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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by the assessee is against the order of DCIT, Circle-1(2), Pune, dated 26.11.2012 relating to assessment year 2008-09 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’).
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The assessee has raised the following grounds of appeal:- 1. The learned DCIT pursuant to directions of the Hon'ble DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs.2,20,75,181 to the value of international transactions entered into by the Appellant with its Associated Enterprise with respect to receipt of advisory services. 2. The learned DCIT pursuant to directions of the Hon'ble DRP has erred on the facts and circumstances of the case and without giving any cogent reasons, by calculating arm's length price of advisory services as NIL. 2.1 The learned DCIT pursuant to directions of the Hon'ble DRP erred on the facts and circumstances of the case by calculating arm's length price of advisory services as NIL, without considering the evidences submitted in connection with receipt of advisory services. 3. The learned DCIT pursuant to directions of the Hon'ble DRP erred in facts and circumstances of the case in rejecting following companies as comparables: 3.1 Bright Autoplast Pvt. Ltd. 3.2 K R Rubberite Ltd. 3.3 Lifelong India Ltd. 4. The learned DCIT pursuant to directions of the Hon'ble DRP erred in facts and circumstances of the case in not granting adjustment made to the profit level indicator of Appellant on account of production wastage due to start-up phase of its manufacturing facility at Chennai. 5. The learned DCIT pursuant to directions of Hon'ble DRP has erred in law and on the facts and in circumstances of the case in not granting the benefit of +/- 5 percent as per proviso to section 92C(2) of the Act. 6. The learned DCIT erred on the facts and in law in proposing to initiate penalty proceedings u/s 271(1)(c) of the Act, without considering the facts of the case. 7. Each one of the above grounds of appeal is without prejudice to the other.
The assessee has also raised additional ground of appeal which reads as under:- 1:0 Re.: Not restricting the amount of transfer pricing adjustment to the ‘transactions’ between Associated enterprises: 1:1 The Assessing Officer / Dispute Resolution Panel has erred in not restricting the amount of transfer pricing adjustment to the transactions between Associated enterprises. 1:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the Assessing Officer / Dispute Resolution Panel ought to have restricted the amount of transfer pricing adjustment to the transactions between Associated Enterprises.
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1:3 The Appellant submits that the Assessing Officer be directed to restrict the amount of transfer pricing adjustment to the transactions between Associated enterprises only.
The issue raised in the present appeal is against transfer pricing adjustment of ₹ 2,20,75,181/- made in the hands of assessee.
The assessee by way of additional ground of appeal has also raised linked issue in respect of transfer pricing adjustment.
The learned Authorized Representative for the assessee at the outset pointed out that grounds of appeal No.1, 7 and 8 are general in nature, hence the same are dismissed. He further pointed out that grounds of appeal No.2, 3 and 4 relate to the transfer pricing adjustment of international transactions of provision of advisory services by the assessee to its associated enterprises. He further stated that ground of appeal No.5 relates to non granting benefit of +/- 5%. The ground of appeal No.6 raised by the assessee against initiation of penalty proceedings which is premature and the same is also dismissed. The additional ground of appeal raised by the assessee is to the extent that adjustment, if any, could be made only to the value of international transactions.
Briefly, in the facts of the case, the assessee was manufacturer of headliners, door panels, parcel trays, etc. The technical centre of assessee was at Viman Nagar, Pune and was providing design and drawing services using CA software and infrastructure set up. The assessee had entered into various international transactions with its associated enterprises having two segments i.e. Computer aided designing / Drawing & Design Segment, in which no adjustment was made by Transfer Pricing Officer (TPO) and second segment
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was Manufacturing Segment, wherein adjustment of ₹ 2.20 crores was made and the assessee is in appeal against same before us. The assessee in its TP study report had applied TNMM method as most appropriate method and had computed its PLI after excluding abnormal cost of ₹ 3.02 crores for wastage, etc. and had worked out its PLI at 7.13%. The assessee has selected various concerns as comparables whose mean margin worked out to 11.21%. Since the margins were within +/- 5% range, the case of assessee was that its international transactions were at arm's length. The Assessing Officer had made reference to the TPO to benchmark international transactions undertaken by the assessee. During TP proceedings, the TPO asked the assessee to update margins of comparables and thereafter, the assessee prepared fresh set of comparables of eleven companies whose mean margin worked out to 4.66% as reproduced by the TPO under para 9 at page 3 of TPO’s order. The TPO observed that he had not asked for any new comparables but had asked only for comparables which would be available in AR matrix of original search. But, he also observed that certain comparables which were selected at the time of original TP study had RPT’s and same were selected as they provided better FAR analysis. However, the same needed to be rejected. The TPO accepted the set of comparables selected by the assessee except three comparables i.e. Bright Autoplast Ltd., being wholly owned subsidiary of Sintex Holdings BV, Netherlands and hence RPT being high, Lifelong India Ltd., which makes parts for two wheelers and K.R. Rubberite Ltd. was in manufacturing sheet metal components, which were not directly relatable to the product profile of assessee. The TPO also rejected the adjustment of PLI for abnormal wastage since no adjustment had to be made in the hands of tested parties and adjustment, if any, had to be made in the hands of comparables. The plea of assessee that increase in scrap was mainly due to the contract labour at
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Chennai plant was rejected as the assessee failed to furnish the details of workers and their experience and other details to gauge the hypothesis of assessee regarding the contract labour. The TPO also noted that only during the months of July and August, there was exceptional loss and then onwards all the efficiency parameters showed improvement. The assessee was asked to file evidence of scrap sale from the excise data but the assessee could only give one month return, wherein scrap sales were reflected. The TPO observed that The scrap generated as per the assessee is more than Rs.3 Crs for which adjustment is being asked for but there is no independent third party verification available for the same. The explanation of assessee that it had dumped the same since nobody bought it was not accepted as the assessee had failed to provide gate entry / exit registers entries. Another point noted by the TPO was that assessee had scrapped all the units at a cost of ₹ 781.68 and how the said cost was assigned and worked out was not explained, hence the cost asked for adjustment was not allowed by the TPO. Further, the TPO noted that total value of international transactions relating to manufacturing segment was ₹ 5,83,99,095/-, out of which major transactions were only on advisory services and the other transactions of FA was on capital account. The unadjusted margins of assessee worked out to (-) 11.56% and that of comparables were at 6.39%. The TPO observed that This means that the TNMM used for the benchmarking is not correct. In view of that it is held that the Advisory services are not at an ALP and hence taken at Nil. The arm's length price of transactions was thus, determined at ₹ 2,20,75,181/-. The Assessing Officer proposed the said TP adjustment in the draft assessment order, against which the assessee filed objections before the Dispute Resolution Panel (DRP), which were rejected. The DRP held that TPO had correctly observed that higher wastage was during the months of July and August, 2007 which could be
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considered as extraordinary and initial trial run wastage. The method of assessee to consider all units scrapped till March 2008 as wastage and that too extraordinary wastage was not appreciated by the DRP. The alternate plea of assessee on without prejudice basis that wastage adjustment to the tune of 28.03% should be allowed, which was the difference between assessee’s ratio of wastage of 30.21% to that of average of comparables at 2.17%, was not accepted as no clear details were given as to how the scrap wastage was computed in other cases, in the absence of having data in this regard being not available in public domain data base. Vide para 6.4, the DRP further observed as under:- “6.4 The TPO has contended that assessee has not carried out any adjustment in initial study report as well as in revised TP search report. It has filed above claim only during transfer pricing proceedings and requested for adjustment citing it as extra ordinary expenses, by comparing it with scraps percentage of other comparables. The TPO has stated that similarity in level of specific expenses is not required under TNMM. Only extra ordinary nature of expenses can be adjusted and such adjustment is to be carried out in the hand of comparables as provided in Rule 10(1)(e)(ii).”
The DRP thus, holds that only such economic adjustment which has bearing on price determination while dealing with third party could be adjusted and not all expenses which were at variance with such expenses of comparables. Hence, the assessee’s plea of adjustment to PLI on account of extra ordinary expenses cannot be acceded to accept for first two months excess wastage that too over and above regular wastage in the manufacturing process of the assessee. Further, the DRP noted the contention of assessee that TPO had ignored that the receipt of advisory services were genuine as contractual obligation was created due to agreement entered into by the assessee and associated enterprises; though the TPO had not disputed the receipt of advisory services as well as benefit received. The DRP observed that the TPO had clearly demonstrated that the assessee had not received any
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benefit through advisory services as it had earned negative margin of (-) 11.56% of manufacturing segment, whereas comparables had earned 6.39% positive margins. The DRP further observed that the assessee had not demonstrated anywhere in its documentation that their services were not available in house or in the country and for whatever services rendered by associated enterprises any third party would be ready to pay for such services in similar circumstances. The DRP concluded by holding that computation of arm's length price of advisory services at Nil price by following TNMM method was correct. In respect of three comparables rejected by the TPO, the DRP held the said concerns to be functionally not comparable and upheld rejection. The Assessing Officer thus, passed final order under section 143(3) r.w.s. 144C(13) of the Act making an adjustment of ₹ 2.20 crores, against which the assessee is in appeal before us.
The learned Authorized Representative for the assessee pointed out that adjustment has been made in the segment of advisory services provided by assessee to its associated enterprises. He further stated that during the course of TP proceedings, the assessee had given revised working, wherein fresh set of comparables were picked up whose margins worked out to 4.66% as against assessee’s margins at 3.32%. However, the TPO rejected three comparables out of same and revised mean margins of comparables was 6.39%. He further pointed out that TPO also rejected working of PLI of assessee i.e. exclusion of extraordinary cost and the assessee’s margin was computed at (-) 11.56%. He then, referred to the order of TPO at page 9, wherein he says that advisory services in manufacturing segment were not at arm's length price and takes arm's length price at Nil and makes adjustment of ₹ 2.20 crores. He then, referred to the observations of DRP, who extended the view of TPO without any
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basis with special reference to para 7 at page 7. The learned Authorized Representative for the assessee pointed out that if only TNMM method is to be applied to advisory services, then proportionate arm's length price has to be determined. With regard to its claim of extraordinary wastage cost, the learned Authorized Representative for the assessee pointed out that it had set up a unit at Chennai, which was an extraordinary event and then the same has to be excluded. However, in case the transactions of assessee are accepted, then no adjustment is possible. He then commented on each of the comments of TPO by way of written note and pointed out that the adjustment was made in TP study report itself. The submissions were made before the TPO in this regard, which are placed at pages 262 and 263 of Paper Book. In the next year, wastage stabilized and in assessment year 2009-10 it is mini sequel. With regard to rejection of comparables, the learned Authorized Representative for the assessee pointed out that assessee was engaged in manufacturing of auto ancillary and both the concerns K.R. Rubberite Ltd. and Lifelong India Ltd. were engaged in business of auto ancillary units. Our attention was drawn to search analysis, which the assessee adopted, placed at pages 36 and 37 of appeal memo, wherein the assessee had taken auto ancillary to select the comparables. With regard to Bright Autoplast Ltd., the learned Authorized Representative for the assessee pointed out that it places reliance on submissions made before TPO. In respect of additional ground of appeal, the learned Authorized Representative for the assessee sought proportionate adjustment to international transactions with its associated enterprises.
The learned Departmental Representative for the Revenue in reply, pointed out that the assessee was engaged in two lines of activities and the manufacturing activities were in the nature of car interiors. He referred to the
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order of TPO at page 9, wherein he has disturbed advisory services. He also made reference to the TP study report but could not explain the order of TPO in rejecting the claim of assessee. However, he pointed out that if certain aspects need to be looked into, then the matter may be sent back to the file of TPO. In respect of comparables selected, the learned Departmental Representative for the Revenue pointed out that they were functionally different and hence, not comparable. Coming to the next stand of assessee i.e. adjustment of PLI on account of wastage and scrap, he referred to the orders of TPO and DRP and pointed out that there was no third party evidence. The learned Departmental Representative for the Revenue then referred to case laws relied upon by the learned Authorized Representative for the assessee and pointed out that the decisions were on different facts and where the assessee has not established why the loss and wastage and hence, the adjustment to PLI cannot be allowed.
The learned Authorized Representative for the assessee in rejoinder referred to the submissions filed at pages 255 and 256 of Paper Book explaining why losses arisen to the assessee.
We have heard the rival contentions and perused the record. The assessee before us has entered into various international transactions with its associated enterprises. The assessee was engaged in the manufacture of headliners, door panels, parcel trays, etc. and also had technical centre for providing design and drawing services. No adjustment has been made in the design and drawing segment by the TPO. In respect of manufacturing segment, the assessee had shown total value of transactions with associated enterprises at ₹ 5,83,99,095/-, out of which ₹ 2.30 crores related to acquisition of fixed asset and associated enterprises’ transactions were only
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₹ 3,53,88,084/-. The assessee had applied TNMM method while benchmarking its international transactions of manufacturing segment and had made comparison with external concerns. However, while computing its PLI, it had reduced the abnormal cost on account of wastage, which as per the assessee was extraordinary in nature during the year and the same be not considered while arriving at operating margins for the year. The margins of assessee worked out to 7.15% as against mean margins of comparables finally selected by the assessee at 11.21%. The TPO however, asked the assessee to re-work comparables though he states that he did not ask the assessee for the same but the same is not relevant as he ultimately used the comparables selected by assessee in search during TP proceedings. The TPO also applied TNMM method. He first rejects adjustment to the PLI for abnormal wastage and also rejected three comparables out of eleven comparables selected by assessee and worked out the margins of assessee at (-) 11.56% and compared it with mean margins of comparables at 6.39%. In the final analysis, the TPO holds that advisory services were not at arm's length, hence the same are taken at Nil and makes adjustment of ₹ 2.20 crores being proportionate to advisory services cost related to manufacturing segment. The case of assessee before us is two- fold – that advisory fees related to drawing and designing segment and also the manufacturing segment and once no adjustment has been made in the drawing and design segment, then adjustment of ₹ 2.20 crores, if any, to be made in the manufacturing segment has to be proportionately made. The second issue which is raised before us is in relation to adjustment on account of excess wastage during the year.
The assessee had established a unit at Chennai, where in the initial period, there was wastage and the assessee pointed out that it was
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extraordinary cost, which had to be reduced while computing margins of assessee. However, the case of Revenue was that the margins of tested party could not be adjusted, only the margins of comparables could be adjusted. The assessee claimed that it was an economic adjustment to an extraordinary cost, which is one time non-recurring and needs to be excluded while computing its margins. The learned Authorized Representative for the assessee before us has refuted each of the comments of TPO in this regard. We will deal them one by one. The first allegation made by Assessing Officer was that PLI was later revised and this was not part of transfer pricing report. The learned Authorized Representative for the assessee has referred to para 8.4.2.1 at page 145 of Paper Book i.e. TP study report, wherein this extraordinary cost has been excluded while determining margins of assessee. The second aspect is the objection of TPO that only margins of comparable companies are to be adjusted and not of tested party and the learned Authorized Representative for the assessee stressed that it was one time non-recurring extraordinary item of expenses, which needs to be excluded while computing its margins. The next objection of TPO was the abnormal loss mainly during the months of July and August, for which the learned Authorized Representative for the assessee drew our attention to the chart placed at TPO’s order at page 9, wherein wastage was in each of the months and unit being started in July, wastage in July and August was highest. The learned Authorized Representative for the assessee again countered the objection of TPO that no details were filed as to the material imported on machinery spares to the supplier to be abnormality and explained that total material imported was only ₹ 2,30,11,011/-, which was imported from non-associated enterprise party as against total material used at ₹ 32.92 crores. Since the loss persisted though out the year, then such loss which was one time item during the year of establishment of the unit at Chennai
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needs to be excluded. He also explained that in the next year, wastage had stabilized and in assessment year 2009-10, it was mini sequel. He further drawn attention to the submissions made during TP proceedings with special reference to pages 262 and 263 of Paper Book, wherein the assessee had explained losses and given monthly breakup of losses at page 267 of Paper Book. The TPO though applied TNMM method to benchmark international transactions but since unadjusted margins of assessee worked out to (-) 11.56%, he concludes by saying that TNMM method used for benchmarking was not correct when compared with the margins of comparables at 6.39%. We will deal with the next aspect of TP adjustment i.e. exclusion of comparables finally selected in the paras hereunder.
First, we will deal with the plea of assessee vis-à-vis extraordinary expenses during the year. In this regard, the learned Authorized Representative for the assessee placed heavy reliance on the decision of Pune Bench of Tribunal in HOV Services Ltd. Vs. JCIT (2016) 73 taxmann.com 322 (Pune – Trib.), wherein the Tribunal while determining PLI of tested party had laid down the proposition that extraordinary expense incurred by assessee such as expenses on account of GDR issue, buy back of shares, restructuring options like ESOP, etc. were to be granted adjustment while determining arm's length price. The Pune Bench of Tribunal in turn, relying on the ratio laid down by the Hon’ble High Court of Delhi in Marubeni India (P.) Ltd. Vs. DIT (2013) 354 ITR 638 (Del), held as under:- “39. We find merit in the submission of the Ld. Counsel for the assessee that the expenditure incurred on account of GDR issue, buyback of shares and restructuring options like ESOP etc. amounting to Rs.1,02,17,339/- should be considered as nonoperating expenses while determining the operating margin of the assessee. Similar is the case with rejected tax refund claim written off since the said expenditure was not related to providing of services to its AEs. As regards the expenses of accounting and MIS process is concerned, we find because of termination of certain projects by the customers, the assessee, on
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the hope of getting some alternate projects retained its employees assigned to those projects. Since no new projects were received, the salary cost of these employees amounting to Rs.19,35,527/- was claimed as extraordinary item. Since the assessee had to retain employees who are assigned to certain projects which are terminated, therefore, in our opinion, salary cost of these employees has rightly been considered by the assessee as extraordinary item. As regarding the expenses of software team is concerned, we find the assessee during this year has debited such expenditure to the profit and loss account instead of capitalizing the same in the book as was done in earlier years. Since the projects in which the employees were working were terminated and the assessee was capitalizing the cost incurred in the book till earlier year has debited such expenses to the profit and loss account during this year, therefore, this in our opinion is also an extraordinary item. 40. We find in the case of Marebeni India Pvt. Ltd. (Supra) the assessee company had paid compensation for closure of its India units and this expenditure was claimed as normal expenditure. The Hon’ble Delhi High Court held that this expenditure would represent abnormal cost and the same has to be excluded while computing the operating margin. The relevant observation of the Hon’ble High Court reads as under : “17. Question No.6 relates to the finding of the Tribunal that the expenses relating to the closure of the business were abnormal expenses and cannot be considered relevant while arriving at the ALP in respect of the international transaction. It also refers to the finding of the Tribunal that none of the comparable companies had incurred such expenses. The assessee had paid compensation for closure of its units, including the Delhi and Chennai offices, in an amount of Rs.68,97,992/-. The assessee sought inclusion of the compensation in the operating costs, on the footing that the closure of the units does not benefit the associated enterprise. It was further submitted by the assessee that its Indian business was being run as a totally independent unit with authority to the management in India to take decisions regarding closure of the offices in India. According to the assessee, the associated enterprise is not allowed to interfere in such decisions which are administrative in nature. The payment of compensation for closure of the Indian units was an abnormal item of expense and therefore, ought to have been excluded from the operating costs while arriving at the ALP of the international transaction. The case made out by the income tax department was that since the assessee is a captive unit of its associated enterprise, it was actually the latter which undertook the entire risk, that the associated enterprise was paying the assessee at the rate of cost plus 10 percent that if the Indian units are closed then the operating costs would correspondingly be reduced and therefore, the compensation paid would form part of the operating costs and would thus be relevant for arriving at the ALP. 18. The aforesaid issues were considered by the Tribunal. It noted that despite a specific direction issued by the CIT(Appeals), the assessee was unable to adduce any documentary evidence to show that the decision to close the Indian units was taken by the assessee independently and without being influenced by the associated enterprise. The Tribunal thus appears to have doubted the assessee's claim that it was an independent decision, taken without consulting the associated enterprise, to close down the Indian offices. The Tribunal further agreed that the stand taken by the revenue authorities that the closure of the Indian branches would correspondingly reduce the costs of the associated enterprise and therefore, it would be relevant item for consideration in the matter of arriving at the appropriate ALP. The
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Tribunal opined that transfer pricing is not an exact science and it is difficult to arrive at the ALP with any amount of certainty or definiteness; an element of guess work was always a part of the process. The Tribunal agreed with the assessee that the compensation received on account of closure of the Indian units may be a regular phenomenon but held that by closing down certain branches in India the assessee had actually reduced the costs of associated enterprise. It is according to the Tribunal meant that the closure of the branches had direct link with the international transaction. For these reasons the Tribunal held that the revenue was right in upholding that the costs of closure are not to be excluded from computing the operating expenses. 19. The contention of the counsel for the assessee before us is that the assessee was being compensated by way of a commission of fees by the associated enterprise and not on cost plus basis as erroneously held by the Tribunal. It was submitted that in this context, the compensation paid in connection with the closure of the Indian units represents abnormal costs which have to be excluded for determining the ALP. Counsel also posed the question whether the closure of the Indian units would benefit the associated enterprise and answered the same in the negative, and submitted that in such a case, the abnormal or external costs should not be taken into consideration while arriving at the ALP. 20. It may not be possible to lay down a formula that would be applicable universally to determine whether a particular expenditure or cost incurred by the assessee is a normal or abnormal item of expense, in cases relating to transfer pricing. If as held by the Tribunal, the assessee is compensated for its service on the basis of cost plus 10 percent then again the question may arise as to whether the compensation paid for closure of the Indian units can be considered to be normal or abnormal cost, because the compensation would directly depend or vary according to the quantum of the costs. In such case it would be relevant to consider whether the compensation paid for closure of the Indian units would amount to normal or abnormal expense. But as rightly pointed out by the counsel for the assessee, the assessee is being compensated by a fee or commission which has no connection with the costs incurred. This has been referred to even in the assessment order at paragraph 6.3 as follows:- "For the agency and market support services, MIPL has received two kinds of remuneration. a. handling commission - which varies from transaction to transaction and depends on the product, volume etc.; (during the proceedings the assessee was asked to give transaction wise break up of commission received but inability in this regard was expressed as it was stated that the transactions were numerous and could not collated); b. Services fees - fixed fees for rendering marketing support in form of market survey etc." The CIT (Appeals) proceeded to decide the issue on the basis that the assessee was unable to produce any document to show the circumstances under which the decision to close the offices was taken. He also assumed that the relevance of the closure of the Indian units and the payment of compensation both would hinge upon as to whose decision it was to close down the Indian units. He held that the decision was taken at the behest of the associated enterprises and therefore, for transfer-pricing purposes the assessee must be compensated by them and accordingly the costs of closure are not to be excluded for computing the operating expenses. The decision of the CIT(Appeals) was endorsed by the Tribunal which noted that since MCJ was paying
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the assessee on the basis of cost plus 10 percent, the a closure of the Indian units would automatically reduce the costs of the associated enterprise and therefore, would be a relevant issue for inclusion in the operating costs. In arriving at such a decision, it seems to us that the revenue authorities and the Tribunal failed to keep in mind that even according to the assessing officer, the assessee was being compensated for its agency and market support service by way of handling commission and fixed service fee. It seems rather remote that considering the nature of the remuneration received by the assessee from its associated enterprise, the payment of compensation on closure of the Indian offices would have any impact on the transfer pricing issue or in the fixing of the ALP. It therefore, appears to us that having regard to the nature and manner in which the assessee is remunerated for its services, the payment of compensation to the Indian units on their closure would represent abnormal costs which have to be excluded in the determination of the ALP. In our view, the income tax authorities as well as the Tribunal have erred in holding to the contrary. We accordingly, answer the question No.6 in the negative, in favour of the assessee and against the revenue. 41. The Delhi Bench of the Tribunal in the case of HCL Technologies BPO Services Ltd. (Supra) has held that while computing operating cost, abnormal costs incurred on account of start up of business like, salary, rent and depreciation etc. have to be excluded. Similarly, the Delhi Bench of the Tribunal in the case of Exxon Mobil Gas india Ltd. (Supra) has held that both nonoperating incomes and non-operating expenses should be excluded while computing the net operating profit under TNMM. The Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (Supra) has held that the expenditure incurred on relocation of its office by the assessee, additional rent paid for two months and salary paid for unproductive/idle hours should be considered as non-operating expenses. 42. Since the assessee in the instant case has given full details of the various expenses justifying its treatment as non-operating expenditure, therefore, considering the totality of the facts of the case and in the light of the decisions cited above, we hold that the assessee was fully justified in adjusting the above expenses for computing its operating margin. Therefore, we set aside the order of the CIT(A) on this issue and direct the AO to compute the operating margin of the assessee company by adjusting the above expenses. Grounds raised by the assessee on this issue are accordingly allowed.”
The learned Authorized Representative for the assessee also pointed out that similar ratio has been laid down by Mumbai Bench of Tribunal in Pangea3 & Legal Database Systems (P.) Ltd. Vs. ITO (2017) 79 taxmann.com 303 (Mumbai – Trib.), wherein it was held that where a material difference had arisen in case of assessee due to abnormal feature (abnormal loss on cancellation of forward contract) which admittedly was absent in cases of comparables, a suitable adjustment had to be made to factor in material
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difference in PLI and thus, loss on account of cancellation of forward contracts out of total forex loss needed to be eliminated from operating cost.
Looking at the wastage cost of units scrapped, both the TPO and DRP has commented on the wastage in the months of July and August. 2007 at 49.17% and 23.58%, respectively, though it has gone down in subsequent months but in January, 2008 it was 21.56%, in February, 2008, it was 20.06% and in March, it was 20.47%. Hence, the total wastage of the year is to be taken into consideration for adjudicating the issue in hand. We find no merit in the stand of authorities below in not excluding the cost on account of extraordinary event during the year. Accordingly, we direct the Assessing Officer/TPO to take the margins of assessee after excluding wastage cost, which was extraordinary event of the year.
Another aspect of the issue which has to be kept in mind is that while applying TNMM method which has been applied by both the Assessing Officer and TPO, percentage of margins of assessee is to be compared with the margins of comparables and the advisory fees paid by assessee cannot be taken at Nil especially ignoring the evidences filed by assessee during the course of proceedings. The TPO has failed to come to a finding in this regard as to whether advisory services have been availed by the assessee or not but has gone to take the value of same at Nil. Where an expenditure or payment has been incurred for the purpose of business, the same cannot be disallowed on any extraneous reasoning. The TPO cannot determine arm's length price at Nil without going into merits of rendition of services by the assessee to associated enterprises. The TPO in the final analysis has only commented that since unadjusted margins of assessee are (-) 11.56% and that of comparables
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are at 6.39%, hence TNMM analysis used for benchmarking was not correct and further held the advisory services were not at arm's length price and hence, taken at Nil. We find no merit in the stand of TPO in this regard, which has been upheld by DRP. In any case, we have already allowed the claim of adjustment to be made on account of extraordinary cost to be reduced while arriving at operating margins of assessee and the same would work out to 7.13%.
Now, coming to rejection of three comparables by the TPO. The assessee was engaged in auto ancillary units, wherein the assessee was manufacturing headliners, door panels, parcel trays, etc. The concern K.R. Rubberite Ltd. which was selected by assessee was also engaged in production of auto parts and hence, the same could not be rejected as not being functionally comparable.
Similarly, the concern Lifelong India Ltd. was engaged in the manufacture of auto parts i.e. Air cleaner assembly, handle assembly, moulded parts and aluminum die-casting, which get covered under the term ‘auto ancillary’ i.e. segment in which the assessee is operating. Hence, the same is functionally comparable to the assessee.
Now, coming to the third concern i.e. Bright Autoplast Ltd., which is wholly owned subsidiary of Sintex Holdings BV, Netherlands and the related party transactions were very high. In view of comparable not fulfilling RPT filter, the said concern cannot be selected as comparable. Accordingly, we direct the Assessing Officer to re-compute mean margins of comparables after including K.R. Rubberite Ltd. and Lifelong India Ltd. and also to adopt the PLI of
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assessee after reducing extraordinary cost wastage of Chennai plant and determine the arm's length price of international transactions, if any. However, adjustment is to be restricted to international transactions only. The Assessing Officer/TPO shall afford reasonable opportunity of hearing to the assessee in this regard. Hence, the grounds of appeal No.2 to 4 and additional ground of appeal are allowed and the ground of appeal No.3 is partly allowed.
In the result, appeal of assessee is partly allowed.
Order pronounced on this 17th day of October, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 17th October, 2018. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : The Appellant; 1. The Respondent; 2. The DRP, Pune; 3. The DIT (TP/IT), Pune; 4. The DR ‘A’, ITAT, Pune; 5. Guard file. 6. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune