JAMSHEDPUR CONTINUOUS ANNEALING & PROCESSING COMPANY PRIVATE LIMITED,KOLKATA vs. NATIONAL E-ASSESSMENT CENTRE, DELHI

Per Anikesh Banerjee, Judicial Member: The instant appeals were filed by the assessee that is directed against final

assessment order passed by the ld. National e-Assessment Centre(in brevity

AO) U/s 143(3) rws144C (13)/ 144B of the Income Tax Act (brevity the Act)

dated 25/10/2021in pursuant to the directions of Dispute Resolution Panel-2 (in

brevity DRP), New Delhi, dated 13/09/2021 issued U/s 144C(5) of the Act

pertains to Assessment years2017-18 & 2018-19.

common factual issue. For brevity we have taken together,heard together and

disposed of together. We have taken onITA No. 595/Kol/2021 as the lead case.

3 I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 Assessment Years: 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. rejecting the cash profit level indicator (“PLI”) of the Appellant as well as of comparable for the purpose of bench marking. 2.2. Rejected Transfer pricing Documentation and Economic Analysis That on the facts and in the circumstances of the case, the Learned TPO and the Learned AO erred. i) in rejecting the transfer pricing documentation maintained by the company in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (“Rules) And ii) in not accepting the economic analysis undertaken by the Appellant which was in accordance with the provisions of the Act read with Income Tax Rules, 1962 (Rules) for establishing the Arm’s Length Price (ALP) of the International Transactions. iii) In undertaking a fresh search and thereby making an adjustment to the international transactions with AEs. 2.3. Comparables On the facts and circumstances of the case and in law, the learned TPO erred a. in not providing the detailed search process for selecting the companies considered comparable by him. b. Rejecting the companies proposed by the Appellant which were functionally comparable. • Vallabh Steel Limited, for which rectification application under Section 154 has been filed with the learned Transfer pricing officer and is pending for disposal. • Uttam Galva Steels Ltd. c. In selecting the companies engaged in functionally different operations: • Tata Steel BSL Limited • M/s Stelco Limited 3. On the facts and circumstances of the case, the Ld. AO has erred in proposing to initiate penalty proceedings under Section 270A of the Act against the Appellant, which is bad in law. 4. Brief facts of the case are that Jamshedpur Continuous Annealing &

Processing Co. Pvt Ltd (‘JCAPCPL’ or the assessee’)was incorporated on 17th

March 2011 as a wholly owned subsidiary of Tata Steel Limited (TSL). It was

later converted into a Joint Venture (JV) between TSL and Nippon Steel and

4 I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 Assessment Years: 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Sumitomo Metal Corporation (NSSMC) on 17th August 2012.The JV was

incorporated for constructing, owning and operating a Continuous Annealing

and Processing Line (‘CAPL’) in Jamshedpur for the production of

continuously annealed, cold-rolled steel / coils and sheets for catering to the

niche product requirements of the automotive sector which was not very

established in India.The commercial operations of JCAPCPL commenced on

01/04/2015. The company has been set up as India’s first CAPL 600,000 tonnes

per annum of high-quality cold rolled sheets exclusively for the automotive

industry. Transaction under consideration:

Purchase of spares For AY 2017-18

Transaction Value with AE: Rs. 2,52,65,650/- •

Value of Adjustment: Rs.35,27,000/- •

For AY 2018-19

Transaction Value with AE: Rs. 8,10,61,143/- •

Value of Adjustment: Rs. 20,33,322/- •

During calculation of Net profit margin in ALP the TPO had considered

the depreciation of asseessee. The assessee is a newlyset up business

entity and yielding huge depreciation. The assesseerequested for

acceptance of cash PLI for calculation ALP which was rejected the by the

5 I.T.A. No. I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 ITA No. 295/Kol/2022 Assessment Years: 2017 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. TPO. The DRP had accepted the assessee’s DRP had accepted the assessee’splea, but the TPO had not but the TPO had not

considered. The adjustment is calculated by the considered. The adjustment is calculated by the TPO amount to Rs. TPO amount to Rs.

