companies as comparables, out of which the ld.TPO did not accept the Hindustan Motors Ltd., the accept/reject matrices is as under:- 3.10 The TPO observed that in the case of Hindustan Motors Co. Ltd., it is not functionally comparable because it is manufacturing only one car i.e Ambassador whereas the tax payer is manufacturing Innova, Fortuner Cororal, Cambry 90 Etios Sedan and Liva cars. The company is also a persistently loss making company, therefore, the TPO rejected stating that it is not a comparable company. The TPO finally computed the average PLI and adjustment as under:= ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar. The Appellant also submitted that a company should not be rejected merely on the ground that it is persistenty making losses. (Pg No.1023-1035 of PB-III). The DRP held that persistent losses on year on year basis itself shows existence of exceptional and extreme circumstances and therefore a good reason for exclusion of the company from comparable set. The DRP did not adjudicate on the ground of functionality. (Pg No.29 of Appeal Papers) Submission before ITAT 2.3 In relation to functionality, the Appellant submits that Hindustan Motor Ltd launched sports utility vehicle (SUV) called Pajero Sport and a seven-seater upgraded version of the Mitsubishi Outlander during the financial year. The Appellant submits that that both Mitsubishi Pajero and Outlander vehicles are in direct competition to the Appellant s vehicles namely Innova and Forunter. Further, Ambassador and Mitsubishi Cedia are in the passenger car segment. The Appellant, therefore submits that the TPO s reason of rejection (Hindustan Motors Limited has only one car namely Ambassador) is factually incorrect. The products manufactured and sold by Hindustan Motors are similar to that of the Appellant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating in nature. (Pg 147, 148 and 281 and of PB-I). Similar approach was also adopted while computing the margin of the comparable companies. 2.10 The learned TPO treated the other income and finance cost as non-operating nature without providing any reasons for the said treatment (Pg 70 of Appeal Papers). There is no discussion on these issues in the TP order. 2.11 With respect to treatment of above items, the Appellant submits as follow: Sl. No. Submissions before DRP and decision Submissions before ITAT 1. Interest received from Bank FD should be considered as operating income. The learned CIT(A) has upheld the action of the TPO in treating interest income as non-operating in nature (Pg 30 of Appeal Papers) Interest received from Bank FD should be considered as operating income. The Bank FD have their origin in business funds due to efficient resource management strategy, Just-in-time approach and prudent business practice. (Pg 1039 and 1040 of PB-III) In support of above, the Appellant relies on the decision of Snam Progetti S.P.A. v ACI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace to onsite suppliers, duty drawback income and other income. These should be taken as operating in nature for the following reasons: The above incomes have direct link or nexus with business activity of the Appellant Expenses incurred in relation to above incomes are debited to P L account and are considered as part of operating cost. If these incomes are considered as non-operating, then even the expenses attributable to these incomes will have to be excluded from the operating cost. 5 Interest paid should be considered as operating expense. The learned DRP has not made any discussion on the same Interest paid should be considered as operating expense both for the appellant and the comparables. Automobile industry is capital intensive. An entity may be funded by debt or equity and interest paid reflects financial risk borne by the enterprise. (Pg 1046 and 1047 of PB-III) Ground No.5 and 6 - Adjustments Custom Duty Adjustment 2.12 The Appellant in its TP study had made custom duty adjustment while computing the operating margins (Pg 268 of PB-I). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 to 34 of Appeal Papers). 2.19 The Appellant submits that its substantial imports are from Thailand. In comparison, the comparables have very minimal imports (Pg No. 1049 of PB-III). In July 2011, flood caused extensive devastation in Thailand. As plants in Thailand were shut, Toyota Group had to cut production in several parts of the world. (Please refer News reports at Pg No.948-956 and 1336 of PB-III]. 2.20 The Appellant is highly dependent on Thailand for its imports (68% of imports in AY 12- 13, Thailand Import chart is at Pg No. 1364 of PB-III). The disaster resulted in major disruptions in supply chains of Appellant causing shortage of components for automobile manufacturing. During such period, the appellant had to procure these parts and components at higher price and incur substantial additional cost. Vehicle price list for before, during and after floods is at Pg No 1338 of PB-III. Price comparison of parts before, during and after floods at Pg No 1339 to 1363 of PB-III. The price was normalised post Thai floods. 2.21 The Appellant therefore submits that the additional cost incurred by it of ₹ 42.74 crores (calculation at Pg No 1332 of PB-III) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be excluded from operating cost for the Appellant and the comparables. This will bring all entities at par. In the alternative and if Cash PLI is not accepted, depreciation adjustment should be given as given by the TPO in AY 03-04. 2.29 The Appellant relies on the following decision in support of its contention: PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) [Para 7 8 at Pg 2120 of Case Law Compilation]. The Karnataka HC directed to exclude depreciation from operating cost. In AY 03-04, the ITAT in appellant s own case cash PLI was rejected- [Para 19.4.1 to 19.4.3, Pg 1466 of Case Law Compilation]. However, the Tribunal observed that the TPO himself has given depreciation adjustment for difference in the level of depreciation cost with reference to sales. 2.30 Therefore, based on above, the Appellant requests your honour to direct TPO to adopt Cash PLI or to grant Depreciation adjustment. Ground No.8 - TP Adjustment should be restricted to AE transactions 2.31 The Appellant submitted before the TPO to restrict the TP adjustment, if any only to the AE transactions. The Appellant submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure to net sales in case of comparable vis a vis that of royalty to Local Value Addition (LVA) in case of the Appellant. The TPO has computed TP adjustment of Rs.154,54,32,070/- in respect of royalty transaction. (Pg 117 of Appeal Papers). 2.36 However, the TPO has held that TNMM approach at entity level includes royalty also and therefore separate adjustment for royalty is not required. The TPO has stated that only in a case where adjustment at entity level does not hold good at appellate level, the learned AO may resort to adjustment on account of Royalty on standalone basis. 2.37 Before DRP, the Appellant reiterated it stand by filing detailed submissions against the analysis of TPO (Pg 1102 to 1221 of PB-III). The DRP rejected the submission of the Appellant and upheld the action of TPO (Pg.39 to 43 of Appeal Papers). 2.38 The Appellant submits that once the net profit margin is tested on the touchstone of arm s length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm s length. 2.39 The above view has been accepted by the Honourable Bangalore Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance of concept of prudence in preparation of accounts. Further, AS-29 provides that provision should be made if there is probability of outflow of resources embodying economic benefits. The Appellant further submits that AS-15 dealing with Employee Benefits provides for recognition as a liability of other long-term employee benefits (page 970 and 971 of Paper Book III). The Appellant submits that the liability is an existing liability and estimation is reliable as per Actuarial valuation. The learned DRP disallowed the claim of the Appellant by holding that the same is contingent in nature (Pg 38 of Appeal Papers). 