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Facts
The assessee, Yutaka Autoparts India Pvt. Ltd., a subsidiary of Yutaka Giken Company Ltd. Japan, engaged in manufacturing auto components. The appeals concern Transfer Pricing adjustments made by the TPO for Assessment Years 2011-12 and 2012-13, regarding the Arm's Length Price of international transactions. Both the assessee and the Revenue challenged the final assessment orders before the Tribunal.
Held
The Tribunal largely ruled in favor of the assessee on several key comparability issues. XLO India Ltd. was directed to be included as a comparable, overturning its exclusion by CIT(A). Various other companies (Elofic Industries, WABCO TVS, Brakes India, Clutch Auto, ANG Industries, Faiveley Transport Rail Technologies, Rane Brake Lining, Sundram Brake Linings) were directed to be excluded as comparables due to functional dissimilarities, export turnover filters, size, R&D activities, and high AMP expenses. Foreign exchange gain was directed to be considered as operating income, and the issue regarding consideration of cash profits (to account for high depreciation) for TNMM was remanded to the TPO for fresh examination.
Key Issues
1. Selection and exclusion of comparable companies for Arm's Length Price (ALP) determination under the Transactional Net Margin Method (TNMM). 2. Treatment of foreign exchange gain as operating income for computing operating margins. 3. Consideration of cash profits or depreciation adjustment as the Profit Level Indicator for TNMM.
Sections Cited
143(3), 144C, 92CA(1), 92CA(3), 92C(2)
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Income Tax Appellate Tribunal, DELHI BENCH’ I’: NEW DELHI
Date of Hearing 13/09/2024 Date of Pronouncement 16/10/2024 ORDER
PER YOGESH KUMAR U.S.JM:
The above mentioned Appeals are filed by the Assessee and the Revenue for assessment years 2011-12 And 2012-13 aggrieved by the final assessment order passed u/s 143(3)/144C of the Income Tax Act, 1961, (“Act” for short) dated 26/09/2016 and 26/12/2017 passed by the Commissioner of Income Tax Appeals- 44, New Delhi (“Ld. CIT(A)” for short).
The Grounds of Appeal by the Assessee/Revenue are as under:-
(A.Y 2011-12) (Assessee) “1. Ld. Commissioner of Income Tax (A) (Ld CIT (A)’) has even making an addition offs 1,56,03,544/- to the total income of the appellant on account of adjustment in the As Length Price (ALP) of the international transactions. 2. In law and on facts and circumstances of the case, the L. CIT (A) haserred in considering certain companies as companies comparable to the Appellant on following grounds.
2a. Comparables have export turnover more than 10% of sales thus geographically different from Appellant.
2b. Comparables are functionally dissimilar to Appellant
3. In law and on facts and circumstances of the case, the Ld. CIT (A) has erred in not considering KLO India Ltd. as comparable to the Appellant despite the fact that net worth of XLO India Ltd has improved during the year 2010-11
4. In law and on facts and circumstances of the case, the Ld. CIT (A) has erred in not considering foreign exchange gain as operating income
5. Without prejudice to the above, and in law and on facts and circumstances of the case, the Ld. CIT (A) erred in not giving adjustment on account of high depreciation to the total cost in the case of the appellant. The Ld. CIT(A) ought to have given relief for the high cost of depreciation (10.57%) when compared to other Indian companies whose average depreciation is only 2.91% of the total cost.
6. Without prejudice to the above, and in law and on facts and circumstances of the case, the Ld. CIT (A) erred in not considering Cash profit/Operating Income as Profit level Indicator on account of high depreciation component in the Appellant's case.
7. Without prejudice to the above and in law and on facts and circumstances of the case, the Ld. CIT (A) has erred on law by not granting the Appellant the option to chose a price that falls within +/- 5% range of the arithmetic mean of the comparables, as contemplated under the proviso to section 92C(2) of the Act. Accordingly, this has resulted in hardship for Appellant, having regard to the principle of natural justice and Hon'ble DRP has erred in upholding the same.
In law and on facts and circumstances of the case the appellant in the interest of justice, may be allowed to 2742 & 2795/Del/2018 Yutaka Autoparts India Vs. ITO adduce additional evidence as may be necessary in support of the grounds raised hereinabove after following due procedures laid down in the Income Tax (Appellate Tribunals) Rules, 1963.
9. In law and on facts and circumstances of the case, the appellant may be allowed to add, supplement, revise, amend or withdraw any of the grounds raised herein above at or before the time of hearing.
(A.Y 2012-13) (Assessee)
“1. Ld. Commissioner of Income Tax (A)/ Transfer Pricing Officer ('Ld. CIT (A)'/ 'Ld. TPO') has erred in making an addition of Rs. 2,08,02,312 to the total income of the appellant on account of adjustment in the Arm's Length Price ('ALP') of the international transactions. 2. In law and facts and circumstances of the case, Ld. TPO erred in computing the margins of comparable companies considered by the Ld CIT(A) while incorporating the directions of order of Ld. CIT (A).
3. In law and on facts and circumstances of the case, the Ld. CIT (A) has erred in considering Brakes India Pvt Ltd and Clutch Auto Ltd as comparable to the Appellant on account of following reasons: 3A. Both the Companies are operating substantially in different geography as compared to the Appellant which is primarily serving the domestic market, thus as per Rule 10B(2)(d), they should not be considered as comparable. 3B. Brakes India Ltd is having turnover around 39 times of the turnover of the Appellant, thus, should not be considered as comparable on account of huge size of operations as compared to Appellant 2742 & 2795/Del/2018 Yutaka Autoparts India Vs. ITO 3C. Ld. CIT (A) after itself accepting the contention of the Assessee of rejecting companies having Advertisement marketing and promotion expenses (AMP) to sales ratio greater than 2% erred in considering Clutch Auto Ltd having AMP to sales ratio of 2.16% as comparable to the Appellant. 3D. Brakes India Ltd is dealing in different products than that of the Appellant.
4. Without prejudice to the above, and in law and on facts and circumstances of the case, the Ld. CIT (A) erred in not giving adjustment on account of high depreciation to the total cost in the case of the appellant.
5. Without prejudice to the above, and in law and on facts and circumstances of the case, Ld. CIT (A) erred in not considering Cash profits for the purpose of Transactional Net Margin Method in order to provide for excessive depreciation in the case Appellant vis-a-vis the comparable companies.
In law and on facts and circumstances of the case the appellant in the interest of justice, may be allowed to adduce additional evidence as may be necessary in support of the grounds raised
hereinabove after following due procedures laid down in the Income Tax (Appellate Tribunals) Rules, 1963.
7. In law and on facts and circumstances of the case, the appellant may be allowed to add, supplement, revise, amend or withdraw any of the grounds raised herein above at or before the time of hearing.”
(A.Y 2012-13) (Revenue)
“1. "The CIT (A) has erred on the facts and circumstances of the case, by deleting the disallowance of Rs.1,91,71,631/- for AY 2012-13 on account of adjustment made in accordance with the order of Transfer Pricing Officer u/s 92CA(3)."
(AY 2011-12)(Assessee)
Brief facts of the case are that, the Assessee is a group Company of Honda Group and is wholly subsidiary of Yutaka Giken Company Ltd. Japan Yutaka India is Indian manufacturing for Auto components System and breaking system products. During the scrutiny assessment proceedings the reference was made u/s 92CA(1) of the Act by the Assessing Officer to the TPO for determination of Arm’s Length Price (‘AMP’) of international transactions entered by the Assessee. The TPO specifically proceeded to determine Arm’s Length Price u/s 92CA (3) of the Act.
During the year under consideration, the Assessee entered into following international transaction along with bench marking as per TP document:-
Description of Transaction Method Selected Amount (In Rs.) Purchased of raw materials, TNMM 220900258 components and consumables Sale of Finished goods & Other sales TNMM 10227265 CPM/TNMM Purchase of Fixed Assets 75304592 Royalty Expenses CPM/TNMM 11394405 TNMM Guarantee Fees & Collaterals Paid 2126898 Technical Support Expenses TNMM 19359971 Other Receipts TNMM 44457 The Yutaka India, based on the customer requirement in India Placed order to its different AE for the import of parts for the manufacturing products in India. To bench mark its international transactions Assessee, compared its entity level PLI (OP/Sales) with external comparables using TNMM as most appropriate method.
Assessee computed its PLI at 1.41% and that all comparables at 3.62%. Based on these analysis, the Assessee claimed that its international transaction are at arm's length.
4.1 The TPO during the TP proceedings after examining the TP study and considering the functional profile and FAR analysis issued show cause notice on 26/12/2014 to the Assessee. Ld. TPO accepted TNMM as the most appropriate method for bench marking the international transactions. During the TP proceeding the TPO sought updated margin of the comparables on single year data basis. Updated margin of the final set of comparables come at 3.93% of four comparables tabulated as under: -
Sr. No. Company name OP/Sales(5) 1 Company Name Enkei Wheels 3.09 (India Ltd.) 2 Mubea Suspension India Ltd. 0.31 3 XLO India Ltd. 2.94 4 Lumax DK Auto Industries Ltd. 9.37 5 average 3.93 4.2. Ld. TPO examined the comparables of the Assessee and found that two comparables namely XLO India Ltd. and ENKEI wheels India Ltd. are having negative net-worththerefore those comparables cannot be considered as good comparables for benchmarking. Accordingly, TPO proposed nine comparables which are upheld by the DRP in last assessment order and proposed them in the final list of comparables in the show cause.
4.3. The Details of final comparables along with the average PLI of 9.52% are reproduced as under: -
Sr. No. Company name OP/Sale (%) 1 Hindi Composites 26.48 2 ANG Inds 1.1 3 Alofic Inds. 7.84 4 WABCO India 19.53 5 CM Smith 14.66 6 Brakes India 6.45 7 Mubea Suspension India Ltd. 0.31 8 Lumax DK Auto Industries Ltd. 9.37 Average 9.52 4.4 Ld. TPO has computed the PLI of the Appellant at 1.33% computed as under:-
Particulars Value A Sales (Net) 610975024 B Change in stock 2566144 C-(A+B) Operating Income 613541168 D Material Cost 396660914 E Employee Cost 34278919 F Admin&other operating expenses 107356642 G Finance charges 2521985 H Depreciation 64556296 Operating Expenses 605374756 1= (D+F+G+H) L-(C-K) Operating Profit 8166412 M= (L/C) OP/ Sales 1.33% Based on the average PLI of the comparables and the PLI of the Assessee, Ld. TPO has computed adjustments in ALP for Rs.
2,08,88,330 in the show cause letter which is reproduced as:
“The value of international transaction is Rs. 25,16,54,644/-. Applying a margin of 1.33% the resultant sale will be Rs. 25,50,46,766/-. Using this as a base the ALP is calculated as under: ALP @ 9.52%:- Rs. 2,42,80,452 Operating Profit Shown @ 1.33%:- Rs. 33,92,122/- Difference:- Rs. 2,08,88,330/-”
4.5. The Assessee responded to the show cause notice before the TPO and the findings of the TPO are as under: - i) Assessee has raised objection of the selection of comparables proposed bythe TPO on functional dissimilarity and applicant of various filters. The remarks of the TPO are tabulated as under:-
Sr. Company Assessee’s Objection TPO’s Remark Name No. (%)
1)Export sales of the 1 ANG company is 33.13% of 1) Contention of the Industries total sales comparing to assessee is accepted as Ltd. export sale is above 30%. no export income of the assessee It will not be used as 2)Functionally dissimilar comparable. 1)Export sales of the 1) Contention of the 2 Elofic company is 21.58% of assessee is rejected as Industries discussed above. total sales comparing to Ltd. 2) The company is no export income of the assessee functionally similar to the 2)Functionally dissimilar assessee, the same company was used in last year TP assessment and same was upheld by the Hon’ble DRP. 1)Export sales of the 1) Contention of the 3 WABCO TVS company is 13.25% of assessee is rejected as discussed above. total sales comparing to (India) Ltd. 2) no export income of the The company is assessee functionally similar to the assessee, the same 2)Functionally company was used in last year TP assessment and dissimilar same was upheld by the Hon’ble DRP. 1)Export sales of the 4 Brakes India company is 13.25% of total sales comparing to no export income of the assessee 2)Functionally 1) Contention of the dissimilar assessee is rejected as discussed above. ii) The appellant has also insisted for inclusion of XLO India on the ground that there is significant improvement in net worth of this company compared to last year. Ld TPO has considered this argument and was of the view that even afterthe end of the relevant financial year this comparable has negative net worth therefore, the appellant's contention was rejected. iii) The appellant has contended that some of the comparable companies are operating in much wider functionality vis-a-vis the assessee which only operates only in motor vehicle segment and such companies should not be considered as comparable.
