KNAUF INDIA PVT LTD (EARLIER KNOW AS USG BORAL BUILDING PRODUCTS (INDIA) PVT LTD),HARYANA vs. ITO,WARD 14 (3) , NEW DELHI

The TPO rejected the above TP study with the observation that it is based on management accounts instead of audited financial statements and only two years data was taken in respect of comparable companies instead of three years data. He also observed that he proposes to adopt no margin on sales at the PLI against GP/Sales taken by the assessee in its TP study as the effect of marketing, selling and distribution functions, market and & 2061/DEL/2022 credit risk etc. does not get captured in the PLI selected by the assessee. In view of the above shortcomings, the TPO rejected the comparable companies whose data is not available in public domain and he adopted various filters and conducted fresh search using prowess data base and accordingly, he selected two comparables as under:- S.No. Company Name Weighted NPM (i) TBK Deepgiri Tile bath 0.69% Kitchen Pvt. Ltd. (ii) Solid Stone Co. Ltd. 1.88% Average 1.29% and the AO determined the ALP as under :-

Accordingly, he computed the ALP adjustment at Rs.8,19,75,929/- and TPO issued a show-cause notice in this regard. In response, assessee has submitted various objections to exclusion of comparables selected by the assessee which are reproduced below :-

After considering the submissions of the assessee, the TPO rejected the submissions of the assessee and dealt with the same as under :-

Accordingly, he sustained the ALP determined by him at Rs.8,19,75,929/-.

Aggrieved with the above order, assessee filed objections before the ld. DRP and ld. DRP, after considering the detailed submissions and findings of TPO, rejected the objections raised by the assessee. Assessee also objected before the DRP for rejection of RPM as Most Appropriate Method (MAM) adopted by the assessee and substituted the same by TNMM by the TPO. It was submitted that RPM with gross profit margin as PLI was accepted by the TPO in all preceding assessment years and the FAR of the assessee in the year under consideration is identical to the FAR of the preceding years. Assessee made detailed submissions before the ld. DRP. After considering the detailed submissions of the assessee, ld. DRP observed that assessee has filed detailed submissions before the TPO vide letter dated 25.01.2021, however there is no discussion in the TPO order as to what submissions were made by the assessee as regards the justification for RPM as the MAM or gross profit margin as PLI. The TPO was directed to consider the argument of the assessee in support of RPM as MAM and RPM as PLI and directed the TPO to pass a speaking order justifying applicability of MAM and PLI keeping in view the FAR profile of the assessee. Further assessee has raised objection on the issue & 2061/DEL/2022 of denying working capital adjustment under Rule 10B(1)(c) of the Rules for determination of ALP to account for differences in working capital employed by the assessee vis-à-vis comparable companies. After considering the submissions of the assessee, ld. DRP directed the TPO to compute the working capital in accordance with the OECD Guidelines as follows ;- “(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 for the relevant year on revenue account only. (b) Compute 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 comparable. (d) Multiply the above difference by the interest rate i.e. SBI Prime Lending Rate as on 30th June of the relevant financial year. (e) The above adjustments shall be added to the profit margin of comparable companies as finally determined in accordance with the directions of this Panel. (f) Credits received from various group concerns or loans etc., should not be taken into account.”

The TPO in order giving effect discussed the TNMM over RPM method as under:-

With the above observation, TPO has justified in adopting TNMM as the MAM.

After considering the observations of the TPO in OGE, in our considered view, ld. DRP has directed the TPO to pass a speaking order why the RPM is MAM adopted by the assessee and same method was adopted by the assessee in earlier years having the same FAR in the preceding assessment years. We failed to understand why TPO in OGE has not passed a speaking order on the above said directions and merely carried out the RPT filter against one of the comparables. The TPO has not given a clear finding on the aspect of similar FAR in the current assessment year as well as earlier assessment years in which RPM was accepted as MAM. The TPO has merely observed that assessee is not a pure distributor of tangible products. He has grossly rejected the plea of the assessee and proceeded to determine the ALP on the basis of TNMM.

Aggrieved with the above order, assessee is in appeal before us.

