SHACHIHATA (I) PVT LTD,THIRUVALLUR vs. DRP-2, , BENGALURU

आदेश / O R D E R PER MANJUNATHA.G, AM: This appeal filed by the assessee is directed against final assessment

order passed by the AO u/s.143(3) r.w.s.92CA & 144C(1) of the Income

Tax Act, 1961, (in short “the Act"), dated 29.10.2018, in pursuant to

directions of the Dispute Resolution Panel-2, Bangalore, u/s.144C(5) of the

Act, dated 20.09.2018, and pertains to assessment year 2014-15.

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Pvt. Ltd., is engaged in manufacture and distribution of permanent

markers, white board markers, painting markers, stamp pads, stationery

products for office including pens, glue, etc., stationery items for students

including pencil, colour pencil, crayons, pastels, modelling clay, eraser,

scales, geometry box, glue etc. During the financial year relevant to AY

2014-15, the assessee has entered into various international transactions

with its Associated Enterprises (in short “AEs"), including purchase of raw

materials, royalty payment, and re-payment of loan, etc. The assessee has

adopted Cost Plus Method (in short “CPM") as most appropriate method for

purchase of raw materials, finished goods and packing materials and also

for sale of finished goods, but for transactions like loan re-payment, interest

on ECB loan, etc., the assessee has adopted Comparable Uncontrolled Price

(in short “CUP") as most appropriate method. The case was selected for

scrutiny and during the course of assessment proceedings, a reference was

made to the Transfer Pricing Officer (in short “TPO") for determining Arm’s

Length Price (in short “ALP") of international transaction of the assessee

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with its AE. During the course of TP proceedings, the TPO called upon the

assessee to file necessary details to justify CPM & CUP methods adopted

for various international transactions. Since, the assessee could not

provide relevant details, the TPO has rejected CUP & CPM, and has adopted

TNMM Transactional Net Margin Method (in short “TNMM") as most

appropriate method. In support of TNMM, the assessee has submitted list

of two comparables with average margin of 3.76% against its own margin

of (-) 3.76%. The TPO has rejected comparables selected by the assessee

and has conducted fresh TP study and selected six comparables with an

average margin of 4.30%. The assessee has objected for certain

comparables on the ground of upper turnover filter and argued that

companies having more than 10 times or above 200 Crores, turnover

should be excluded. The TPO after considering relevant submissions of the

assessee, has excluded two comparables and retained four comparables

with average margin of 0.99%. The TPO had also worked out margin of the

assessee at 3.76% and then compared with margin of comparables and

made TP adjustment of Rs.84,86,054/- at entity level. Thereafter, the AO

passed draft assessment order u/s.143(3) r.w.s.144C(1) of the Act, on

26.12.2017 and made additions towards international transactions as

suggested by the TPO.

the assessee has challenged TP adjustment carried out by the TPO and also

computation of operating margin by including ‘legal & professional charges’.

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The assessee seeking exclusion of M/s.GM Pens International Pvt. Ltd.,

having turnover of Rs.390 Crs., and M/s.Linc Pen & Plastics Ltd., having

turnover of Rs.316 Crs. The assessee had also challenged computation of

operating margin at (-)3.76% by including ‘legal & professional charges’ on

the ground that ‘legal & professional charges’ incurred by the assessee is

one-time expenditure to settle certain disputes between assessee and the

third party, and same cannot be considered as operating in nature. The

DRP after considering relevant submissions of the assessee and also by

following the decision of the Hon’ble Bombay High Court in the case of

Pentair Water India Pvt. Ltd. v. CIT reported in 381 ITR 216, excluded

M/s.GM Pens International Pvt. Ltd., and M/s.Linc Pen & Plastics Ltd., from

the final list of comparables. However, rejected arguments of the assessee

for making adjustment towards international transaction alone as against

entity level carried out by the TPO. The DRP had also rejected arguments

of the assessee in so far as computation of operating margin by excluding

‘legal & professional charges’ on the ground that ‘legal & professional

charges’ incurred by the assessee is ongoing dispute and it does not appear

as if litigation going to end and likely to go to higher forum, and hence,

opined that such litigation expenditure may have been incurred by

comparables also and accordingly, rejected arguments of the assessee for

excluding ‘legal & professional charges’ for computation of operating

margin. In pursuant to the DRP directions, the AO has passed final

assessment order u/s.143(3) r.w.s.144C(1) of the Act, on 29.10.2018 and

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determined total income of the assessee at Rs.38,35,370/- by making

