Appeal details
Counselvise Citation
[2018] 125 COUNSELVISE.COM (IT) 6749 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 3 month(s) 5 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
04-07-2018
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I
Assessment Year
2010-2011
Appeal Filed On
30-03-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1807/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. YUTAKA AUTOPARTS INDIA PVT. LTD., VS. ITO, WA RD 27 (4), 1005, ROOTS TOWER, PLOT NO.7, NEW DELHI. DISTRICT CENTER, NEAR NIRMAN VIHAR METRO STATION, LAXMI NAGAR, DELHI 110 092. (PAN : AAACY2991H) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI GAURAV GARG, CA MS. SHWETA GUPTA, CA SHRI HARSHIT KHURANA, CA REVENUE BY : SHRI SANJAY KUMAR YADAV, SENIOR DR DATE OF HEARING : 06.06.2018 DATE OF ORDER : 04.07.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. YUTAKA AUTOPARTS INDIA PVT. LTD. (F OR SHORT THE TAXPAYER), BY FILING THE PRESENT APPEAL SOUGH T TO SET ASIDE THE IMPUGNED ORDER DATED 12.01.2015, PASSED BY THE AO U NDER SECTION 144C READ WITH SECTION 143 (3) OF THE INCOME-TAX AC T, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 IN CONSONANCE ITA NO.1807/DEL./2015 2 WITH THE ORDERS PASSED BY THE LD. DRP/TPO ON THE GR OUNDS INTER ALIA THAT :- 1. IN LAW AND FACTS AND CIRCUMSTANCES OF THE CASE , THE ASSESSING OFFICER (AO')/DISPUTE RESOLUTION PANEL C DRP') HAS ERRED IN MAKING AN ADDITION OF RS.19,357,801 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTM ENT IN THE ARM'S LENGTH PRICE (ALP') OF THE INTERNATIONAL TRANSACTIONS. 2. IN LAW AND FACTS AND CIRCUMSTANCES OF THE CASE, LD. TRANSFER PRICING OFFICER (TPO')/ DRP ERRED IN NOT CONSIDERING FOREIGN EXCHANGE GAIN AS A PART OF OPER ATING INCOME WHILE COMPUTING THE OPERATING MARGINS OF THE APPELLANT AND THE COMPARABLE COMPANIES. 3. IN LAW AND FACTS AND CIRCUMSTANCES OF THE CASE, LD. TPO ERRED IN COMPUTING THE MARGINS OF THE COMPANIES CONSIDERED AS COMPARABLE BY IT AND ALSO UPHELD BY L D. DRP FOR THE PURPOSE OF TRANSACTIONAL NET MARGIN METHOD. 4. IN LAW AND FACTS AND CIRCUMSTANCES OF THE CASE, LD. TPO/ DRP ERRED IN CONSIDERING CERTAIN ~ COMPANIES A S COMPARABLE TO THE APPELLANT ON THE FOLLOWING GROUND S: A. APPLYING EXPORT TURNOVER FILTER OF LESS THAN EQU AL TO 30% OF THE SALES AND DISREGARDING EXPORT TURNOVER F ILTER OF LESS THAN EQUAL TO 10% OF THE SALES APPLIED BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION, WITHOUT ACKNOWLEDGING THE FACT THAT APPELLANT IN ONLY DEALI NG IN DOMESTIC MARKET AND IS HAVING NEGLIGIBLE EXPORT SAL ES. FOLLOWING COMPANIES DOES NOT QUALIFY THE EXPORT TUR NOVER FILTER OF LESS THAN EQUAL TO 10% OF TOTAL SALES AND THUS SHOULD BE REJECTED: I. ANG INDUSTRIES LTD II. ELOFIC INDUSTRIES LTD III. WABCO- JVS (INDIA) LTD IV. BRAKES INDIA B. CONSIDERING FOLLOWING COMPANIES HAVING DIVERSIFI ED OPERATIONS AND SERVING DIFFERENT MARKET AREA AS COM PARABLE I. ANG INDUSTRIES LTD II. ELOFIC INDUSTRIES LTD III. WABCO-1VS (INDIA) LTD ITA NO.1807/DEL./2015 3 5. WITHOUT PREJUDICE TO THE ABOVE, AND IN LAW AND O N FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. TPO/ D RP ERRED IN NOT GIVING ADJUSTMENT ON ACCOUNT OF HIGH DEPRECIATION TO THE TOTAL COST IN THE CASE OF THE A PPELLANT. 6. WITHOUT PREJUDICE TO THE ABOVE, AND IN LAW AND O N FACTS AND CIRCUMSTANCES OF THE CASE, LD. TPO/ DRP E RRED 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. 7. IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CAS E, IN THE INTEREST OF JUSTICE, APPELLANT MAY BE ALLOWED T O ADDUCE ADDITIONAL EVIDENCE AS MAY BE NECESSARY IN SUPPORT OF THE GROUNDS RAISED HEREINABOVE AFTER FOLLOWING DUE PROC EDURES LAID DOWN IN THE INCOME TAX (APPELLATE TRIBUNALS) R ULES, 1963. 2. BRIEFLY STATED THE FACTS NECESSARY TO ADJUDICATE THE ISSUES IN CONTROVERSY ARE : THE TAXPAYER IS A GROUP COMPANY O F HONDA GROUP AND IS A WHOLLY OWNED SUBSIDIARY OF YUTAKA GIKEN CO MPANY LIMITED, JAMAN (YUTAKA, GIKEN, JAPAN) ALONG WITH IT S NOMINEE. THE TAXPAYER IS INTO MANUFACTURING AND ASSEMBLING O F AUTO COMPONENTS, BROADLY DEALS IN PRODUCTS AS UNDER :- (I) EXHAUST SYSTEMS IT INCLUDES EXHAUST MANIFOLDS , CATALYTIC CONVERTER AND SILENCER. (II) BRAKING SYSTEM PRODUCTS IT INCLUDES THE BRAK E DISCS (THE MAIN COMPONENTS OF DISC BRAKE ARE BRAKE PADS, CALIPER & ROTOR). ITA NO.1807/DEL./2015 4 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTER PRISES (AE) AS UNDER:- DESCRIPTION OF TRANSACTIONS METHOD SELECTED VALUE OF TRANSACTIONS (IN INR) PURCHASE OF RAW MATERIAL, COMPONENTS & CONSUMABLES CPM 25,11,78,477 PURCHASE OF FIXED ASSETS CPM 34,26,522 GUARANTEE FEES & COLLATERALS PAID CUP 17,33,223 SALE OF FINISHED GOODS CUP 9,37,876 TECHNICAL SUPPORT SERVICES CUP 18,04,928 ROYALTY EXPENSES CUP 78,58,339 OTHER MISCELLANEOUS PURCHASES CMP 1,88,306 SHARE APPLICATION MONEY RECEIVED - 11,00,00,000 4. THE TAXPAYER USED TO PLACE ORDERS TO DIFFERENT A ES FOR IMPORT OF PROPRIETARY PARTS FOR MANUFACTURING PRODUCTS IN INDIA AS PER ITS REQUIREMENT. YUTAKA, GIKEN, JAPAN HAS ASSISTED THE TAXPAYER IN SETTING UP THE MANUFACTURING FACILITIES AND CONTINU OUSLY TO MONITOR THE QUALITY STANDARDS FOLLOWED BY THE TAXPAYER. FO R BRAKING SYSTEMS, THE TAXPAYER GETS DESIGN AND PROPRIETY PAI NT FROM ITS AE AND MANUFACTURES THE PRODUCT. YUTAKA, GIKEN, JAPAN CONTINUES TO MONITOR THE QUALITY STANDARDS OBSERVED BY THE TAXPA YER. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATIONAL TR ANSACTIONS COMPARED ITS ENTITY LEVEL MARGIN (OP/SALES) WITH EX TERNAL COMPARABLE AND COMPUTED ITS MARGIN AT 1.06% AS AGAI NST MARGIN OF THE COMPARABLES AT 2.34% AND CLAIMED ITS INTERNATIO NAL TRANSACTIONS AT ARMS LENGTH. ITA NO.1807/DEL./2015 5 5. THE TAXPAYER BY APPLYING TRANSACTIONAL NET MARGI N METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH OP ERATING PROFIT / SALES (OP/SALES) AS THE PROFIT LEVEL INDIC ATOR (PLI) FOR BENCHMARKING AT ENTITY LEVEL, CHOSEN SIX COMPARABLE S USING MULTIPLE YEARS DATA AND COMPUTED ITS AVERAGE MARGIN AT 2.34%. HOWEVER, DURING TP PROCEEDINGS, THE TAXPAYER UPDATE D ITS MARGIN OF SIX COMPARABLES WITH OP/SALES AT 2.77%. HOWEVER , TPO, AFTER SELECTING 7 COMPARABLES HAVING AVERAGE OP/SALES AT 8.56% AS AGAINST TAXPAYERS MARGIN OF 0.87%, PROPOSED ENHANC EMENT OF RS.4,19,64,587/-. HOWEVER, SUBSEQUENTLY TPO RECTIF IED THE ADJUSTMENT UNDER SECTION 154 OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) VIDE ORDER DATED 18.03.2014 AT RS. 2,21,29,016. 6. ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP B Y RAISING OBJECTIONS WHO HAS GRANTED PARTIAL RELIEF TO THE TA XPAYER BY TREATING CLAIM RECEIVED, JOBWORK CHARGES AND SUNDRY BALANCES WRITTEN OFF AS OPERATING BUT RATIFIED THE REMAINING FINDINGS RETUR NED BY THE TPO. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.1807/DEL./2015 6 8. UNDISPUTEDLY, THE TPO HAS ACCEPTED THE TNMM AS T HE MAM WITH OP/SALES AS PLI AT ENTITY LEVEL FOR BENCHM ARKING THE INTERNATIONAL TRANSACTIONS APPLIED BY THE TAXPAYER AND PROPOSED ENHANCED TP ADJUSTMENT AT RS.4,19,64,587/- (SUBSEQU ENTLY REDUCED TO RS.2,21,29,016/- BY VIRTUE OF THE ORDER DATED 28 .03.2014 PASSED U/S 154 OF THE ACT). TPO BY APPLYING TNMM AS THE M AM WITH OP/SALES AS PLI AT ENTITY LEVEL SELECTED 9 COMPARAB LES HAVING AVERAGE OF 8.56%, WHICH ARE AS UNDER :- S.NO. COMPANY NAME OP/SALES % 1. HIND COMPOSITES 3.19 2. IAI INDUSTRIES -0.46 3. ANG INDS 15.54 4. ELOFIC INDS. 14.88 5. WABCO INDIA 22.97 6. C M SMITH 2.71 7. BRAKES INDIA 9.31 8. MUBEA SUSPENSION INDIA LTD. 6.31 9. SHARDA SEJONG 2.60 AVERAGE 8.56 9. TPO COMPUTED THE ALP OF INTERNATIONAL TRANSACTIO NS CONCERNING SALE OF FINISHED GOODS, PURCHASE OF RAW MATERIAL AND OTHER MISCELLANEOUS EXPENSES AS UNDER :- SALES RS.54,57,03,341 ALP PROFIT @ 8.56% RS.4,67,12,206 MARGIN SHOWN RS.47,47,619 DIFFERENCE RS.4,19,64,587 THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION RELATED TO THE PURCHASE OF RAW MATERIAL AND OTHER MISCELLAN EOUS EXPENSES IS DETERMINED AT RS.20,92,13,890 AS AGAINS T RS.25,11,78,477 DETERMINED BY THE ASSESSEE. THE AS SESSING OFFICER SHALL ENHANCE THE INCOME OF THE ASSESSEE BY RS.4,19,64,587. ITA NO.1807/DEL./2015 7 10. IT IS ALSO NOT IN DISPUTE THAT AFTER THE ORDER PASSED BY THE LD. DRP ADJUSTMENT IN ALP OF INTERNATIONAL TRANSACTIONS COMES TO RS.19,35,801/-. 