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TMI Blog2024 (10) TMI 1147X X X X Extracts X X X X X X X X Extracts X X X X ..... g a meager export sale of 0.17% and since the comparable companies are operating in entirely different geographical market, the same cannot be a valid comparable vis- -vis the taxpayer. Faiveley Transport Rail Technologies India Ltd. has revenue from comparable segment 26% and it has AMP expense ratio of 4% which is higher than filter of 2% which has been considered appropriate by the CIT(A) to direct the TPO to exclude from the comparable in the absence of any contrary materials on record, we find no error or infirmity in the finding and the conclusion of the CIT(A). XLO India Ltd. excluded having negative net worth - As per the financials of the XLO India Ltd., it had profit of Rs. 6,150/- thousand in AY 2010-11 and it had negative net worth in the same year. The net worth of the said company has been improved from previous three years and it is not the case of diminishing returns, to substantiate the above claim, the Assessee produced the working at Annexure A-1 to the submission filed on 13/06/2024 - thus as relying on the ratio laid down in the case of Gillette Diversified and Operation Pvt. Ltd.[ 2017 (5) TMI 1828 - DELHI HIGH COURT] and Welspun Zucchi Textiles Ltd. [ 2014 (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for assessment years 2011-12 And 2012-13 aggrieved by the final assessment order passed u/s 143(3)/144C of the Income Tax Act, 1961, ( Act for short) dated 26/09/2016 and 26/12/2017 passed by the Commissioner of Income Tax Appeals- 44, New Delhi ( Ld. CIT(A) for short). 2. The Grounds of Appeal by the Assessee/Revenue are as under:- ITA No.1607/Del/2017 (A.Y 2011-12) (Assessee) 1. Ld. Commissioner of Income Tax (A) (Ld CIT (A) ) has even making an addition offs 1,56,03,544/- to the total income of the appellant on account of adjustment in the As Length Price (ALP) of the international transactions. 2. In law and on facts and circumstances of the case, the L. CIT (A) has erred in considering certain companies as companies comparable to the Appellant on following grounds. 2a. Comparables have export turnover more than 10% of sales thus geographically different from Appellant. 2b. Comparables are functionally dissimilar to Appellant 3. In law and on facts and circumstances of the case, the Ld. CIT (A) has erred in not considering KLO India Ltd. as comparable to the Appellant despite the fact that net worth of XLO India Ltd has improved during the year 2010-11 4. In law and on facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Brakes India Pvt Ltd and Clutch Auto Ltd as comparable to the Appellant on account of following reasons: 3A. Both the Companies are operating substantially in different geography as compared to the Appellant which is primarily serving the domestic market, thus as per Rule 10B(2)(d), they should not be considered as comparable. 3B. Brakes India Ltd is having turnover around 39 times of the turnover of the Appellant, thus, should not be considered as comparable on account of huge size of operations as compared to Appellant 3C. Ld. CIT (A) after itself accepting the contention of the Assessee of rejecting companies having Advertisement marketing and promotion expenses (AMP) to sales ratio greater than 2% erred in considering Clutch Auto Ltd having AMP to sales ratio of 2.16% as comparable to the Appellant. 3D. Brakes India Ltd is dealing in different products than that of the Appellant. 4. Without prejudice to the above, and in law and on facts and circumstances of the case, the Ld. CIT (A) erred in not giving adjustment on account of high depreciation to the total cost in the case of the appellant. 5. Without prejudice to the above, and in law and on facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as most appropriate method. Assessee computed its PLI at 1.41% and that all comparables at 3.62%. Based on these analysis, the Assessee claimed that its international transaction are at arm's length. 4.1 The TPO during the TP proceedings after examining the TP study and considering the functional profile and FAR analysis issued show cause notice on 26/12/2014 to the Assessee. Ld. TPO accepted TNMM as the most appropriate method for bench marking the international transactions. During the TP proceeding the TPO sought updated margin of the comparables on single year data basis. Updated margin of the final set of comparables come at 3.93% of four comparables tabulated as under: - Sr. No. Company name OP/Sales(5) 1 Company Name Enkei Wheels (India Ltd.) 3.09 2 Mubea Suspension India Ltd. 0.31 3 XLO India Ltd. 2.94 4 Lumax DK Auto Industries Ltd. 9.37 5 average 3.93 4.2. Ld. TPO examined the comparables of the Assessee and found that two comparables namely XLO India Ltd. and ENKEI wheels India Ltd. are having negative net-worththerefore those comparables cannot be considered as good comparables for benchmarking. Accordingly, TPO proposed nine comparables which are upheld by the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales comparing to no export income of the assessee 2) Functionally dissimilar 1) Contention of the assessee is rejected as discussed above. 