3.3 The Appellant submits that it adopts mercantile system of accounting. The provision was made in compliance with the Accounting Standard-15 and as per actuarial valuation report. The Appellant submits that the liability is an existing liability and estimation is reliable. 3.4 The Appellant relies on the decision on the decision of Honourable Supreme Court in the case of Bharat Earth Movers vs CIT [2000] 245 ITR 428 (SC) wherein it was observed that merely because a liability is to be discharged at future date does not convert an accrued liability into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase orders, as asset were put to use. Portion of provision (Rs.48.34 crores) was subsequently reversed. In the year of reversal, relevant WDV and depreciation were reversed completely. Therefore, instant disallowance by the AO is resulting in double disallowance. 3.11 The Appellant adopts mercantile system of accounting and the capitalisation is in accordance with AS-10. The liability is estimated on fair basis. When the assets were put to use, actual amounts were not available and therefore capitalisation was done on estimation basis [Extract of AS-10 is at Pg 1256-1257 of PB-III]. The Appellant submits that its claim is in accordance with the mercantile system of accounting and disallowance should be deleted. Ground No.18- Double Disallowance of Royalty 3.12 In AY 2011-12, the Appellant had incurred Rs. 179.98 crores towards royalty. Out of this, Rs. 57.53 crores was provision made on 31.03.2011. With respect to provision of Rs. 57.53 crores, the Appellant had not remitted TDS within the stipulated time and same was disallowed in return of income for AY 2011-12 u/s 40(a)(i). The TDS was remitted subsequently and the Appellant made a claim of Rs.57.53 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity and revised prices for the parts supplied. Based on mutual consensus, supplier issued credit note amounting to Rs.1,34,40,305/- for the difference in price due to price reduction 'for various parts supplied during the period from April 2011 to Dec 2011. Though the credit note was dated 31.03.2012, it was communicated/issued by the supplier to the Appellant on 25.05.2012 (Copy of the credit note along with e-mail communication is at Pg No 371 372 of PB-I). Since the income accrued in FY 12-13 and also books of accounts of the Appellant were audited and financial statement for FY 2011-12 was approved by the Board on 07.05.2012, the Appellant accounted this credit note in the next year viz FY 2012-13 and offered to tax in AY 13-14. 3.19 In the draft assessment order, the AO has held that the price reduction from Denso Kirloskar Industries Pvt Ltd amounting to Rs. 1,38,79,923/- has to be accounted during AY 12-13 (Pg No 122 and 123 of Appeal Papers). 3.20 Before, the DRP, the Appellant made detailed submissions (Pg No.1270-1285 of PB-III). The learned DRP disallowed the claim of the Appellant and upheld the action of AO (Pg 45 of Appeal Papers). The Appellant al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O at para No.4.1 to 4.20, placed at paper book page nos.915 to 926, which is as under. In March 2012, the Company launched a state-ofthe art sports utility vehicle (SUV), called Pajero Sport and a seven seater upgraded version of the Mitsubishi Outlander both from its Chennai Car Plant under license from Mitsubishi Motors Corporation, Japan. Pajero Sport has been well received in the market. The Company also started production of CNG driven Winner from its Pithampur Plant during the year. These new products are expected to receive favourable response in the market. It is clear from the above, the company is functionally comparable. Further, he submitted that the persistent loss company can also be considered as a comparable if the comparable company s function is similar with the assessee company. 6.1 He stated that the Hindustan Motors Ltd., was consistently considered by the assessee from the assessment year 2002-03 onwards as a comparable and the Department has accepted in certain years therefore, it should not be rejected. In regard to persistent losses, the criteria for comparability or the economic parameters like functions performed, assets employed, risks assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies while benchmarking its international transactions. On the contrary, we find, that the A.O in the assessment order had observed that the difference in the working of the margins had arisen because the assessee had considered write off (bad debts) as a non-operating expense. It was observed by the A.O had that after treating the bad debts as an operational expense, the margin of the aforesaid company was negative for all the three years. At this stage, we may herein observe that the assessee had neither rebutted the said observation of the A.O before the lower authorities nor any contention to dislodge the same had been made before us by the ld. A.R. 8. We have deliberated at length on the aforesaid issue under consideration and are unable to persuade ourselves to subscribe to the projection of the aforesaid comparable company viz. M/s Cather Consultancy Services Pvt. Ltd by the assessee as a profit making company during the financial year 2009-10. As observed by us hereinabove, the assessee had tried to wriggle out of the fact that the aforesaid comparable company was a persistent loss making company by treating bad debts as a non-operational expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esel engine thus losing sale in major markets, decline in order from government customers, higher petrol prices, increased interest rates, delay in launch of Pajero Sport due to disruption in operation of Mitsubishi plant in Thailand caused by flood and shortage of working capital. The adverse fluctuation in foreign exchange severely affected the profitability of Chennai Car Plant despite reduction in kit prices by the collaborator Mitsubishi Motors Corporation, Japan in the second half of the year. The Company took measures like value engineering and cost reduction initiatives etc. 6.5 We noted that M/s. Hindustan Motors Ltd. was producing one Ambassador Car and in the month of March, 2016, the company has also started production of Pajero Sport vehicles. Therefore, it cannot be said that the company is engaged in only one segment for production of Ambassador car. We hold that it is engaged in more than one vehicle manufacturing activity. Therefore, M/s. Hindustan Motors Ltd. company is functionally similar with the assessee company. We reject the observation of the Ld. AO/TPO/DRP on this issue. Further, the lower authorities have observed that the company is persistent loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ======== ======== Total 9680.53 10056.06 ======== ======== From the above Financial statement, it is clear that the company is selling its non current investments and land and buildings. The net worth of the Hindustan Motors ltd. is also going down. The net worth in FY 2010-11 was Rs. 4080.32 Lakhs and in the FY 2011-12 it has come down to 2876.70 lakhs even after selling of non current investments and land and buildings. 