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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 ..... 1,86,520/-. In the course of assessment proceedings, the AO noticed from Form No. 3CEB that the assessee had entered into international transactions with its associated enterprises (AE), in view of which a reference to Transfer Pricing Officer (TPO) was made for determining the Arm's Length Price (ALP) of these international transaction. The international services were in respect of manufacturing segment, management support services and IT enabled support services (ITES). The TPO vide order u/s. 92CA(3) of the Act dated 21.10.2010 proposed a total TP adjustment of Rs. 6,29,55,148/- as under: S. No. International Transaction Amount (Rs.) of adjustment 1 Import of raw materials for manufacturing 4,39,53,971 2 Income from ITES segment 44,47,175 3 Payment of management charges 1,45,54,002 Total TO adjustment 6,29,55,148 3. The AO completed the assessment in conformity with the additions proposed by the TPO. A draft order u/s 143(3) r.w.s. 144C(1) of the Act was passed on 20.12.2010 and as the assessee did not file any objection before DRP, the assessment was completed u/s. 143(3) r.w.s. 144C(4) of the Act on 31.01.2011 at total income of Rs. 9,63,85,420/-. Apart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuments submitted by the appellant with regard to selection/rejection of comparable companies such as product profiles, intangible assets etc. 4.4 The AO/CIT(A) erred in law and on facts in selecting additional 8 (eight) alleged comparable companies without taking cognizance of Rule 108(2), (3) and (4) of the Rules. 5. ITES segment (Adjustment of Rs. 4,447,175) 5.1 The ld. AO erred in law and on facts, in holding that the international transaction of providing hack-office support services by the appellant to its associated enterprises is not at arm's length and making an adjustment of Rs. 4,447,175. 5.2 The ld. AO erred in law and on facts in disregarding methodical search process undertaken by the appellant and rejecting 7 (seven) out of 12 (twelve) comparable companies selected by the Appellant, without taking cognizance of Rule 108(2) of the Income Tax Rules, 1962 ('the Rules') 5.3 The ld. 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 6 (six) alleged comparables 5.4 The ld. AO erred in law and on facts in sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any cogent reasons. 6.8 Without prejudice to the contentions of the appellant that no adjustment is warranted in case of the appellant, it is submitted that as the amount of Rs. 14,353,642 (excluding markup of Rs. 201,360) incurred by the associated enterprise represents share of actual cost, directly or indirectly, related to the appellant and be allowed as reimbursement of expenses by the appellant to the associated enterprise. 7. Standard deduction of 5% variation as provided u/s 92C(2) of the Act 7.1 Without prejudice to our contention that no adjustment ought to have been made in case of the Appellant, the ld. AO ought to have applied the beneficial provision regarding the arm's length range as contained within the proviso to section 92C(2) of the Act as it stood during the financial year ended 31 March 2007 and not as it stood after the amendment by the Finance Act (No.2), 2009. 7.2 Without prejudice, in applying the benefit of 5% variation as permitted by the proviso to section 92C(2) of the Act (prior to the amendment by Finance (No. 2) Act, 2009), the ld. AO / ΤΡΟ should apply 5% variation to the arm's length price of the international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities. 7.3 We have carefully considered the rival submissions and the materials on record. Though the TPO had not explicitly pointed out any deficiency in the document prepared by the assessee, it is evident that the information or data used by the assessee in computation of ALP in its TP study report was not held as reliable or correct, which is a precondition under section 92C(3) of the Act. It is found that the primary objective of the study report prepared by the assessee was to review the transfer pricing arrangement for international transactions with its associate enterprises during the year ended on 31st March 2 007. Thus, this study report was not intended to determine the ALP of international transactions with AEs for the current year in accordance with the IT Rules. In essence, this T P study report was in the nature of policy making document and not for determining the ALP. It was for the purpose of policy making that past two years data were utilized in this study report and not a single data of current year was imported. It is difficult to accept that no data for financial year 2006-07 was available when the study report was prepared in the month of October 2007. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence on the determination of transfer prices in relation to the transaction being considered". The assessee has placed significant reliance on the OECD guidelines to contend the admissibility of previous year's data for transfer pricing determination. However, for reasons given in the paragraphs below, this Court is of the opinion that the OECD guidelines have no bearing on this issue. 7.6 It is a well settled principle that the assessee is required to perform FunctionalAsset and Risk (FAR) analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. If so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to other years. To do so, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability 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. 7.7 In view of the above facts and the judicial pronouncement, the reliance of the assessee on previous two years dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO was disregarded. Further, the TPO had also erred in arbitrarily rejecting loss-making companies and cherry picking the comparable. The Ld. Counsel has painstakingly taken us through the accounts of the comparable companies contested by the assessee, the details of which were filed in multiple volumes of paper book, to drive home his point. 8.3 Per contra, Dr. Darsi Suman Ratnam, the Ld. CIT (DR), supported the stand of the TPO and the CIT(A). He submitted that the TPO was well within his jurisdiction and power to reject the comparables which were functionally not comparable. Further, there was nothing wrong in selection of other functionally comparable companies to benchmark the international transaction with the AEs. He submitted that comparability of the case is to be tested for each and every year independently and separately for the purpose of determination of ALP. The international transaction has to be compared with uncontrolled and unrelated transaction by using data relating to financial year in which international transaction was entered into and not merely on the basis of data of earlier years. The Ld. CIT(DR) also gave his counter submissions with regard to eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the dispute in the manufacturing segment is in respect of exclusion of four comparable from assessee's set and in respect of inclusion of three comparable by the TPO, as upheld by the Ld. CIT(A). 8.5 It is found from Schedule 12 of the accounts of the assessee for the F.Y. 2006-07 as well as from the TP Study Report that the products manufactured by it were "Single wall Tubes / Copper coated steel Tubes, Brakes and Fuel Lines and other components". For the purpose of manufacturing the tubes and auto components, it was importing copper plated steel strips from its AEs. These components were used as brake and fuel carrying systems in automobiles. The major raw material of the assessee for manufacturing of auto components and tubes was copper coated steel stripes and sheets which accounted for 70% of total raw materials. The TPO had rejected some of the comparable as selected by the assessee for the reason that they were functionally not comparable. According to TPO, these comparables were coil and spring making companies which used steel, whereas the assessee was engaged in manufacturing of auto components by using copper coated materials. Keeping these functional aspects int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al bearings. On the other hand, the assessee was manufacturing tubular products. The raw materials utilized by GIL were tubes, bright bars, shock fluid, non-ferrous metals and steel strips. In addition components such as Pressed Parts, Die Castings, Rubber Parts, Sintered Parts and Forgings etc. were also utilized. Shock absorber is altogether different type of spring which can't be compared with the products being manufactured by the assessee. The other products manufactured by GIL are also found different from the products manufactured by the assessee as there is no similarity in the product profile. Considering the difference in the product profile of the two companies the rejection of GIL as a comparable is upheld. 8.10 Jamna Auto Industries Ltd.(JAIL): In the case of Jamna Auto Industries Ltd., the manufacturing product was Spring & Spring Leaves and the raw material consumed was spring steel flats. Further, all the raw material of JAIL was indigenously acquired and there was no import of any raw material. Considering this difference in the product and in mode of acquisition of raw materials viz. the import filter, this company couldn't have been considered as a comparable. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated party transaction of FCC in respect of purchase of raw materials during the year was 37.17%. It is also seen from the order of the Ld. CIT(A) that he had rejected the comparable, where the related party transaction was in excess of 25%. As the related party transaction in this case also exceeds 25%, it is directed that FCC should also be excluded from the set of comparable. 8.14 Setco Automotive Ltd.: The contention of the assessee is that this company has different product profile and there was abnormal event of acquisitions as reported in the audited accounts under Management Discussions and Analysis. It was further submitted that due to presence of intangibles, this company was not a comparable. It was contended that another company, Clutch Auto, was selected by TPO as comparable but the same was dropped by CIT(A) as comparable in the A.Y. 2008-09 due to presence of intangibles. The Ld. Sr. Counsel relied upon the decision of ITAT Bangalore in the case of 3 DPLM Software Solutions Ltd. vs. DCIT, (42 taxmann.com 333) in this regard. The Ld. CIT(DR) on the other hand submitted that the assessee had not demonstrated as to how intangibles effect the margin of the comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e intangibles owned by Setco Automotive Ltd. and stated that intangible assets owned by this company are not in the nature of those that could affect the margin by enabling the entity to earn the higher margins such as goodwill and technical knowhow. The intangibles having large volumes are computer software and product development. The appellant in the present case also has not demonstrated as to how these intangibles will effect the margins of this comparable. Hence, the selection of Setco Automotive Ltd. is confirmed and that of Clutch Auto Ltd. is rejected." 8.14.3 The presence of any intangible doesn't make a company ineligible to be considered as a comparable. One has to find out as to how the intangible is effecting the margin of the comparable company. The assessee has not brought out anything on record to demonstrate that the intangible had an impact on the margin of this comparable company. Rather the TPO had analyzed the intangibles owned by Setco Automotive Ltd. and stated that intangible assets owned by this 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under MAP with UK companies has been brought on record. As a result of the MAP resolution, the assessee company has filed revised Ground of Appeal withdrawing the grounds challenging the TP adjustment in respect of its transactions with AE of UK. The Ld. A.R. explained that the margin as per assessee's TP study was 10.36% whereas ALP as determined by TPO and upheld by Ld. CIT(A) was 26.7%. On the other hand the margin as agreed upon under MAP resolution was 18% only. The Ld. A.R. requested that the margin of 18% determined under MAP may be applied to adjustment in respect of transactions with AEs of other than UK Countries in respect of ITES service. In this regard, he placed reliance on the decision in the case of J.P. Morgan Services India (Pvt.) Ltd. Vs. DCIT (Mum-Trib.) reported in 70 taxmann.com 228. He pointed out that the appeal filed by the Department against this decision was dismissed by the Hon'ble Bombay High Court and the SLP was also dismissed by the Hon'ble Supreme Court. 9.3 The Ld. D.R. on the other hand relied upon the order of the Ld. CIT(A). 9.4 We have heard the rival submissions and gone through the material placed before us. A copy of Letter F. No.480/01/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational Services India (Pvt.) Ltd. Vs. DCIT (73 taxmann.com 24),wherein it was held that if after taking a FAR analysis of non-US transactions, it is found that factors influencing the price were similar between US and non-US AE transactions, same price fixed under MAP can be adopted for all the transactions. The ground is allowed for statistical purpose. 10. Ground No. 6: TP adjustment in management charge 10.1 This grounds pertains to TP adjustment of Rs. 145,54,002/- in respect of management charges. The assessee has filed a letter dated 28.02.2019 informing that MAP was initiated under Article 27 of Double Tax Avoidance Agreement (DTAA) between India and the United Kingdom (UK) in respect of management fee adjustment of Rs. 145,54,002/- pertaining to transactions with AE in the UK. The Ld. AR informed that after examination of the facts of the case and the issue involved a resolution was arrived in terms of section 90 of the Act read with Article 27 of the India UK DTAA and Rule 44H of I.T. Rules. As per MAP order dated 18.08.2016, 70% of the management fee adjustment was allowed and, therefore, the assessee has requested for withdrawal of the ground in respect of disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo years is derived from them. The facts of the case Ucal Machine Tools (P.) Ltd. (supra) relied upon by the assessee are found to be different. In that case, the issue involved was expenditure on tools such as screw drivers, spanners which are purchased along with the machineries and their replacement was claimed as revenue expenditure. In the present case, the assessee itself is not treating the expenditure in respect of jigs and fixtures as revenue expenditure, rather it is writing off the same in the accounts over two years period. 12.4 In view of the above facts and the treatment as given in the earlier years, the decision of the Ld. CIT(A) to treat the expenditure on jigs and fixtures as capital expenditure and allow depreciation on the brought forward WDV is upheld. Therefore, this ground is dismissed. 13. Ground No. 9- Interest 13.1 The ground charging of interest u/s 234B and 234D as well as withdrawal of interest on refund u/s 244A is only consequential in nature and need not be adjudicated. The ground is dismissed. 14. Additional Ground no. 1: Working Capital adjustment 14.1 The assessee had raised an additional ground for granting working capital adjustment while d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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