AT the time of hearing, ld. AR of the assessee submitted that assessee is dealing in international transaction of finished goods and assessee has adopted RPM method, however TPO has noticed that it has adopted other method. He brought to our notice OGE of TPO after direction of DRP and submitted that TPO has not followed the directions of DRP in giving speaking order on the aspect of applicability of RPM in the case of the assessee. In this regard, ld. AR of the assessee brought to our notice TP study report submitted by the assessee before the TPO and he brought to our notice page 276 of the paper book wherein assessee has submitted FAR analysis and trading functions of the assessee wherein assessee purchases goods from its AE and sell the same to customers. He submitted that same method of trading was adopted by the assessee over the years. Further he brought to our notice page 334 of the paper book wherein assessee has submitted a segmental profitability before the TPO wherein assessee has clearly bifurcated the manufacturing segment and trading segment separately. He submitted that assessee has earned GP/Sales of 43% in manufacturing segment and in trading segment with & 2061/DEL/2022 its AE, achieved profit of 10.05% and with non-AE it has achieved 10% and in overall entity level, the assessee has achieved 26%. He submitted that TPO has not considered the abovesaid segmental report. He further submitted that assessee is not doing any value addition with regard to trading activities. In this regard, he relied on the decision of Hon’ble High Court of Delhi in the case of Pr.CIT vs. Fujitsu India Pvt. Ltd in ITA 34/2019 & ors. order dated 12.10.2023; Mumbai Bench of ITAT in ITO vs. L’oreal India (P.) Ltd. vs. (2012) 24 taxmann.com 192 (Mum.); Delhi Bench in Karcher Cleaning Systems Private Ltd. in order dated 18.10.2023 and Delhi Bench in D Light Energy P. Ltd. vs. Assessing Officer in ITA No.516/Del/2022 order dated 10.06.2024.

In all the above cases, Hon’ble High Court of Delhi as well as coordinate Benches has accepted the RPM method in trading activities. He relied on the same. He also brought to our notice page 2271 of the Paper Book wherein assessee has filed a copy of invoices of purchase of material from its AE, Star-USG Building Materials Co. Ltd. and relevant customs clearance document and he prayed that the issue under consideration in which the TPO has not given a clear finding on the aspect of applicability of RPM in the case of the assessee which was adopted by the assessee & 2061/DEL/2022 over the years and also submitted that TPO has not followed the directions of the DRP.

On the other hand, ld. DR of the Revenue objected to the above submissions and relied on the findings of the lower authorities.

Considered the rival submissions and material available on record. We observed that assessee has filed TP study report before the TPO and also filed a segmental report before the TPO. However, TPO rejected the same with the observation that it is based on management report rather than audited report. We also observed that the segmental report submitted by the assessee before the TPO is without any certification. The TPO has rejected the method adopted by the assessee and proceeded to determine ALP based on the TNMM method. The DRP no doubt accepted the submissions of the assessee and remitted the issue back to the file of TPO to pass a speaking order on the aspect of applicability of RPM method in the case of the assessee considering the fact that same method was adopted by the assessee in the earlier assessment years and the same was accepted by the Revenue, considering the fact that there is no change in the FAR adopted by the assessee in the impugned assessment years and earlier assessment years. We observed that in OGE, TPO has passed the order rejecting the RPM method with the observation that assessee is not a pure distributor of tangible products and & 2061/DEL/2022 he also observed that assessee has availed engineering support services, business support services and IT expenses/income which shows that RPM method is prima face unlikely to be appropriate for assessee. Therefore, RPM would not be appropriate for benchmarking of the impugned transactions. In our considered view, TPO has misunderstood the clear directions of the DRP on the aspect of FAR profile of the assessee and applicability of RPM in the case of the assessee which was accepted by the Revenue in the earlier assessment years. There is no clear finding on the aspect of non-applicability of RPM and TPO merely and grossly rejected the RPM with the observation that assessee is not a pure distributor and it also does manufacturing activity. In our considered view, the TPO has grossly misunderstood the business of the assessee and proceeded to complete the ALP on the basis of TNMM method. In our considered view, the TPO has to redo the ALP adjustment on the basis of various details available on record which shows that assessee has two segments – (a) manufacturing and (b) trading activities – and the ALP of the trading activities was accepted by the Revenue in the earlier assessment years on the basis of RPM. Therefore, we are inclined to remit this issue back to the file of AO/TPO to redo the ALP adjustment on the basis of RPM and at the same time, we direct the assessee to file audited segment report before the AO/TPO and bring on record FAR submissions to the AO/TPO. It is needless to say that TPO may provide opportunity of being heard to the assessee. Accordingly, grounds no.3 to 7 are allowed for statistical purposes.

