JAMSHEDPUR CONTINUOUS ANNEALING & PROCESSING COMPANY PVT. LTD.,KOLKATA vs. ITO, NATIONAL E-ASSESSMENT CENTRE, DELHI

Per Anikesh Banerjee, Judicial Member:

1. General Ground That on the facts and in the circumstances of the case and in law, the Learned AO erred in assessing the total loss at INR 2,699,202,298 under normal provisions as against loss of INR 2,709,117,138 declared by the Appellant in the return of income under normal provisions of the Act.

2. Transfer Pricing Adjustment That on the facts and in the circumstances of the case, the Learned TPO and the Learned AO erred, in carrying out an adjustment to the international transactions with AEs. 2.1. Rejected Cash PLI On the facts and in the circumstances of the case and in law, with respect to the transaction of purchase of spare parts from NSENGI, the learned TPO has erred in 3 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.

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. 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.

6 I.T.A. No. 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. 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.

8 I.T.A. No. 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. 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. 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 & 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 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.”

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 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