6.8 The company which is continuously incurring losses for three years cannot be considered as a comparable. From the TP study the assessee has taken it as a comparable, whereas the AO/TPO/DRP have rejected this company as comparable on the noted points i.e (1) functionally not comparable and (2) the company is incurring persistent losses. The ld.DRP has also upheld the order of the TPO. The ld.DR relied on the decision of ITAT Bombay Tribunal in the case of CGO cited (supra). A similar case has been decided by the Hon ble Delhi High Court in the case of Commissioner of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, it has been found that said company Quintegra Solutions Ltd. was an abnormal company; as on one hand, sales were declining, receivables and write-offs were increasing. Debtors of earlier years were affecting the working capital adjusted OP/TC of the company significantly. Said company was regularly incurring losses. Persistent losses coupled with declining turnover over the period indicated abnormal functional circumstances, which rendered it non- comparable and justified the exclusion of such a company from the list of comparables. Consequently, exclusion of Quintegra Solutions Ltd. was in order and cannot be interfered with. 18. In view of the above findings, this Court is of the opinion that no substantial question of law arises. The appeal is dismissed. 6.9 In the above judgment, the Hon ble Delhi High Court has held that the persistent loss company cannot be considered as a good comparable. We further noted from the judgement relied by the Ld DR in which it has also been held that the persistent loss company cannot be considered as a comparable company with the assessee company. The facts of the case on hand are also similar and, therefore, the decisions quoted ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on received on direct sales made by AE in India- Rs.54,973/-:- Compensation paid by the AEs to the assessee in consideration of direct sales affected in the assessee's specified territory i.e. to any third party customer in India. ? Insurance claim recovered Rs. 7,774/-:- Recovery of insurance claim on lost laptops and testing devices. 20. Vide ground of appeal no. 4, the assessee is aggrieved as DRP directions were not followed by Ld. AO/TPO regarding treatment of certain expenses as non-operating expenses. We are of the view that both these issues raised vide ground of appeal nos. 3 and 4 needs to be looked into by the AO/TPO and decide the issue after affording reasonable opportunity to the assessee. Hence allowed. 7.4 Respectfully following the above decision, we also remit this issue to the AO for de-novo consideration and the assessee is directed to produce necessary documents for substantiating his case. 7.5. Ground 4(c) : The assessee has raised the ground that the revised TP adjustment has not been properly done as per the direction of the DRP. Considering to the arguments of the ld.AR, we also direct the AO/TPO for following the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies were in manufacturing sector and it is a full pledged manufacturer with sufficient localization as evident from the documents. He submitted that higher import content does not warrant an adjustment, as it is a commercial decision. He further submitted that the case law relied by the ld. AR is not applicable in the present facts of the case of the assessee. Therefore, he requested the adjustment for custom duty should not be given to the assessee. 8.3 After going through the rival contentions, we observe that the assessee is a manufacturer as well as trader of Toyota motors of different products. During the impugned assessment year, the assessee has paid Rs.4187.32 million of custom duty for which he sought to be excluded for the computation of operating margin. In this regard, we want to reproduce the order of the TPO as well as the DRP, which is as under:- Customs Duty adjustment In its TP study, the Assessee had made adjustment for Custom Duty. The Assessee computed its margins after excluding the Custom Duty paid. The Assessee contended that its import component of raw material is higher and therefore the corresponding customs duty expense is also proporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Senior Officials of the company. The following conclusions are drawn as below: 1. Importing of parts, CBU, SKI) and other material from AE is a business decision of the Taxpayer for the commercial expediency and business requirements of Toyota Brand and to maintain the standards and high quality. This reason cannot be accepted for low margins because it is the business model of the Taxpayer. 2. Import of goods attracts Custom Duty which is a part of the total cost of the goods imported. The price of goods imported are inclusive of Custom Duty. As any other Importer of goods a profit markup is decided with Customs valuations as a part of the cost. The sale price with markup is decided considering the Custom Duty along with the import price. Therefore, Custom Duty is an integral part of the value of the goods imported. The Taxpayer's claim of Custom Duty as a non-operating expenditure and same to be excluded from the cost base is not permissible for the reasons mentioned below: Refer to Rule 10B(i)(e) which mandates that adjustment can be made only to the comparables and not to the tested party. Rule is extracted below: (e) transactional net marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009130 SOT 319 (Pune), 1)Demag Cranes Components (India) (P.) Ltd. v DCIT [2013] 30 taxmann.corn 364 (Pune - Trib.) and Putzmeister Concrete Machines P Ltd v DIT TS-239-ITAT-2014PAN)-TP. 7.1.1. TPO's comments on case laws relied upon by the Taxpayer: In the above mentioned case laws Hon'ble ITAT, Pune Bench in the case of M/s Skoda Auto India Put Ltd v AC'IT [2009] 30 SOT 319 (Pune) and Demag Cranes. components (India) (P.) Ltd. v DCIT [2 01 3] 30 taxmann.com 364 (Pune - Tub.) has set aside the issue of Custom Duty adjustment back to the file of TPO for reconsidered and fresh adjudication. No relief has been granted by the Hon'ble Tribunal oil issue. 7.1.2.. Judicial Precedence in Taxpayer's own case inAY2oo-o4. Hon'ble ITAT in the AY 2003-04 in the Taxpayer's own case has remanded back to the TPO whether Custom Duty adjustment is to be allowed or not. The TPO was directed to examine the contentions of the Assesse on custom duty adjustment in a holistic perspective also keeping in mind the observations made by us (supra) and in the light of the decisions of the ITAT, Pune in the case of Skoda Auto India Pvt Ltd Vs ACIT (2009-TIOL-214-ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s part of the cost in comparability analysis relevant part of the Hon'ble ITAT's ruling is reproduced below: 136. As regards the Taxpayer s claim for adjustment to the operating margins of the comparables on account of higher amount of Custom Duty paid on imported components viz. the comparables, it is noticed that the working of such adjustment sought by the Taxpayer is given oil no. 365 and 356 of the Taxpayer's paper book. A perusal of the said working shows that it is mainly based on proportion of imported components and the duty paid oil imported components. In our opinion, this basis adopted by the Taxpayer for seeking the adjustment on account of excess Custom Duty before by it is not correct in as much as consideration of duty payment alone would not justify such adjustment and it would be necessary to take into account the cost of components imported along with the Custom Duty paid thereon for the purpose of comparison with the corresponding indigenous components consumed by the comparables. Moreover, the local levies such as sales tax etc. are also required to be taken into account for such comparison. It is also pertinent to note here that if the Taxpa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of vehicles in India is a business model of the assessee and sale price has thus been decided accordingly. Thus, this is a commercial decision taken by the assessee. The reliance of the TPO on the decision of ITAT in the case of Sony India FyI Ltd is DCJT 114 lTD 448 is also well placed. Although the assessee has relied on the decision of ITAT in the case of Skoda Auto India (P) Ltd. v. ACJT ('Supra) and tried to distinguish its own case from the case of Sony India Pvt. Ltd vs DCIT(Supra), however, both these decisions support the order of the TPO. In Skoda Auto India (F) Ltd. v. ACIT (Supra), the ITAT observed that it was assessee's first full year of operation and the assessee had 98.55% of import content as compared to comparables which had import in the range of 26% to 56.83%, and that is why the case was different from that of the Sony India FyI Ltd('Supra). The JTAT further observed that the case of Skoda supra, was virtually that of an assembly job of imported knocked down- kits and its business model was fundamentally different from the comparables with import in range of 26% to 56.83%. The ITAT also observed that Sony India Pvt Ltd (Supra) needs to be app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee, the comparable companies have import components as under:- Ashok Leyland 6.79% Force Motors 22.28% Hindustan Motors 56.53% Swaraj Mazda 3.57% 8.8 During the impugned assessment year, the assessee sold 57,500 units of Innova vehicles and 11,500 units of Fortuner vehicles. Till the financial year 2009-10, the assessee was achieving sales volume of less than 1 lakhs units per annum. During the end of financial year 2010- 11, the assessee commenced the second plant to manufacture of Etios, Cedan and Etios Liva version. In financial year 2012-13, the assessee increased its production capacity from 2,10,000 units to 3,10,000 units. We also observe from the financial statements that the turnover of the assessee has also been increased by 48% (114522.06 77241.26 = 37280.08 Rs.in million (net of excise duty compared to the previous assessment year. ) 8.9 In the assessee s own case for the assessment year 2007-08, 2008-09 and 2010-11 no such adjustment have been sought for, whereas the business model of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the overall basis. The situation would have been different if the assessee had paid Customs duty at a rate higher than that paid by its comparables, which would have called for adjustment to have a level playing. Instantly, we are confronted with a case in which the assessee is claiming exclusion of extra custom duty on the strength of its higher quantum and not the higher rate of Customs duty. In case of comparable companies, there are various costs which also fluctuate so as to have disadvantageous position viz., to the taxpayer. These differences would not have material effect on net margins that s why the TNMM method is adopted as a MAM. 8.11 Further during the course of hearing, the ld.AR could not substantiate that there is a variation in the rate of custom duty paid by the assessee in the imported goods for consumption of raw materials, the quantum of imported materials of the assessee company as well as the comparable companies are immaterial. Considering the facts and circumstances of the case, we direct the assessee for providing rates of custom duties paid by the assessee company as well as the comparable company to the AO/TPO and if the assessee could prove t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents for early disposal of the issue. 10. Ground No.5(e) Not providing working capital adjustment 10.1 During the course of TP proceedings, the assessee provided working capital adjustment and requested to the TPO for grant such adjustments but the ld.TPO did not grant working capital adjustment. The ld.DRP also upheld the action of the TPO and held that the assessee did not demonstrate how working capital levels have impacted the margins. 10.2 The ld.DR relied on the order of the lower authorities. 10.3 Considering the rival submissions the assessee has placed working capital adjustments. The working capital adjustment is an accepted adjustment and this issue has also been decided by various High Courts in favour of the assessee. A similar issue has been decided by the coordinate bench of the Tribunal in assessee s own case in ITA No.2016/Bang/2018 order dated 18/08/2021 for the assessment year 2013-14, wherein it has been held as under:- 9. The assessee had provided the working capital adjustment computation and requested the TPO to grant such adjustment. The TPO did not grant working capital adjustment. There is no discussion on this aspect in the TPO s order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment should be given as given by the TPO in AY 2003-04 for the differential depreciation with comparable companies. He also relied on the judgments as cited in his written synopsis. 11.2 The ld.DR relied on the order of the lower authorities and submitted that they have rightly rejected the adjustments as sought by the assessee. The ld.DRP has discussed this issue in detail. He further submitted that the assessee company is working in India before the assessment year 2003-04 and it is also engaged in the manufacturing segments. Therefore, the plant and machinery used by the assessee has also become old. Therefore, the comparable companies are using old plant and machinery for their manufacturing which are not tenable. He further submitted that during the financial years 2010-11 and 2011-12, the assessee has enhanced his production capacity and the assessee started a second plant to manufacture and sell Etios versions of cars (Etios (sedan) and Liva (hatchback)). Further Etios sedan (diesel) with D, VD and VXD variants Liva Hatchback (diesel) with GD GD (SP) variants were launched in September 2011. During the year under consideration, in order to optimize the production c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on the context and purpose for which profit is to be computed. 19.4.2 In the case of Schefenacker Motherson Ltd (supra) of the ITAT, Delhi, the issue of whether depreciation can be excluded for comparison has been discussed at length and it was held in para 22 thereof that .. The basic issue involved was whether the cost paid or charged for international transactions was at arm s length or not. The factors which go to influence price, cost or profits are / were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by the IT regulations. There is no way to dislodge the claim of the tax payer. The context and purpose of legislation and facts of the case overwhelmingly approve adoption of cash profit only. This case was relied upon by the assessee in support of its proposition that cash PLI or PBDIT is the appropriate PLI. 19.4.3 We find that the above finding of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith its AEs, whereas, balance transactions are undertaken with third parties. The assessee requested the TPO to restrict the TP adjustment to only AEs transaction. The TPO, however, did not accept the contention (there is no discussion on this aspect in the order of the TPO). 10.1 Aggrieved, the assessee preferred an appeal to the first appellate authority. Before the CIT(A), the assessee filed detailed submissions why TP adjustment should be restricted to AEs transactions. The CIT(A) requested for a remand report from the TPO on this issue. The TPO submitted a remand report by stating ALP should be calculated on entity level. The assessee filed a rejoinder. The CIT(A) accepted the submissions of the assessee and directed the TPO to restrict the TP adjustment to the transaction it had entered with its AEs, alone. 10.2 Aggrieved, the Revenue has raised this issue before the Tribunal. The learned Departmental Representative relied on the order of the AO / TPO. 10.3 The learned AR, on the other hand, submitted that in assessee s own case for assessment year 2003-2004, the Bangalore Bench of the Tribunal had accepted that the TP adjustment is to be restricted only to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction or class of transaction or class of associated persons, functions performed, assets employed and risks assumed etc. 7. The assessee selected TNMM as the most appropriate method is not disputed by the revenue. The Ld.AR submitted that the TNMM considers the net profit margin earned by an organization. Adjustments are made to the net profits to factor in the differences at the transaction level or the enterprise level. It is submitted that the adjustments are also made for difference in the accounting methodology. TNMM makes a comparison at the entity / global / segment level and not at the transactional level. He assailed that the merit of this method is that, it is resilient to minor functional differences. As a result of this characteristic, examination is not made at the individual component level of income or expenditure that has been reckoned in arriving at the net profit but at the entity level. The Ld.AR emphasized that when comparison is made at the macro (global) level, where multiple intertwined transactions exist, it is not possible to identify or pinpoint the contribution of each facet or transaction to the earning of net profit. 8. He submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to TMC in accordance with the technical service agreement being an integral part of the manufacturing activity. Admittedly, the Ld.TPO upon segregating the manufacturing and trading activity found the margin determined under the separate segments to be at arm s length. It has been submitted by Ld.AR that for: A.Y. 2008-09 in IT(TP)A No. 1595/Bang/2012, A.Y. 2010-11 in IT(TP)A No. 16/Bang/2015 and A.Y. 2013-14 in ITA Nos. 2016 1972/Bang/2018 the Coordinate Bench of this Tribunal in assessee s own case has analysed that the royalty payment has been made by assessee towards the license to manufacture items on exclusive basis. It is also been submitted that in the sister concern s case being Toyota Kirloskar Auto Parts for A.Y. 2007-08 in IT(TP)A No. 1356/Bang/2011, this Tribunal has taken similar view. We note that for A.Y. 2007- 08, this Tribunal in assessee s own case for A.Y. 2007-08 reported in [2014] 48 taxmann.com 380 has considered the issue of separately bench marking the royalty as under. 48. On the issue whether the TPO can come to a conclusion that the ALP of an international transaction is nil because no services were rendered or that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India's tax jurisprudence. The Hon'ble Court held that it is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may also add that the miscellaneous petition is thoroughly misconceived and has been filed without a proper reading of the order of the Tribunal. We hope that such miscellaneous petitions will not be filed by the revenue in future, when the orders in question clearly set out its conclusions. The miscellaneous petition is therefore dismissed. 12. It is also observed that the principle of aggregation has been upheld by various High Courts as well as decision of this Tribunal. Admittedly, the assessee has treated royalty to be closely interlinked with the transactions, which was rejected by the revenue authorities. Reliance has been placed on following decisions in respect of above proposition. a) DCIT vs. Air Liquide Engineering India P Ltd. reported in [2014] 43 taxmann.com 299 (Hyderabad Tribunal) b) Dell International Services India Pvt. Ltd. vs. JCIT in IT(TP)A No. 130/Bang/2014 IT(TP)A No. 121/Bang/2014 dated 22.12.2021 c) McCann Erikson India Pvt Ltd vs. ACIT ITA No.5871/Del/2011 d) M/s. Thyssen Krupp Industries India Pvt Ltd V ACIT ITA No. 7032/Mum/2011 e) Lumax Industries Ltd v ACIT TS-152-ITAT-2013(DEL)-TP. f) Hindustan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided by the coordinate bench of the Tribunal in the assessee s own case noted supra, therefore ground Nos.8 to 15 become academic in nature, accordingly, we allow ground nos.8 to 15. 14. Ground No.16 (a,b,c) Provision for Employees Long Term Benefit In the revised return of income, the assessee made a claim of Rs.2,63,30,833/- as a provision for long term service liability. During the course of assessment proceedings, the assessee explained to the AO that the employees who have completed 10 years of service are presented with mementos in the form of gold. Therefore, the liability has been provided in the books of accounts. The AO noted that neither the liability was crystallized nor accrued accordingly, he disallowed. On objection before the DRP, he confirmed the objection no. (i) to (iii) and in case of objection no.4, the actual amount debited was Rs.1,01,88,674/-. In this regard the assessee has filed rectification application, accordingly, after verifying the records, the addition was reduced to Rs.1,01,88,674/- Accordingly, he partly allowed. 14.1 The ld.AR reiterated the submissions made before the lower authorities as well as the written synopsis quoted sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to. The liability in this case might arise on account of employees completing 10 years of service in future, is therefore, required to be quantified and recognized over a period of time in accordance with the Accounting Standards. Accrual is one of the fundamental accounting assumption. The term accrue is not defined in the Act. As per AS-1 (Disclosure of accounting policies), Accrual presupposes that the financial statements are prepared on mercantile system of accounting. Under this system, the effects of transaction and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in financial statements the period to which they relate. 3.4.2 The Hon ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 112 taxman 61 (SC) had held if business liability has definitely arisen in the accounting year, then the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % on an year to year basis for gifting the memento on completion of 10 years of service, we could have understood the valuation report is based on some reasonable basis. Further, when the employee leaves the assessee company prior to completion of ten years, how the provision is reduced on year to year basis, is also not explained. Before us, no explanation was offered as regards how the provision of Rs.46,60,033 is arrived at. Therefore, in the facts of the given case, the assessee has to prove before the A.O. the scientific basis for creating a provision for Rs.46,60,033. For this purpose, the issue raised in ground No.11 is restored to the files of the A.O. with the above directions. It is ordered accordingly. 15. Ground No.17 Excess claim of depreciation The assessee had capitalized some capital assets on provisions basis, the assets were acquired. Subsequently, in the next financial year it was reversed. Before the AO vide letter dated 25/02/2016, the assessee submitted that it was only because of the price negotiations with the vendors was not finalized, therefore the assessee claimed depreciation on the basis of liability, which has neither been quantified no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012-13 2013-14 Buildings 23,88,52,782 4,33,67,034 Plant and Machinery 22,29,86,906 15,19,545 Computers 2,02,05,240 --- Total 48,34,50,207 4,48,86,579 15.5 Since this is a company and it has to prepare its financial statements following the accounting standards, the accounting standard AS 10 para no.9.1 is as under:- 9.1 The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are: (i) site preparation;( (ii) initial delivery and handling costs; (iii) installation cost, such as special foundations for plant; and (iv) professional fees, for example fees of architects and engineers. The cost of a fixed ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of sec.40(a) and it was added back while computing its total income. Accordingly, the effective claim of royalty was Rs.122.45 crores. The ld.TPO determined the ALP of royalty at Rs.77.99 crores, thereby the adjustment was of Rs.107.99 crores. Accordingly, it was assumed that Rs.50.46 crores was subjected to TDS and rest of the amount of Rs.57.53 crores on which no TDS was made and the same amount was also disallowed by the assessee. The revenue authorities noted that the disallowance of an amount of Rs.57.53 crores was adjustment u/s 92CA of the Act towards the royalty payment. Accordingly it was disallowed. 