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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 ..... f comparable 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). Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port 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 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argin 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, 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies. 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. 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k. 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) 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aded 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 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia 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) method for providing depreciation in its books of account and for this reason, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 487,355,759 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 coordinate Bench of the Tribunal in cases of ACIT vs. Gates India (P) Ltd. - ITA No. 75/Del/2011 order dated 31.07.2017 and Schefenacker Motherson Ltd. vs. ITO - 123 TTJ 509 (Delhi). 44. The ld. DR for the Revenue supporting the order passed by the TPO/DRP contended that the taxpayer is required to choose one of the method provided u/s 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-à-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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