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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
Before: Ms. Suchitra KambleDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 31.03.2021 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
Following grounds have been raised by the assessee:
“4. That, the Hon’ble DRP and Learned TPO have failed to appreciate that the Appellant conducts its business activities under one consolidated business segment viz. value-added trading of steel coils. Hence, they have incorrectly erred in bifurcating the operations of the Appellant into “manufacturing” and “trading” segments.
2 Rajasthan Prime Steel Processing Center Pvt. Ltd.
5. Without prejudice, the Hon’ble DRP and the Learned TPO have erred in passing the impugned order ignoring the basic tenets of principle of consistency and disregarding that the Learned TPO in earlier years has himself accepted that the Appellant conducts its business activities under one consolidated business segment i.e. value-added trading of coils and the economic analysis undertaken by the Appellant to benchmark the impugned international transactions was accepted without any modification.
That on the facts of the case, The Hon’ble DRP andLearned TPO have erred in re-characterizing the business of the Appellant under the “processing segment” as full-fledged manufacturing operations/ high value adding activities, despite the fact that the processing activities are limited to cutting, slitting and blanking only.
7. Without prejudice, the Learned TPO have erred in arbitrarily drawing the “manufacturing” and “trading” segments by bifurcating all the income and expenses in sales ratio, without taking cognizance of the details of segmental margins submitted by the Appellant during the assessment proceedings.
7.1. Without prejudice, the Hon’ble DRP have erred in law by not adjudicating the on the Appellant’s ground pertaining to the correct calculation of segmental margin for The trading and processing operations of the Appellant as furnished during the assessment proceedings and others.”
The assessee company Rajasthan Prime Steel Processing Center Private Limited (RPSC) was incorporated on 05 October 2007 as a subsidiary of Honda Trading Corporation, Japan ("HTC") which, in turn, is a subsidiary company of Honda Motor Co. Ltd., Japan, ("HONDA"). As on 31st March 2016, Honda Trading Corporation, Japan holds 49% of the equity share capital, while 30% is held by Steel Centre Co. Ltd., 13.53% is held by Honda Cars India Limited and 6.04% is held by Honda Trading Asia Co. Ltd. (Thailand) and 1.42% is held by Honda Trading Corporation India Private Limited.
3 Rajasthan Prime Steel Processing Center Pvt. Ltd. The assessee has its headquarters and processing facilities in Rajasthan. It is wholly and solely engaged in the business of trading/processing of steel coils a supports Honda Group companies in the field of motorcycles, automobiles and power equipment.
It was held by the TPO that the company is undertaking both the trading and manufacturing activities. TPO had asked the assessee to furnish the segmental data of these two segments. Failing to submit the relevant segmental data, the TPO rejected the entity vide margin of the assessee and bifurcated the margin into Manufacturing segment and Trading segment. Adopting TNMM as MAM and OP/OR as PLI, TPO, after making a fresh search applying appropriate filters, selected certain companies as comparables to determine the arm's length price of the international transaction in manufacturing segment and trading segment.
The assessee in its TP study report has primarily considered that the assessee is a company engaged only in distribution activity. The TPO, on the other hand, concluded that the assessee is engaged in the manufacturing and trading segment both. It was observed by the TPO that since the functional profile of the companies engaged in manufacturing of auto ancillaries/equipments is different from that of companies engaged in trading of auto ancillaries /equipments, the two segments are required to be benchmarked separately.
6. It was submitted by the assessee that it conducts its business under two operations i.e. trading operations and processing operations. As per the assessee it is merely procuring the steel coils and supplying it further to its customer in India or its AE is outside India, without any value addition. It is further submitted that the company operates as a pure distributor of the steel coils, exclusively sourced from the overseas AEs suppliers. Under the processing operations, it was submitted that the assessee procures coils from 4 Rajasthan Prime Steel Processing Center Pvt. Ltd. its AEs and after performing limited operations specific to slitting, blanking and welding process, resells the same to its customers. The main contention of the assessee is that there is no substantial value addition is made under these operations. The operations are limited to processing activities and not full-fledged manufacturing activities, which is a high value adding activity. The assessee therefore emphasizes that it performs distribution activities and can be characterized as a distributor of steel products that performs minimum value added functions mainly and is not a manufacturer.
Slitting is a metal manufacturing process wherein a coil of material, such as aluminum or steel, is slit into the lengths and widths specified by the end application. As the material runs through the machine, the steel rolls are moved through extremely sharp circular blades, making the cuts. In order to make the slice, substantial compressive forces must be applied and when the forces exceed the tensile strength of the material, it slices. The end product is long strips of material cut to the buyer's specifications. Slitting steel is, essentially, a manufacturing process in which coils of steel are cut lengthwise to create strips of metal that are narrower than the original in width. This is an automated process where the master coil is run through a machine that has very sharp rotary blades, one upper and one lower, often called "knives." All such activities need lot of mechanization and involve automated machines which is akin to manufacturing activities. Plant and machinery and other infrastructure required in steel manufacturing will not be required in the processing of steel coils into sheets but the overall installation of large automated machines and other related Technological requirements to cut and slit the large coils into sheets of required sizes make the whole process a manufacturing activity. Hence, the ld. DRP held that the assessee is engaged in the manufacturing activity of processing steel coils into sheets. The ld.DRP found that the assessee was engaged in the manufacturing of steel. On perusal
5 Rajasthan Prime Steel Processing Center Pvt. Ltd. of all the details submitted during the proceedings, the ld. DRP was of the view that the assessee is not merely a distribution company but engaged in the processing of imported steel coils into steel sheets of different sizes/quality by the process of cutting and slitting which is nothing but a manufacturing activity with deployment of plant and machinery, technology and automation require in manufacturing activity
Heard the arguments of both the parties and perused the material available on record.
