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TMI Blog2024 (5) TMI 587X X X X Extracts X X X X X X X X Extracts X X X X ..... tent prejudicial to the Appellant, is bad in law and is liable to be quashed. 2. On the facts and in the circumstances of the case and in law, Hon'ble Panel erred in upholding the action of the learned Transfer Pricing Officer ('Ld. TPO') / Learned Assessing Officer ('Ld. AO') in proposing an adjustment of INR 3,33,61,422 to the international transactions pertaining to purchase of raw materials / finished goods by the Appellant to its Associated Enterprises ('AEs'). 3. On the facts and in the circumstances of the case and in law, Ld. AO / Ld. TPO / Hon'ble Panel has erred in including companies in the comparable set which are not comparable to the Appellant's functions, asset base and risk profile, viz., (a) Cera Sanitary Ware Limited and (b) HSIL Limited. 4. On the facts and in the circumstances of the case and in law, Ld. AO / Ld. TPO / Hon'ble Panel has erred in considering certain cost elements as non-operating in nature while computing operating margins of tested party and comparable companies. 5. On the facts and in the circumstances of the case and in law, Ld. AO has erred in crystalizing tax demand by ignoring the MAT credit c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and (b) HSIL Limited. 5. In this regard, the ld. AR has drawn our attention to the order of DRP and our attention was drawn to Para 2 to 2.22. which is to the following effect : 2.1.1 It is contended by the assessee that HSIL Limited is not comparable to the assessee company as HSIL Limited is engaged in manufacture diversified products such as sanitary ware, faucets, kitchen appliances, wellness products such as massage tubs, multi-functions, shower panels, shower enclosures, tiles, extractor fans, glass containers, PET bottles, etc. It was also pleaded that if at all, only the building product division which is engaged in manufacture of sanitary tiles is comparable. It was further argued that the company has not provided the segmental results for its building product division and the packing product division in its annual report, and therefore, in the absence of such information, this company cannot be considered as comparable. The assessee also pleaded that the company has incurred substantial R&D expenditure, and whereas the assessee company did not incur any such expenditure, and therefore, this company has to be excluded. 2.1.2 Having considered the submissions, and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er information given (at page 179 and 180 of the annual report of this company for F.Y. 2014-15, information at page 168 of annual report for F.Y. 2013-14 and information at page 152 of annual report for F.Y. 2012-13), the subsidiaries pertaining to the Building product division have very meagre operational income of rupees one crore or less during these years (i.e., F.Y. 2012-13 - Rs. 86.39 lakh, Rs. 93.61 lakh for F.Y. 2013-14) and have also shown substantial losses in all these years. These information further strengthens our view that the segmental results given in the consolidated financial statement pertain to the building division of the company HSIL and can be reliably taken for the comparable analysis. Even otherwise, considering the low operating turnover and losses of the subsidiaries, and their corresponding impact in reducing the profit margin of HSIL, at the consolidated level, we note that the assessee is not adversely affected, as only a reduced margin is considered for comparable analysis. Accordingly, the AO / TPO is directed to take the following margins, pertaining, to the building product division of HSIL for the comparable analysis. F.Y. 2012-13 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plea of R & D expenditure, we note that the TPO has brought on record as to the expenditure incurred by the assessee towards technology by way of royalty payment and thus, there is no functional difference in regard to comparability on account of R & D spend. Accordingly, we uphold the selection of this company as comparable." 6. The ld. AR further submitted that in the first round, the Tribunal vide its order in ITA No.2378/Hyd/2008 dt. 15.09.2021 has remanded back the issue to the file of DRP with the following directions. "4. Learned department representative fails to dispute that the DRP herein has nowhere taken into consideration the assessee's detailed objections quoting functional similarity, lack of the relevant segmental financials and engagement of the said twin entities in R & D activities, whilst declining the impugned objection in a cryptic manner. 5. Faced with this situation, we deem it appropriate to restore the assessee's instant substantive grounds back to the DRP for its afresh adjudication on merits after considering all the detailed evidence filed; as per law within three effective opportunities of hearing." 