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TMI Blog2024 (9) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ability are the same. The assessee has not done any such analysis and established that the factors of comparability for the years as selected by it were identical to the facts and factors of the current year. The reliance of the assessee on previous two years data and not using any current year data was not in accordance with the provisions of law and, therefore, the TP study report of the assessee was rightly rejected. The ground taken by the assessee is dismissed. TP adjustment in manufacturing segment - Comparable selection - HELD THAT:- Coventry Coil-O-Matic (Haryana) Ltd.(CCHL) is found to be engaged in manufacture of altogether different product and raw material utilized by it was also different. CCHL was manufacturing Auto Suspension Springs and Coil Springs while the assessee was manufacturing tubular products. The raw materials of CCHL was steel wires whereas the assessee s raw materials were copper coated steel strips and sheets. As the product as well as the raw material of CCHL was different from that of the assessee, the two companies were not functionally comparable. Hence, CCHL was correctly rejected by the TPO as a comparable. Frontier Springs Ltd.(FSL) - When the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company was not in the nature of those that could affect the margin by enabling the entity to earn the higher margins; which has not been controverted by the assesse. Therefore, the objection of the assessee to this comparable is rejected and the order of the CIT(A) in this regard is upheld. ANG Industries Ltd. - As found from the accounts that the export sales of this company was Rs. 65.24 crores against domestic sales of Rs. 48.22 crores during the Financial Year 2006-07. On the other hand the export to turnover ratio of the assessee company was only 4.72%. As this issue of export filter was neither raised before nor examined by the lower authorities the matter is set aside to the TPO to examine the objection of the assessee on the ground of export filter in respect of this comparable. TP adjustment in ITES segment - assessee company was providing back office support service to its AEs - ALP of the service was determined by the TPO and an adjustment was made - HELD THAT:- In the present case, transactions covered under MAP resolution is only the 41.16%. Thus, the facts of the two cases are found to be distinctly different as the transaction not covered under MAP in that case wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture on jigs and fixtures as capital expenditure and allow depreciation on the brought forward WDV is upheld. Therefore, this ground is dismissed. Working Capital adjustment - HELD THAT:- The matter is set aside to the file of the TPO to verify whether any working capital adjustment was granted while determining the ALP of the international transactions in the A.Y. 2009-10 and 2010-11, as claimed by the assessee. If yes, a similar adjustment may be allowed in the current year as well. The ground is allowed for statistical purpose. - Shri T.R. Senthil Kumar, Judicial Member And Shri Narendra Prasad Sinha, Accountant Member For the Appellant : Shri S. N. Soparkar, Sr. Advocate And Shri Parin Shah, A.R. For the Respondent : Dr. Darsi Suman Ratnam, CIT. DR ORDER PER SHRINARENDRA PRASAD SINHA, AM: This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-I, Baroda, (in short the CIT(A) ) dated 22.03.2013 for the Assessment Year 2007-08. 2. The brief facts of the case are that the assessee company, M/s Bundy India Ltd., is engaged in manufacturing of tubes, automotive components and tubular products primarily for the auto industry and manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified in section 92C(3) read with section 92CA(3) of the Act were satisfied. 4. Manufacturing segment (Adjustment of Rs. 22,929,998) 4.1 The AO/CIT(A) erred in law and on facts, in holding that the international transaction of import of raw material by the Appellant from the associated enterprises ('AEs') in not at arm's length and rejecting transfer pricing documentation. 4.2 The AO/CIT(A) erred in law and on facts in disregarding methodical search process undertaken by the appellant and rejecting 5 (five) out of 8 (eight) comparable companies selected by the Appellant, without taking cognizance of Rule 10B(2) of the Income Tax Rules, 1962 ('the Rules ). 4.3 The AO violated the principle of natural justice by not providing/sharing complete details of the benchmarking analysis carried out by him and adopting arbitrary approach in selection of additional alleged comparables. 4.3.1 The CIT(A) erred in law and on facts in disregarding the data for export turnover submitted by the appellant for alleged comparable companies selected by the AO. 4.3.2 The AO/CIT(A) erred in law and on facts in disregarding the publicly available data in respect of FCC Rico Lid, provided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of management fees by the appellant to its associated enterprises is not at arm's length and considering arm's length price of management charges as Nil. 6.2 The AO/CIT(A) erred in law and on facts in contending and ld. CIT(A) in upholding that the management fees have not been benchmarked and rejecting transfer pricing study in not submitted by the appellant. 6.3 The AO/CIT(A) erred in law and on facts, in disregarding aggregation of management fees with the manufacturing segment as adopted by the appellant for benchmarking the international transactions. 6.4 The AO/CIT(A) erred in law and on facts, in holding that benefit received by the appellant on paying management fees is not adequate and conveniently neglected detailed management recharge analysis and evidences submitted by the appellant to support its contentions. 6.5 The AO/CIT(A) erred in law and on facts in upholding that the documentary evidences have not been submitted by the appellant to substantiate the allocation methodology. 6.6 The ld. AO erred in law and on facts, in not providing any observation/findings on various documentary evidences submitted by the appellant to support arm's length of manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt submits that each grounds of appeal is without prejudice to one another. 5. An additional ground was raised by the assessee in this appeal, which is as under: (i) The Appellant ought to have been granted working capital adjustment while determining the arm's length price of the International transactions by the Learned Assessing Officer/Transfer Pricing Officer ( Ld. AO/TPO) and/or by the Hon'ble Commissioner of Income-tax Appeals [Hon'ble CIT(A)]. 6. Ground Nos. 1 and 2 are general in nature and were not pressed, hence dismissed. 7. Ground number 3-Non-Satisfaction of conditions: 7.1 Shri S. N. Soparkar, Sr. Advocate appearing for the assessee, submitted that the AO/TPO had not explicitly established that any situation envisaged in section 92C(3) Of the Act was fulfilled before making adjustment to the international transactions. He contended that the AO/TPO had not pointed out any deficiency in the T P study report prepared by the assessee nor pointed out furnishing of any inaccurate details, so as to warrant alteration and re-computation of ALP. The search process adopted by the assessee was not disputed, except rejection of certain comparable selected by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar s data. To quote from the order: 35. As regards the relevance of multiple year data for transfer pricing determination, this Court is of the opinion that the general rule as prescribed in Rule 10B(4) mandates the tax authorities to take into account only the relevant assessment year's data. The proviso to Rule 10B(4) permits data relating to two years prior to the relevant assessment year to be taken into account in the event that they have an influence on the determination of price. However, in such instances, the onus lies upon the assessee to establish the relevance of such data. The language of Rule 10B(4) does not leave any scope for ambiguity on this issue. This Court notices that this very ground- i.e applicability of previous years' data for reaching out comparables, was sought to be urged in Marubeni India (P.) Ltd. v. DIT [2013] 354 ITR 638/215 Taxman 122 (Mag.)/33 taxmann.com 100 (Delhi) but deliberately left moot, because the assessee had given it up before the Tribunal. The TPO in his order dated 03.10.2011 has comprehensively examined the authorities on this issue and rightly held that ordinarily, the revenue has to consider only the relevant assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies, TPO had rejected five companies as comparables for the reason that they were engaged in other business and were functionally not comparable. 8.2 Sri Soparkar explained that the assessee had selected operating profit to sales as the profit level indicator (PLI) to benchmark international transactions under the manufacturing segment, which was also accepted by the TPO as an appropriate PLI. The assessee had earned operating margin of 5.58% on sales under its manufacturing segment compared to average operating margin of 4.82% on sales earned by the set of comparable companies selected by the assessee. Therefore, all the international transactions of the assessee under its manufacturing segment were concluded at ALP and no TP adjustment was required. The TPO had not disputed this fact, except rejection of some comparable selected by the assessee. The Ld. Counsel contended that the TPO was not correct in including certain comparable, which had abnormal increase in sales and had super normal profits. Similarly, the TPO had also erred in selecting companies having substantial related party transactions and disregarding the documentary evidences submitted by the assessee in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, which summarizes the comparable not disputed, erroneous exclusion of comparables from assessee s set and erroneous inclusion of some of the comparable in CIT(A) set. The said chart is reproduced below: Sr. No. Comparables Comparables not disputed Comparable selected by Unadjusted margins as per CIT(A) WCA margins 1 Bosch Chassis Systems India Ltd. Assessee 8.11% 7.53% 2 Canara Workshops Ltd. Assessee 5.73% 1.47% 3 Rane Brake Linings Ltd. Assessee 5.50% 3.35% 4 Deepak Industries Ltd. Department 5.90% 6.17% 5 STI Sanoh India Ltd. Department 10.67% 8.37% 6 C M Smith Sons Ltd. Department 6.90% 6.75% 7 Ceekay Daikin Ltd. (Exedy India Limited) Department 7.51% 3.57% 8 Special Engineering Services Limited Department 7.38% 5.95% Erroneous exclusions from appellant's set 9 Coventry Coil-O-Matic (Haryana) Ltd. Assessee -0.55% -1.94% 10 Frontier Springs Ltd. Assessee 6.88% 3.93% 11 Gabriel India Ltd. Assessee 3.87% 2.64% 12 Jamna Auto Industries Limited Assessee 6.94% 6.44% Erroneous inclusions from CIT(A) s set 13 FCC Rico Ltd. Department 14.99% 16.78% 14 Setco Automotive Ltd. Department 13.99% 14.77% 15 ANG Industries Ltd. Department 26.34% 21.46% Thus, the dispute in the manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raw materials were copper coated steel strips and sheets. As the product as well as the raw material of CCHL was different from that of the assessee, the two companies were not functionally comparable. Hence, CCHL was correctly rejected by the TPO as a comparable. 8.8 Frontier Springs Ltd.(FSL):This company was manufacturing coil springs and the raw materials were indigenous springs steel round. There was no import of any raw material by this company. Not only the product profile and raw material of this company is different, all the raw materials are found to be indigenously acquired by FSL whereas in the case of assessee 50% of the raw materials were imported. When the assessee has requested for application of export filter while choosing the comparable; by the same logic import filter also has to be applied to the comparable. And when we consider the import filter, this company can t be considered as functionally comparable to the assessee. Hence, rejection of this company as a comparable by the TPO is upheld. 8.9 Gabriel India Ltd.(GIL): This company was manufacturing shock absorbers, struts, front forks, bimetal strips and bimetal bearings. On the other hand, the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e raw material was imported whereas in some of the compatibles, there was no import of raw material at all. In view of these factors and functional differences, the rejection of the above four comparable by the TPO is upheld. 8.12 We now consider the erroneous exclusion of comparable companies by the TPO from the assessee s list as contended by the assessee. 8.13 FCC Rico Ltd.(FCC): It is found that the assessee has filed account of FCC Rico Ltd. for the Financial Year 2007-08 in which the figures for Financial Year 2006-07 are also available. From the related party disclosures appearing in the accounts, it is found that this company had the following percentage of purchases of raw materials from related parties during the Financial Year 2006-07: (i) FCC Co. Ltd. 8.25% (ii) Rico Auto India Ltd. 18.72% (iii) FCC (Philippines) Corporation 4.62% (iv) FCC (Thailand) Co. Ltd. 1.69% (v) Chengdu Yonghua FCC Clutches Co. Ltd. 0.97% (vi) FCC Europe Ltd. 2.09% (vii) FCC (Brasil) 0.16% (viii) PT. FCC Indonesia 0.66% (ix) FCC Taiwan 0.01% Total : 37.17% It is found from the above chart that the related party transaction of FCC in respect of purchase of raw materials during the year was 37.17%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company engaged in proprietary software products and owning its own tangible cannot be held as a comparable with another company who is a software service provider. Thus, nature of the activity in that case was totally different where the assessee was a software service provider. In the case of software service, the intangible, such as license, provide