With regard to Ground No.8, relevant facts are, during assessment proceedings, the Assessing Officer observed that various expenses incurred by the assessee during the year are much higher than the expenses incurred in the immediate preceding year. The Assessing Officer compared the data of AYs 2016-17 & 2017-18 and observed that assessee has incurred expenses of Rs.15,59,09,015/- whereas in the previous assessment year it was at Rs.10,70,00,000/-. He observed that expenses are increased @ 45.71% compared to immediately preceding year which is abnormal. At the same time, he also observed that the revenue from operation was increased @ 35% whereas the expenses were increased to 45.71%. The assessee was asked to submit the relevant ledger copy and bills/invoices/vouchers of the following expenses involving Rs.1 lakh and part of each head of expenses :-

In response, assessee filed reply dated 08.04.2021. After considering the submissions of the assessee, Assessing Officer observed that the assessee has not produced bills/vouchers/invoices in respect of expenditure claimed in ITR, therefore, he was not able to verify the genuineness of the expenses. Accordingly, he proceeded to disallow 10% of the total expenditure u/s 37 of the Act. Accordingly, he disallowed Rs.1,66,74,127/-.

Aggrieved with the above order, assessee preferred objections before the ld. DRP and ld. DRP called for the remand report and since remand report was not submitted on time, the issue was remitted back to the Assessing Officer to consider the additional evidences submitted by the assessee and allow the same as per law. In final assessment order, Assessing Officer considered the additional evidences submitted by the assessee and analysed each expenditure in detail and to the extent of vouchers/bills submitted by the assessee, he allowed the same and to the extent of Rs.41,41,229/- no evidences were submitted. Accordingly, he sustained the addition.

Aggrieved with the above order, assessee is in appeal before us raising ground of appeal and before us, assessee has filed application for admission of additional evidences. After considering the submissions of the assessee, we are inclined to remit this issue to the file of Assessing & 2061/DEL/2022 Officer to verify the additional evidences submitted by the assessee. Accordingly, we direct the Assessing Officer to verify the additional evidences and allow the claim of the assessee as per law, after giving proper opportunity of being heard to the assessee. Accordingly, ground no.8 raised by the assessee is allowed for statistical purposes.

In final assessment order, the Assessing Officer considered the additional evidences submitted before the ld. DRP. The Assessing Officer observed that as per the ledger and documents submitted by the assessee to the extent of Rs.16,24,34,730/- whereas as per the CBEC Export Import data available with the department, the customs duty paid by the assessee of Rs.17,09,31,904/-. No proper explanation with respect to the difference of Rs.84,97,174/- was furnished by the assessee. Accordingly, he proceeded to sustain the addition to that extent.

Aggrieved with the order, assessee is in appeal before us.

At the time of hearing, ld. AR of the assessee brought to our notice findings of the Assessing Officer at page 9 of the final assessment order and submitted that the Assessing Officer has not furnished details of customs duty paid by the assessee and also submitted that the assessee has not claimed any expenditure with respect to payment of customs duty & 2061/DEL/2022 and the same cannot be disallowed by the Assessing Officer. However, he prayed that the issue may be remitted back to the Assessing Officer to reconcile the difference and assessee will furnish the details before Assessing Officer.

On the other hand, ld. DR of the Revenue relied on the orders of the lower authorities.

Considered the rival submissions and material placed on record. We observed that the Assessing Officer received information from CBEC export and import data and the assessee has submitted relevant information available with them. However, still there is a difference of Rs.84,97,174/- and the Assessing Officer has disallowed the same merely relying on the information available from CBEC export and import data. From the assessment order, we observed that even Assessing Officer does not have details of customs duty paid by the assessee. For the sake of justice, we are inclined to remit back this issue to the file of Assessing Officer to collect the information from assessee. Assessing Officer cannot make the addition merely on the basis of CBEC export import data and Assessing Officer has to collect the total imports made by the assessee during the year and reconcile the same with customs duty paid by the assessee. Needless to say that assessee may be given an opportunity of being heard and we direct the assessee also to submit the & 2061/DEL/2022 relevant information before the Assessing Officer. Accordingly, ground no.9 raised by the assessee is allowed for statistical purposes.

In the result, the appeal filed by the assessee being