16.2 On objections filed before the DPP, the DRP held as under:- 6.5 The submissions of the assessee in relation to above objections have duly been considered. In brief, during the AY 2011-12, the assessee had debited an expenditure of Rs 119,98,19,708/- to its P L account as expenditure relating to royalty. However, in relation to above amount, the assessee had not complied with the provisions of section 40(a) in respect of an amount of Rs .57,53,23,147/-. So, as per assessee, this amount was disallowed in the computation of income. So effectively an amount. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the ALP. However, in the instant case the assessee has not claimed the expenditure of Rs.7,42,20,575/- during the impugned assessment year and has itself disallowed the same while computing its taxable income. Therefore, we agree with the submission of the learned counsel for the assessee that the provisions of section 92 are not applicable. We also find force in the submission of the learned counsel for the assessee that there cannot be double disallowance/addition of the same amount. We, therefore, are of the opinion that although the transaction between the assessee and its AE falls within the meaning of an international transaction still no adjustment on account of ALP can be made since the assessee has suo-moto added the amount while computing its taxable income for the impugned assessment year and no benefit of the same has been taken either by capitalising it and claiming depreciation on it or taken benefit in subsequent years. In this view of the matter, the order of the Assessing Officer on this issue is setaside and the grounds raised by the assessee are allowed. 16.4 The ld.DR relied on the orders of the lower authorities. 16.5 Considering the submissions f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplier has reduced the prices of various items sold to the assessee and the total price reduction amounted to Rs.1,41,95,451/- In this regard the assessee was asked to furnish details of such price reduction offered by the various suppliers and the how same has been accounted for. It was conceded by the assessee that there was price reduction due to re negotiation with the suppliers. Though the assessee was allowed sufficient time the assessee has sent mail seeking 10 more days time to furnish details. The assessee was informed that the detail should be furnished by 16/3/2016 failing which 5% of the purchases will be disallowed towards price reduction and renegotiation. The assessee by its letter dated 16/3/2016 submitted that an amount of Rs. 10, 87, 63,369/ - was accounted for as price reduction during the FY20 11- 12. This has been confirmed by the assessee by its mail that this amount has been reduced from the purchases . As regards price reduction by M/s Denso Kirloskar, only a sum of Rs.3,15,528 /- is included in the above as the assessee claims that the balance was accounted for in FY.2012-13. Hence, the balance amount of Rs. 1,38,79,923/- is to be reduced from the purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conjunction with the charging provisions contained in section 4, the scope of total income as defined in section 5 and other relevant provisions, it is clear that the provisions of section 145 cannot override provisions of section 5. If income has neither actually accrued nor is received within the meaning of section 5, whatever section 145 may say, such income cannot be charged to tax, even though a book keeping entry may have been made recognizing such hypothetical income, which, in law, and, in fact, did not really accrue or arise or was received in the previous year. Section 145 determines the method of computing the taxable income; it does not affect the range of taxable income or the ambit of taxation. The computational provisions cannot enlarge or restrict the contents of taxable income. Accordingly, the range of taxable income or ambit of taxation is to be determined in accordance with the charging provisions. Even where an assessee is following the mercantile system of accounting, it is only accrual of real income which is chargeable to tax; that accrual is a matter to be decided on commercial belief, having regard to the nature of business of the assessee and character of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appreciating that the provisions of section 40A(2) override the provisions of Chapter X and there being no action under section 40A(2) for royalty expenses, no adjustment under Chapter X can be made. d. Passing the order without demonstrating that the Appellant had any motive of tax evasion. GROUND RELATING TO TNMM ANALYSIS 3. The learned CIT(A) has erred in confirming the action of the AO and TPO in selecting i) Tata Motors Ltd. ii) Mahindra and Mahindra Ltd and iii) Maruti Suzuki India Ltd as comparables under TNMM analysis, without appreciating that they fail related party transaction filter of 25% on sales and not comparable in terms of functional analysis. 4. The learned CIT(A) has erred in: a. Unilaterally directing the AO/TPO to compute RPT of the comparables by adopting ratio of 'total RPT divided by total sales plus total expenditure' without appreciating that both the Appellant and the TPO had adopted the ratio of total RPT by total sales ; and b. Drawing incorrect inference from the Order of CIT(A) for AY 2013-14 and accordingly modifying the RPT ratio to be adopted for applying the filter. 5. The learned CIT(A) has e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made with respect to these transactions are bad in law. GROUNDS RELATING TO ROYALTY ADJUSTMENT 10. The learned CIT(A) has erred in confirming the action of the AO and TPO in: a. Not appreciating that the Appellant had adopted TNMM at the entity level, in which process, the royalty payment were considered as closely linked transaction and hence was subsumed into the expenditure; b. Not substantiating how the royalty payment were singled out of the many transactions to be tested on the basis of the ALP; and c. Not appreciating that once the margin is tested on the touchstone of ALP, it presupposes that the various components of income and expenditure considered in the process of arriving at the margin are also at ALP; 11. Assuming without admitting that the royalty is to be separately evaluated on the touchstone of arm's length principle, the CIT(A) has erred in confirming action of the AO and TPO in adopting the TNMM for royalty payment without following the prescribed methodology as per Rule lOB. 12. The learned CIT(A) has erred in confirming the action of the AO and TPO in not appreciating that: a. Royalty represents a recurrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice benefit liability has not crystallized nor has accrued. GROUND RELATING TO CORPORATE TAX (MISCELLANEOUS EXPENSE) 16. The learned CIT(A) has erred in confirming the action of the AO in disallowing a sum of Rs. 17,21,675/- incurred towards construction of basic civil structure for water purification Plant and supply of water purifier cum cooler, without appreciating the fact that these expenses are incurred wholly and exclusively for the purpose of business of the Appellant and are therefore allowable; 17. The learned CIT(A) has erred in disallowing 50% ofRs.l0,519/- incurred towards promotion of Japanese language, without appreciating the fact that it is incurred wholly and exclusively for the purpose of business of the Appellant and are therefore allowable. GROUND RELATED TO ADDITIONAL CLAIM 18. The learned CIT(A) has erred in remanding the matter back to the file of the AO in relation to the Additional Claim of the Appellant relating to disallowance of deprecation on assets capitalized on provisional basis and reversed subsequently, and reversal of mark to market losses on derivative hedge contracts, without giving specific direction on non-taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions for selecting the comparables in respect of three companies viz., Martui Suzuki India Ltd., Tata Motors Ltd. and Mahindra Mahindra, which were rejected by the TPO. Accordingly based on the search process adopted by the TPO and after discussing objections raised by the assessee, in the final set of comparables, the following companies were selected by the TPO and computed average margin as under:- 21.1 After selecting of the above five comparable companeis, the arithmetic margin of the profit level indicator (PLI) was taken as arms length price and computed the following adjustmetns:- 21.2 Accordingly as per above table, the adjustment u/s 92CA was calculated by the TPO of Rs.496,06,27,952/-. 21.3 Further, the TPO calculated adjustment based on account of excess Royalty payment of Rs.199,8322,791/- on the basis of observation in the assessment year 2012-13 and 2013-14 @2%. The royalty was paid by the assessee @6%, therefore, the adjustment u/s 92CA for excess payment of royalty calculated as above. However, the TPO observed that no separate adjustment of Royalty needs to be done because TNMM approach at entity level includes Royalty also. Accordingly, he pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd, Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd should be rejected as comparables as they fail 25% RPT filter (Pg 739-747 of Paper Book III). The details of ratios are tabulated below: Sl No Name of the Company RPT Ratio on Sales Pg No for calculation 1 Maruti Suzuki India Limited 31.80% 742 2 Tata Motors Limited 32.78% 743 and 744 3 Mahindra Mahindra Ltd 31.33% 745 2.44 The learned CIT(A) drew incorrect inference from the Order of CIT(A) for AY 2013-14 and unilaterally directed the TPO to adopt RPT ratio of total RPT divided by total sales plus total expenditure for selecting the above comparables. (Pg No. 17 of Appeal Papers). Submission before ITAT 2.45 The Appellant submits that RPT ratio has to be calculated on aggregate basis taking ratio of RPT incomes plus RPT expenses by sales. The said position has been accepted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received from Bank FD should be considered as operating income. The Bank FD have origin in business funds due to efficient resource management strategy, Just-in-time approach and prudent business practice. (Pg 749 and 750 of Paper Book III) In support of above, the Appellant relied on the decision of Snam Progetti S.P.A. v ACIT 132 ITR 70 [para 13 and 14 at Pg 1300 and 1301 of Case Law Compilation]. 2. Liabilities/Provisions written back of Rs.73,70,70,000/- should be considered as operating income. The learned CIT(A) rejected the claim of the Appellant on the ground that the Appellant did not furnish any details in support of its claim. (Pg 19 and 20 of Appeal Papers) Liabilities/Provisions written back of Rs.73,70,70,000/- should be considered as operating income. The Appellant submits that since in the year of creation, provision was treated as part of operating cost, the reversal of such provision should also be treated as operating in nature (Pg 750 and 754 of Paper Book III). The above contention of the Appellant is accepted by the Tribunal for AY 2013-14 at para 8.3 of the Rrder [ITA No.2016/Bang/2018, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as operating expense. The learned CIT(A) has upheld the action of the TPO in treating interest expenses as non-operating in nature (Pg 17 and 18 of Appeal Papers) Interest paid should be considered as operating expense both for the appellant and the comparables. Automobile industry is capital intensive. An entity may be funded by debt or equity and interest paid reflects financial risk by the enterprise. (Pg 756 of Paper Book III) 2.50 Based on above the Appellant submits that Interest income/Provisions written back/miscellaneous income/finance cost should be treated as operating in nature and PF Provision for international workers as non-operating in nature. Ground No.6 and 7 - Adjustments Working Capital Adjustment 2.51 The Appellant in its submissions before TPO provided working capital adjustment computation and requested the TPO to grant such adjustment (Pg 701 to 703 of Paper Book II). The TPO did not grant working capital adjustment (Pg 96 to 98 of Appeal Papers). 2.52 Before CIT(A), the Appellant made detailed submissions on why it should be granted working capital adjustment (Pg 807 to 832 of Paper Book III). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .59 Therefore, based on above, the Appellant requests your honour to direct TPO to grant custom duty adjustment. Capacity Under Utilization Adjustment 2.60 The Appellant in its TP study had claimed capacity underutilization adjustment while computing the operating margins (Pg 216 of Paper Book I). In AY 2013-14, the Appellant increased the production capacity from 2,10,000 units to 3,10,000 units per annum. Due to adverse market economic factors the Appellant produced only 1,54,627 units and thereby resulting in underutilization of 50.44%. The industry underutilization stood at 42.80% (Pg 217 of Paper Book I). Before TPO, the Appellant submitted that capacity utilization adjustment should be granted (Pg 547 to 551 of Paper Book II). The TPO denied capacity utilization adjustment by stating that law allows to make adjustment to the profit of the comparables and not of the tested party. So, the adjustment made by the Appellant is incorrect (Pg 95 to 96 of Appeal Papers). However, the TPO does not deny the fact that the Appellant has underutilization of capacity. 2.61 Before CIT(A), the Appellant made detailed submissions on why it should be granted capacity util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook III). The learned CIT(A) rejected the submission of the Appellant and upheld the action of TPO (Pg 28 to 29 of Appeal Papers). 2.69 The Appellant submits that manufacturing activities require huge outlay on fixed assets. The Appellant undertook substantial expansion by setting up Plant II in FY 10-11 and FY 11-12. Comparable companies are comparatively old in the industry and operate with depreciated plant and machinery. This results in higher depreciation for Appellant at 4.14% vis- -vis for comparables at 3.15%. Therefore, Cash PLI should be adopted and depreciation should be excluded from operating cost for the Appellant and the comparables. This will bring all entities at par. In the alternative and if Cash PLI is not accepted, depreciation adjustment should be given as given by the TPO in AY 03-04. 2.70 The Appellant relies on the following decision in support of its contention: PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) [Para 7 8 at Pg 1242 and 1243 of Case Law Compilation]. The Karnataka HC directed to exclude depreciation from operating cost. In AY 03-04, the ITAT in appellant s own case cash P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered as closely linked transaction and part of operating cost (Pg 150 to 153 of Paper Book I). The TPO rejected the above stand of the Appellant and proposed to benchmark the royalty transaction separately as per the methodology adopted in AY 2012- 13 and AY 2013-14. The Appellant filed detailed submission before TPO on why royalty payment should not be benchmarked separately. The learned TPO rejected the submission of the Appellant and benchmarked the royalty separately by the following approach of AY 2012-13 and AY 2013-14 (Pg 101 to 103 of Appeal Papers). 2.78 The learned TPO has made TP adjustment for shortfall in margins as well as Royalty. The Royalty adjustment has been made despite royalty being part of operating cost, although the royalty adjustment is held by the TPO as subsumed within the margin adjustment. 2.79 Before CIT(A), the Appellant reiterated it stand by filing detailed submissions against the analysis of TPO (Pg 855 to 954 of Paper Book III). The CIT(A) rejected the submission of the Appellant and upheld the action of TPO (Pg.33 to 35 of Appeal Papers). 2.80 The Appellant submits that once the net profit margin is tested on the touchstone of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s). 