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TMI Blog2018 (7) TMI 2351X X X X Extracts X X X X X X X X Extracts X X X X ..... law and facts and circumstances of the case, Ld. Transfer Pricing Officer ('TPO')/ DRP erred in not considering foreign exchange gain as a part of operating income while computing the operating margins of the Appellant and the comparable companies. 3. In law and facts and circumstances of the case, Ld. TPO erred in computing the margins of the companies considered as comparable by it and also upheld by Ld. DRP for the purpose of Transactional Net Margin Method. 4. In law and facts and circumstances of the case, Ld. TPO/ DRP erred in considering certain ~ companies as comparable to the Appellant on the following grounds: a. Applying export turnover filter of less than equal to 30% of the sales and disregarding export turnover filter of less than equal to 10% of the sales applied by the Appellant in the transfer pricing documentation, without acknowledging the fact that Appellant in only dealing in domestic market and is having negligible export sales. Following companies does not qualify the export turnover filter of less than equal to 10% of total sales and thus should be rejected: i. ANG Industries Ltd ii. Elofic Industries Ltd iii. Wabco- JVS (India) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the taxpayer in setting up the manufacturing facilities and continuously to monitor the quality standards followed by the taxpayer. For braking systems, the taxpayer gets design and propriety paint from its AE and manufactures the product. Yutaka, Giken, Japan continues to monitor the quality standards observed by the taxpayer. The taxpayer in order to benchmark its international transactions compared its entity level margin (OP/Sales) with external comparable and computed its margin at 1.06% as against margin of the comparables at 2.34% and claimed its international transactions at arm's length. 5. The taxpayer by applying Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit / Sales (OP/Sales) as the Profit Level Indicator (PLI) for benchmarking at entity level, chosen six comparables using multiple years data and computed its average margin at 2.34%. However, during TP proceedings, the taxpayer updated its margin of six comparables with OP/Sales at 2.77%. However, TPO, after selecting 7 comparables having average OP/Sales at 8.56% as against taxpayer's margin of 0.87%, proposed enhancement of Rs. 4,19,64,587/-. However, subseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operating income while computing operating margin of the taxpayer as well as the comparable companies; challenged computation of margin of the companies considered as comparables and also challenged inclusion of ANG Industries Ltd., Elofic Industries Ltd., WABCO - TVS (India) Ltd. and Brakes India as comparables on ground of export turnover filter and being into diversified operations. The taxpayer without prejudice also claimed to consider adjustment on account of high depreciation to the total cost in the case of the taxpayer and also claimed to consider cash profits for the purpose of TNMM in order to provider for excessive depreciation in case of taxpayer vis-à-vis comparable companies. We would discuss all the issues raised by the taxpayer under specific grounds as under. GROUND NO.1 12. Ground No. 1 is general in nature, hence does not require any specific adjudication. GROUND NO.2 13. TPO has not returned any specific findings in treating foreign exchange gain as non-operating while computing the operating margin. Ld. DRP by ratifying the decision taken by TPO also considered foreign exchange gain as non-operating by applying the Safe Harbour Rules. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able companies. So, Ground No. 2 is determined in favour of the taxpayer. GROUND NO.3 19. The taxpayer by raising ground no3 sought to compute the margin of the company considered as comparable by the taxpayer for the purpose of TNMM. The taxpayer pointed out differences in margin in tabulated form as under :- S.No. Name of Company Margin as computed by the assessee (OP/Sales) Margins as per the order of the Ld. TPO (OP/ Sales) Annual Report copy reference to paper book 1 ANG Industries 15.33% 15.54% Annexure 37, Pg.619 to Pg. 651 2 Brakes India 8.14% 9.31% Annexure 38, Pg.651 to Pg. 705 3 Hindustan Composites Limited 3.02% 3.19% Annexure 41, Pg.812 to Pg. 821 4 Wabco India 20.15% 22.97% Annexure 40, Pg.764 to Pg. 811 20. When there are apparent discrepancies in the margin in OP/Sales computed by TPO as well as taxpayer, the TPO is directed to verify the margin and to reconsider the same to bring on record the correct margin of the aforesaid comparable companies. So, Ground No. 3 is determined in favour of the taxpayer for statistical purposes. GROUND NO.4 21. The taxpayer has sought exclusion of four companies viz. ANG Industries L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpayer. So, the TPO has principally agreed with the contention raised by the taxpayer that in view of the provisions contained under Rule 10B(2)(d), companies operating in same geographical location and having similar size of markets can be compared. However, TPO rejected the contention of the taxpayer to reject the companies having export sales more than 10% of the total sales simply for the reason that by putting different income bar at 10% would lead to a very narrow set of comparables, hence used the filter to reject the company having 30% income from export. Ld. DRP also concurred with the view taken by the taxpayer. The taxpayer relied upon the decision rendered by the coordinate Bench of the Tribunal in case of Gharda Chemical Ltd. vs. DCIT - ITA No. 2242/Mum/2006 available at page 508 to 524 of the paper book and ACIT vs. Rhoida Chemicals India P. Ltd. - ITA No. 2242/Mum/2006 available at page 525 to 534 of the paper book. 25. Coordinate Bench of the Tribunal in case of Gharda Chemical Ltd. (supra) observed that for the purpose of comparability, factors like location of parties, available of raw material, demand & supply and acquisition are also necessary to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17% and since the comparable companies are operating in entirely different geographical market, the same cannot be a valid comparable vis-à-vis the taxpayer. 28. Moreover, the companies which are otherwise not comparable cannot be taken as comparable merely on the ground that it will lead to very narrow set of comparables. More so, the Revenue in taxpayer's own case for AY 2012-13 has accepted the turnover filter of 25% of sales for identifying the comparable companies and has rejected ANG Industries and Sundaram Brake Linings Ltd. which are also comparable during the year under assessment vide order passed by ld. CIT (A) for AY 2012-13 made available by the taxpayer at page 195 of the paper book. 29. The ld. AR for the taxpayer further challenged the inclusion of ANG Industries Ltd., Elofic Industries Ltd and Wabco- JVS (India) Ltd. by the TPO for benchmarking the international transactions on ground of their diversified operation as well as diversified market. TPO selected all the three companies as comparables on the ground that the same are dealing in products which are comparable to the taxpayer. We would examine their comparability as under. ANG INDUSTRIES LTD. (ANG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rake aggregates. Further, to improve availability of quality service in rural areas, the company also commissioned 145 certified workshops. These initiatives would result in improved service practices, availability of genuine parts and generate additional revenue for the company. Furthermore, annual report at page 769 of the paper book shows that WABCO is carrying out significant research and development activities in specific areas and is deriving benefits from R&D activities as under :- "B. TECHNOLOGY ABSORPTION Research & Development (R & D) 1. Specific areas in which R & 0 is carried out by the company. Existing activities: (a) Double diaphragm spring brake actuator (DDSBA) type 20/24 and upgraded version of type 16/24 for disc brake validated and production ready for European Market. These devices are designed for high level of robustness against dust and water entry. (b) Automatic slack adjuster (ASA) with patented adjustment mechanism developed and validated for European market. (c) New Air Processing and Distribution Assembly (APDA) which was in promotion phase last year is now fully developed, validated and production ready. This product contributes to cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out prejudice, the taxpayer challenged the order passed by TPO/DRP in not providing adjustment on account of high depreciation to the total cost in the case of the taxpayer. The ld. AR for the taxpayer contended that it is the second year of production whereas all the companies selected by the TPO are very old/senior in the business and claimed depreciation to the total cost. The taxpayer brought on record complete data showing depreciation rate with respect to sales in the year under assessment as under :- S.No. Company Name Sales (in cr.) Depreciation (in cr.) Depreciation / Sales % 1 Hind Composites Ltd. 89.9 3.85 4.28% 2 C M Smith & Sons Ltd. 102.09 3.485608 3.41% 3 Mubea Suspension India Ltd. 62.92 1.71 2.72% 4 Sharda Sejong Auto Components Ltd. 254.45 7.06 2.77% 5 IAI Industries Ltd. 21.67 0.9893 4.57% 6 ANG Industries Ltd. 106.73 5.16 4.83% 7 Elofic Industries Ltd. 99.21 2.46 2.48% 8 WABCO TVS (India) Ltd. 591.26 14.44 2.44% 9 Brakes India 1885.56 55.35 2.94% Average Depreciation 3.38% Yutaka India (Assessee) 5.57 5.34 9.79% 37. The taxpayer followed Written Down Value (WDV) m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide for excessive depreciation in case of the taxpayer vis-à-vis comparable companies. The taxpayer provided the analysis of the cash profit earned by it as under :- Particulars Actual Cash Profits Amount in Rs. Amount in Rs. Sales 545,703,341 545,703,341 Other Operating income Sundry balances W/off 1,910,317 1,910,317 Claim received 111,661 111,661 Job work charges 40,589 40,589 Foreign exchange gain 1,719,684 1,719,684 Total operating income 549,485,592 549,485,592 Cost of sales 378,562,282 378,562,282 Employee cost 27,624,330 27,624,330 Manufacturing & Administration 78,923,208 78,923,208 Bank charges 2,245,939 2,245,939 Depreciation 53,402,064 Total Operating expenses 540,757,823 487,355,759 Operating profit 8,727,769 62,129,833 Non Operating income Interest received 35,410 35,410 Depreciation 53,402,064 Non Operating expenses Interest on loan 19,258,549 19,258,549 PBT (10,495,370) (10,495,370) OP/Sales 1.60% 11.39% 43. The taxpayer relied upon the decision rendered by the coor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing {supra} by Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons." 47. When the taxpayer has brought on record the complete analysis of cash profits earned by the taxpayer to be compared with complete analysis of cash profit earned by the comparable companies extracted in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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