2) The company is functionally similar to the assessee, the same company was used in last year TP assessment and same was upheld by the Hon ble DRP. 4 Brakes India 1) Export sales of the company is 13.25% of total sales comparing to no export income of the assessee 2) Functionally dissimilar 1) Contention of the assessee is rejected as discussed above. ii) The appellant has also insisted for inclusion of XLO India on the ground that there is significant improvement in net worth of this company compared to last year. Ld TPO has considered this argument and was of the view that even afterthe end of the relevant financial year this comparable has negative net worth therefore, the appellant's contention was rejected. iii) The appellant has contended that some of the comparable companies are operating in much wider functionality vis-a-vis the assessee which only operates only in motor vehicle segment and such companies should not be considered as comparable. Ld TPO examined the contention of the appellant. He was of the view that all the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in considering Elofic Industries Ltd., WABCO TVS (India) Ltd. Brakes India Pvt. Ltd. and Clutch Auto Ltd. as comparable Companies. 9. The Ld. Counsel for the Assessee contended that the above Companies having export turnover of 10% and more, thus submitted the following details: Company Name Export turnover Assessment year in which ground raised Elofic Industries Ltd. 21.58% A.Y 2011-12 WABCO TVS (India) Ltd. 13.25% A.Y 2011-12 Brakes India Pvt. Ltd. 16.89% in A.Y 2011-12 19.43% in A.Y 2012-13 A.Y 2011-12 10. The Assessee's Representative argued that the export turnover filter was upheld by the Delhi Bench at 10% in Assessee s own case for Assessment Year 2010-11 and the Elofic Industries, WABCO and Bakers India were rejected on the said ground. Further submitted that Tribunal in Assessee s own case for Assessment Year 2011-12 has upheld the export filter of 10%, therefore, Clutch Auto should also be rejected as the same is having export sales of 11%. Further contended that the above Companies are functionally dissimilar which are covered in Assessee s own case. 11. Per contra, the Ld. Departmental Representative relied on the orders of the Lower Authorities and sought for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rakes India Pvt. Ltd. from the list of comparables. Accordingly, the Ground No. 2 of the Assessee is allowed. 15. In Ground No. 3 the Assessee contended that the CIT(A) has erred in not considering XLO India Ltd. as comparable to the Assessee as the net worth of XLO India has improved during the year 2010-11. XLO India Ltd. 16. The Ld. CIT(A) excluded XLO from the comparables as the same has negative net worth in following manners: - Brakes India Ltd. :- Ld. AR has argued that as per the Accounting Schedule 17, this company has three segments namely brake Division, Foundry Division, and others comprising of Engineering plastics etc. Therefore, functionally different. I have considered the arguments of Ld AR. The facts remain that all three divisions caters to auto industries and product of these three division are used in auto mobile industries. Therefore, on entity basis also this company will remain functionally similar to the appellant. (iii) Third ground of appeal is against not considering the XLO India Ltd as comparable by the TPO. Ld. AR has argued that M/s XLO India Ltd. has improved its working and net worth of XLO India Ltd. has increased net worth during the year. Ld AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction, therefore it is an operative item, therefore, the foreign exchange fluctuation should be considered as operating revenue. The Ld. CIT(A) while rejecting the said contention held as under: - Findings: I have considered findings of the Ld. TPO and the arguments of Ld. AR. Ld. TOP has not treated foreign exchange income as non-operating income while computing the PLI of the appellant. There are divergent views of Hon'ble tribunal in earning foreign exchange as operating or non operating items I have considered all the Judicial pronouncements relied by the Ld AR foreign exchange fluctuation operating and non operating items has not been defined in the TP provisions however in safe Harbour Rules operating and non operating items is not in Rule 10TA it is reproduced as under:- Rule 10TA (i) operating expense means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortization expenses relating to the assets used by the assessee, but not including the following, namely including expenses (ii) Provision for unascertained liabilities (iii) Pre-operating expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. DR relied on the orders of the Lower Authorities and sought for dismissal of the Ground No.4. 24. Heard the parties perused the material. The similar question came for consideration in Assessee s own case for AY 2010-11 in ITA No. 1807/Del/2015. The Co-ordinate Bench of the Tribunal decided the above issue in favour of the Assessee in following manners: - 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered by the Coordinate Bench of the Tribunal in Assessee s own case for AY 2011-12 in ITA No. 1807/Del/2015 and decided the same in favour of the Assessee, thus, sought for allowing the Ground No. 6 of the Assessee. 29. Per contra, the Ld. DR sought for dismissal of the Ground No. 6 of the Assessee by relying on the findings of the CIT(A). 