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Income Tax Appellate Tribunal, DELHI ‘I-1’ BENCH,
Before: SHRI N.K. BILLAIYA & MS. SUCHITRA KAMBLE&
therefore, they were heard together and are being disposed of by this common order for the sake of convenience.
2. We first take up for A.Y. 2009-10.
3. The grounds raised by the assessee for A.Y.2009-10 are as under :-
Based on the facts and in law, the Appellant respectfully craves leave to prefer an appeal under Section 253 of the Income-tax Act, 1961 (“the Act”) against the order passed by Learned Assessing Officer (‘AO’) passed under Section 143(3) read with section 144C(13) of the Act and the order of ‘the Honourable Commissioner of Income Tax (Appeals), New Delhi (hereinafter referred to as the ‘Hon. CIT(A)’) passed on 29 May 2015 received by the Appellant on 18 June 2015.
1. Transfer Pricing Grounds 1.1 On the facts and in circumstances of the case and in law, the Ld. Transfer Pricing Officer (‘TPO’)/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPO/AO by making transfer pricing addition of Rs. 152,075,072 to the Appellant’s income.
1.2 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPO/AO by disregarding the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Income- tax Rules, 1962 (‘the Rules’) and the various submissions made by the Appellant.
1.3 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPO/AO by rejecting the ‘transaction by transaction’ benchmarking analysis performed in the transfer pricing study report to justify the arm’s length nature of the international transactions and has instead adopted the “aggregation” approach.
1.4 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPO/AO by rejecting Comparable Uncontrolled Price (“CUP”) method which is a direct method and inappropriately applying Transactional Net Margin Method (“TNMM”) method which is a profit based method for benchmarking the international transactions of import of raw materials, packing materials, semi-finished products and export of finished goods.
1.5 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld-. TPO/AO by selecting Heinz India Pvt. Ltd having very high economies of scale and rejecting Godrej Hershey Ltd. (incorrectly mentioning turnover of Rs.2,000 crores and persistent loss making) selected by the Appellant. 1.6 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the-action of the Ld. TPO/AO by not allowing the economic adjustments like capacity underutilization, risk adjustments adjustment on account of incremental costs associated with the import of goods in order to reduce the difference while comparing the Appellant, being a start-up company, with already established companies. 1.7 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPO/AO by not providing any reason to reject the alternative benchmarking carried out by the Appellant wherein the AE is considered as tested party for arms’ length price. 1.8 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPO/AO by not granting the benefit of +/- 5 percent as per proviso to section 92C(2) of the Act.
2. Corporate Tax Grounds 2.1 On the facts and in circumstances of the caseand in law, the Ld. TPO/AO has erredand the Hon. CIT(A)has further erred in upholding/confirming the action of the Ld.TPO/AO by disallowing Miscellaneous Expenses.
2.2On the facts and in circumstances of the caseand in law, the Ld. TPO/AO has erredand the Hon. CIT(A)has further erred in upholding/confirming the action of the Ld. TPO/AO by not considering the accumulated brought forward losses up to the captioned assessment year amounting to Rs. 1,22,04,525, while determining the assessed income of the Appellant. The above ‘Grounds of Appeal’ are all independent and without prejudice to one another. The Appellant craves leave to supplement, to cancel, amend, add and/or otherwise alter or modify, any or all, grounds of appeal stated hereinabove.
4. Ground No.1.1 and 1.2 which are general in nature and needs no separate adjudication.
5. Ground No.1.3 and 1.4 are not pressed and are accordingly dismissed.
6. Ground No.1.5 the assessee alleged that the CIT erred in upholding/ confirming the action of the AO by selecting Heinz India Pvt. Ltd. and
7. Briefly stated the facts of the case are that the appellant company was incorporated on 08.02.2007 and is a wholly owned subsidiary of Ferror S.p.A with ultimate holding company being Ferrero International SA.
8. The appellant company alongwith its group companies is engaged in the business of manufacturing chocolate and other confectionary products.
9. The appellant has been established with the object of manufacturing and selling its products on wholesale basis in India and confectionaries.
10. The international transactions undertaken by the assessee with its AE’s during the year under consideration as under :-
Method used Transaction Value S.N Nature of transaction (Rs.)
Import of Raw Material for Kinder Joy Chocolates CUP Customs Value 1. 90,123,537
Import of Packing Material CUP Customs Value 2. 788,893
Import of Raw Material (Toys) CUP Customs Value 141,118,967
4. Import of Semifinished Product (TicTac Pills) CUP Customs Value 6,848,697
Import of Packing Material (for Tic Tac Mint) CUP Customs Value 291,081
Import of Packing Material (Service tray) CUP Customs Value 6. 52,018
7. Import of Packing Material (blisters, paper CUP Customs Value 150,762 display, etc)
Export of Finished Product (Kinder Joy) CUP 8. 84,453,325 Internal benchmark
Export of Semifinished Product (TicTac ) TNMM 3,097,513
10. Export of Packing Material (Kinder Joy) TNMM 3,321,087
11. Import of Services CUP 1,314,859
Import of Fixed Assets CUP 23,316,104 12. Independent Valuation
13. Reimbursement of expenses by the Company No benchmarking 20,329,613 required
11. For benchmarking international transactions the assessee used CUP method using custom duty valuation data, for Import of Raw Material, Packing Material, Semi Finished Products and Import of Services.
The TPO disregarded the transaction by transaction benchmarking analysis conducted by the assessee using CUP method and instead of applied aggregation approach using TNMM as the most appropriate method. The TPO identified fresh comparables and also disregarded the economic adjustments (working capital adjustments and custom duty adjustment) thereby making upward adjustments of Rs.15,20,75,072/-.Following comparables were finally selected for the benchmarking of the international transaction :-
13. Proceeding further the AO disallowed 10%of miscellaneous expenses of Rs.2897951/- claimed by the assessee and made an addition of Rs.289800/- on ad-hoc basis. Assessee challenged the assessment before the CIT(A) but without any success.
14. Before us the counsel for the assessee assailed the approach of the lower authorities on the following issues :-
1. Exclusion of Heinz India Private Limited as comparables 2. Adjustment on account of custom duty and capacity utilisation
3. Ad-hoc disallowance of miscellaneous expenses
Allow Set off of brought forward accumulated losses
15. It is the say of the counsel that it was challenged before the TPO for the exclusion of Heinz India as a comparable in the final set off comparables on the ground that the turnover of Heinz India Pvt. Ltd. Was Rs. 720 crores and that of the assessee is only 34 crores.
16. The counsel vehemently stated that such higher turnover company should not be used as comparable with a low turnover company like the assessee.
17. The counsel continued by stating that the company engaged in manufacturing operations having varied turnovers cannot be compared to each other as the difference in their sizes and scale of operations have a direct impact on their profitability.
The counsel further pointed out that the CIT(A) upheld the action of the AO/ TPO by relying upon the decision given in the case M/s. Wills Processing Services Vs. DCIT 30 Taxman.com 350 wherein the coordinate Hon’ble Mumbai ITAT Bench has held that turnover criteria is not a valid criteria.
It is the say of the counsel that Heinz India is functionally not comparable as it is engaged in manufacturing of products like energy drinks/ (Complan and Glucon-D), Prickly Heat Power (Nycil), Tomato Ketchup and Ghee whereas the assessee is a manufacturer of Chocolate and confectionaries. The counsel prayed for the exclusion of Heinz India Ltd. from the final set off comparables.
Per contra the DR strongly supported the findings of the CIT(A).
We have given a thoughtful consideration to the orders of the authorities below and have carefully considered the rival submissions. In our considered opinion, in commercial world, the manufactures in order to earn higher turnover at times reduce their margin of profit. It means higher turnover lower the margin of the profit, therefore, merely because a comparable company as a higher turnover cannot be the ground for its exclusion. However, we find that Heinz India Ltd. cannot be a good comparable as it is engaged in a different set of products. As mentioned elsewhere Heinz India manufactures products like drinks, Prickly Heat Power (Nycil), Tomato Ketchup and Ghee whereas the appellant is a manufacturer of chocolate and confectionaries goods. Being functionally dissimilar, Heinz India fails the test of functional similarity and deserves to be excluded. The DR had vehemently stated that under the TNMM method comparables cannot be on the same platform and some leverage has to be given.
We do not find any merit in this contention of the DR. The Hon’ble High Court of Delhi in the case of Rampgreen Solution Private Limited 377 ITR 533 have observed as under :-
“43. In our view, the aforesaid approach would not be apposite. Insofar as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted, in other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PIT must trigger further investigations/ analysis.”
In the light of the aforesaid observations of the Hon’ble High Court of Delhi we direct the AO / TPO to exclude Heinz India from the final set of comparables.
The next issue relates to the adjustment on account of custom duty.
The appellant company claimed custom duty adjustments since the year under consideration is the first full year of operation, the assessee did not procure any raw material locally and imported 100% of raw material and finished products.
Before us the counsel for the assessee vehemently stated that the comparable companies are not dependent on imports whereas the assessee has 100% imports of raw materials. It is the say of the counsel that in the light of the peculiar facts custom duty adjustment need to be given.
The DR strongly supporting the findings of the CIT(A) stated that no reliable datas are available.
We have carefully perused the orders of the authorities below. The undisputed fact is that the assessee has imported 100% of its raw material whereas the average import in the case of the comparable companies is only 0.56% as can we seen from the following chart :-
The coordinate bench in the case of Terex India Private Limited in and 6783/Del/2015 has held as under :-
Considering the factual matrix as discussed here in above in the light of the decision of the coordinate bench (supra) we direct the AO/TPO to allow the adjustment of custom duty.
The next issue relates the adjustment on account of capacity utilisation. Before us the counsel for the assessee vehemently stated that since this year is the first full year of operations hence, the assessee could not utilise its instalment capacity to the fullest and could utilise only 45.34% of it capacity in relation the production of finished goods whereas the average capacity utilisation of the comparables is 71%. It is the say of the counsel that the CIT(A) disregarded this adjustment on the basis that there was practical difficulty in finding out the relevant data for carrying out the capacity adjustment of the comparables. The counsel prayed for the allowance for adjustment of capacity utilisation.
The DR strongly supporting the findings of the CIT(A).
We have carefully perused the orders of the authorities below. At the very outset we do not agree with the findings of the CIT(A) who stated that there is a practical difficulty in finding out relevant data.
In our considered opinion the financial report of every company contains the details relating to the capacity utilisation and the same are available in the public domain also. The financial reports of the comparable companies used by the TPO do contain the capacity utilisation details and the same can be used for giving the benefit of under utilisation of capacity by the appellant company. We accordingly direct the AO /TPO to allow adjustment of capacity utilisation by comparing the data of the comparable companies in so far as capacity utilisation is concerned with that of the assessee. In alternate the assessee shall furnish the relevant data and the AO / TPO shall examine the same after giving a reasonable opportunity of being heard to the assessee.
The next issue relates to the ad-hoc disallowance of miscellaneous expenses of Rs.50,000/-
Facts on record show that the AO has disallowed Rs.289800/-being 10% of the miscellaneous expenses incurred during the year and the CIT( has restricted the disallowance to Rs.50,000/-. In our understanding of the facts the first appellate authority has already given substantial relief to the assessee and considering the smallness of the amount we decline to interfere. This ground is accordingly dismissed.
The next grievance relates to non granting of set of brought forward losses.
We find that in A.Y.2008-09 the assessed loss was determined by the AO. The same was brought forward in A.Y. 2009-10 at Rs.12204535/-. The AO is directed to allow set of brought forward losses as per the provisions of the law.
In the result the appeal by the assessee is allowed in part for statistical purpose.
1. Facts relating to the business profile of the assessee remain the same.
The details of international transaction by the assessee are as under :-
S. No. International Transaction Amount fin Rs.} Import of Raw Material, Semi-finished 1 360,550,033 product, packing material 2 import of Fixed Assets 26,230,289 3 Import of services 1,725,461 4 Export of Finished Product 214,193,927 5 Export of Packing Material 6,286,772 6 Reimbursement of expenses to AEs 14,967,395 7 Issue of Equity Share Capital 271,200,000
The TPO disregarded the benchmarking analysis conducted by the assessee using TNMM as the most appropriate method and rejected one of the comparables namely Candico India Limited. The TPO further disregarded the economic adjustment that is working capital adjustment custom duty adjustment and capacity utilisation adjustment. The TPO further considered the provision for impairment of assets amounting to Rs.1537275/- as an operating expenses. The proceeding were completed by making an upward adjustment of Rs.119114362/-.
3. The assessee carried the matter before the CIT(A) but without any success.
4. Before us the counsel for the assessee has challenged the order of the CIT(A) on the following issues :-
Treatment of provision for impairment of assets as non operation
8. The appellant
5. Before us the counsel for the assessee stated that the AO/TPO have grossly erred in taking provision for impairment of assets amounting to Rs.1537275/- as an operating expenses while calculating the operating cost of the assessee. The counsel explained the facts stating that during the year the assessee purchased machinery in the production of poly pack of tic tak. These machines were lying under capital work in progress as on 31.03.2010 as the company could not start the line of packing and did not capitalise these machines. The counsel further explained that the management decided not to enter into the line of production in the poly pack and sold the machinery as scrap. Accordingly the company has provided for impairment of losses to be incurred on sale of machines. It is the say of the counsel that the treatment given by the assessee is in compliance with the accounting standard issued by the ICAI and hence the impairment of asset should be considered as non operating expenses.
Per contra the DR supported the findings of the lower authorities.
We have carefully considered the orders of the authorities below. There is no dispute that the machinery purchased by the assessee was lying in capital work in progress. It is also not in dispute that the treatment given by the assessee is in line with the accounting standard issued by the ICAI. In our considered opinion a provision for impairment of assets is not a depreciation charge nor amortisation of fixed assets but it is a provision made to the carring amount of the fixed assets which is reversible in nature. Moreover section 92 (1) of the Act requires that any income arsing from an international transaction / allowance for any expenses shall be computed having regard to arms length price. In our considered view impairment of assets cannot be related as international transaction of the assessee. Further the provision for impairment of assets is not regular business expenditure since it is not recurring in nature and is not related normal business operation and hence not in the nature of operation expenses, therefore, in our considered opinion the same cannot be treated as operating expenditure for the calculation of PLI of the assessee. We accordingly direct the AO / TPO to exclude provision of impairment of assets as operating expenditure. This ground is accordingly allowed.
The next grievance relates to the exclusion of Candico India Ltd. In the final set of comparables.
9. Facts on record show that this company was rejected by the TPO and such rejection was upheld by the CIT(A) solely on the ground that this company is a persistent loss making company.
Before us the counsel for the assessee vehemently stated that Candico India is not a persistent loss making company in as much as in F.Y.2007-08. It has shown profit 0.13% though in F.Y. 2008-09 and F.Y.2009-10 it showed losses.
It is the say of the counsel that a persistent loss making means continues loss making for more than 3 years. For this proposition reliance was placed on the decision of the Tribunal Mumbai Bench in the case of TPG Capital India in ITA No.7594/Mum/2014/
12. Per contra the DR supported the orders of the AO / TPO/ CIT(A).
We have carefully considered the orders of the authorities below. The undisputed fact is that Candico India fulfils all the quantitative and qualitative filters applied by the assessee as well as the TPO. The only reason by the lower authorities for rejecting Candico from the final set of comparables is that it is a persistent loss making company. However, as mentioned elsewhere in the past 3 years Candico India has shown loss only in 2 years. Further the assessee itself is a loss making company which is evident from the assessment orders. In F.Y.2008-09 the assessee returned loss of Rs.13.13 crores and during the year under consideration the assessee has returned loss of Rs.9.02 crores. The Hon’ble Bombay High Court in the case of Gold SASH India Securities Private Limited in of 2013 had the occasion to consider the following substantial question of law :-
The relevant findings of the Tribunal in reads as under :-
Considering the facts in totality in the light of the judicial decisions referred here in above we direct the AO / TPO to include Candico India in the final set of comparables.
The next issue relates the adjustment on account of custom duty and capacity utilisation this issue has been discussed by us at length in for A. Y.2009-10 (supra) in detailed discussion therein we order accordingly.
In the result, the appeal filed by the assessee is allowed in part for statistical purpose.
Order pronounced in the open court on 21.08.2020.