3.25 Before the CIT(A), the Appellant made detailed submissions wherein it was submitted that the provision was created in line with the Accounting Standard. As per the mandate of Companies Act and Income Tax Act. As per section 145(2), the Appellant is under obligation to follow AS-1. AS-1 mandates observance of concept of prudence in preparation of accounts (page 953 of Paper Book III). Further, AS-29 provides that provision should be made if there is probability of outflow of resources embodying economic benefits (page 954 9555 of Paper Book III). The Appellant further submits that AS-15 dealing with Employee Benefits provides for recognition as a liability of other long-term employee benefits (page 970 and 971 of Paper Book III). The Appellant submitted that the liability is an existing liability and estimation is reliable as per Actuarial valuation (Pg 1069 to 1081 of Paper Book III). The learned CIT(A) disallowed the claim of the Appellant by holding that the same is contingent in nature (Pg 38 of Appeal Papers). 3.26 The Appellant submits that it adopts mercantile system of accounting. The provision was made in compliance with the Accounting Standard-15 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... water purification plant at Bidadi and Manchanayakanahalli Village located around 2.5 Km away from the Appellant s manufacturing plant and also supplied water purifiers cum coolers for benefit of its employees and their families. Good health of its employees and their family would ensure more efficiency at work. 3.32 The Appellant s employees who are selected for Inter Company Transfers, have to learn Japanese Language. Therefore, there was a requirement to develop Japanese Language Learning Centre in Bangalore. So, to promote Japanese language and also to benefit the employees who have enrolled for this course, the Appellant made payment amounting to Rs. 10,519/- to Bangalore University. 3.33 The Appellant would like to submit that above expenses are incurred wholly and exclusively for the purpose of its business and enhancing its brand image. The Appellant relies on the following case laws: CIT vs Infosys Technologies Ltd [2014] 43 taxmnann.com 251 (Karnataka High Court) [Pg 1252 and 1253 of Case Law Compilation] expenditure on traffic signal is allowable. PCIT vs Gujarat Narmada Valley Fertilizer and Chemicals Ltd [2020] 121 taxmann.com 82 (Gujarat) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Motors Ltd. and Maruti Suzuki India Limited. 28.1 On perusal of the order of the CIT (A), he has followed the order of the co-ordinate bench of the Tribunal in assessee s own case for the AY 2013-14 and directed the AO for fresh consideration as per his direction. Respectfully following the above judgment, we also direct the AO/TPO to calculate RPT ratio in above terms as per assessee s own case in the assessment year 2013-14 cited supra considering the direction of the CIT (A), accordingly, this issue is allowed for statistical purposes. 29. Ground No.5(a), (b) (c) : A similar issue in respect of interest received from bank FD, interest paid, liabilities provisions/written back and Miscellaneous expenses has been decided by us in assessee s own case for the assessment year 2012-13 at para Nos.7 to 7.4 and the result mutatis and mutandis shall apply to assessment year 2014-15. The Provision for PF of international workers is to be seen in the light of the AY 2012-13 too. 30. Ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olla TM vehicle from Plant 1 to Plant 2. 2.9 Till FY 2009-10 the assessee was achieving a sales volume of less than 1,00,000 units per annum, During end of the FY 2010-11, the assessee commenced the second plant to manufacture Etios Sedan Etios Liva versions. The assessee further invested for enhancement of production capacity anticipating market demand. In FY 2012-13, the assessee increased its total production capacity from 2,10,000 units to 3,10,000 units. Considering potential growth in automobile sector, in line with the increase in capacity, the assessee also initiated to localize petrol engine required for Etios model. The assessee through manufacturer localized manufacturing of petrol engine from October 2012. Also, the assessee through its local supplier localized manufacturing of transmission for Etios petrol version of vehicles from January 2013. With these localizations, the assessee could achieve more than 90% localization of parts in case of Etios Petrol vehicles. 2.10. However, due to adverse fuel price position ( the price of petrol was significantly higher than the price of diesel), the efforts of the assessee did not bear required fruits. The exorbit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. One such factor is conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 24. Rule 10B(3) of the Rules provide that: An uncontrolled transaction shall be comparable to an international transaction if (i) none 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. 25. As per Section 92C of the Act, ALP is required to be computed using any of the given six methods and in the manner as is prescribed in Rule 10B of the Rules. Rule 10B in tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. For purposes of this section, a material difference is one that would materially affect the measure of an arm's length result under the method being applied. 28. The Indian transfer pricing regulations, OECD Guidelines and the US transfer pricing regulations call for an adjustment to be made in case of material differences in the transactions or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin. While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the ITAT, Mumbai in the case of Petro Araldite P. Ltd. (supra), we hold that any adjustment for capacity underutilisation can be granted..... (iv) In the recent case of GE Intelligent Platform Private Limited (IT(TP)A No. 148/Bang/2015 and 164/Bang/2015) for AY 2010-11 was held as follows: 8 . now the law is quite settled to the extent that once there is unutilized capacity or men power, such underutilization impacts margin and therefore, the adjustment should be made while computing the ALP If the underutilization is more than average underutilization of the industry then necessary adjustment is required to be made to the margin of computing ALP...... 29. Moreover, the above argument of the assessee for grant of capacity utilization adjustment is also supported by the following decision of Bangalore ITAT in the case of Genisys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010). Relevant extract of the decision is under:- 15.2 We agree with this contention of the counsel for the assessee. All the comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33. The assessee has under-utilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) of the Act. The relevant extracts of the section are as under:- (6) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. Ground No. 9 is general in nature and does not require any adjudication. 37. Ground No.10 to 14 Royalty Adjustment : A similar issue has been decided by us in assessee s own case for the assessment year 2012-13 at para No.13 to 13.2 and the result mutatis mutandis shall apply to assessment year 2014-15. 38. Ground No.15 Provision for Employee s Long Term Benefit A similar issue has been decided by us in assessee s own case for the assessment year 2012-13 at para No.14 to 14.3 and the result mutatis mutandis shall apply to assessment year 2014-15. 39. Ground No.16 to 17- Miscellaneous Expenses A similar issue has been decided by us in assessee s own case for the assessment year 2013-14 at para No.4.7, which is reproduced as under:- 4.7 We have heard rival submissions and perused the material on record. Majority of the expenses incurred by the assessee amounting to Rs.73,91,476 is incurred in villages very near to assessee s manufacturing plant. It is the claim of the assessee that the workers and their family has benefitted from the above expenditure. This fact has also accepted by the CIT(A) by allowing as deduction 10% of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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