We have examined the page nos. 12 & 13 of the paper book which reflects the details of the revenue from operations and details of cost of material consumed. We find that the sale consists of finished goods and traded goods. The traded goods are named as steel coils. In addition, the assessee had revenue of Rs.23.51 crores from sale of scrap and very minimal revenue out of the job work. Further, the assessee had work-in-progress of the goods in manufacturing and inventories of the finished goods at beginning and closing of the year. The assessee has paid Excise Duty of Rs.69.94 crores and the consumption fuel & power to tune of Rs.1.60 crores. The plant & machinery consists of plant equipment on which depreciation has been duly claimed under the block of assets. The sale of finished goods was Rs.548 crores against the receipts of trading goods of Rs.117 crores. These financials clearly prove that the assessee has well divisible manufacturing as well as trading segment.
Hence, we have no hesitation to affirm the action of the TPO who has conducted economic analysis on manufacturing and trading segment separately.
Having determined that the assessee has got two segments, the main grievance of the assessee with regard to inclusion of one
6 Rajasthan Prime Steel Processing Center Pvt. Ltd. comparable namely, SK Pipe Fitting Pvt. Ltd. in case of trading segment and according capital adjustment on the economic analysis are being examined.
SK Pipe Fittings Pvt. Ltd:
Before the ld. DRP, the assessee contended that the annual report pertaining to this comparable is not available and it was also not appearing in the search conducted for the TP study. It was contended that the company is engaged in manufacture of rubber products, rubber plate sheets, strips and rubber tubes whereas the assessee is in the business of steel products. Hence, the ld. AR contended that steel cannot be compared with rubber. The ld. DRP held that the FAR is broadly same and hence directed retention of this comparable. Since, the product range is different, we hold that two different industrial output cannot be treated as crossing the barrier of FAR. Hence, we direct to exclude this comparable.
Capital Adjustment:
With regard to the working capital adjustment, the key areas considered by the ld. DRP are inventory, account receivable and account payable. As working capital requirements affect, the margins or prices, costs or profits because this is an implicit cost which is recovered/recoverable from the customers. Therefore, the ld. DRP was of the opinion that in view of the Rule 10B(3) and to improve the comparability in the facts of the present case, while comparing the margins of tested party with that of the comparables, adjustment be made for working capital for which the reliable data is to be provided by the taxpayer. The TPO has stated that the taxpayer has not demonstrated that there is a difference in the levels of working capital employed by it vis-a-vis the comparables, the nature of assets employed and the difference in asset intensity, which affect prices and consequently profits. With regard to this objection, as 7 Rajasthan Prime Steel Processing Center Pvt. Ltd. discussed above, the holding of inventories, trade debtor/ creditors, trade receivable/payable has always an interest cost. Therefore there is definitely a connection in the level of working capital and the price at which one is willing to offer its services/goods.
Taking from the OECD Guidelines, the ld. DRP directed the TPO and the taxpayer to take following into consideration while working out the working capital adjustment: a) Compute the average of opening and closing balances of inventories, trade debtors/receivables, trade creditors/payables of both the tested party and the comparables, on revenue account only. b) Work out the net working capital ratio (in percentage) after dividing the net working capital by operating cost/sales or such denominator (as Is used in the PLI) both for the tested party and the comparables. c) Determine the difference between the tested party's ratio with that of each comparables. d) Thereafter multiply the above difference by interest rate i.e. SBI Prime Lending Rate (PLR) as on 30th June of the relevant financial year. e) Besides, credits received from various group concerns or loans etc should not be taken into account. f) Lastly, these adjustments are to be added to the profit margin of comparable companies as finally determined in accordance with the directions of this Panel.
The Revenue relied on the judicial decisions in Mentor Graphics (109 ITD 101), Sony India (288 ITR 52 (Delhi- IT AT), Philips Software (26 SOT 226) (Bangalore- ITAT), Mercer
8 Rajasthan Prime Steel Processing Center Pvt. Ltd. Consulting (India) Pvt. Ltd (Delhi ITAT), Sunlife India Service Centre Pvt. Ltd. Vs DCIT (2015-TII-420-ITAT-DEL-TP).
In a word, the TPO is directed to give working capital adjustment by applying SBI PLR (as on 30th June of the relevant financial year) as the interest rate.
The issue before us is whether PLR is to be applied or base rate is to be applied for capital adjustment. PLR is the benchmark rate used for setting up the interest rate on floating rate loans. Base rate is referred to the minimum interest rate that financial institutions could offer and lending below the base rate was not permitted unless the RBI made exceptions in certain cases. The average cost of fund plays an instrumental role in determining the base rate. PLR is generally used for floating rate loans. We have gone through the CircularofRBI/DBR/2015-6/20DirectionDBR.Dir.No.85/13.03.00/2015- 16. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy. Accordingly, guidelines were issued for implementation by banks replacing the BPLR system with Base Rate system effect from July 1, 2010. As per the circular Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. Hence, we direct that Base Rate be applied for according economic adjustment.
In the result, the appeal of the assessee is partly allowed.
Order Pronounced in the Open Court on 11 /11/2021.