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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 ..... arable companies - ANG Industries Ltd. be excluded as comparable on the ground that the same is engaged in diversified activities and segmental reporting is not available. So, in these circumstances, we find ANG chosen by the TPO/DRP not a valid comparable. Elofic is not a valid comparable keeping in view the diversified market of Elofic and failing the export income to total sales filter. WABCO's provision of catering to after market segment and carrying out significant R D activities benefiting the company makes it incomparable to the taxpayer which is a routine manufacturer. So, we order to exclude WABCO. DRP not providing adjustment on account of high depreciation to the total cost in the case of the taxpayer - Keeping in view the fact that in taxpayer s own case for AY 2009-10, difference in capacity in which the taxpayer is operating and the capacity in which comparable companies are operating were recognised, we are of the considered view that the issue is required to be sent back to the TPO to decide in the light of the revenue s own order in taxpayer s own case for AY 2009-10 and in view of the decisions rendered by the coordinate Benches of the Tribunal (supra). Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 iv. Brakes India b. Considering following companies having diversified operations and serving different market area as comparable i. ANG Industries Ltd ii. Elofic Industries Ltd iii. Wabco-1VS (India) Ltd 5. Without prejudice to the above, and in law and on facts and circumstances of the case, the Ld. TPO/ DRP erred in not giving adjustment on account of high depreciation to the total cost in the case of the appellant. 6. Without prejudice to the above, and in law and on facts and circumstances of the case, Ld. TPO/ DRP erred in not considering Cash profits for the purpose of Transactional Net Margin Method in order to provide for excessive depreciation in the case Appellant vis-a - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vel 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, subsequently TPO rectified the adjustment under section 154 of the Income-tax Act, 1961 (for short the Act ) vide order dated 18.03.2014 at Rs. 2,21,29,016. 6. Assessee carried the matter before the ld. DRP by raising objections who has granted partial relief to the taxpayer by treating claim received, jobwork charges and sundry balances written off as operating but ratified the remaining findings returned by the TPO. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 8. Undisputedly, the TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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. However, it is the case of the taxpayer that Safe Harbour Rules are not in case of the taxpayer qua AY 2010-11 and it is required to be treated as operating while computing the operating margins of the taxpayer as well as comparable companies and relied upon the decision rendered by Hon ble Delhi High Court in Cash Edge India Pvt. Ltd. vs. ITO ITA 279/2016 order dated 04.05.2016 available at page 258 to 261 of the Paper book and Pr. CIT-2 vs. M/s. Fiserv India Pvt. Ltd. ITA 17/2016 order dated 06.01.2016 available at page 262 to 267 of the Paper book. 15. Hon ble Delhi High Court in case cited as Cash Edge India Pvt. Ltd. (supra) decided the identical issue qua AY 2010-11 in favour of the assessee by returning following findings :- 7. As far as the question, i.e., foreign exchange fluctuation element is concerned, the records clearly reveal that the Safe Harbour Rules came into force later wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect 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 Ltd., Elofic Industries Ltd and Wabco- JVS (India) Ltd. and Brakes India on two grounds : (i) that these companies as comparables do not qualify the export turnover filter of equal to 10% of the sales; (ii) that these companies are having diversified operations and serving different market area as comparable. 22. Undisputedly, during the year under assessment, the taxpayer s export sales is merely 0.17%. It is also not in dispute that the taxpayer in its TP analysis applied export sales not more than 10% as one of the filters so as to eliminate the company working in different geographical market and relied upon Rule 10B(ii)(d) of the Income-tax Rules, 1962 (for short the Rules ) which are extracted as under for ready perusal :- (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: (d) conditions prevailing in the markets in which the respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of comparability, factors like location of parties, available of raw material, demand supply and acquisition are also necessary to be considered. Operative part of the order is extracted as under :- 16. .. The importance of the similar circumstances cannot be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions can be judged by the quality, grade and quantity of the material. In addition, the factors like the location of the parties, availability of raw material; demand and supply equation also play pivotal role in finding out as to whether the two are really comparable or not. 26. Identical issue has been decided by the coordinate Bench of the Tribunal in case of ACIT vs. Rhoida