11. THE TAXPAYER, AFTER RAISING DIFFERENT GROUNDS, SOUGHT TO CONSIDER FOREIGN EXCHANGE GAIN AS PART OF THE OPERA TING INCOME WHILE COMPUTING OPERATING MARGIN OF THE TAXPAYER AS WELL AS THE COMPARABLE COMPANIES; CHALLENGED COMPUTATION OF MAR GIN OF THE COMPANIES CONSIDERED AS COMPARABLES AND ALSO CHALLE NGED INCLUSION OF ANG INDUSTRIES LTD., ELOFIC INDUSTRIES LTD., WABCO TVS (INDIA) LTD. AND BRAKES INDIA AS COMPARABLES ON GROUND OF EXPORT TURNOVER FILTER AND BEING INTO DIVERSIFIED O PERATIONS. THE TAXPAYER WITHOUT PREJUDICE ALSO CLAIMED TO CONSIDER ADJUSTMENT ON ACCOUNT OF HIGH DEPRECIATION TO THE TOTAL COST IN T HE CASE OF THE TAXPAYER AND ALSO CLAIMED TO CONSIDER CASH PROFITS FOR THE PURPOSE OF TNMM IN ORDER TO PROVIDER FOR EXCESSIVE DEPRECIA TION IN CASE OF TAXPAYER VIS--VIS COMPARABLE COMPANIES. WE WOULD DISCUSS ALL THE ISSUES RAISED BY THE TAXPAYER UNDER SPECIFIC GR OUNDS AS UNDER. GROUND NO.1 12. GROUND NO.1 IS GENERAL IN NATURE, HENCE DOES NO T REQUIRE ANY SPECIFIC ADJUDICATION. ITA NO.1807/DEL./2015 8 GROUND NO.2 13. TPO HAS NOT RETURNED ANY SPECIFIC FINDINGS IN T REATING FOREIGN EXCHANGE GAIN AS NON-OPERATING WHILE COMPUT ING THE OPERATING MARGIN. LD. DRP BY RATIFYING THE DECISIO N TAKEN BY TPO ALSO CONSIDERED FOREIGN EXCHANGE GAIN AS NON-OPERAT ING BY APPLYING THE SAFE HARBOUR RULES. 14. HOWEVER, IT IS THE CASE OF THE TAXPAYER THAT SA FE HARBOUR RULES ARE NOT IN CASE OF THE TAXPAYER QUA AY 2010-1 1 AND IT IS REQUIRED TO BE TREATED AS OPERATING WHILE COMPUTING THE OPERATING MARGINS OF THE TAXPAYER AS WELL AS COMPARABLE COMPA NIES AND RELIED UPON THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN CASH EDGE INDIA PVT. LTD. VS. ITO ITA 279/2016 OR DER DATED 04.05.2016 AVAILABLE AT PAGE 258 TO 261 OF THE PAPE R 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 PAPE R BOOK. 15. HONBLE 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 FINDI NGS :- 7. AS FAR AS THE QUESTION, I.E., FOREIGN EXCHANGE FLUCTUATION ELEMENT IS CONCERNED, THE RECORDS CLEARLY REVEAL TH AT THE SAFE HARBOUR RULES CAME INTO FORCE LATER WHEREAS THE FAC TS OF THIS CASE PERTAIN TO THE ASSESSMENT YEAR 2010-11 (FINANC IAL YEAR 2009-10). AS A CONSEQUENCE, THE IMPUGNED ORDER CANN OT BE INTERFERED WITH. NO QUESTION OF LAW THUS ARISES. TH E APPEAL IS CONSEQUENTLY DISMISSED. ITA NO.1807/DEL./2015 9 16. SIMILARLY, HONBLE DELHI HIGH COURT IN CASE CIT ED AS FISERV INDIA PVT. LTD. (SUPRA) ALSO DECIDED THE IDENTICAL ISSUE PERTAININ G TO AY 2009-10 IN FAVOUR OF THE ASSESSEE BY RETURNING F OLLOWING FINDINGS :- 10. AS REGARDS QUESTION (II) IT IS POINTED OUT BY LEARNED COUNSEL FOR THE ASSESSEE THAT THE SAFE HARB OUR NOTIFICATION DATED 18 TH SEPTEMBER 2013 RELIED UPON BY THE REVENUE IS PROSPECTIVE AND DID NOT APPLY TO THE AY IN QUESTION. EVEN OTHERWISE THE COURT FINDS THAT TH E DECISIONS RELIED UPON BY THE ITAT IN THE IMPUGNED ORDER COVERS THIS ISSUE IN FAVOUR OF THE ASSESSEE A S FAR AS THE AY IN QUESTION IS CONCERNED. CONSEQUENTLY, T HE COURT DECLINES TO FRAME ANY QUESTION ON THE ISSUE. 17. MOREOVER, IN TAXPAYERS 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 EXCH ANGE GAIN AS PART OF OPERATING INCOME. SO, THE REVENUE IS ALSO LEGALLY BOUND TO FOLLOW THE RULE OF CONSISTENCY. 18. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT IN ORDER TO COMPUTE THE OPERAT ING MARGIN OF THE TAXPAYER, FOREIGN EXCHANGE GAIN IS TO BE CONSID ERED AS PART OF OPERATING INCOME FOR COMPUTING THE OPERATING MARGIN OF TAXPAYER AS WELL AS COMPARABLE COMPANIES. SO, GROUND NO.2 I S DETERMINED IN FAVOUR OF THE TAXPAYER. ITA NO.1807/DEL./2015 10 GROUND NO.3 19. THE TAXPAYER BY RAISING GROUND NO3 SOUGHT TO CO MPUTE THE MARGIN OF THE COMPANY CONSIDERED AS COMPARABLE BY T HE TAXPAYER FOR THE PURPOSE OF TNMM. THE TAXPAYER POINTED OUT DIFFERENCES IN MARGIN IN TABULATED FORM AS UNDER :- S.NO. NAME OF COMPANY MARGIN AS COMPUTED BY THE ASSESSEE (OP/SALES) MARGINS AS PER THE ORDER OF THE LD. TPO (OP/ SALES) ANNUAL REPORT COPY REFERENCE TO PAPER BOOK 1 ANG INDUSTRIES 15.33% 15.54% ANNEXURE 37, PG.619 TO PG. 651 2 BRAKES INDIA 8.14% 9.31% ANNEXURE 38, PG.651 TO PG. 705 3 HINDUSTAN COMPOSITES LIMITED 3.02% 3.19% ANNEXURE 41, PG.812 TO PG. 821 4 WABCO INDIA 20.15% 22.97% ANNEXURE 40, PG.764 TO PG. 811 20. WHEN THERE ARE APPARENT DISCREPANCIES IN THE MA RGIN IN OP/SALES COMPUTED BY TPO AS WELL AS TAXPAYER, THE T PO IS DIRECTED TO VERIFY THE MARGIN AND TO RECONSIDER THE SAME TO BRING ON RECORD THE CORRECT MARGIN OF THE AFORESAID COMPARAB LE COMPANIES. SO, GROUND NO.3 IS DETERMINED IN FAVOUR OF THE TAXP AYER FOR STATISTICAL PURPOSES. ITA NO.1807/DEL./2015 11 GROUND NO.4 21. THE TAXPAYER HAS SOUGHT EXCLUSION OF FOUR COMPA NIES VIZ. ANG INDUSTRIES LTD., ELOFIC INDUSTRIES LTD AND WABC O- JVS (INDIA) LTD. AND BRAKES INDIA ON TWO GROUNDS : (I) THAT THESE COMPANIES AS COMPARABLES DO NOT QUALIFY THE EXPORT TURNOVER FILTER OF EQUAL TO 10% OF THE SALES; (II) THAT THESE COMPA NIES ARE HAVING DIVERSIFIED OPERATIONS AND SERVING DIFFERENT MARKET AREA AS COMPARABLE. 22. UNDISPUTEDLY, DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYERS EXPORT SALES IS MERELY 0.17%. IT IS ALS O NOT IN DISPUTE THAT THE TAXPAYER IN ITS TP ANALYSIS APPLIED EXPOR T SALES NOT MORE THAN 10% AS ONE OF THE FILTERS SO AS TO ELIMINATE THE COMPANY WORKING IN DIFFERENT GEOGRAPHICAL MARKET AND RELIED UPON RULE 10B(II)(D) OF THE INCOME-TAX RULES, 1962 (FOR SHORT THE RULES) WHICH ARE EXTRACTED AS UNDER FOR READY PERUSAL :- (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARAB ILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: (D) CONDITIONS PREVAILING IN THE MARKETS IN WHIC H THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. ITA NO.1807/DEL./2015 12 23. IT IS THE CASE OF THE TAXPAYER THAT DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER WAS INTO MANUFACTURING AND EMPLOYING OF AUTO COMPONENTS LIKE ENHANCED SYSTEM AND BRAKING SY STEM FOR SALE TO THE ORIGINAL MANUFACTURING EQUIPMENTS (OEMS) IN INDIA. WHEN WE EXAMINE THE PERCENTAGE OF EXPORT SALES TO THE TO TAL SALES OF THE COMPARABLE COMPANIES, IT IS NOT NEAR TO THE TAXPAYE R. FOR READY PERUSAL, DETAILS OF PERCENTAGE OF EXPORT SALES TO T OTAL SALES OF THE COMPARABLE COMPANIES AS PROVIDED BY THE TAXPAYER ON THE BASIS OF ANNUAL REPORTS IS EXTRACTED AS UNDER :- S.NO. NAME OF COMPANY EXPORT SALES (IN CR.) SALES EXPORT SALES / SALES % REFERENCE TO ANNUAL REPORT 1 ANG INDUSTRIES 32.89 110.63 29.73 PG.631 TO PG. 637 OF PAPER BOOK 2 ELOFIC INDUSTRIES 28.53 110.63 29.07 ANNEXURE 38, PG.651 TO PG. 705 3 WABCO TVS 76.06 591.25 12.86 ANNEXURE 41, PG.812 TO PG. 821 4 BRAKES INDIA 289.74 1885.56 15.18 ANNEXURE 40, PG.764 TO PG. 811 24. TPO, ON THE OTHER HAND, REJECTED THE COMPANIES HAVING EXPORT SALES MORE THAN 30% OF THE TOTAL SALES AS AG AINST 10% FILTERS PROPOSED BY THE TAXPAYER. SO, THE TPO HAS PRINCIPA LLY AGREED WITH THE CONTENTION RAISED BY THE TAXPAYER THAT IN VIEW OF THE PROVISIONS CONTAINED UNDER RULE 10B(2)(D), COMPANIES OPERATING IN SAME GEOGRAPHICAL LOCATION AND HAVING SIMILAR SIZE OF MA RKETS CAN BE ITA NO.1807/DEL./2015 13 COMPARED. HOWEVER, TPO REJECTED THE CONTENTION OF THE TAXPAYER TO REJECT THE COMPANIES HAVING EXPORT SALES MORE TH AN 10% OF THE TOTAL SALES SIMPLY FOR THE REASON THAT BY PUTTING D IFFERENT INCOME BAR AT 10% WOULD LEAD TO A VERY NARROW SET OF COMPA RABLES, HENCE USED THE FILTER TO REJECT THE COMPANY HAVING 30% IN COME FROM EXPORT. LD. DRP ALSO CONCURRED WITH THE VIEW TAKEN BY THE TAXPAYER. THE TAXPAYER RELIED UPON THE DECISION RE NDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE OF GHARDA CHEMICAL LTD. VS. DCIT ITA NO.2242/MUM/2006 AVAILABLE AT PAGE 5 08 TO 524 OF THE PAPER BOOK AND ACIT VS. RHOIDA CHEMICALS IND IA P. LTD. ITA NO.2242/MUM/2006 AVAILABLE AT PAGE 525 TO 534 O F THE PAPER BOOK. 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, AV AILABLE OF RAW MATERIAL, DEMAND & SUPPLY AND ACQUISITION ARE ALSO NECESSARY TO BE CONSIDERED. OPERATIVE PART OF THE ORDER IS EXTRACT ED AS UNDER :- 16. .. THE IMPORTANCE OF THE SIMILAR CIRCUMSTANCES CANNOT BE LOST SIGHT OF IN THIS CONTEXT BECAUSE A R OUND CANNOT BE COMPARED WITH A SQUARE AND A RECTANGLE WITH A TRIAN GLE. IN OTHER WORDS THE UNCONTROLLED TRANSACTIONS WHICH ARE CONTE MPLATED FOR COMPARISON SHOULD BE ALIKE, IF NOT IDENTICAL. SIMIL ARITY BETWEEN THE TWO SETS OF TRANSACTIONS CAN BE JUDGED BY THE Q UALITY, GRADE AND QUANTITY OF THE MATERIAL. IN ADDITION, THE FACT ORS LIKE THE LOCATION OF THE PARTIES, AVAILABILITY OF RAW MATERI AL; DEMAND AND SUPPLY EQUATION ALSO PLAY PIVOTAL ROLE IN FINDING O UT AS TO WHETHER THE TWO ARE REALLY COMPARABLE OR NOT. ITA NO.1807/DEL./2015 14 26. IDENTICAL ISSUE HAS BEEN DECIDED BY THE COORDIN ATE BENCH OF THE TRIBUNAL IN CASE OF ACIT VS. RHOIDA CHEMICALS INDIA P. LTD. (SUPRA) AND ON THE BASIS OF EXPORT FILTER, COMPARAB LE 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% O F THE TOTAL SALES, IT IS SEEN THAT ASSESSEES 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 TPOS REJECTION OF THIS CRITERIA IS ALSO NOT CORRECT THAT IT SHOULD BE TAKEN AS NIL OR ZERO PERCENTAGE. THEREFORE, WE ARE OF THE CONSIDERED OPI NION THAT THE SECOND CRITERIA FOR SELECTION OF COMPARABL E COMPANIES SHOULD BE THE COMPANIES HAVING EXPORT SAL ES OF IN AND AROUND 13% WHICH WOULD BE QUITE APPROPRIATE. THUS, WE DIRECT THE TPO TO LOOK FOR TH E COMPARABLE COMPANIES, WHICH ARE HAVING EXPORT TURNOVER PERCENTAGE OF AROUND 13% OF THE TOTAL SALE S 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. 27. KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE AND BY FOLLOWING THE ORDER PASSED BY THE COORDINATE BEN CH OF THE TRIBUNAL, WE ARE OF THE CONSIDERED VIEW THAT ALL TH E FOUR COMPARABLE COMPANIES VIZ., ANG INDUSTRIES LTD., ELOFIC INDUSTRIES LTD., WABCO- JVS (INDIA) LTD. AND BRAKES INDIA ITA NO.1807/DEL./2015 15 HAVING EXPORT SALES OF 29.73%, 29.07%;, 12.86% AND 15.18% TO THE TOTAL SALES ARE NOT EVEN NEAR TO THE TAXPAYER W HICH IS HAVING A MEAGER EXPORT SALE OF 0.17% AND SINCE THE COMPARABL E COMPANIES ARE OPERATING IN ENTIRELY DIFFERENT GEOGRAPHICAL MA RKET, THE SAME CANNOT BE A VALID COMPARABLE VIS--VIS THE TAXPAYER . 28. MOREOVER, THE COMPANIES WHICH ARE OTHERWISE NOT COMPARABLE CANNOT BE TAKEN AS COMPARABLE MERELY ON THE GROUND THAT IT WILL LEAD TO VERY NARROW SET OF COMPARABLES . MORE SO, THE REVENUE IN TAXPAYERS OWN CASE FOR AY 2012-13 HAS A CCEPTED THE TURNOVER FILTER OF 25% OF SALES FOR IDENTIFYING THE COMPARABLE COMPANIES AND HAS REJECTED ANG INDUSTRIES AND SUNDA RAM BRAKE LININGS LTD. WHICH ARE ALSO COMPARABLE DURING THE Y EAR UNDER ASSESSMENT VIDE ORDER PASSED BY LD. CIT (A) FOR AY 2012-13 MADE AVAILABLE BY THE TAXPAYER AT PAGE 195 OF THE PAPER BOOK. 29. THE LD. AR FOR THE TAXPAYER FURTHER CHALLENGED THE INCLUSION OF ANG INDUSTRIES LTD., ELOFIC INDUSTRIES LTD AND WABC O- JVS (INDIA) LTD. BY THE TPO FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS ON GROUND OF THEIR DIVERSIFIED OPERATI ON AS WELL AS DIVERSIFIED MARKET. TPO SELECTED ALL THE THREE COM PANIES AS COMPARABLES ON THE GROUND THAT THE SAME ARE DEALING IN PRODUCTS WHICH ARE COMPARABLE TO THE TAXPAYER. WE WOULD EXA MINE THEIR COMPARABILITY AS UNDER. ITA NO.1807/DEL./2015 16 ANG INDUSTRIES LTD. (ANG) 30. THE TAXPAYER BROUGHT ON RECORD THE DIVERSIFIED OPERATION OF ANG AS PER INFORMATION AVAILABLE ON WEBSITE AND IN THE ANNUAL REPORTS; THAT ANG IS A DIVERSIFIED ENGINEERING AND MANUFACTURING COMPANY WITH INTEREST IN HEAVY STEEL FABRICATION, T RACTORS AND TRAILERS, TIPPER BODY BUILDING, SPECIALIZED CONTAIN ERS AND AUTOMOTIVE COMPONENTS FOR HEAVY COMMERCIAL VEHICLES ; THAT ANG IS HAVING VARIOUS DIVISIONS VIZ. HCV DIVISION, TRAI LER AND BODY BUILDING, HEAVY STEEL FABRICATION AND AGRICULTURAL COMPONENT. FURTHERMORE, AS PER ANNUAL REPORT, ANG IS SERVING T HE KEY INFRASTRUCTURE SECTORS OF POWER, CONSTRUCTION AND S URFACE TRANSPORT ROADWAYS & RAILWAYS. 31. DIVERSIFIED OPERATION AND DIVERSIFIED MARKET OF ANG MAKES IT INCOMPARABLE WITH THE TAXPAYER WHICH IS UNDISPUT EDLY PRODUCING TWO PRODUCTS, NAMELY, EXHAUST SYSTEM AND BRAKING SY STEM. 32. COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS M/S. CARLYLE INDIA ADVISORS LTD. VS. DCIT ITA NO.7367/ MUM/2012 ORDER DATED 07.02.2014 EXCLUDED THE COMPANY AS COMPARABLE ON THE GROUND THAT THE SAME IS ENGAGED IN DIVERSIFIED ACTIVITIES AND SEGMENTAL REPORTING IS NOT AVAILABLE. SO, IN THESE CIRCUMSTANCES, WE FIND ANG CHOSEN BY THE TPO/DRP NOT A VALID COMPA RABLE. ITA NO.1807/DEL./2015 17 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 PRE CEDING PARAS AND SECONDLY, ON GROUND OF DIVERSIFIED MARKET AS TH E FILTERS MANUFACTURED BY ELOFIC SHARE A COMMON BOND OF TRUST , DURABILITY AND PERFORMANCE AND FIND APPLICATION IN MULTIFARIOU S SEGMENTS LIKE AUTOMOBILES, AGRICULTURE, INDUSTRIAL, SMALL ENGINES , TWO-WHEELERS, EARTHMOVING, MARINE, AUTON AIR-CONDITIONING, INDUST RIAL HEATING AND PETROCHEMICAL. KEEPING IN VIEW THE DIVERSIFIED MAR KET 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 W ABCO ON GROUND OF FAILING THE EXPORT INCOME FILTER AND ON T HE GROUND THAT IT IS CATERING TO AFTER-MARKET SEGMENT AND THE COMPANY IS CARRYING OUT SIGNIFICANT RESEARCH AND DEVELOPMENT ACTIVITIES. A NNUAL REPORT, RELEVANT PAGE 772, SHOWS THAT WABCO HAS COMMISSIONE D 156 AUTHORIZED SERVICE CENTERS AT STRATEGIC LOCATIONS A CROSS THE COUNTRY, TO PROVIDE QUICKER AND BETTER SERVICE ON AIR BRAKE AGGREGATES. FURTHER, TO IMPROVE AVAILABILITY OF QUALITY SERVICE IN RURAL AREAS, THE ITA NO.1807/DEL./2015 18 COMPANY ALSO COMMISSIONED 145 CERTIFIED WORKSHOPS. THESE INITIATIVES WOULD RESULT IN IMPROVED SERVICE PRACTI CES, AVAILABILITY OF GENUINE PARTS AND GENERATE ADDITIONAL REVENUE FO R 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 BENEFI TS 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 B RAKE VALIDATED AND PRODUCTION READY FOR EUROPEAN MARKET. THESE DEV ICES ARE DESIGNED FOR HIGH LEVEL OF ROBUSTNESS AGAINST DUST AND WATER ENTRY. (B) AUTOMATIC SLACK ADJUSTER (ASA) WITH PATENTED A DJUSTMENT MECHANISM DEVELOPED AND VALIDATED FOR EUROPEAN MARK ET. (C) NEW AIR PROCESSING AND DISTRIBUTION ASSEMBLY (A PDA) WHICH WAS IN PROMOTION PHASE LAST YEAR IS NOW FULLY DEVELOPED, VALIDATED AND PRODUCTION READY. THIS PRODUCT CONTRI BUTES TO CLEAN WORKING ENVIRONMENT FOR LONG LIFE OF PNEUMATIC SYST EMS ON VEHICLE. (D) IMPROVED AND REDESIGNED D2 GOVERNOR VALVE WITH PATENTED SEALING SOLUTION DEVELOPED AND VALIDATED F OR US MARKET. (E) DESIGN ACTIVITY KICKED OFF ON FOURTEEN VALVE DE VICES FOR NORTH AMERICAN OEMS AS PART OF MARKET EXPANSION STR ATEGY. THESE DEVICES DELIVER BEST IN CLASS PERFORMANCE, CA PABLE OF OPERATING IN HIGHER TEMPERATURE AND CORROSIVE ENVIR ONMENT. (F) NEW LIFE COMPRESSOR II GENERATION (NLC II) WHIC H WAS UNDER PROMOTION PHASE LAST YEAR IS NOW DEVELOPED AN D ITA NO.1807/DEL./2015 19 UNDERGOING CUSTOMER VALIDATION. THIS IS A UNIQUE PA TENTED SOLUTION FOR IMPROVED PERFORMANCE AT REDUCED COST T O THE CUSTOMER COMPARED TO THE PREVIOUS GENERATION NLC I. (G) NEW INITIATIVE FOR ENGINEERING EXCELLENCE BASE D ON MODEL BASED ENGINEERING (MBE) LAUNCHED. MATHEMATICAL MODE LS FOR FLOW SIMULATION OF VALVES AND COMPRESSOR PERFORMANC E SIMULATION DEVELOPED AND VALIDATED, WHICH IS EXPECT ED TO SIGNIFICANTLY REDUCE DESIGN LEAD TIME FOR NEW PRODU CTS. (H) INDIGENOUS ENVIRONMENTALLY FRIENDLY TECHNOLOGY DEVELOPED FOR ACHIEVING CORROSION RESISTANCE OF PRO DUCTS (480 HOURS OF NEUTRAL SALT SPRAY) TO MATCH EXPECTATIONS OF GLOBAL CUSTOMERS. (I) NEW WELDING PROCESS DEVELOPED TO ACHIEVE EXTEND ED LIFE OF BRAKE CHAMBER PARTS CRITICAL TO SAFETY. (J) KICKED OFF DEVELOPMENT OF AUTOMATED MANUAL TRANSMISSION (AMT) FOR INDIAN CUSTOMERS. THIS TECHN OLOGY WILL SIGNIFICANTLY REDUCE DRIVER FATIGUE AND IMPROVE FUE L EFFICIENCY. (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 TRAI LER SYSTEMS AND OFF-HIGHWAY DUMPERS TO SIGNIFICANTLY IM PROVE ROAD SAFETY. (M) CONTINUED FOCUS ON COST REDUCTION BASED ON PRO CESS AND DESIGN CHANGE TO REDUCE MATERIAL CONTENT HAS YIELDE D SIGNIFICANT BENEFITS. (N) SIGNIFICANT EFFORT AT COST REDUCTION THROUGH T RANSFERRING PRODUCTION OF BRAKE CHAMBERS FROM EUROPE TO INDIA W ITH LOCALLY DEVELOPED PARTS, WHICH ARE FULLY VALIDATED TO GLOBA L CUSTOMER STANDARDS. 35. AFORESAID FACTS, PROVISION OF CATERING TO AFTER MARKET SEGMENT BY WABCO AND CARRYING OUT SIGNIFICANT R&D A CTIVITIES BENEFITING THE COMPANY MAKES IT INCOMPARABLE TO THE TAXPAYER WHICH IS A ROUTINE MANUFACTURER. SO, WE ORDER TO E XCLUDE WABCO. SO, GROUND NO.4 IS DETERMINED IN FAVOUR OF THE TAXPAYER. ITA NO.1807/DEL./2015 20 GROUND NO.5 36. WITHOUT PREJUDICE, THE TAXPAYER CHALLENGED THE ORDER PASSED BY TPO/DRP IN NOT PROVIDING ADJUSTMENT ON ACCOUNT O F HIGH DEPRECIATION TO THE TOTAL COST IN THE CASE OF THE T AXPAYER. THE LD. AR FOR THE TAXPAYER CONTENDED THAT IT IS THE SECOND YEAR OF PRODUCTION WHEREAS ALL THE COMPANIES SELECTED BY TH E TPO ARE VERY OLD/SENIOR IN THE BUSINESS AND CLAIMED DEPRECIATION TO THE TOTAL COST. THE TAXPAYER BROUGHT ON RECORD COMPLETE DATA SHOWIN G DEPRECIATION RATE WITH RESPECT TO SALES IN THE YEAR UNDER ASSESSMENT AS UNDER :- S.NO. COMPANY NAME SALES (IN CR.) DEPRECIATION (IN CR.) DEPRECIATION / SALES % 1 HIND COMPOSITES LTD. 89.9 3.85 4.28% 2 C M SMITH & SONS LTD. 102.09 3.485608 3.41% 3 MUBEA SUSPENSION INDIA LTD. 62.92 1.71 2.72% 4 SHARDA SEJONG AUTO COMPONENTS LTD. 254.45 7.06 2.77% 5 IAI INDUSTRIES LTD. 21.67 0.9893 4.57% 6 ANG INDUSTRIES LTD. 106.73 5.16 4.83% 7 ELOFIC INDUSTRIES LTD. 99.21 2.46 2.48% 8 WABCO TVS (INDIA) LTD. 591.26 14.44 2.44% 9 BRAKES INDIA 1885.56 55.35 2.94% AVERAGE DEPRECIATION 3.38% YUTAKA INDIA (ASSESSEE) 5.57 5.34 9.79% 37. THE TAXPAYER FOLLOWED WRITTEN DOWN VALUE (WDV) METHOD FOR PROVIDING DEPRECIATION IN ITS BOOKS OF ACCOUNT AND FOR THIS ITA NO.1807/DEL./2015 21 REASON, HIGH DEPRECIATION WAS CHARGED IN THE INITIA L YEAR OF OPERATION AND QUANTUM OF DEPRECIATION GET REDUCED G RADUALLY. SO, THE TAXPAYER IN ITS TP STUDY PROVIDED FOR ADJUSTMEN T IN ITS OWN MARGIN BY ADJUSTING THE DEPRECIATION EXPENSES TO MA KE THE RATIO OF DEPRECIATION TO SALES IN THE CASE OF TAXPAYER EQUIV ALENT TO THAT OF AVERAGE DEPRECIATION TO SALES IN CASE OF COMPARABLE COMPANIES. 38. IT IS CONTENDED BY LD. AR FOR THE TAXPAYER THAT IN TAXPAYERS OWN CASE FOR AY 2009-10 IN ITA NO.1120/DEL/2014, TH E TRIBUNAL RECOGNISED THE DIFFERENCE IN THE CAPACITY IN WHICH THE TAXPAYER IS OPERATING AND THE CAPACITY IN WHICH COMPARABLE COMP ANIES ARE OPERATING GRANTED THE TAXPAYERS CLAIM FOR CAPACITY UTILIZATION. 39. HOWEVER, TPO REJECTED THE CONTENTION RAISED BY THE TAXPAYER WITHOUT PROVIDING ANY REASONS AND CONSIDERED THE OP ERATING MARGINS EARNED BY THE TAXPAYER AS MARGINS EARNED FR OM INTERNATIONAL TRANSACTIONS. LD. DRP ALSO REJECTED THE CLAIM OF THE TAXPAYER ON THE GROUND THAT THE DEPRECIATION TO THE TOTAL COST RATIO DEPENDS ON THE ASSET SIZE VIS--VIS OTHER EXPENSES AND AS SUCH, A REASONABLE ACCURATE AND RELIABLE ADJUSTMENT CANNOT BE MADE. 40. THE TAXPAYER RELIED UPON THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASES OF OUTSOURCE PARTNERS INTERNATIONAL P. LTD. VS. DCIT ITA NO.337/BANG/2015, M/S. INFINEON TECHNOLOGIES INDIA LTD. VS. ITA NO.1807/DEL./2015 22 ACIT ITA NO.657/BANG/2011, AMDOCS BUSINESS SERVIC ES PVT. LTD. VS. DCIT ITA NO.1412/PUNE/11, ACIT VS. M/S. FIAT INDIA PVT. LTD. ITA NO.1848/MUM/2009 AND E.I. DUPONT IN DIA (P) LTD. VS. DCIT ITA NO.5336/DEL/2010 . 41. KEEPING IN VIEW THE FACT THAT IN TAXPAYERS OWN CASE FOR AY 2009-10, DIFFERENCE IN CAPACITY IN WHICH THE TAXPAY ER IS OPERATING AND THE CAPACITY IN WHICH COMPARABLE COMPANIES ARE OPERATING WERE RECOGNISED, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE IS REQUIRED TO BE SENT BACK TO THE TPO TO DECIDE IN TH E LIGHT OF THE REVENUES OWN ORDER IN TAXPAYERS OWN CASE FOR AY 2 009-10 AND IN VIEW OF THE DECISIONS RENDERED BY THE COORDINATE BE NCHES OF THE TRIBUNAL (SUPRA). SO, GROUND NO.5 IS DETERMINED IN FAVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.6 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 TH E TAXPAYER VIS-- VIS COMPARABLE COMPANIES. THE TAXPAYER PROVIDED TH E ANALYSIS OF THE CASH PROFIT EARNED BY IT AS UNDER :- ITA NO.1807/DEL./2015 23 PARTICULARS ACTUAL CASH PROFITS AMOUNT IN RS. AMOUNT IN RS. SALES 545,703,341 545,703,341 OTHER OPERATING INCOME SUNDRY BALANCES W/OFF 1,910,317 1,910,317 CLAIM RECEIVED 111,661 111,661 JOB WORK CHARGES 40,589 40,589 FOREIGN EXCHANGE GAIN 1,719,684 1,719,684 TOTAL OPERATING INCOME 549,485,592 549,485,592 COST OF SALES 378,562,282 378,562,282 EMPLOYEE COST 27,624,330 27,624,330 MANUFACTURING & ADMINISTRATION 78,923,208 78,923,20 8 BANK CHARGES 2,245,939 2,245,939 DEPRECIATION 53,402,064 TOTAL OPERATING EXPENSES 540,757,823 487,355,759 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% 43. THE TAXPAYER RELIED UPON THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASES OF ACIT VS. GATES INDIA (P) LTD. ITA NO.75/DEL/2011 ORDER DATED 31.07.201 7 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 ITA NO.1807/DEL./2015 24 ONE OF THE METHOD PROVIDED U/S 92C OF THE ACT FOR C OMPUTING THE ALP UNDER TNMM AND THE MANDATE FOR DETERMINING THE ALP UNDER TNMM AS GIVEN AS PER RULE 10B(1) OF THE ACT A ND FURTHER CONTENDED THAT THE CASH PROFIT CANNOT BE USED IN PL ACE OF NET OPERATING PROFIT FOR THE PURPOSE OF TNMM IN ORDER T O PROVIDE FOR EXCESSIVE DEPRECIATION IN THE CASE OF THE TAXPAYER VIS--VIS COMPARABLE COMPANIES. 45. 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 T HAT EITHER IN THE CASE OF THE ASSESSEE OR IN THE CASE OF COMPARAB LE COMPANIES THERE EXISTS AN EXCEPTIONAL CIRCUMSTANCES UNDER WHI CH THE DEPRECIATION PROVIDED BY THE ASSESSEE IS EITHER EXC ESSIVE IN COMPARISON TO THE COM PARABLES OR DEPRECIATION PROV IDED 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 HEL D AS UNDER :- 19. IN THE PRESENT APPEAL, ALP OF TRANSACTIONS CARRIED WAS TO BE DETERMINED BY COMPARING NET PROFI T OF THE TAXPAYER (TESTED PARTY) WITH MEAN NET PROFIT OF COMPARABLES. ONLY RECEIPTS AND EXPENDITURE, HAVING CONNECTION WITH INTERNATIONAL TRANSACTIONS, WERE ITA NO.1807/DEL./2015 25 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 COMPU TED. 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 T HE TWO DATES SEPARATED BY A YEAR. IT CANNOT BE DEPRECI ATION UNDER TAX OR COMPANIES RULES OR AS PER POLICY OF TH E COMPANY. IN THE CASE IN HAND, REVENUE AUTHORITIES W ENT 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 EXPENDITU RE WHICH MUST BE DEDUCTED IN ALL SITUATIONS. IT HAS NO DIRECT CONNECTION OR BEARING ON PRICE, COST OR PROF IT MARGIN OF THE INTERNATIONAL TRANSACTIONS. PRINCIPLE S 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 WIT H THE LIKE, AND TO ELIMINATE DIFFERENCES, IF ANY, BY SUIT ABLE ADJUSTMENT IS TO BE SEEN. THEREFORE, THERE WAS JUSTIFICATION ON THE PART OF THE TAXPAYER IN PLEADI NG THAT PROFITS BE TAKEN WITHOUT DEDUCTION OF DEPRECIATION AS DEPRECIATION WAS LEADING TO LARGE DIFFERENCES IN MA RGINS FOR VARIOUS REASONS. 47. WHEN THE TAXPAYER HAS BROUGHT ON RECORD THE COM PLETE ANALYSIS OF CASH PROFITS EARNED BY THE TAXPAYER TO BE COMPARED WITH COMPLETE ANALYSIS OF CASH PROFIT EARNED BY THE COMP ARABLE COMPANIES EXTRACTED IN THE PRECEDING PARAS, WE ARE OF THE ITA NO.1807/DEL./2015 26 CONSIDERED VIEW THAT THE ISSUE IS REQUIRED TO BE DE CIDED AFRESH BY THE TPO IN THE LIGHT OF THE DECISION RENDERED BY TH E 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. GROUNDS NO.7 & 8 48. GROUNDS NO.7 & 8 ARE GENERAL IN NATURE, HENCE D O NOT REQUIRE ANY SPECIFIC ADJUDICATION. 49. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 4 TH DAY OF JULY, 2018. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 4 TH DAY OF JULY, 2018 TS ITA NO.1807/DEL./2015 27 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.