Ld TPO examined the contention of the appellant. He was of the view that all the comparables are in the business of manufacturing of motor parts, therefore, broadly the functionality is same. Minor difference of different auto parts are permissible when comparability has carried out at net margin level. Ld TPO has relied on the decision of Hon'ble Delhi High Court in the case of Lee and Fung India Pvt. In ITA 306 of 2012. iv) The appellant has sought depreciation adjustment on the ground that the assessee has claimed higher depreciation expense and the reasons for less profitability on account of higher depreciation. Ld TPO has considered the contention and was of the view that adjustments is not possible in the computation of tested parties and relied on the decision of Hon'ble ITAT in the case of Hawarth India Pvt. Ltd. vs. DCIT (2011) Taxmann.com 76 DelhiLd TPO did not allowed adjustments on account of depreciation.”
4.6. The TPO came up with eight comparables and average PLI @ of 7.8% computed as under:-
Sr. No. Company Name OP/Sales (%) 1 Hind Composites -2.95 2 Elofic Inds. 9.91 3 WABCO India 21.29 4 CM Smith 13.38 5 Brakes India 8.22 6 Mubea Suspension India Ltd. 0.32 7 Lumax DK Auto Industries Ltd. 9.44 8 Enkei Wheels 3.15 Average 7.84 Finally, the Ld. TPO made adjustments on the basis of average PLI of 7.84% of the Total value of international transaction of 25,16,54,644 and apply the margin of the appellant at 1.33%.
Computation of arm's length adjustment of Rs. 1,66,03,544 is computed as under :
Arm’s Length Profit @7.84% Rs. 1,99,95,666/- Operating Profit shown @1.33% Rs. 33,92,122 Adjustment Rs. 1,66,03,544/-
The Assessing Officer after issuing draft show cause, passed the order u/s 92CA(3) of the Act by makingaddition on account of Arm’s Length Price of internationaltransaction of Rs. 1,66,03,544/, vide Assessment Order dated 17/04/2015 passed u/s 143(3) read with Section 144C of the Act.
6. Aggrieved by the assessment order dated 17/04/2015, the Assessee preferred an appeal before the CIT(A). The Ld. CIT(A) vide order dated 26/09/2016, dismissed the Appeal filed by the Assessee. Aggrieved by the order of the CIT(A) dated 26/09/2016, the Assessee preferred the present appeal on the Grounds mentioned above.
Ground No. 1 is general in nature, which requires no adjudication, accordingly Ground No. 1 of the Assessee is dismissed.
8. In Ground No. 2 and its sub Grounds, the Assessee contended that the CIT(A) has erred in considering Elofic Industries Ltd., WABCO TVS (India) Ltd. Brakes India Pvt. Ltd. and Clutch Auto Ltd. as comparable Companies.
The Ld. Counsel for the Assessee contended that the above Companies having export turnover of 10% and more,thussubmitted the following details:
Company Name Export turnover Assessment year in which ground raised Elofic Industries Ltd. 21.58% A.Y 2011 12. WABCO TVS (India) Ltd. 13.25% A.Y 2011
12. Brakes India Pvt. Ltd. 16.89% inA.Y 2011-12 & A.Y 2011-12 19.43% in A.Y 2012-13 filter was upheld by the Delhi Bench at 10% in Assessee’s own case for Assessment Year 2010-11 and the Elofic Industries, WABCO and Bakers India were rejected on the said ground. Further submitted that Tribunal in Assessee’s own case for Assessment Year 2011-12 has upheld the export filter of 10%, therefore, Clutch Auto should also be rejected as the same is having export sales of 11%. Further contended that the above Companies are functionally dissimilar which are covered in Assessee’s own case.
Per contra, the Ld. Departmental Representative relied on the orders of the Lower Authorities and sought for dismissal of Ground No. 2 and its sub Grounds of the Assessee.
Elofic Industries Ltd.,& WABCO
The Co-ordinate Bench of the Tribunal in Assessee’s own case for Assessment Year 2010-11 rejected the above saidcomparables in following manners: -
ELOFIC INDUSTRIES LTD. (ELOFIC)
“33. The exclusion of Elofic has been challenged by the taxpayer firstly on ground of export sales to total sales to the tune of 29.07%, which has already been discussed in the preceding paras and secondly, on ground of diversified market as the filters manufactured by Elofic share a common bond of trust, durability and performance and find application in multifarious segments like automobiles, agriculture, industrial, small engines, two-wheelers, earthmoving, marine, auton air- conditioning, industrial heating and petrochemical. Keeping in view the diversified market of Elofic and failing the export income to total sales filter, we do not find Elofic as a valid comparable. WABCO- JVS (INDIA) LTD. (WABCO) 34. The taxpayer also challenged the inclusion of WABCO on ground of failing the export income filter and on the ground that it is catering to after-market segment and the company is carrying out significant research and development activities. Annual report, relevant page 772, shows that WABCO has commissioned 156 authorized service centers at strategic locations across the country, to provide quicker and better service on air brake aggregates. Further, to improve availability of quality service in rural areas, the company also commissioned 145 certified workshops. These initiatives would result in improved service practices, availability of genuine parts and generate additional revenue for the company. Furthermore, annual report at page 769 of the paper book shows that WABCO is carrying out significant research and development activities in specific areas and is deriving benefits from R&D activities as under :- "B. TECHNOLOGY ABSORPTION Research & Development (R & D) 1. Specific areas in which R & 0 is carried out by the company. Existing activities: (a) Double diaphragm spring brake actuator (DDSBA) type 20/24 and upgraded version of type 16/24 for disc brake validated and production ready for European Market. These devices are designed for high level of robustness against dust and water entry.
(b) Automatic slack adjuster (ASA) with patented adjustment mechanism developed and validated for European market. (c) New Air Processing and Distribution Assembly (APDA) which was in promotion phase last year is now fully developed, validated and production ready. This product contributes to clean working environment for long life of pneumatic systems on vehicle. (d) Improved and redesigned D2 governor valve with patented sealing solution developed and validated for US market. (e) Design activity kicked off on fourteen valve devices for North American OEMs as part of market expansion strategy. These devices deliver best in class performance, capable of operating in higher temperature and corrosive environment. (f) New Life Compressor II generation (NLC II) which was under promotion phase last year is now developed and undergoing customer validation. This is a unique patented solution for improved performance at reduced cost to the customer compared to the previous generation NLC I. (g) New initiative for engineering excellence based on Model Based Engineering (MBE) launched. Mathematical models for flow simulation of valves and compressor performance simulation developed and validated, which is expected to significantly reduce design lead time for new products. (h) Indigenous environmentally friendly technology developed for achieving corrosion resistance of products (480 hours of neutral salt spray) to match expectations of global customers. (i) New welding process developed to achieve extended life of brake chamber parts critical to safety. (j) Kicked off development of Automated Manual Transmission (AMT) for Indian customers. This technology will significantly reduce driver fatigue and improve fuel efficiency.
2742 & 2795/Del/2018 Yutaka Autoparts India Vs. ITO (k) Electronically Controlled Air Suspension (ECAS), which was promoted last year in Indian Market introduced in production vehicles. (l) ABS adapted and successfully introduced in trailer systems and off-highway dumpers to significantly improve road safety. (m) Continued focus on cost reduction based on process and design change to reduce material content has yielded significant benefits. (n) Significant effort at cost reduction through transferring production of brake chambers from Europe to India with locally developed parts, which are fully validated to global customer standards. "
35. Aforesaid facts, provision of catering to after market segment by WABCO and carrying out significant R&D activities benefiting the company makes it incomparable to the taxpayer which is a routine manufacturer. So, we order to exclude WABCO. So, ground no.4 is determined in favour of the taxpayer.”
By respectfully following the order of the co-ordinate Bench in Assessee’s own case for AY 2010-11 we order to exclude both Elofic Industries and Wabco TVS India Ltd. from the list of comparable.
The above Company is engaged in three divisions brake division, Foundry division and Polymer division. Foundry division manufactures permanent could castings, grey iron ad SG from castings which can be corroborated with Textual information 7 Brakes India is Rs. 2,64,262.62 lakhs whereas the sales of Assessee is Rs. 7,108.495 lakhs which is 37 times that of Assessee. It is the contention of the Assessee that the Brakes India sales are not only more than 37 times i.e. more than 10 times and also the Brakes India is operating in diversified segments. Considering the above facts and circumstances, as Brakes India Pvt. Ltd. is having diversified operations and diversified market, the Brakes India Ltd. cannot be proper comparable. Accordingly, we order to exclude Brakes India Pvt. Ltd. from the list of comparables. Accordingly, the Ground No. 2 of the Assessee is allowed.
15. In Ground No. 3 the Assessee contended that the CIT(A) has erred in not considering XLO India Ltd. as comparable to the Assessee as the net worth of XLO India has improved during the year 2010-11.
16. The Ld. CIT(A) excluded XLO from the comparables as the same has negative net worth in following manners: - 2742 & 2795/Del/2018 Yutaka Autoparts India Vs. ITO “Brakes India Ltd. :- Ld. AR has argued that as per the Accounting Schedule 17, this company has three segments namely brake Division, Foundry Division, and others comprising of Engineering plastics etc. Therefore, functionally different. I have considered the arguments of Ld AR. The facts remain that all three divisions caters to auto industries and product of these three division are used in auto mobile industries. Therefore, on entity basis also this company will remain functionally similar to the appellant. (iii) ) Third ground of appeal
is against not considering the XLO India Ltd as comparable by the TPO. Ld. AR has argued that M/s XLO India Ltd. has improved its working and net worth of XLO India Ltd. has increased net worth during the year. Ld AR has reproduced the following table of net worth of XLO India :- Particulars 2010-11 2009
10. Amount in Rs. Thousands Share Capital 9.824 9.824 Plus: reserve 2.200 2.200 Less: debit 12,544 18,695 balance of Profit and loss account (520) (6,671) I have considered the arguments of Ld AR though net worth has improved however the facts remain that the company has negative net worth at the end of the year. I agree with the decision of the Ld TPO to exclude the company having negative net worth from the list of comparables. Accordingly this company will not be included in the final list of the comparables. This grounds of appeal is dismissed”. accepted since the XLO is not making loss continuously and the negative net worth of a Company could not make a functionally comparable company as not a comparable. The Ld. Counsel has relied on following case laws: a. ACIT Vs. Gillette Diversified Operations Pvt. Ltd. (ITA 499/Del/2013) upheld by the Hon’ble High Court of Delhi in b. Welspun Zucchi Textiles Ltd. Vs. ACIT (ITA No. 587/Mum/2013) upheld by the Hon’ble Bombay High Court in of 2014.