significant value which leads to huge revenue from software products. Therefore, the ratio of that decision cannot be imported to the facts of the present case as the assessee is engaged in altogether different activity. The assessee has not pointed out as to how the intangible as owned by Setco had any effect on their margin. The finding given by the ld. CIT(A) in respect of this comparable is as under: ii) The other contention of the appellant relates to comparables owning intangibles. It is seen from the order of TPO in appellant's own case for A.Y. 2008-09 that Clutch Auto Limited was not considered as a comparable on account of being owner of many intangibles Patent Trade Mark. But at the same time the TPO analyzed the intangibles owned by Setco Automotive Ltd. and stated that intangible assets owned by this company are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice to its AEs. The ALP of the service was determined by the TPO and an adjustment of Rs. 44,47,175/- was made. The assessee had contested this adjustment before the Ld. CIT(A) in respect of rejection of seven out of twelve comparable companies selected by it. Further the assessee had also objected to the six new comparable selected by the TPO. The operating profit (OP) margin earned by the assessee from its manufacturing activity was 10.36% which was compared with OP margin of 26.7% of the comparables selected by the TPO and accordingly an adjustment of Rs. 44,47,175/- was made to ITES segment. The Ld. CIT(A) rejected the objection of the assessee in respect of comparable used by the TPO and upheld the TP adjustment in this segment. 9.2 The Ld. A.R. submitted that the assessee company had opted for Mutual Agreement Procedure (MAP) in respect of TP adjustment pertaining to transactions with United Kingdom (UK) AE. The assessee had accepted the terms mutually agreed under MAP resolution in respect of transactions made with UK Tax Residents AEs and a copy of the relief under MAP with UK companies has been brought on record. As a result of the MAP resolution, the assessee company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns covered under MAP resolution is only the 41.16%. Thus, the facts of the two cases are found to be distinctly different as the transaction not covered under MAP in that case was a miniscule 4% whereas such transactions in this case is substantial 58.48%. Further, this issue can be decided after undertaking FAR analysis of non-UK transactions in order to find out whether there is any distinction in the factors influencing the price between UK and non UK transactions. The assessee has not brought on record any similarities of factors that influenced the price between UK and non-UK transactions. Therefore, we are of the considered opinion that the matter may be restored to the file of the TPO/AO for analysis of factors influencing the price between UK and non-UK AE transactions for ITES segment. If it is found that the factors influencing the price are similar between UK and non-UK transactions, the price adopted for UK transactions may also be adopted for non-UK transactions. In this regard we are guided by decision of the Ld. ITAT, Bangalore in the case of Dell International Services India (Pvt.) Ltd. Vs. DCIT (73 taxmann.com 24),wherein it was held that if after taking a FAR anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and machinery at all. For treating these items as revenue expenditure, reliance was placed on the decision of ITAT Chennai in the case of Ucal Machine Tools (P.) Ltd. Vs. ITO 71 taxmann.com 230 (Chennai-Trib.). 12.2 The Ld. D.R. on the other hand submitted that this issue was involved in the earlier year as well and the jigs and fixtures were all along treated as capital expenditure. He strongly supported the order of the Ld. CIT(A). 12.3 We have carefully considered the facts of the case and the submissions made by the rival parties. It is found that the assessee company is not treating the jigs and fixtures as revenue expenditure in its books of accounts. The company had a policy of writing off of the expense over a period of two years since long term enduring benefit was derived from jigs and fixtures. Undoubtedly, the jigs and fixtures are not in the nature of repairs and maintenance, so as to claim it as a revenue expenditure. They are utilized in the manufacturing process and the assessee has admitted that long term enduring benefit of at least two years is derived from them. The facts of the case Ucal Machine Tools (P.) Ltd. (supra) relied upon by the assessee are found t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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