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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 ..... assessee from the international transactions is required to be compared 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. 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. Since this company was excluded by the Tribunal in the case of the assessee for A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case and in law, Ld. AO has erred in crystalizing tax demand by ignoring the MAT credit carried forward from previous assessment years. 3. The brief facts of the case are that assessee is a wholly owned subsidiary of RAK Ceramics PSC, UAE and was engaged in the business of manufacturing and sale of ceramic tiles and sanitary wares. Assessee company e-filed its return of income on 30.11.2014 declaring total income of Rs. 4,74,96,090/-. The case was selected for scrutiny under CASS and notice u/s 143(2) dt. 28.08.2015 was issued and served upon the assessee. In response, assessee furnished the information. Thereafter, the case was referred to TPO on 20.10.2016, who passed order dt. 31.10.2017 u/s 92CA(3) of the Act computing the adjustment for the purpose of arms length price at Rs. 2,87,68,954/-. Accordingly, the total adjustments amounting to Rs. 2,87,68,954/- were added to the income of the assessee. Thereafter, penalty proceedings u/s 271BA were initiated separately. 3.1. Aggrieved to the addition, assessee company filed objection before the Dispute Resolution Panel, Bangalore, who directed to recompute the adjustments. As per the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such expenditure, and therefore, this company has to be excluded. 2.1.2 Having considered the submissions, and on perusal of the annual reports of this company for the financial years 2012-13 and 2013-14, we note that the company is engaged in manufacture of tiles and other allied products apart from manufacture of container glass. The company has broadly two divisions - the Building Product division, which manufactures tiles and allied products; the packaging product division - which manufactures container glass bottles. We also note that the company has given its segmental results in its consolidated financial results, wherein it has reported revenue and profit relating to Building product division, Packing product division and Other Revenue. We have noted the following relevant information from the annual reports of the company, which are summarized as under:- 2.1.3 As per Annexure to the Profit Loss account of HSIL in its financial statement (Refer page 86 of the annual report for F.Y. 2013-14 and page 112 of the annual report for F.Y. 2013-14) FY ENDING 31.03.2014 31.03.2013 Sale of products 1855.71 Cr 1681.89 Cr Sale of Sanitary products 910.14 Cr 771.61 Cr Sale of glass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12-13 18.57% 2013-14 21.17% 2.1.7 As to plea of R D expenditure, we note that the TPO has giyen detailed reasons for rejecting this plea. This company has incurred Rs. 57.78.85 lakhs during FY 2013-14 which constitutes meagre 0.03% of its gross turnover of Rs. 188,535 lakhs. As against the above, the assessee company has incurred Rs. 14.41 crore @ 3% of sales towards payment of royalty for these years, towards technical know-how and technology up gradation. Thus, the expenditure incurred by the assessee company is substantially more compared to the R D spend of HSIL. Therefore, as such there is no functional difference on account of R D spend and accordingly, the pleas raised in this regard are rejected. 2.2 CERA Sanitaryware Limited (CERA) - 12.85% (Inclusion) ➢ Functionally different ➢ Diversified business ➢ Faucet manufacturing company cannot be compared to ceramics manufacturer ➢ Segmental financials not available 2.2.1. It was contended by the assessee that the company Cera Sanitary Ware Limited is not comparable to the assessee company as Cera Sanitary Ware Limited is engaged in manufacture of sanitary ware, faucet ware, trading of bathroom tiles w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the DRP in pursuance to the directions of the Tribunal reproduced hereinabove and that the HSIL Limited has been wrongly included by the DRP despite the fact that the said company is not functionally comparable with the assessee company. 8. It was submitted by the ld. AR that the Tribunal in the subsequent assessment year has rejected the grounds of assessee and upheld the order of DRP and thereby held that the HSIL Limited is a comparable which is required to be included in the list of comparables. 8.1. The ld.AR relied upon the submission made by him before the lower authorities for excluding the HISL Limited as comparable. 8.2. The ld.DR on the other hand, relied upon the decision of the Tribunal in the case of the assessee in ITA No.1407/Hyd/2019. 8.3 We have heard the rival submissions of the parties and perused the material available on record including the decision of the co-ordinate Bench of the Tribunal in the case of the assessee for A.Y. 2015-16. The Tribunal vide order dt. 31.08.2023 in Paragraph 21 to 24 has decided the issue in the following manner : 21. Learned DR submitted that functionally both HSIL Ltd., and Cera Sanitaryware Ltd., are similar to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found in the financial statement standalone. Assessee says that because non-availability of segmental information in the financial statements (standalone), that too when HSIL Ltd., operates in more than one segment, it is not a good comparable. 23. On a perusal of the annual reports of HSIL Ltd., learned DRP found as a matter of fact that this entity has broadly two divisions, namely, building products division and packaging products division. In the building product division they are manufacturing tiles and allied products. The sales of the sanitary products were Rs. 963.71 crores with a profitability of Rs. 177.89 crores with a profit margin of 19.47%. Learned DRP perused the financial statement standalone and also the consolidated financial results and gave a factual finding that there is no difference in net turnover of the company as reported in its financial statement (standalone) and the net turnover taken in the consolidated financial results and the segmental results reported in the consolidated financial statement reflect the financial performance of the divisions. To this extent, no contrary material is placed before us. We, therefore, find it difficult that for non-ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same cannot be given much weight. In these circumstances, we agree with the findings of the learned DRP and decline to exclude HSIL Ltd., from the list of comparables. 8.4. Respectfully, following the decision of the co-ordinate Bench of the Tribunal in the case of assessee for the A.Y. 2015-16, we decline to exclude the HSIL Limited from the list of comparables. Accordingly, this ground is dismissed. 8.5. For the other comparable Cera Sanitary Ware Limited, it was pointed out by the ld. AR that the Tribunal has directed to include Cera Sanitary Ware Limited, included this comparable and our attention was drawn to the order of the Tribunal for A.Y. 2015-16 which is to the following effect : 25. Coming to the Cera Sanitaryware Ltd., broadly, this company also performs the same functions insofar as production of sanitaryware is concerned. However, at the outset, learned AR brought to our notice that Note 22 forming part of the accounts shows out of the total consumption of material worth Rs. 709 crores, the consumption of material of Rs. 323 alone is relevant for the sanitaryware production and Rs. 366 crores goes for brass ingots and components, whereas in the profit and loss acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 25 has held that this company has performed as that of the HSIL Limited company and therefore, the subsequent finding of the Tribunal whereby the Tribunal has compared the raw material cost in para 26, is of no use as for the purpose of determining the benchmarking and comparability. The parameters laid down as per Rule 10B(1)(e) for TNMM are required to be considered. Further, the ld. DR has drawn our attention to Rule 10B(1)(e) of the Act which is to the following effect : Transactional Net Margin Method, By Which,- i. the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; ii. the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; iii. the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the dif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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