7. The ld. AR further submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relating to consolidated financial results are correlating with the figures in the financial statement standalone, such figures relating to consolidated financial results are reliable and clue can be had from such figures for the comparability of this entity. Further, as observed by the learned DRP, for the suitability of TNMM as MAM, assessee itself said in their TP study report that under the TNMM, comparable transactions need to be broadly similar, significant product diversity and some functional diversity between the controlled and un-controlled parties are acceptable. Here in this case, what all the assessee pleaded is only some degree of product diversity, but little functional diversity. 22. We have gone through the record in the light of the submissions made on either side. It cannot be disputed that HSIL Ltd., under the brand name 'Hindware' is in the business of manufacturing and selling sanitaryware products and related accessories. On the aspect of functional dissimilarity, all the enumeration made by the learned AR boils down to the fact that HSIL Ltd., is doing business in building division and packaging division. There is segmental information in consolidated fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not deal with cullets and quartz/feldspar. Firstly, cullets and quartz/feldspar are useful only in packing division and we are not considering it now. There is no material to show that the other material that is used has nothing to do with the sanitaryware production. Even if some fraction of it is used, ultimately, the learned DRP while referring to the consolidated financial results held that the segmental results reported therein are agreeing with the figures in the financial statement (standalone) and reflect reliable financial performance of the divisions. When the functions are broadly agreeing with each other, it is not possible to count the differences in the description of the products and to eliminate the entity. Though the terms used are generic in nature giving an impression that the company is engaged in diversified activities, the core activity of both the entities is dealing in tiles and sanitaryware. One shall not lose sight of the fact that information contained in the websites of any entity and sometimes in the annual report would be intended to give a very attractive picture of such company and its areas of activity will be mentioned in usually general and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned TPO to exclude this company from the list of comparables. With these observations, we allow ground No. 3 in part. 9. On the basis of the above and also on the basis of the financials of the Cera Sanitary Ware Limited for the assessment year under consideration, it was pointed that there is no change of facts and our attention was drawn to Page 643 of the paper book wherein the Revenue from Operations was mentioned at Rs. 6,63,69,23,780/- vide Note No.20. It was submitted that quite similar to A.Y. 2015-16, the cost of Materials consumed was mentioned at Rs. 64,91,40,425/- vide Note 22. 10. It was submitted that since the Cera Sanitary Ware Limited is dealing in various verticals including the Faucet manufacturing including facilities like manufacturing tiles etc and therefore, this company is not comparable with the assessee company and therefore the DRP was wrong in including this comparable from the list of comparable. Furthermore, since the same company has been examined by the Tribunal in the subsequent year and there is no change in facts and therefore, this company should not be included and is required to be excluded from the list of comparables. 11. Per contra, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in relation to the cost incurred or the assets employed by enterprise (assessee). In the present case, as noted by the Tribunal in its finding in para 25 the functions performed by the assessee and that of the Cera Sanitaryware Limited are comparable and what was distinguished by the Tribunal in its earlier order is that with the consumption of raw material used by the company (Cera) for different activities is not relatable to the proportion of the revenue by the said activities. In our understanding, once the assessee company is broadly compared with the Cera Sanitaryware Limited, then what is required to be seen is the net profit margin earned by the company (Cera Sanitaryware Limited) with that of the assessee. 14. In the present case, the DRP has considered the submission of the assessee and thereafter, in para 2.2.2 reproduced hereinabove, had concluded that this company is comparable with the assessee and accordingly, the Assessing Officer based on the direction of the DRP has made the assessment in the hands of the assessee. 15. Since this company was excluded by the Tribunal in the case of the assessee for A.Y. 2015-16 in ITA No.1407/Hyd/2019, therefore, respectfully f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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