30. Heard the parties and perused the material. It is the case of the assesses that the average depreciation/sales of the Assessee is 10.57%, therefore, sought adjustment on account of depreciation. The TPO has not allowed the adjustment in PLI of the Assessee on the ground that for the tested party, no adjustment should be allowed in the net profit by relying on the order of the Tribunal in the case of Hind Composites India Pvt. Ltd. The Ld. CIT(A) dismissed the Ground of the Assessee in following manners: - I am not inclined to accept adjustment in the net profit working of the appellant. Further, depreciation in initial years is higher. However, facts remains that in earlier year, cost of repair and maintenance is less. Therefore, unless, the appellant provides the combined data for depreciation and repair maintenance of the appellant an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 receipts and expenditure, having connection with international transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions quoted above that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No. 1607/Del/2017 is partly allowed for statistical purpose. ITA No.2742/Del/2018(AY 2012-13) 35. The Ground No. 1 being general in nature requires no adjudication and the Ground No. 2 has not been pressed by the Assessee, accordingly Ground No. 1 2 of the Assessee s Appeal are dismissed. 36. In Ground No. 3 Assessee is aggrieved by the order of the CIT(A) wherein the Ld. CIT(A) has considered Bakers India Pvt. Ltd. and Clutch Auto Ltd. as comparables to the Assessee Company. Bakers India Pvt. Ltd. 37. The Bakers India Pvt. Ltd. has been considered by us in detail for A.Y 2011-12 and held that the said Brakes India Pvt. Ltd. is not proper comparable and directed to exclude from list of comparables. By following the principals of consistency we direct the TPO to exclude Bakers India Pvt. Ltd. from the list of comparables. Clutch Auto Ltd. 38. The Ld. CIT(A) while considering Clutch Auto Ltd. as comparable held that the said company passes the export filter and also marketing expenses filter, therefore, the contention of the Assessee for exclusion of the said Company from the final list of comparable has been dismissed. 39. It was the specific case of the Assessee that the Clu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion criteria adopted by the assessee with regard to the companies having export sales being less than 20% of the total sales, it is seen that assessee's exports are around 13%, therefore, the selection criteria of 20% of the export does not seems to be correct one. At the same time also, the TPO's rejection of this criteria is also not correct that it should be taken as Nil or zero percentage. Therefore, we are of the considered opinion that the second criteria for selection of comparable companies should be the companies having export sales of in and around 13% which would be quite appropriate. Thus, we direct the TPO to look for the comparable companies, which are having export turnover percentage of around 13% of the total sales and accordingly, select the comparable companies using this criterion. While doing so, the TPO will take into account the export turnover out of total sales, gross of excise duty excluding commission and other income. 27. Keeping in view the facts and circumstances of the case and by following the order passed by the coordinate Bench of the Tribunal, we are of the considered view that all the four comparable companies viz., ANG Industries Ltd., E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1,91,71,631/- for the year under consideration on account of adjustment made by the TPO u/s 92CA(3) of the Act. The Ld. CIT(A) has directed the TPO to exclude ANG Industries Ltd., Faiveley Transport Rail Technologies India Ltd., Rane Brake Lining Ltd. and Sundram Brake Linings Ltd., the Department is on Appeal against the same. ANG Industries Ltd., 50. The Ld. CIT(A) while directing the TPO to exclude the above Company from the final list of comparable held as under:- (a) The above mentioned company earns 32.80% of its sales through exports whereas the appellant is largely caters to the domestic market. As the appellant is producing for the domestic market, it would be reasonable to apply a export filter of 25% of exports to sales ratio so that the companies chosen are comparable to the appellant. As ANG Industries Ltd. does not pass this filter hence the AO/TPO is directed to exclude it from the final list of comparables. The contention of the appellant is accepted. 51. The Coordinate Bench of the Tribunal in Assessee s own case for AY 2010-11 in ITA No. 1807/Del/2015 while rejecting the ANG Industries as the same is having export sales for more than 10% held as under:- 27. Kee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s engaged in supplying of auto components to OEMs only. It has also been stated that the company is incurring 4% (appx) of its sales in selling and marketing expenses in comparison to the appellant which is incurring only 0.06%.It would be reasonable to apply a marketing expense filter of 2% in the instant case as the appellant is incurring marketing expenses of only 0.06%, (b) In view of the above I agree with the appellant that the above mentioned company should not be included in the final list of comparables. The AO/TPO is directed to exclude Rane Brake Lining Ltd from the final list of comparables. 56. Considering the fact that the CIT(A) excluded the above Company from the comparables as the same is having AMP expense ratio of 4% which is higher than filter of 2% as considered appropriate by CIT(A) and it is also supplying goods in aftermarket segment. Considering the above facts and circumstances in the absence of any contrary materials, we find no error or infirmity in directing the T.P.O/A.O. to exclude Rane Brake Lining Ltd. from the comparables. Sundram Brake Linings Ltd. 57. The Ld. CIT(A) while directing to exclude the Sundram Brake Linings Ltd. held as under: - The ab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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