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TMI Blog2025 (4) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ] ii. Initiation of penalty under section 271(1)(c) of the Act [Last ground] Revenue's appeals (ITA No.3537 & 3538/Del/20 18): i. Exclusion of preoperative and or non-recurring expenses; such as custom duty from operating margin (Ground No.1 of both years). ii. To treat foreign exchange gain/loss as operating profit/loss (Ground No.2 of both years) iii. Allowance of working capital adjustment (Ground No.3 of ITA No. 3538) 4. The brief facts giving rise to these appeals are that the assessee is the group company of Honda Trading Corporation, Japan, who is engaged in the business of manufacturing and distribution of automobile, Motor Cycle etc. The assessee, engaged in the business of manufacturing of auto parts and trading of steel coils & sheets, dies, auto components & equipment, auxiliary services, etc., filed its Income Tax Return (hereinafter, the 'ITR') declaring losses of (-) Rs. 24,55,827/- and (-) Rs. 5,00,77,416/- for AYs 2009-10 and 2010-11 respectively. These cases were picked up for scrutiny. Keeping in view the quantum of international transactions; the AO referred the matter of these years to the Transfer Pricing Officer (hereinafter, the 'TPO') for determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es perform simpler functions and thus, require least adjustments with foreign comparables, ii. The comparables picked up by the AO are not appropriate, iii. Adjustment of underutilization of capacity, iv. Adjustments cannot be more than the margin retained by its supplier AE and v. Adjustment has to be restricted to the value of international transactions. 4.4 Following objections to the proposed show-cause notice for adjustment were raised in AY 2020-11: i. Application of Cost-Plus Method in Manufacturing segment, ii. Application of RPM in Trading segment, iii. Incorrect calculation of profit margin and iv. Adjustment has to be restricted to the value of international transactions. 4.5 In AY 2009-10, the TPO, placing emphasis on the OECD guidelines, has held that least complex entity that offers higher degree of comparability with uncontrolled companies should be selected as the tested party. The assessee is not carrying any R & D risk. It does not own any intangible property and unique asset. In simpler words, the assessee has mainly acted as a distributor with major revenue (more than 50%) from trading. The purchases and sales are mainly from/to AEs. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decisions of the Hon'ble Delhi High Court in the case of Li and Fung India Pvt. Ltd. in ITA No. 306 of 2012 (date of order 16.12.2013) and Coim India Pvt. Ltd. ITA No. 269/2019 and 429/2022 (date of order 19.02.2024). 6. On the other hand, the Ld. CIT(DR) placing reliance on the TPO's orders, argued that the said adjustments were justified. He argued vehemently and defended the TPO orders. Further, he requested that the Ld. CIT(A) has erred in giving relief to the assessee by directing the TPO to exclude the custom duty from operating margin and to include foreign exchange gain/loss for determining the operating profit/loss in both years. Further, the Ld. CIT(A) has also erred in allowing working capital adjustment in the AY 2009-10. He further contended that the decision of the Hon'ble Delhi High Court in the case Coim India (supra) was distinguishable on factual matrix because in the present cases, the TPO had identified distortions in the TP study reports, inappropriate comparables and pointed out shortcomings therein entailing rejection of assessee's TP study whereas it was no so in the case of Coim India. 7. We have heard both parties at length and have perused the materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s; Manufacturing and Trading, separately. We are restoring this limited issue to the TPO for working of quantum of adjustments to be made in view of the above. Broad principles accepted by the TPO in AYs 2012-13, 2013-14 and 2014-15 have to be taken for the cases in hand; AY 2009-10 and 2010-11. Ordered accordingly. 10. Further, we find merit in the arguments of Ld. Counsel that the assessee deserves consequential relief on the score of capacity utilization in AY 2009-10. In principle, the TPO has also agreed to the same. But he has not allowed the same on the reasoning that the assessee has failed to provide requisite data. The AO is directed to allow the consequential relief on this score (capacity utilization) after proper verification. For this purpose, this matter of AY 2009-10 is restored back to the TPO. Needless to say that the assessee should cooperate and make available all details required by the TPO. Ordered accordingly. 11. In view of the above, all grounds relating to the transfer pricing issue of both years stand disposed of accordingly. The issue of initiation of penalty under the Act, being premature, stands dismissed. 12. The assessee's appeals of both years th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect. In case the import is part of the business model, then the higher import duty is considered to be passed on to the customers or it must be adjusted for in negotiating the purchasing price. The adjustments then are required to be made for functionally differences. 15. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the taxpayer qua AYs 2009-10 and 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. (ITA 279/2016 order dated 04.05.2016) and Fiserv India Pvt. Ltd. (ITA 17/2016 order dated 06.01.2016). The 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 as under: - "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 whereas the facts of this case pertain to the assessment year 2010-11 (Financial year 2009-10). As a consequence, the impugned order cannot be interfered with. No question of law thus arises. The appeal is consequently dismissed." 18. Similarly, the Hon'ble Delhi High Court in case cited as Fiserv India Pvt. Ltd. (supra) also decided the identical issue pertaining to AY 2009-10 in favour of the assessee as under: - "10. As regards question (ii) it is pointed out by learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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