18. On the other hand, the Ld. DR by relying on the findings of the CIT(A) submitted that the XLO India Ltd. cannot be a good comparable as the said company is having negative net worth.
We have heard the parties perused the material. As per the financials of the XLO India Ltd., it had profit of Rs. 6,150/- thousand in AY 2010-11 and it had negative net worth in the same year. The net worth of the said company has been improved from previous three years and it is not the case of diminishing returns, to substantiate the above claim, the Assessee produced the working at Annexure A-1 to the submission filed on 13/06/2024. relying on the ratio laid down in the case of ACIT Vs. Gillette Diversified and Operation Pvt. Ltd. (supra) and Welspun Zucchi Textiles Ltd. Vs. ACIT (supra), we direct the T.P.O. to consider XLO India as comparable company. Accordingly, we allow Ground No. 3 of the Assessee.
In Ground No. 4 the Assessee contended that the CIT(A) has erred in not considering the foreign exchange gain as operating income. The Assessee contended before the CIT(A) that foreign exchange fluctuation is directly related to business transaction, therefore it is an operative item, therefore, the foreign exchange fluctuation should be considered as operating revenue. The Ld. CIT(A) while rejecting the said contention held as under: -
“Findings: I have considered findings of the Ld. TPO and the arguments of Ld. AR. Ld. TΡΟ has not treated foreign exchange income as non-operating income while computing the PLI of the appellant. There are divergent views of Hon'ble tribunal in earning foreign exchange as operating or non operating items I have considered all the Judicial pronouncements relied by the Ld AR foreign exchange fluctuation operating and non operating items has not been defined in the TP provisions however in safe Harbour 2742 & 2795/Del/2018 Yutaka Autoparts India Vs. ITO Rules operating and non operating items is not in Rule 10TA it is reproduced as under:- Rule 10TA (i) operating expense" means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortization expenses relating to the assets used by the assessee, but not including the following, namely including expenses (ii) Provision for unascertained liabilities (iii) Pre-operating expenses (iv) loss arising an account of foreign currency fluctuations (v)Extraordinary expenses (vi)loss on transfer of assets or investments (vii) Expense on account of income tax and (viii) Other expenses not relating to normal operations of the assessee, (k) "Operating revenue" means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations but not including the following namely:- (i) interest income (ii) income arising on account of foreign currency fluctuations (iii) income on transfer of assets or investments (iv) refunds relating to income tax (v) provision written back (vi) extraordinary incomes and (vii) Other incomes not relating to normal operations of the assessee Though case is not covered by safe harbour rule it would be better to take the report as definition for operating revenue or non operating revenue from the Safe harbour Rules case interpretation will be proper without which a assessee apply in safe horbours rule will treated certain items as operating whereas other assessee which is not 2742 & 2795/Del/2018 Yutaka Autoparts India Vs. ITO apply for safe harbour Rule will treat certain items as operating and other assessee which is not apply for safe harbour will treat some items as non operating therefore, such interpretation of operating and non operating expenses may not be proper for harmonious interpretation of TP provision. As per the definition safe harbours Rule foreign exchange fluctuation as non-operating items. None of the Judicial pronouncement relied by the Ld AR as considered definition of safe harbour rule where foreign exchange fluctuation has been considered as non- operating. In view of the above I hold that the None of the Judicial pronouncement relied by the Ld AR as considered definition of safe harbour rule where foreign exchange fluctuation has been considered as non- operating. In view of the above I hold that the foreign exchange fluctuation income /losses is not operating items accordingly appeal is dismissed.”
The Ld. Counsel for the Assessee submitted that the foreign exchange fluctuation gain is closely linked to the business operation and did not constitute abnormal or extra-ordinary item.
By relying on the order of the Assessee’s own case for Assessment Year 2010-11, submitted that the CIT(A) has erred in not considering foreign exchange gain as operative income.
Per contra, the Ld. DR relied on the orders of the Lower Authorities and sought for dismissal of the Ground No.4.
Heard the parties perused the material. The similar question came for consideration in Assessee’s own case for AY 2010-11 in . The Co-ordinate Bench of the Tribunal decided the above issue in favour of the Assessee in following manners: -
“14. However, it is the case of the taxpayer that Safe Harbour Rules are not in case of the taxpayer qua AY 2010-11 and it is required to be treated as operating while computing the operating margins of the taxpayer as well as comparable companies and relied upon the decision rendered by Hon'ble Delhi High Court in Cash Edge India Pvt. Ltd. vs. ITO - ITA 279/2016 order dated 04.05.2016 available at page 258 to 261 of the Paper book and Pr. CIT-2 vs. M/s. Fiserv India Pvt. Ltd. - ITA 17/2016 order dated 06.01.2016 available at page 262 to 267 of the Paper book.
Hon'ble Delhi High Court in case cited as Cash Edge India Pvt. Ltd. (supra) decided the identical issue qua AY 2010-11 in favour of the Assessee by returning following findings :-
"7. As far as the question, i.e., foreign exchange fluctuation element is concerned, the records clearly reveal that the Safe Harbour Rules came into force later whereas the facts of this case pertain to the assessment year 2010-11 (Financial year 2009-10). As a consequence, the impugned order cannot be interfered with. No question of law thus arises. The appeal is consequently dismissed."
Similarly, Hon'ble Delhi High Court in case cited as Fiserv India Pvt. Ltd. (supra) also decided the identical issue pertaining to AY 2009-10 in favour of the Assessee by returning following findings :-
"10. As regards question (ii) it is pointed out by learned counsel for the Assessee that the Safe Harbour Notification dated 18th September 2013 relied upon by the Revenue is prospective and did not apply to the AY in question. Even otherwise the Court finds that the decisions relied upon by the ITAT in the impugned order covers this issue in favour of the Assessee as far as the AY in question is concerned. Consequently, the Court declines to frame any question on the issue."
Moreover, in taxpayer's own case for AY 2012-13, CIT (A) vide order dated 26.12.2017, available at page 202 of the paper book, allowed the taxpayer to consider foreign exchange gain as part of operating income. So, the Revenue is also legally bound to follow the rule of consistency.
In view of what has been discussed above, we are of the considered view that in order to compute the operating margin of the taxpayer, foreign exchange gain is to be considered as part of operating income for computing the operating margin of taxpayer as well as comparable companies. So, Ground No.2 is determined in favour of the taxpayer.”
By relying on the order of the Co-ordinate Bench in Assessee’s own case for A.Y 2010-11 (supra), we direct to compute the operating margin of the tax payer, foreign exchange gain is to be considering the same as part of operating income for computing the operating margin as well as comparable companies. Accordingly, the Ground No. 4 of the Assessee is allowed.
26. The Ground No. 5 of the Assessee is not pressed, accordingly Ground No. 5 of the Assesseeis dismissed.
27. In Ground No. 6 the Assessee contended that the Ld. CIT(A) erred in not considering cash profit/operating income as profit level indicator on account of high depreciation component in the Assessee’s case. issue was considered by the Coordinate Bench of the Tribunal in Assesse’s own case for AY 2011-12 in and decided the same in favour of the Assessee, thus, sought for allowing the Ground No. 6 of the Assessee.
Per contra, the Ld. DR sought for dismissal of the Ground No. 6 of the Assessee by relying on the findings of the CIT(A).
Heard the parties and perused the material. It is the case of the assesses that the average depreciation/sales of the Assesse is 10.57%, therefore, sought adjustment on account of depreciation.
The TPO has not allowed the adjustment in PLI of the Assessee on the ground that for the tested party, no adjustment should be allowed in the net profit by relying on the order of the Tribunal in the case of Hind Composites India Pvt. Ltd. The Ld. CIT(A) dismissed the Ground of the Assessee in following manners: -
“I am not inclined to accept adjustment in the net profit working of the appellant. Further, depreciation in initial years is higher. However, facts remains that in earlier year, cost of repair and maintenance is less. Therefore, unless, the appellant provides the combined data for depreciation and repair & maintenance of the appellant and comparable, the depreciation adjustments cannot be allowed. For net profit analyses, each item of expenditure cannot be considered for comparability. Accordingly, this grounds of appeal is dismissed.”
31. The very same issue came for consideration by the Co- ordinate Bench of the Tribunal in Assessee’s own case for AY 2010- 11 and the issue has been decided in favour of the Assessee in following manners: -
“42. The taxpayer challenged the order passed by the TPO/DRP in not considering cash profits for the purpose of TNMM in order to provide for excessive depreciation in case of the taxpayer vis-à- vis comparable companies. The taxpayer provided the analysis of the cash profit earned by it as under :- Particulars Actual Cash Profits Amount in Rs. Amount in Rs. Sales 545,703,341 545,703,341 Other Operating income Sundry Balances 1,910,317 1,910,317 W/off Claim received 11,661 111,661 Job work charges 40,589 40,589 Foreign exchange 1,719,684 1,719,684 gain Total operating 549,485,592 549,485,592 income Cost of sales 378,562,282 378,562,282 Employees cost 27,624,330 27,624,330 Manufacturing 78,923,208 78,923,208 &Administration Bank charges 2,245,939 2,245,939 Depreciation 53,402,064 Total operating 540,757,823 487,355,759 expenses Operating Profit 8,727,769 62,129,833 Non Operating Income Interest received 35,410 35,410
Depreciation 53,402,064 Non Operating expenses Interest on loan 19,258,549 19,258,549 PBT (10,495,370) (10,495,370) OP/Sales 1.60% 11.39%
The taxpayer relied upon the decision rendered by the coordinate Bench of the Tribunal in cases of ACIT vs. Gates India (P) Ltd. - order dated 31.07.2017 and Schefenacker Motherson Ltd. vs. ITO - 123 TTJ 509 (Delhi).
44. The ld. DR for the Revenue supporting the order passed by the TPO/DRP contended that the taxpayer is required to choose one of the method provided u/s 92C of the Act for computing the ALP under TNMM and the mandate for determining the ALP under TNMM as given as per Rule 10B(1) of the Act and further contended that the cash profit cannot be used in place of net operating profit for the purpose of TNMM in order to provide for excessive depreciation in the case of the taxpayer vis-à-vis comparable companies.
Coordinate Bench of the Tribunal in ACIT vs. Gates India (P) Ltd. (supra) held that, "Only in the specific and exceptional circumstances where the assessee has demonstrated that either in the case of the assessee or in the case of comparable companies there exists an exceptional circumstances under which the depreciation provided by the assessee is either excessive in comparison to the com parables or depreciation provided by the comparable companies is exceptionally very low. The cash profit can be considered under TNMM".
46. Coordinate Bench of the Tribunal in Schefenacker Motherson Ltd. (supra) while deciding the identical issue also held as under :-
"19. In the present appeal, ALP of transactions carried was to be determined by comparing net profit of the taxpayer (tested party) with mean net profit of comparables. Only receipts and expenditure, having connection with international transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions quoted above that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed.
There is no formula which would be applicable universally and in all circumstances. "Net profit" used in r. 10B can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the learned CIT(A). But depreciation in such profit on commercial principles as to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing {supra} by Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons."
When the taxpayer has brought on record the complete analysis of cash profits earned by the taxpayer to be compared with complete analysis of cash profit earned by the comparable companies extracted in the preceding paras, we are of the considered view that the issue is required to be decided afresh by the TPO in the light of the decision rendered by the coordinate Bench of the Tribunal in ACIT vs. Gates India (P) Ltd. and Schefenacker Motherson Ltd. vs. ITO (supra). So, ground no.6 is allowed for statistical purposes.
By respectfully following the ratio laid down above in Assessee’s own case for Assessment Year 2010-11,we direct the TPO to decide the issue afresh in the light of decision rendered by the Co-ordinate Bench of the Tribunal in the case of ACIT Vs. Gates India Pvt. Ltd. and Schefenacker Motherson Ltd. Vs. ITO, statistical purpose.
The Ground No. 7 to 9 have not been pressed by the Assessee accordingly Ground No. 7 to 9 are dismissed as not pressed.
In the result, the Appeal of the Assessee in is partly allowed for statistical purpose.
ITA No.2742/Del/2018(AY 2012-13)
The Ground No. 1 being general in nature requires no adjudication and the Ground No. 2 has not been pressed by the Assessee, accordingly Ground No. 1 & 2 of the Assessee’s Appeal are dismissed.
In Ground No. 3 Assessee is aggrieved by the order of the CIT(A) wherein the Ld. CIT(A) has considered Bakers India Pvt. Ltd. and Clutch Auto Ltd. as comparables to the Assessee Company.
The Bakers India Pvt. Ltd. has been considered by us in detail for A.Y 2011-12 and held that the said Brakes India Pvt. Ltd. is not By following the principals of consistency we direct the TPO to exclude Bakers India Pvt. Ltd. from the list of comparables.
The Ld. CIT(A) while considering Clutch Auto Ltd. as comparable held that the said company passes the export filter and also marketing expenses filter, therefore, the contention of the Assessee for exclusion of the said Company from the final list of comparable has been dismissed.
It was the specific case of the Assessee that the Clutch Auto Ltd. has export sales of Rs. 24,65,47,359/- and sales of products of Rs. 2,15,83,99,716/-. Thus, export sales are 11.42% to total sales, thus submitted that the said company deserves to be rejected due to the export turnover filter of 10%. The Ld. Counsel submitted that in Assessee’s own case for AY 2010-11 the Co-ordinate Bench of the Tribunal has rejected the comparables having export sales of more than 10%, thus, sought for rejecting the Clutch Auto as comparable Companies.
Per contra, the Ld. DR relying on the findings of the CIT(A) submitted that Clutch Auto Ltd. is good comparable, thus sought for deciding the issue in favour of the Revenue.
Heard the parties and verified the material available on record. As per the financials the Clutch Auto has export sales of Rs. 24,65,47,359/- and sales of products of Rs. 2,15,83,99,716/-.
Thus, export sales are 11.42% to total sales, which can be corroborated from the documents in the paper book submitted by the Assessee. The Co-ordinate Bench of the Tribunal while rejecting the comparables having export sales of more than 10% in Assessees own case for A.Y 2010-11 in held as under:-
“25. Coordinate Bench of the Tribunal in case of Gharda Chemical Ltd. (supra) observed that for the purpose of comparability, factors like location of parties, available of raw material, demand & supply and acquisition are also necessary to be considered. Operative part of the order is extracted as under :- "16. ..... The importance of the "similar circumstances" cannot be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions can be judged by the quality, grade and quantity of the material. In addition, the factors like the location of the parties, availability of raw material; demand and supply equation also play pivotal role in finding out as to whether the two are really comparable or not."
Identical issue has been decided by the coordinate Bench of the Tribunal in case of ACIT vs. Rhoida Chemicals India P. Ltd. (supra) and on the basis of export filter, comparable was ordered to be excluded by returning following findings :-
"13. ....... Insofar as the rejection of other filtration criteria adopted by the assessee with regard to the companies having export sales being less than 20% of the total sales, it is seen that assessee's exports are around 13%, therefore, the selection criteria of 20% of the export does not seems to be correct one. At the same time also, the TPO's rejection of this criteria is also not correct that it should be taken as "Nil" or zero percentage. Therefore, we are of the considered opinion that the second criteria for selection of comparable companies should be the companies having export sales of in and around 13% which would be quite appropriate. Thus, we direct the TPO to look for the comparable companies, which are having export turnover percentage of around 13% of the total sales and accordingly, select the comparable companies using this criterion. While doing so, the TPO will take into account the export turnover out of total sales, gross of excise duty excluding commission and other income."
Keeping in view the facts and circumstances of the case and by following the order passed by the coordinate Bench of the Tribunal, we are of the considered view that all the four comparable companies viz., ANG Industries Ltd., Elofic Industries Ltd., Wabco- JVS (India) Ltd. and Brakes India having export sales of 29.73%, 29.07%;, 12.86% and 15.18% to the total sales are not even near to the taxpayer which is having a meager export sale of 0.17% and since the comparable companies are operating in entirely different geographical market, the same cannot be a valid comparable vis-à- vis the taxpayer.”
By following the ratio laid down in Assessee’s own case for AY 2010- 11 (supra) we find the Clutch Auto Ltd. cannot be a valid comparable vis-à-vis a taxpayer. Accordingly, we direct the TPO to Accordingly, Ground No. 3 of the Assessee is allowed.
The Ground No. 4 has not been pressed by the Assessee, thus the Ground No. 4 is dismissed as not pressed.
43. In Ground No. 5 the Assessee contended that the CIT(A) erred in not considering the cash profits for the purpose of transactional net margin method in order to provide for excessive depreciation in the case of the Assessee vis-à-vis the comparable Companies.
The Ld. Counsel for the Assessee submitted that the above issue regarding consideration of cash profits for the purpose of transactional net margin methods has been considered by the Co- ordinate Bench of the Tribunal in Assessee’s own case for AY 2012- 13 and remanded the matter to the file of the TPO, thus sought for similar direction.
45. Per contra the Ld. DR relied on the order of the Lower Authorities and sought for dismissed of the Ground No. 5.
The similar issue has also been consideration for AY 2011-12, and the issue has been remitted to the file of the TPO to decided the Bench of the Tribunal in ACIT Vs. Gates India Pvt. ltd. and Schefenacker Motherson Ltd. Vs. ITO. Following the principles of consistency, the issue involved in the Ground No. 5 of the Assessee is restored to the file of the TPO for consideration afresh, accordingly, Ground No. 5 of the Assessee is partly allowed for statistical purpose.
47. Ground Nos. 6 & 7 of the assessee are not pressed, accordingly Ground Nos. 6 & 7 of the assessee are dismissed as not pressed.
In the result, Appeal of the Assessee is partly allowed for statistical purpose.
The Department of Revenue is aggrieved by the order of the CIT(A) in deleting the disallowance of Rs. 1,91,71,631/- for the year under consideration on account of adjustment made by the TPO u/s 92CA(3) of the Act. The Ld. CIT(A) has directed the TPO to exclude ANG Industries Ltd., Faiveley Transport Rail Technologies India Ltd., Rane Brake Lining Ltd. and Sundram Brake Linings Ltd., the Department is on Appeal against the same.
The Ld. CIT(A) while directing the TPO to exclude the above Company from the final list of comparable held as under:-
(a) The above mentioned company earns 32.80% of its sales through exports whereas the appellant is largely caters to the domestic market. As the appellant is producing for the domestic market, it would be reasonable to apply a export filter of 25% of exports to sales ratio so that the companies chosen are comparable to the appellant. As ANG Industries Ltd. does not pass this filter hence the AO/TPO is directed to exclude it from the final list of comparables. The contention of the appellant is accepted.
The Coordinate Bench of the Tribunal in Assessee’s own case while rejecting the ANG Industries as the same is having export sales for more than 10% held as under:-
“27. Keeping in view the facts and circumstances of the case and by following the order passed by the coordinate Bench of the Tribunal, we are of the considered view that all the four comparable companies viz., ANG Industries Ltd., Elofic Industries Ltd., Wabco- JVS (India) Ltd. and Brakes India having export sales of 29.73%, 29.07%;, 12.86% and 15.18% to the total sales are not even near to the taxpayer which is having a meager export sale of 0.17% and since the comparable companies are operating in entirely different geographical market, the same cannot be a valid comparable vis-à- vis the taxpayer. the Tribunal in Assessee’s own case for A.Y 2010-11, we find no error or infirmity in the order of the CIT(A) in excluding ANG Industries Ltd. from comparables.
The Ld. CIT(A) while directing the A.O/TPO not to include the above company in final list of comparables held as under: -
“(a) The main contention of the appellant is that the company is engaged in manufacturing and supplying of equipment’s for the railway industry and has earned revenue from multiple activities such as energy and comfort, brakes and safety, access and information and services. Only 26% of it's revenue is derived from brakes and safety segment. Moreover, it incurs 4% of its sales in selling and marketing expenses in comparison to 0.06% incurred by the appellant. (b) In view of the above I agree with the appellant that the functional profile of the above mentioned company is different from that of the appellant and hence it should not be included in the final list of comparables.
Considering the fact that the Faiveley Transport Rail Technologies India Ltd. has revenue from comparable segment 26% and it has AMP expense ratio of 4% which is higher than filter of 2% which has been considered appropriate by the CIT(A) to direct the materials on record, we find no error or infirmity in the finding and the conclusion of the CIT(A).
the Ld. CIT(A) while directing the TPO to exclude the above company from the above companies held as under: -
“(a) The main contention of the appellant is that the above mentioned company is providing its products to after market segment whereas the appellant is engaged in supplying of auto components to OEMs only. It has also been stated that the company is incurring 4% (appx) of its sales in selling and marketing expenses in comparison to the appellant which is incurring only 0.06%.It would be reasonable to apply a marketing expense filter of 2% in the instant case as the appellant is incurring marketing expenses of only 0.06%, (b) In view of the above I agree with the appellant that the above mentioned company should not be included in the final list of comparables. The AO/TPO is directed to exclude Rane Brake Lining Ltd from the final list of comparables.”
Considering the fact that the CIT(A) excluded the above Company from the comparables as the same is having AMP expense ratio of 4% which is higher than filter of 2% as considered appropriate by CIT(A) and it is also supplying goods in aftermarket absence of any contrary materials, we find no error or infirmity in directing the T.P.O/A.O. to exclude Rane Brake Lining Ltd. from the comparables.
The Ld. CIT(A) while directing to exclude the Sundram Brake Linings Ltd. held as under: -
“The above mentioned company earns 32.72% of its sales through exports and hence it fails the export filter of 25% discussed in para (i) of 6. 1 above. The AO/TPO is directed to exclude Sundaram Brake Linings Ltd. from the final list of comparables”.
The above company has export sales of 32.72% of total sales and also involved in manufacturing of automotive and non- automotive, railways and industrial friction materials and also catering the aftermarket segments. The CIT(A) excluded from final list of comparables as the export sales are more than filter of 28%.
Apart from the same, the Co-ordinate Bench of the Tribunal in Asssesse’s own case for AY 2010-11 in rejected a comparable Company having export sale more than 10% in following manners:-
2742 & 2795/Del/2018 Yutaka Autoparts India Vs. ITO “27. Keeping in view the facts and circumstances of the case and by following the order passed by the coordinate Bench of the Tribunal, we are of the considered view that all the four comparable companies viz., ANG Industries Ltd., Elofic Industries Ltd., Wabco- JVS (India) Ltd. and Brakes India having export sales of 29.73%, 29.07%;, 12.86% and 15.18% to the total sales are not even near to the taxpayer which is having a meager export sale of 0.17% and since the comparable companies are operating in entirely different geographical market, the same cannot be a valid comparable vis-à- vis the taxpayer”.
In view of the above and by respectfully following the ratio laid down by the Coordinate Bench of the Tribunal in Assesse’s own case for AY 2010-11 (supra), we find no error or infirmity in the order of the CIT(A) in directing the TPO/A.O. to exclude Sundram Brake Linings Ltd. from the list of comparables. Accordingly, we find no merit in the Grounds of appeal of the Revenue. is dismissed.