35,27.000/- for AY 2017 for AY 2017-18 which was upheld by the which was upheld by the ld. AO. The

aggrievedassessee filed assessee filed an appeal before us by challenging the before us by challenging the

assessment order.

kept in the record. The Ld. A.R invited our attention in written submission kept in the record. The Ld. A.R invited our attention in written submission kept in the record. The Ld. A.R invited our attention in written submission APB

page 223 and the details of comparisons for calculation of ALP. The submission the details of comparisons for calculation of ALP. The submission the details of comparisons for calculation of ALP. The submission

has duly inserted as below: has duly inserted as below:

6 I.T.A. No. I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 ITA No. 295/Kol/2022 Assessment Years: 2017 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd.

7 I.T.A. No. I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 ITA No. 295/Kol/2022 Assessment Years: 2017 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd.

DRP and the assessee is using TNMM as M DRP and the assessee is using TNMM as MAM so cash credit/operating M so cash credit/operating

revenue as margin of the assessee there on was 3.45%. Whereas including revenue as margin of the assessee there on was 3.45%. Whereas including revenue as margin of the assessee there on was 3.45%. Whereas including

depreciation the margin comes comes to 16.92%. The Ld. A.R further proceeded that further proceeded that

the company is newly set up and all the fixed the company is newly set up and all the fixed assets are yielding huge are yielding huge

depreciation. Considering excluding depreciation of the on. Considering excluding depreciation of the variables, variables, the cash PLI

is almost similar with the other is almost similar with the other comparable. The Ld. A.R . The Ld. A.R has drawn our

attention in the order of Ld. DRP in page 2 para 4.1 which is reproduced as attention in the order of Ld. DRP in page 2 para 4.1 which is reproduced as attention in the order of Ld. DRP in page 2 para 4.1 which is reproduced as

below:

8 I.T.A. No. I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 ITA No. 295/Kol/2022 Assessment Years: 2017 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. “4.1. In DRP proceedings, the a “4.1. In DRP proceedings, the assessee submitted that adjusted PLI i.e. cash ssessee submitted that adjusted PLI i.e. cash profit/operating Revenue should be considered under TNMM in place of operating profit/operating Revenue should be considered under TNMM in place of operating profit/operating Revenue should be considered under TNMM in place of operating profit for better comparison. Specifically, the assessee wished to exclude depreciation profit for better comparison. Specifically, the assessee wished to exclude depreciation profit for better comparison. Specifically, the assessee wished to exclude depreciation on the grounds that during the year, though grounds that during the year, though the assets of the Assessee were put to use the assets of the Assessee were put to use to which depreciation has been recognized, the operation of the company to which depreciation has been recognized, the operation of the company to which depreciation has been recognized, the operation of the company- had not started. The assessee stated that considering depreciation as a part of the total cost started. The assessee stated that considering depreciation as a part of the total cost started. The assessee stated that considering depreciation as a part of the total cost would not be appropriate for the purpose of would not be appropriate for the purpose of benchmarking since the depreciation in benchmarking since the depreciation in the year under consideration was 16.92% of its revenue, vis the year under consideration was 16.92% of its revenue, vis-a-vis depreciation of vis depreciation of 4.85% of seven comparable companies (taken by the TPO) which in most cases as 4.85% of seven comparable companies (taken by the TPO) which in most cases as 4.85% of seven comparable companies (taken by the TPO) which in most cases as average depreciation as a percentage of revenue en in the average depreciation as a percentage of revenue en in the table below. The assessee table below. The assessee also stated that as per rule 10B(1)(e) of the Act, the net profit margin referred to in also stated that as per rule 10B(1)(e) of the Act, the net profit margin referred to in also stated that as per rule 10B(1)(e) of the Act, the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions should be adjusted to clause (ii) arising in comparable uncontrolled transactions should be adjusted to clause (ii) arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the take into account the differences, if any, between the international transaction and the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such comparable uncontrolled transactions, or between the enterprises entering into such comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the transactions, which could materially affect the amount of net profit margin in the transactions, which could materially affect the amount of net profit margin in the open market. The assessee referred to OECD guidelines,U open market. The assessee referred to OECD guidelines,US transfer pricing S transfer pricing regulations and ICAI guidance note in this regard. The assessee also relied upon regulations and ICAI guidance note in this regard. The assessee also relied upon regulations and ICAI guidance note in this regard. The assessee also relied upon various decisions including that of Hon’ble Delhi ITAT in SchefenackerMotherson various decisions including that of Hon’ble Delhi ITAT in SchefenackerMotherson various decisions including that of Hon’ble Delhi ITAT in SchefenackerMotherson Limited (123 TTJ 509) wherein it was held that the transfer pricing regulati Limited (123 TTJ 509) wherein it was held that the transfer pricing regulati Limited (123 TTJ 509) wherein it was held that the transfer pricing regulations do not provide for mandatory deduction of depreciation and that depreciation could be provide for mandatory deduction of depreciation and that depreciation could be provide for mandatory deduction of depreciation and that depreciation could be disregarded to compute the operating margin of the tax payer and the comparables. disregarded to compute the operating margin of the tax payer and the comparables. disregarded to compute the operating margin of the tax payer and the comparables. 4.2 The submissions have been perused along with the materials on record. The Panel 4.2 The submissions have been perused along with the materials on record. The Panel 4.2 The submissions have been perused along with the materials on record. The Panel finds that this issue has been elaborately discussed by the Hon’ble ITAT, Delhi order finds that this issue has been elaborately discussed by the Hon’ble ITAT, Delhi order finds that this issue has been elaborately discussed by the Hon’ble ITAT, Delhi order dated Sumi Motherson Innovative Engineering Ltd vs DCIT dated Sumi Motherson Innovative Engineering Ltd vs DCIT in ITA in ITA No. 1816/Del/2011 dated 11.2.2014 in which the'decision of SchefenackerMotherson Limited (supra) 14 in which the'decision of SchefenackerMotherson Limited (supra) 14 in which the'decision of SchefenackerMotherson Limited (supra) relied upon by the assessee has also been discussed. n by the assessee has also been discussed.” Further the Ld. A.R invited our attention in written submission related to Further the Ld. A.R invited our attention in written submission related to Further the Ld. A.R invited our attention in written submission related to