Chemicals India P. Ltd. (supra) and on the basis of export filter, comparable was ordered to be excluded by returning following findings :- 13. . Insofar as the rejection of other filtration criteria adopted by the assessee with regard to the companies having export sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts which are comparable to the taxpayer. We would examine their comparability as under. ANG INDUSTRIES LTD. (ANG) 30. The taxpayer brought on record the diversified operation of ANG as per information available on website and in the annual reports; that ANG is a diversified engineering and manufacturing company with interest in heavy steel fabrication, tractors and trailers, tipper body building, specialized containers and automotive components for heavy commercial vehicles; that ANG is having various divisions viz. HCV Division, Trailer and Body Building, Heavy Steel Fabrication and Agricultural Component. Furthermore, as per annual report, ANG is serving the key infrastructure sectors of power, construction and surface transport roadways railways. 31. Diversified operation and diversified market of ANG makes it incomparable with the taxpayer which is undisputedly producing two products, namely, Exhaust System and Braking System. 32. Coordinate Bench of the Tribunal in case cited as M/s. Carlyle India Advisors Ltd. vs. DCIT ITA No. 7367/Mum/2012 order dated 07.02.2014 excluded the company as comparable on the ground that the same is engaged in diversified activities and segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ped, validated and production ready. This product contributes to clean working environment for long life of pneumatic systems on vehicle. (d) Improved and redesigned D2 governor valve with patented sealing solution developed and validated for US market. (e) Design activity kicked off on fourteen valve devices for North American OEMs as part of market expansion strategy. These devices deliver best in class performance, capable of operating in higher temperature and corrosive environment. (f) New Life Compressor II generation (NLC II) which was under promotion phase last year is now developed and undergoing customer validation. This is a unique patented solution for improved performance at reduced cost to the customer compared to the previous generation NLC I. (g) New initiative for engineering excellence based on Model Based Engineering (MBE) launched. Mathematical models for flow simulation of valves and compressor performance simulation developed and validated, which is expected to significantly reduce design lead time for new products. (h) Indigenous environmentally friendly technology developed for achieving corrosion resistance of products (480 hours of neutral salt spray) to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, high depreciation was charged in the initial year of operation and quantum of depreciation get reduced gradually. So, the taxpayer in its TP study provided for adjustment in its own margin by adjusting the depreciation expenses to make the ratio of depreciation to sales in the case of taxpayer equivalent to that of average depreciation to sales in case of comparable companies. 38. It is contended by ld. AR for the taxpayer that in taxpayer s own case for AY 2009-10 in ITA No. 1120/Del/2014, the Tribunal recognised the difference in the capacity in which the taxpayer is operating and the capacity in which comparable companies are operating granted the taxpayer s claim for capacity utilization. 39. However, TPO rejected the contention raised by the taxpayer without providing any reasons and considered the operating margins earned by the taxpayer as margins earned from international transactions. Ld. DRP also rejected the claim of the taxpayer on the ground that the depreciation to the total cost ratio depends on the asset size vis- -vis other expenses and as such, a reasonable accurate and reliable adjustment cannot be made. 40. The taxpayer relied upon the decision rendered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92C of the Act for computing the ALP under TNMM and the mandate for determining the ALP under TNMM as given as per Rule 10B(1) of the Act and further contended that the cash profit cannot be used in place of net operating profit for the purpose of TNMM in order to provide for excessive depreciation in the case of the taxpayer vis- -vis comparable companies. 45. Coordinate Bench of the Tribunal in ACIT vs. Gates India (P) Ltd. (supra) held that, Only in the specific and exceptional circumstances where the assessee has demonstrated that either in the case of the assessee or in the case of comparable companies there exists an exceptional circumstances under which the depreciation provided by the assessee is either excessive in comparison to the com parables or depreciation provided by the comparable companies is exceptionally very low. The cash profit can be considered under TNMM . 46. Coordinate Bench of the Tribunal in Schefenacker Motherson Ltd. (supra) while deciding the identical issue also held as under :- 19. In the present appeal, ALP of transactions carried was to be determined by comparing net profit of the taxpayer (tested party) with mean net profit of comparables. Only r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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