additions towards international transaction at Rs.38,35,369/-. Aggrieved

by the final assessment order, the assessee is in appeal before us.

of the assessee’s appeal is computation of operating profit margin by

including ‘legal & professional charges’. The Ld.Counsel for the assessee

submits that the assessee has incurred certain ‘legal & professional

charges’ in connection with Suit filed by the third party against the company

and said legal expenditure is one time, and thus, same needs to be treated

as non-operating in nature for the purpose of computation of operating

margin.

5.1 The Ld.DR present for the Revenue supporting the order of the DRP

submits that if you go through the nature of expenditure incurred by the

assessee, it is in the nature of operating expenses incurred by any

corporate house in day to day operations of their business. Further, the

assessee has failed to make out a case that such litigation expenses may

have not been faced by comparables, and thus, in absence of any specific

evidences, the TPO & the DRP has rightly computed operating margin of

the assessee by including ‘legal & professional charges’, and thus, their

findings should be upheld.

5.2 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. The assessee has

filed details of ‘legal & professional charges’ which includes fees paid for

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filing Suits, advise on corporate matters, advise on filing Suits and

appearance before various authorities. From the details filed by the

assessee, it appears that expenditure incurred under the head ‘legal &

professional charges’ is routine in nature and further operating expenses

like any other assessee / entity incurs in their day to day operations.

Further, the DRP recorded categorical findings that the cases on which ‘legal

& professional charges’ spent by the assessee is continuing one and every

year the assessee has incurred such expenses. We further noted that such

litigation may have been faced by comparable companies also and some

legal expenses are part and parcel of running a business. Therefore, we

are of the considered view that there is no merit in the arguments of the

Ld.Counsel for the assessee for exclusion of ‘legal & professional charges’

on the ground that such expenditure is one time, which is non-operating in

nature. The DRP after considering relevant submissions has rightly rejected

the arguments of the assessee and upheld computation of operating margin

by the TPO, and thus, we reject the arguments of the assessee and upheld

the operating margin computed by the TPO.

Nos.3-4 of the assessee’s appeal is exclusion of M/s.Writefine Products Pvt.

Ltd., on turnover filter. The Ld.Counsel for the assessee submits that

although, the DRP has excluded high turnover companies from the list of

comparables, but failed to exclude M/s.Writefine Products Pvt. Ltd., even

though, turnover of above company is more than 10 times of turnover of

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the assessee company. He further submits that it is a well settled principle

of law, turnover is a criteria for exclusion of any comparables and this

position is settled by the decision of various Courts and Tribunals, including

the Hon’ble Bombay High Court in the case of Pentair Water India Pvt. Ltd.

(supra). A similar view has been taken by the ITAT Bangalore Benches in

the case of Mformalation Software Technologies (I) (P.) Ltd. v. ITO reported

in [2020] 182 ITD 78 (Bangalore-Trib.). Therefore, he submits that a

direction may be given to exclude M/s.Writefine Products Pvt. Ltd., from

the list of final comparables.

6.1 The Ld.DR present for Revenue, on the other hand, supporting the

order of the DRP submits that the assessee seeking an exclusion of at least

two comparables on turnover filter from the list of final comparables. The

DRP has excluded two comparables which are having turnover above 200

Crores. Therefore, there is no merit in the arguments of the assessee for

exclusion of M/s.Writefine Products Pvt. Ltd., from the list of final

comparables.

6.2 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. ‘Turnover’ in a

manufacturing sector, is a criteria for deciding whether it can be a

comparable or not. Because, in manufacturing sector, due to high fixed

cost, the turnover is an important factor as it may have an impact on

economic cost of production. It is also an admitted fact that high turnover

companies cannot be compared with tiny companies having less turnover

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and this position has been upheld by the Hon’ble Bomaby High Court in the

case of Pentair Water India Pvt. Ltd. (supra). The DRP on the basis of

submissions of the assessee for exclusion of at least two comparables on

the ground of turnover filters excluded M/s.GM Pens International Pvt. Ltd.

& M/s.Linc Pen & Plastics Ltd., both are having above Rs.200 Crores

turnover from the list of comparables. Now, the assessee seeks to exclude

M/s.Writefine Products Pvt. Ltd., on the ground of turnover of said

company, is more than 10 times of turnover of the assessee company. We

find that the turnover of the assessee company is 16.21 Crs. whereas the

turnover of M/s.Writefine Products Pvt. Ltd., is Rs.190 Crs. The assessee

seeks to exclude M/s.Writefine Products Pvt. Ltd., on account of high

turnover. We find that turnover filter is an important indicator to select

any comparables. However, how to adopt turnover filter is depending upon

facts of each case. There are two ways in applying turnover filters. One is

on the basis of number of times of turnover, and the other one is on the

basis of size of turnover. The various Tribunals have held that companies

having turnover more than 10 times of the assessee company or turnover

from 0-200 Crs. should be factor for comparing any company. In the

present case, the assessee seeks to exclude at least two comparables on

the ground of turnover filter and such filter has been adopted by the DRP

by considering 0-200 Crs. turnover as the basis for exclusion for

comparables and also excluded two comparables from the list of final

comparables. The third comparable which the assessee seeks to exclude

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from the list is M/s.Writefine Products Pvt. Ltd., which is having turnover of

Rs.190 Crs. is comes within 0-200 Crs. turnover filter adopted by the DRP.

Since 0-200 Crs. turnover basis is one of the basis for adopting turnover

filter, in our considered view, there is no error in the turnover filter adopted

by the DRP, to exclude comparables from the list of final comparables.

Further, the assessee had also seeking exclusion of at least two

comparables from the list of final comparables. Therefore, we are of the

considered view that the assessee cannot come and seek exclusion of the

third comparable, even though, the turnover of such comparable is fitting

within the range of turnover filter adopted by the DRP. Therefore, we are

of the considered view that there is no merit in the arguments of the

Ld.Counsel for the assessee for exclusion of M/s.Writefine Products Pvt.

Ltd., from the list of comparables, and thus, we reject the ground taken by

the assessee.

6.3 In so far as case law relied upon by the assessee, we find that

although, the Tribunal has accepted turnover filter on the basis of number

of times of turnover, but we find that the turnover filter adopted by the DRP

by considering 0-200 Crs. as a basis is one of the accepted methods of

applying turnover filter, and thus, we are of the considered view that the

case law relied upon by the assessee are not applicable to the facts of the

present case, and thus, rejected.

assessee’s appeal is entity level adjustment carried out by the TPO. The

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TPO has carried out adjustment towards total turnover of the assessee,

including the domestic turnover. It is a well settled principle of law by the

decision of various courts and Tribunals that entity level adjustment cannot

be made. Therefore, we are of the considered view that the TPO & the DRP

erred in making adjustment at entity level, and thus, we direct the TPO to

make adjustment to international transactions of the assessee alone.

Order pronounced on the 12th day of July, 2023, in Chennai. Sd/- Sd/- (वी. दुगा� राव) (मंजूनाथा.जी) (MANJUNATHA.G) (V. DURGA RAO) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 12th July, 2023. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�/CIT 5. गाड� फाईल/GF 2. ��यथ�/Respondent 4. िवभागीय �ितिनिध/DR