depreciation/sale of comparable comparable and the assessee. The comparable comparableare duly

reproduced as below:

9 I.T.A. No. I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 ITA No. 295/Kol/2022 Assessment Years: 2017 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd.

10 I.T.A. No. I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 ITA No. 295/Kol/2022 Assessment Years: 2017 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd.

The Ld. A.R respectfully relied on the decision of Co The Ld. A.R respectfully relied on the decision of Co-ordinate Bench ordinate Bench of ITAT-

Kolkata in the case of DCIT vs. in the case of DCIT vs. M/s Epcos Ferrites Ltd., in ITA No. 1597 & M/s Epcos Ferrites Ltd., in ITA No. 1597 &

1598/Kol/2017 for AY 2002 1598/Kol/2017 for AY 2002-03 & 2003-04 date of order 30.01.2019 04 date of order 30.01.2019. The

relevant paragraph is reproduced as relevant paragraph is reproduced as below:

“We note that for determining the fair and true profit for the purpose of the We note that for determining the fair and true profit for the purpose of the We note that for determining the fair and true profit for the purpose of the application of the TNMM, it is appropriate that the effect of the depreciation must be application of the TNMM, it is appropriate that the effect of the depreciation must be application of the TNMM, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. T excluded out of the operating profit for determining the operating profit ratio. T excluded out of the operating profit for determining the operating profit ratio. The best way of computing operating profit would be to compute profit before best way of computing operating profit would be to compute profit before best way of computing operating profit would be to compute profit before depreciation in respect of each of the comparable company. It would take out the depreciation in respect of each of the comparable company. It would take out the depreciation in respect of each of the comparable company. It would take out the inconformity or the variation in the profit level of the comparables arising due to inconformity or the variation in the profit level of the comparables arising due to inconformity or the variation in the profit level of the comparables arising due to adoption of different method of charging depreciation. For this we rely on the ferent method of charging depreciation. For this we rely on the ferent method of charging depreciation. For this we rely on the judgment of the Coordinate Bench of ITAT Delhi in the matter of judgment of the Coordinate Bench of ITAT Delhi in the matter of judgment of the Coordinate Bench of ITAT Delhi in the matter of SchefenackerMotherson Ltd. V. Income SchefenackerMotherson Ltd. V. Income-tax Officer [2009] 123 TTJ 509 (Delhi) tax Officer [2009] 123 TTJ 509 (Delhi) wherein coordinate bench confirmed the use of cash p wherein coordinate bench confirmed the use of cash profit for the purpose of rofit for the purpose of application of the TNMM.We also rely on the decision of the Hon'ble Bombay High application of the TNMM.We also rely on the decision of the Hon'ble Bombay High application of the TNMM.We also rely on the decision of the Hon'ble Bombay High

11 I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 Assessment Years: 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Court in the matter of CIT vs. Reuters India (P) Ltd reported in [2016] 69 taxmann.com 187 (Bombay) wherein the Hon'ble High Court confirmed the application of the cash profit margin for the purpose of computation of net profit indicator (PLI) under the TNMM. Keeping in view the aforesaid judicial precedents, we approve the use of cash profit margin by the assessee for placing the tested party and the comparable companies on equal footing. The assessee has demonstrated that the cash profit margin of the assessee was 8% (approximately), whereas the arithmetic mean of the cash . profit margins of the aforesaid nine comparable companies stands at 12,41%. It is noted that the net profit margin of the tested party was (-)6.70%, whereas the cash profit margin of the tested party stood 8% thereby indicating that the loss was caused by a considerable increase in provision for depreciation. We are of the considered view that the assessee was justified in applying cash profit margin as more appropriate financial indicator than net profit margin.”

submit any contrary judgment against the submission of the Ld. A.R.

in the record. The grievance of the assessee is to consider the depreciation

during calculation of fair net profit under TNMM by the TPO. The assessee is

newly set-up company and yielding huge depreciation in respect of comparable

M/s Stelco Limited and M/s Tata Steel BSL Limited who are incorporated in

1995 and 1983 respectively. In comparison of depreciation percentage of

revenue was @1.09% for Stelco Limited and 11.19% for Tata Steel BSL

Limited whereas the assessee has @16.92%. The assessee prayed to reject both

the comparable as functionally different. We accordingly direct the TPO /AO to

remove both the comparable during calculation of fairnet profit for ALP.

12 I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 Assessment Years: 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. Further, the assessee has requested for acceptance of two comparable M/s

Vallabh Steel Limited, for which rectification application under Section 154 has

been filed before the TPO and is pending for disposal and M/s Uttam Galva

Steels Ltd. We direct the TPO /AO to accept both the comparable M/s Vallabh

Steel Limited and M/s Uttam Galva Steels Ltd after considering the function

and activity of the two companies and direct to dispose the rectification petition

filed U/s 154. The TPO/AO is directed to allow the fresh search in relation to

comparable of the assessee.

The assessee prayed to remove the depreciation during the calculation of profit

margin and requested for cash PLI in TNMM. In cash PLI the average of

comparable 10.44% which is similar for assessee. The assessee stated that

considering depreciation as a part of the total cost would not be appropriate for

the purpose of benchmarking since the depreciation in the year under

consideration was 16.92% of its revenue, vis-a-vis depreciation of 4.85% of

seven comparable companies as taken by the TPO which in most cases as

average depreciation as a percentage of revenue. The assessee has relied on the

order of ITAT-Kolkata Bench in the case of M/s Epcos Ferrites Ltd(supra).

We also relied on the same. In our considered view the depreciation should be

removed for calculation of net profit margin and cash PLI is justified method.

Accordingly, we remit back the matter to the file of TPO/AO for further

13 I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 Assessment Years: 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd. calculation of TP adjustment by considering the direction of the Bench. We order accordingly.

Order is pronounced in the open court on 26th February, 2024

Sd/- Sd/- (Dr.Manish Borad/डॉ मनीष बोरड) (Anikesh Banerjee /अ�नकेश बनज�) Accountant Member/लेखा सद�य Judicial Member/�या�यक सद�य Dated: 26th February, 2024 SM, Sr. PS

14 I.T.A. No.595/Kol/2021 ITA No. 295/Kol/2022 Assessment Years: 2017-18 & 2018-19 Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd.

Copy of the order forwarded to: