Sami Labs Limited, Bangalore V. DCIT, Bangalore

ITA 186/BANG/2015

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 9405 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-02-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 20-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Rectification of order; Opportunity of being heard; International transaction; Notional interest; Set aside
• Section: 92C; 143(3); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER IT (TP)A NO. 186/BANG/2015 ASSESSMENT YEAR : 201 0 - 11 M/S. SAMI LABS LIMITED, 19/1 & 19/2, FIRST MAIN, SECOND PHASE, PEENYA INDUSTRIAL AREA, BANGALORE 560 058. PAN: AADCS2549E VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6 (1) (1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI CHERIAN K BABY, CA RESPONDENT BY : MS. NEERA MALHOTRA, CIT (DR) DATE OF HEARING : 19 .0 3 .2019 DATE OF PRONOUNCEMENT : 05.04.2019 O R D E R PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE ASSESSEE AND THE SAME IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 07.01.2015 PASSED BY THE AO U/S. 143(3) R.W.S. 144C (13) OF IT ACT, 1961 AS PER THE DIRECTIONS OF DRP FOR ASSESSMENT YEAR 2010-11. 2. THE ASSESSEE HAS FILED REVISED GROUNDS OF APPEAL IN THE MONTH OF MARCH 2019 WHICH ARE AS UNDER. THE GROUNDS OF APPEAL ARE AS GIVEN BELOW. ALL THE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER. TRANSFER PRICING ADJUSTMENT OF RS.12,90,24,688/- DONE TO MANUFACTURING SEGMENT 1. THE AO AND TPO HAS GRIEVOUSLY ERRED IN MAKING TRANSFER PRICING ADJUSTMENT OF RS.12,90,24,688/- TO PRICES CHARGED BY YOUR APPELLANT. 2. THE TPO HAS ERRED IN REJECTING THE COST PLUS METHOD ADOPTED BY YOUR APPELLANT AS THE MOST APPROPRIATE METHOD FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE AND WRONGLY ADOPTING TRANSACTION NET MARGIN METHOD. THE DRP HAS ERRED IN UPHOLDING THIS REJECTION OF COST PLUS METHOD. 3. WHILE FOLLOWING THE REVISED DIRECTIONS OF THE DRP DATED 16-03-2015 TO RESTRICT THE ALP ADJUSTMENT TO TRANSACTIONS WITH AE ONLY, THE TPO HAS ERRED IN WRONGLY COMPUTING THE ADJUSTMENTS RELATING TO AE TRANSACTIONS. IT(TP)A NO. 186/BANG/2015 PAGE 2 OF 11 4. THE TPO AND THE DRP HAS ERRED IN NOT CONSIDERING EXPORT INCENTIVES OF RS.1,80,85,480/- AS PART OF OPERATING REVENUES OF YOUR APPELLANT AND COMPARABLES OR REDUCING FROM COST TO DETERMINE OPERATING PROFITS. 5. THE TPO HAS ERRED IN NOT CONSIDERING THE UNDER UTILIZATION OF MANUFACTURING CAPACITIES OF YOUR APPELLANT AND THE RESULTING IDLE COSTS WHICH HAVE BEEN WRONGLY IGNORED WHILE COMPUTING YOUR APPELLANT'S MARGINS. THE DRP HAS ERRED IN UPHOLDING THE ACTION OF THE TPO. 6. THE TPO HAS ERRED IN THE APPLICATION OF FUNCTIONAL SIMILARITY FILTER WHILE REJECTING COMPANIES SELECTED BY YOUR APPELLANT AS COMPARABLES AND SELECTING WRONG COMPARABLE COMPANIES, WHOSE BUSINESS AND OPERATIONS HAVE NOTHING IN COMMON WITH THAT OF YOUR APPELLANT. THE DRP HAS ERRED IN UPHOLDING THE SAME. 7. THE TPO HAS ERRED IN MAKING APPARENT ERRORS IN MARGIN COMPUTATION OF INDFRAG LIMITED BY CONSIDERING RENTAL INCOME OF RS.68 LAKHS AS PART OF OPERATING REVENUE. NO SPECIFIC DIRECTION HAS BEEN GIVEN BY THE DRP ON THIS MATTER. 8. THE TPO HAS ERRED IN NOT MAKING ANY ADJUSTMENTS FOR THE DIFFERENCES IN THE FUNCTIONS AND RISKS WHICH ARE NOT UNDERTAKEN BY YOUR APPELLANT BUT UNDERTAKEN BY THE COMPARABLE COMPANIES, CONSIDERING THE FACT THAT YOUR APPELLANT DOES NOT UNDERTAKE ANY MARKETING ACTIVITIES IN RESPECT OF TRANSACTIONS WITH AES. THE HON'BLE DRP HAS ALSO ERRED IN UPHOLDING THE ACTION OF THE TPO. TRANSFER PRICING ADJUSTMENT OF RS.96,99,405/- AS COMMISSION ON GUARANTEE 9. IN THE LIGHT OF THE BINDING LEGAL PROVISIONS THAT PROHIBIT CHARGING COMMISSION ON GUARANTEES OF THE NATURE EXTENDED BY YOUR APPELLANT, THE TPO HAS ERRED IN HOLDING THAT THE GUARANTEES GIVEN TO AES CANNOT BE CONSIDERED TO BE AT ARM'S LENGTH SINCE NO COMMISSION WAS CHARGED BY YOUR APPELLANT. THE HON'BLE DRP HAS ALSO ERRED IN UPHOLDING THE ACTION OF THE TPO. MISCELLANEOUS 10. YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, VARY AND/ OR WITHDRAW ANY OR ALL OF THE ABOVE GROUNDS OF APPEAL. 11. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT MAY BE DIRECTED THAT THE ORDER OF THE LEARNED ASSESSING OFFICER AS UPHELD BY THE HON'BLE DRP BE MODIFIED TO THE EXTENT APPEALED AGAINST. 3. IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT GROUND NOS. 1, 2 AND 3 ARE GENERAL AND HENCE, THESE GROUNDS DO NOT REQUIRE ANY SEPARATE ADJUDICATION. REGARDING GROUND NO. 4, HE SUBMITTED THAT HE PLACED RELIANCE ON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF CIT VS. WELSPUN ZUCCHI TEXTILES LTD. AS REPORTED IN [2017] 77 TAXMANN.COM 137 (BOMBAY), COPY AVAILABLE ON PAGES 494 TO 499 OF PAPER BOOK. HE POINTED IT(TP)A NO. 186/BANG/2015 PAGE 3 OF 11 OUT THAT IN THIS JUDGMENT, IT WAS HELD BY HONBLE BOMBAY HIGH COURT THAT FOR THE PURPOSE OF SECTION 92C OF IT ACT, DEPB BENEFIT IS OPERATING REVENUE INCLUDABLE IN ARRIVING AT OPERATING PROFIT. THEREAFTER HE SUBMITTED THAT THE ORDER PASSED BY DRP U/S. 154 R.W.S. 144C OF IT ACT ON 16.03.2015 IS AVAILABLE ON PAGES 144 TO 149 OF PAPER BOOK AND IN PARTICULAR, OUR ATTENTION WAS DRAWN TO PARA NO. 4 ON PAGE NO. 146 OF PAPER BOOK AND IT WAS POINTED OUT THAT IN THIS PARA, IT IS NOTED BY THE DRP THAT IN DRPS ORDER FOR ASSESSMENT YEAR 2009-10 THE TPO WAS DIRECTED TO EXCLUDE SUCH INCENTIVES IN THE CASE OF COMPARABLES ALSO AND TO RECOMPUTE THE TP ADJUSTMENT. IT IS ALSO NOTED IN THE SAME PARA THAT THE TPO AT PAGE NO. 13 OF THIS PRESENT TP ORDER HAS STATED THAT THE TAX PAYER COMPANY HAS ALSO SUBMITTED THAT THE EXPORT INCENTIVES AND EXCISE DUTY WERE NOT EXCLUDED FROM THE OPERATING REVENUE IN 6 COMPARABLES AND THE SAME IS ACCEPTED. THEREAFTER IN PARA 4.1 OF THE SAME ORDER, IT IS STATED BY DRP THAT THE EXPORT INCENTIVES ARE EITHER TO BE EXCLUDED OR TO BE INCLUDED IN OPERATING REVENUE OF BOTH THE COMPARABLE CASES AS WELL AS THAT OF THE ASSESSEE, WHILE COMPUTING THE OPERATING PROFIT RATIO AND THEREAFTER, IT IS HELD BY DRP IN THE PRESENT ORDER THAT IN LINE WITH THE DRP ORDER IN THE EARLIER YEAR, IT IS HELD THAT IN THE YEAR UNDER CONSIDERATION ALSO, THE EXPORT INCENTIVE SHOULD BE EXCLUDED FROM BOTH COMPARABLE CASES AND THAT OF THE ASSESSEE AND TO RECOMPUTE THE TP ADJUSTMENT THEREAFTER. THEREAFTER HE DRAWN OUR ATTENTION TO PAGES 490 TO 493 OF ITS RECTIFICATION ORDER OF TPO DATED 14.12.2018 AND IN PARTICULAR, OUR ATTENTION WAS DRAWN TO PARA 2 OF ITS ORDER ON PAGE 491 OF THE PAPER BOOK AND IT IS POINTED OUT THAT IT IS STATED BY TPO IN THIS PARA NO. 2 B) THAT DRP HAS DIRECTED TO EXCLUDE EXPORT INCENTIVES FROM THE COMPUTATION OF OPERATING REVENUES OF ASSESSEE AND THE COMPARABLES AND THEREAFTER, THE TPO HAS STATED THAT EXPORT INCENTIVES HAS BEEN REMOVED FROM THE OPERATING REVENUES OF THE COMPARABLE COMPANIES IN THE ORDER U/S. 92CA OF IT ACT, 1961 AND HENCE, NO FURTHER CORRECTION HAS TO BE DONE IN THIS REGARD. 4. HE SUBMITTED THAT IN VIEW OF THIS JUDGMENT OF HONBLE BOMBAY HIGH COURT WHICH IS DATED 06.01.2017, IT SHOULD BE ACCEPTED THAT EXPORT INCENTIVES SHOULD BE INCLUDED IN THE OPERATING PROFIT OF THE TESTED PARTY AS WELL AS THE IT(TP)A NO. 186/BANG/2015 PAGE 4 OF 11 COMPARABLES. THE LD. DR OF REVENUE SUBMITTED THAT THERE IS NO INFIRMITY IN THE RECTIFICATION ORDER PASSED BY THE TPO. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. ON THIS ASPECT, THERE IS NO DISPUTE THAT EXPORT INCENTIVE HAS TO BE INCLUDED OR EXCLUDED FROM THE OPERATING PROFIT OF BOTH I.E. TESTED PARTY AND COMPARABLES. AS PER THE EARLIER ORDER OF DRP IN ASSESSEES OWN CASE, IT WAS HELD THAT THE SAME SHOULD BE EXCLUDED FROM THE TESTED PARTY AS WELL AS THE COMPARABLES AND ON THE SAME LINE IN THE PRESENT YEAR ALSO, THE ISSUE WAS DECIDED ON THAT LINE. NOW WE HAVE THE BENEFIT OF LATER JUDGMENT OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF CIT VS. WELSPUN ZUCCHI TEXTILES LTD. (SUPRA) WHICH IS DATED 06.01.2017. IN THIS JUDGMENT, IT WAS HELD THAT DEPB BENEFIT IS OPERATING REVENUE INCLUDABLE IN ARRIVING AT OPERATING PROFIT IN TP ANALYSIS. HENCE BY RESPECTFULLY FOLLOWING THIS JUDGMENT OF HONBLE BOMBAY HIGH COURT, WE HOLD THAT THE EXPORT INCENTIVES SHOULD BE INCLUDED IN THE OPERATING PROFIT OF THE ASSESSEE AS WELL AS THE COMPARABLES. BUT IT SHOULD BE ENSURED THAT SUCH EXPORT INCENTIVE IS IN RESPECT OF TURNOVER OF THE PRESENT YEAR ONLY BECAUSE IF THE EXPORT INCENTIVE IS RELATABLE TO THE TURNOVER OF AN EARLIER YEAR THEN THE SAME CANNOT BE INCLUDED IN THE PRESENT YEAR PROFIT FOR TP ANALYSIS BECAUSE IN THAT SITUATION, THE PROFIT WILL REMAIN INCLUDED IN THE NUMERATOR, BUT THE CORRESPONDING TURNOVER WILL NOT REMAIN INCLUDED IN THE DENOMINATOR AND THIS WILL GIVE ABSURD RESULT. HENCE WE DIRECT THE AO/TPO TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THIS JUDGMENT OF HONBLE BOMBAY HIGH COURT AND IN THE LIGHT OF ABOVE DISCUSSION. THE SAME EFFECT SHOULD BE GIVEN FOR WORKING OUT THE OPERATING PROFIT PERCENTAGE OF THE ASSESSEE I.E. THE TESTED PARTY AND THE COMPARABLES BOTH AND IF IT IS FOUND THAT THE EFFECT CANNOT BE GIVEN IN THE CASE OF THE COMPARABLE FOR WANT OF REQUIRED DATA THEN IT SHOULD NOT BE INCLUDED IN THE PROFIT OF THE TESTED PARTY I.E. ASSESSEE ALSO. NECESSARY ORDER AS PER LAW SHOULD BE PASSED BY AO/TPO IN THE LIGHT OF ABOVE DISCUSSION AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO ASSESSEE. GROUND NO. 4 IS ALLOWED FOR STATISTICAL PURPOSES. 6. REGARDING GROUND NO. 5, IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT ON THIS ISSUE, THERE IS TRIBUNAL ORDER AVAILABLE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 IN IT(TP)A NO. 61/BANG/2014 DATED 23.11.2016, IT(TP)A NO. 186/BANG/2015 PAGE 5 OF 11 COPY AVAILABLE ON PAGES 340 TO 357 OF PAPER BOOK AND IN PARTICULAR, OUR ATTENTION WAS DRAWN TO PARA NO. 16 ON PAGE NO. 352 OF PAPER BOOK. IT WAS POINTED OUT THAT AS PER THIS PARA OF THE TRIBUNAL ORDER, THE MATTER WAS RESTORED BACK TO AO WITH SIMILAR DIRECTIONS. THE LD. DR OF REVENUE SUPPORTED THE ORDER OF CIT(A). 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE REPRODUCE PARA NO. 16 OF THE TRIBUNAL ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 FROM PAGES 352 AND 353 OF PAPER BOOK. THE SAME IS AS UNDER. 16. WE HAVE HEARD THE LEARNED A.R. AS WELL AS LEARNED D.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE TRIBUNAL FOR THE ASSESSMENT YEAR 2009-10 HAS DIRECTED THE A.O./TPO/A.O. TO CONSIDER THE CLAIM OF THE ASSESSEE FOR THE PURPOSE OF GIVING ADJUSTMENT ON ACCOUNT OF LOW CAPACITY UTILIZATION. WE MAKE IT CLEAR THAT THE ADJUSTMENT IS ONLY ON ACCOUNT OF COST ATTRIBUTABLE TO IDLE CAPACITY FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THE ASSESSEE HAS TO PROVIDE ALL THE DETAILS OF CAPACITY UTILIZATION OF ASSESSEE AS WELL AS COMPARABLE FOR COMPUTATION OF ADJUSTMENT IF ANY. 8. RESPECTFULLY FOLLOWING THIS TRIBUNAL ORDER, WE RESTORE BACK THIS MATTER TO THE FILE OF AO/TPO WITH SIMILAR DIRECTIONS. GROUND NO. 5 IS ALSO ALLOWED FOR STATISTICAL PURPOSES. 9. REGARDING GROUND NO. 6, IT WAS SUBMITTED THAT AS ORDERED BY DRP IN PARA 3.7 OF ITS DIRECTIONS, THIS WAS ONE OF THE OBJECTIONS RAISED BY ASSESSEE BEFORE DRP THAT WHILE ARRIVING AT THE ARMS LENGTH PRICE, THE TPO HAS COMMITTED ERRORS IN SELECTION OF COMPARABLE COMPANIES. IT IS ALSO SPECIFIED THAT TPO HAS WRONGLY SELECTED 10 COMPANIES AS COMPARABLES WHOSE BUSINESSES AND OPERATIONS HAVE NOTHING IN COMMON WITH THAT OF THE ASSESSEE. THEREAFTER HE SUBMITTED THAT THE ISSUE IN DISPUTE REGARDING TP ADJUSTMENT WAS DECIDED BY DRP IN PARAS 3.8 AND 3.9, BUT THERE IS NO DECISION ON THIS ASPECT AND HENCE, THIS MATTER SHOULD BE RESTORED BACK TO AO/TPO OR DRP. THE LD. DR OF REVENUE SUPPORTED THE ORDER OF DRP. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE REPRODUCE PARAS 3.7 TO 3.9 OF THE DIRECTIONS OF DRP FROM PAGES 6 TO 10 OF DRP DIRECTIONS. THE SAME ARE AS UNDER. 3.7 THE SUMMARY OF SUBMISSIONS MADE BY THE ASSESSEE IS REPRODUCED BELOW: MAIN DISPUTES INVOLVED A) MOST APPROPRIATE METHOD IT(TP)A NO. 186/BANG/2015 PAGE 6 OF 11 COST PLUS METHOD ADOPTED BY THE PETITIONER WAS REJECTED BY THE TPO AND INSTEAD TRANSACTION NET MARGIN METHOD WAS USED AS THE MOST APPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRICE FOR TRANSACTIONS RELATING TO EXPORT OF GOODS TO ASSOCIATED ENTERPRISES. SINCE YOUR PETITIONER TRANSFERS SEMI -FINISHED GOODS, THE COST-PLUS METHOD IS THE MOST APPROPRIATE METHOD. THE MAJOR TRANSACTIONS WITH ASSOCIATED ENTERPRISES WERE IN THE NATURE OF SALE OF PRODUCTS TO ASSOCIATED ENTERPRISES. THERE WAS ALSO PURCHASE OF MATERIALS FROM CERTAIN ASSOCIATED ENTERPRISES WHICH WERE OF RELATIVELY SMALL VALUES. A) ADJUSTMENTS WERE NOT RESTRICTED TO AE TRANSACTIONS ONLY ALP ADJUSTMENTS HAVE BEEN DONE TO NON AE TRANSACTIONS ALSO THOUGH OPERATING MARGIN STATEMENTS FOR AE AND NON AE TRANSACTIONS WERE FILED IN THE TP DOCUMENTATION WHICH HAS NOT BEEN CONSIDERED BY THE TPO. BY DOING SO THE TPO HAS TRAVELLED MUCH BEYOND HIS AUTHORITY. THE LAW DOES NOT PERMIT A TPO TO RECOMPUTE ARM'S LENGTH PRICE IN RESPECT OF DOMESTIC TRANSACTIONS WITH ANY PARTY AS WELL AS IN INTERNATIONAL TRANSACTIONS WITH NON AES. ON THIS GROUND ALONE, THE ENTIRE ORDER OF THE TPO REQUIRES TO BE SET ASIDE AS IT SUFFERS FROM SERIOUS ILLEGALITY. FOR AY 2009-10, THE HON'BLE DRP HAD DIRECTED THE TPO TO RESTRICT THE ADJUSTMENTS TO TRANSACTIONS WITH AE ONLY. CASE LAWS RELIED UPON IT WAS HELD IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. VS DCIT AY 2006-07 (ITA NO.1231 (BANG)/2010) THAT ALP ADJUSTMENTS MADE BY THE TPO SHOULD HE RESTRICTED TO TRANSACTIONS WITH ASSOCIATED ENTERPRISES ONLY. B) EXPORT INCENTIVES THE TPO HAS ALSO ERRED IN NOT CONSIDERING EXPORT INCENTIVES OF RS.1,80,85,480/- AS PART OF OPERATING REVENUES FOR THE PURPOSE OF COMPUTING OPERATING MARGINS OF YOUR APPELLANT. THESE OUGHT TO HAVE BEEN CONSIDERED AS PART OF OPERATING REVENUES SINCE THESE WERE EARNED IN THE COURSE OF THE BUSINESS AND RELATED PRIMARILY TO THE EXPORT OPERATIONS OF YOUR PETITIONER, A MAJOR PORTION OF WHICH IS TO AES. AS THE EXPORT INCENTIVES ARE PRIMARILY A REIMBURSEMENT OF INDIRECT TAXES AND OTHER COSTS ARISING FROM STRUCTURAL INEFFICIENCIES IN INDIA, THEY ARE PART AND PARCEL OF PRICE FIXATION FOR INTERNATIONAL MARKETS WHICH IS HIGHLY COMPETITIVE AND HENCE CANNOT BE IGNORED. C) SELECTION OF COMPARABLES BY TPO WHICH ARE FUNCTIONALLY DIFFERENT WHILE ARRIVING AT THE ARMS LENGTH PRICE, THE TPO HAS COMMITTED ERRORS IN SELECTION OF COMPARABLE COMPANIES. THE TPO HAS WRONGLY SELECTED 101 COMPANIES AS COMPARABLES WHOSE BUSINESSES AND OPERATIONS HAVE NOTHING IN COMMON WITH THAT OF YOUR PETITIONER. THOUGH THIS HAS BEEN POINTED OUT TO THE TPO DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, NO RECTIFICATION WAS DONE ON THE SAME WHILE PASSING THE TPO'S ORDER U/S 92CA OF THE INCOME TAX ACT, 1961. IT(TP)A NO. 186/BANG/2015 PAGE 7 OF 11 D) FOREX GAIN: THE TPO HAS ALSO NOT CONSIDERED FOREIGN EXCHANGE GAIN OF RS.62.24 LAKHS WHILE ARRIVING AT OPERATING REVENUES THOUGH THIS GAIN IS PRIMARILY RELATING TO THE EXPORT OPERATIONS OF THE COMPANY MOST OF WHICH ARE WITH ASSOCIATED ENTERPRISES. (SAP LABS INDIA PRIVATE LIMITED VS ACTT (006 ITR (TRIB) 0081 1TAT (BANG)). THE EXCHANGE GAIN HAD ARISEN ON ACCOUNT OF FACTORS LIKE REALIZATION OF SALES, PAYMENTS TO SUPPLIERS ETC. HENCE, THESE WERE CONSIDERED AS OPERATING IN NATURE BY YOUR PETITIONER. E) NO ADJUSTMENTS DONE FOR IDLE COSTS FOR EXCESS CAPACITY THE TURNOVER OF THE COMPANY IN THE FINANCIAL YEAR 2009-2010 WAS LOWER THAN ITS PEAK CAPACITY ACHIEVED IN FY 2005-2006 I.E. 45.06% DUE TO NON AVAILABILITY OF RAW MATERIALS PARTICULARLY COLEUS AMONG OTHER REASONS. THIS HAS LED TO THE FIXED COSTS BEING SPREAD ACROSS LOWER TURNOVER BASE RESULTING IN LOWER NET MARGINS. COLEUS, WHICH IN FY 2005-06 CONSTITUTED 58% OF OUR TOTAL SATES, CONTRIBUTED ONLY 10.8% OF THE TOTAL SALES IN FY 2009-10. THIS CHANGE IN PRODUCT MIX AFFECTED THE TURNOVER AND PROFITABILITY OF THE COMPANY. AS NEW PRODUCTS HAD TO BE BROUGHT IN, THE COMPANY HAD TO RESORT TO HIGHER LEVELS OF OUTSOURCED MANUFACTURING RESULTING IN HIGHER PROCESSING CHARGES AND CONSEQUENT INCREASE IN COSTS AND LOWER PROFITS. IT ALSO RESULTED IN LOWER UTILIZATION OF OWN FACILITIES AND CONSEQUENT IDLE TIME. FIXED COSTS ATTRIBUTABLE TO IDLE CAPACITY IS RS.12.41 CRORES. THE TPO HAS NOT MADE ANY ADJUSTMENT FOR IDLE CAPACITY OF YOUR PETITIONER THOUGH THE DETAILS OF THE SAME WERE FILED BY YOUR PETITIONER. HE SEEMS TO BE UNDER THE FALSE IMPRESSION THAT ALL MANUFACTURING ENTITIES WILL MAKE THE SAME LEVEL OF PROFITS IRRESPECTIVE OF THEIR LEVEL OF CAPACITY UTILIZATION / BUSINESS. IT IS A BASIC PRINCIPLE IN MARGINAL COSTING THAT UNDER UTILIZATION OF CAPACITIES WILL ERODE MARGINS HIGHER THAN IN PROPORTION TO THE CONTRACTION IN CAPACITY UTILIZATION. THIS FUNDAMENTAL PRINCIPLE HAS BEEN GIVEN A GO BYE BY THE TPO IN MAKING AN ALP ADJUSTMENT FOR ITS ENTIRE BUSINESS. F) RISK ADJUSTMENT NO ADJUSTMENTS WERE MADE BY THE TPO FOR THE DIFFERENCES IN THE FUNCTIONS AND RISKS WHICH ARE NOT UNDERTAKEN BY YOUR PETITIONER BUT UNDERTAKEN BY THE COMPARABLE COMPANIES CONSIDERING THE FACT THAT YOUR PETITIONER DOES NOT UNDERTAKE MARKETING ACTIVITIES IN RESPECT OF TRANSACTIONS WITH AES. THE HON'BLE ITAT HAD HELD IN THE CASE OF ROLLS ROYCE PLC VS. DDIT DATED JANUARY 30TH, 2009 THAT 35% OF THE PROFITS SHOULD BE ATTRIBUTED TO THE MARKETING FUNCTION. THE TPO OUGHT TO HAVE MADE THIS ADJUSTMENT WHILE DETERMINING THE ARM'S LENGTH PRICE OF SALES TO AES FOR ADJUSTMENT. G) COMMISSION ON GUARANTEE THE TPO HAS ALSO COMPUTED COMMISSION ON GUARANTEE AT 3% BY CONTENDING THAT YOUR PETITIONER OUGHT TO HAVE CHARGED THE COMMISSION IT(TP)A NO. 186/BANG/2015 PAGE 8 OF 11 ON GUARANTEES THAT IT EXTENDED TO BANKS WHO WERE LENDING TO THE AES. PAYMENT / RECEIPT OF COMMISSION IS NOT PERMITTED AS PER GUIDELINES OF THE RESERVE BANK OF INDIA (MASTER CIRCULAR OF RBI ON GUARANTEES AND CO-ACCEPTANCES 2009-10 / 70). HENCE YOUR PETITIONER CANNOT CHARGE ANY GUARANTEE COMMISSION. YOUR PETITIONER HAD GIVEN CORPORATE GUARANTEES AMOUNTING TO RS. 32,33,13,497/- TO HANKERS ON BEHALF OF THE ASSOCIATED ENTERPRISES. ACTUAL BORROWINGS AGAINST THIS BY THE AES WAS ONLY RS.17.74 CRORES @ RS.46.68 PER USD AS ON 31/12/2009 (OUTSTANDING BORROWINGS BEING USD 38,00,000/- ON DEC 31, 2009). THE LOANS TAKEN BY THE ASSOCIATED ENTERPRISES IS FULLY SECURED AGAINST THE ASSETS HELD BY THEM IN USA. NO SPECIAL BENEFIT HAS ACCRUED TO THEM ON ACCOUNT OF THE GUARANTEES GIVEN BY THE ASSESSE. HENCE THE GUARANTEE WAS ONLY A PASSIVE GUARANTEE GIVEN FOR ADDITIONAL COMFORT TO BANKS. NO COMMISSION WAS CHARGED ON THESE GUARANTEES GIVEN AS IT IS NOT PERMITTED BY LAW. HENCE NO ADJUSTMENT OUGHT TO HAVE BEEN MADE IN THIS REGARD. 3.8 THE OBJECTIONS AND THE SUBMISSIONS OF THE ASSESSEE IN REGARD TO THE TWO ADJUSTMENTS TOWARDS TRANSFER PRICING AS MADE BY THE TPO AND ADOPTED BY THE AO HAVE BEEN CAREFULLY CONSIDERED. WE FIND THAT THE DISPUTE RESOLUTION PANEL, BANGALORE IN ITS DIRECTIONS IN F.NO.18/DIT/IT/2012-13 DATED 22/11/2013 FOR THE ASSESSMENT YEAR 2009 10 HAS HELD AT PARE 6.1.2 THAT CPM IS NOT THE APPROPRIATE METHOD FOR BENCHMARKING IF THE GROSS LEVEL MARGIN CANNOT BE ACCURATELY DETERMINED IN A CASE LIKE THE ASSESSEE SINCE THE CPM IS NOT APPLICABLE TO PURCHASE TRANSACTIONS AS THE ASSESSEE'S ACTIVITY CONSISTS OF PURCHASE AND SALE TRANSACTIONS WITH ASSOCIATED ENTERPRISES; WHEN THERE ARE PRACTICAL DIFFICULTIES IN IDENTIFYING THE DIRECT AND INDIRECT COSTS OF PRODUCTION IN THE ABSENCE OF ANY STATUTORY REQUIREMENT OR ACCOUNTING STANDARDS GOVERNING THE SAME FOR DIFFERENT INDUSTRIES OR SECTORS; AND WHERE GRANULAR DETAILS ARE NOT AVAILABLE FOR DETERMINATION IN RESPECT OF COMPARABLES. WITH THESE IN VIEW, FOR THE ASSESSMENT YEAR 2009-10 THE DRP JUSTIFIED AND UPHELD THE TPO'S ACTION IN APPLYING TNMM AS THE MORE PREFERABLE METHOD FOR BENCHMARKING IN THE ASSESSEE'S CASE. FOR THE SAME REASONS, WE HOLD THAT, FOR THE ASSESSMENT YEAR 2010-11 IN QUESTION ALSO, THE TPO'S ACTION IN REJECTING THE CPM ADOPTED BY THE ASSESSEE AND IN ADOPTING THE TNM AS THE APPROPRIATE METHOD TO MEASURE THE ASSESSEE'S BUSINESS OPERATIONS, IS JUSTIFIED AND CONFIRM HIS ACTION IN DETERMINING THE TRANSFER PRICING ADJUSTMENT IN THIS REGARD. 3.9 AS REGARDS CHARGING OF INTEREST ON GUARANTEE COMMISSION, IT WAS HELD BY THE DRP FOR THE ASSESSMENT YEAR 2009-10 THAT THE GUIDELINES APPLY TO GUARANTEES OFFERED BY DIRECTORS IN THEIR INDIVIDUAL CAPACITY AND NOT QUA DIRECTORS SINCE THE BAR IMPOSED IN THE GUIDELINES IS TO PREVENT THE DIRECTORS AND OTHERS IN THE MANAGERIAL RANK FROM MAKING IT(TP)A NO. 186/BANG/2015 PAGE 9 OF 11 IT A SOURCE OF INCOME FOR THEMSELVES. THE DRP, THEREFORE, UPHELD THE TPO'S ACTION IN CHARGING NOTIONAL INTEREST ON THE GUARANTEE COMMISSION FOR THE PURPOSE OF DETERMINING THE TRANSFER PRICING ADJUSTMENT. WE ARE IN AGREEMENT WITH THE VIEWS OF THE DRP FOR THE ASSESSMENT YEAR 2009-10 IN THE CASE OF THE ASSESSEE AND UPHOLD SIMILAR ACTION ON THE PART OF THE TPO IN THE ASSESSEE'S CASE FOR THE ASSESSMENT YEAR 2010-11 IN CONSIDERING INTEREST AT 3% ON THE GUARANTEE COMMISSION FOR THE PURPOSE OF DETERMINING THE TRANSFER PRICING ADJUSTMENT. 11. FROM THE ABOVE PARAS REPRODUCED FROM THE DIRECTIONS OF DRP, IT IS SEEN THAT AS PER CLAUSE (C) OF PARA 3.7, THIS IS ADMITTED POSITION THAT THIS WAS THE DISPUTE RAISED BEFORE DRP THAT THE TPO HAS COMMITTED ERRORS IN SELECTION OF COMPARABLE COMPANIES. THE TPO HAS WRONGLY SELECTED 10 COMPANIES AS COMPARABLES WHOSE BUSINESSES AND OPERATIONS HAVE NOTHING IN COMMON WITH THAT OF THE ASSESSEE. FROM THE DECISION OF DRP AS PER PARAS 3.8 AND 3.9 OF ITS DIRECTIONS AS REPRODUCED ABOVE, WE FIND THAT IN PARA 3.8, THIS ISSUE WAS DECIDED BY DRP THAT TNMM IS THE MOST APPROPRIATE METHOD AND THERE IS NO DECISION ON ANY OTHER ASPECT OF THE ISSUE IN DISPUTE. IN PARA 3.9 OF DRP DIRECTIONS AS REPRODUCED ABOVE, THE DECISION IS WITH REGARD TO CHARGING NOTIONAL INTEREST ON THE GUARANTEE COMMISSION AND IN THIS PARA ALSO, THERE IS NO DECISION REGARDING SELECTION OF COMPARABLES. HENCE WE FEEL IT PROPER TO RESTORE THE MATTER BACK TO THE FILE OF DRP FOR FRESH DECISION. GROUND NO. 6 IS ALSO ALLOWED FOR STATISTICAL PURPOSES. 12. REGARDING GROUND NO. 7, IT WAS SUBMITTED THAT THERE IS NO DECISION OF DRP ON THIS ISSUE. HENCE THIS ISSUE SHOULD ALSO BE RESTORED BACK TO THE FILE OF DRP FOR FRESH DECISION. THE LD. DR OF REVENUE SUPPORTED THE ORDER OF AO AND DRP. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT ON PAGES 7 AND 8 OF THE ANNEXURE I TO FORM 35A, THE ASSESSEE HAS RAISED VARIOUS OBJECTIONS IN RESPECT OF EACH OF THE 9 COMPARABLES OUT OF 10 COMPARABLES SELECTED BY THE TPO. FOR THE COMPANY INDFRAG LIMITED, IT IS STATED THAT RENTAL INCOME OF RS. 68 LAKHS HAS BEEN CONSIDERED AS OPERATING REVENUES. IN THE IMPUGNED ORDER OF DRP, THERE IS NO DECISION ON THIS ASPECT THAT AS TO WHETHER THE SAME SHOULD BE INCLUDED IN OPERATING REVENUE OR NOT AND FOR THIS ISSUE ALSO, WE RESTORE THE MATTER BACK TO DRP FOR FRESH DECISION. GROUND NO. 7 IS ALSO ALLOWED FOR STATISTICAL PURPOSES. IT(TP)A NO. 186/BANG/2015 PAGE 10 OF 11 14. REGARDING GROUND NO. 8, IT WAS SUBMITTED THAT AS PER PARAS 17 AND 18 OF THE TRIBUNAL ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 AVAILABLE ON PAGE NO. 353 OF PAPER BOOK, THE ISSUE REGARDING RISK ADJUSTMENT WAS RESTORED BACK TO THE FILE OF AO/TPO. THEREFORE, IN THE PRESENT YEAR ALSO, THIS ISSUE SHOULD BE RESTORED BACK TO THE FILE OF AO/TPO WITH SIMILAR DIRECTIONS. THE LD. DR OF REVENUE SUPPORTED THE ORDER OF AO/TPO AND DRP. SHE ALSO SUBMITTED THAT THE ASSESSEE HAS NOT SUBMITTED THE COMPUTATION OF THE RISK ADJUSTMENT BEING CLAIMED BY THE ASSESSEE AND THEREFORE, THIS ISSUE SHOULD NOT BE RESTORED BACK. IN THE REJOINDER, IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT ON PAGES 11 AND 12 OF FORM 35A FILED BEFORE THE DRP, IT HAS BEEN SPECIFICALLY CLAIMED BY THE ASSESSEE THAT IT IS HELD BY THE TRIBUNAL IN THE CASES OF ROLLS ROYCE PLC VS. DDIT IN ITS ORDER DATED 30.01.2009 THAT 35% OF THE PROFITS SHOULD BE ATTRIBUTED TO THE MARKETING FUNCTION. HE SUBMITTED THAT CLARIFICATION WAS FILED EARLIER ALSO AND THE SAME WILL BE FILED AGAIN IF THE MATTER IS RESTORED BACK TO THE FILE OF AO/TPO. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE REPRODUCE PARAS 17 AND 18 FROM THE TRIBUNAL ORDER WHICH IS AVAILABLE ON PAGE NO. 353 OF PAPER BOOK. THE SAME READS AS UNDER. 17. GROUND NO.6 IS REGARDING RISK ADJUSTMENT. 18. WE HAVE HEARD THE LEARNED A.R. AS WELL AS LEARNED D.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE IS CLAIMING THE RISK ADJUSTMENT BECAUSE OF THE MAJORITY OF THE SALE TO THE AE IN COMPARISON TO THE COMPARABLES MAKING SALES TO THE THIRD PARTY. THE ID. AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS FURNISHED ALL THE REQUISITE DETAILS. RISK ADJUSTMENT IS ONE OF THE COMPONENT TO BE TAKEN INTO ACCOUNT FOR FAR ANALYSIS. THEREFORE THE TPO/A.O./A.O IS DIRECTED TO CONSIDER THE CLAIM OF RISK ADJUSTMENT ON THE BASIS OF THE DETAILS TO BE FURNISHED BY THE ASSESSEE. 16. FROM THE ABOVE PARAS REPRODUCED FROM THE TRIBUNAL ORDER, IT IS SEEN THAT IN THAT YEAR, THE AO/TPO WERE DIRECTED TO CONSIDER THE CLAIM OF RISK ADJUSTMENT ON THE BASIS OF THE DETAILS TO BE FURNISHED BY THE ASSESSEE. HENCE IN THE PRESENT YEAR ALSO, WE RESTORE THIS MATTER BACK TO AO/TPO WITH SIMILAR DIRECTIONS. GROUND NO. 8 IS ALSO ALLOWED FOR STATISTICAL PURPOSES. IT(TP)A NO. 186/BANG/2015 PAGE 11 OF 11 17. REGARDING GROUND NO. 9 ALSO, IT WAS SUBMITTED THAT PARA NO. 20 OF THE SAME TRIBUNAL ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 IS RELEVANT AND IN THAT YEAR, THE AO/TPO WERE DIRECTED TO ADOPT THE ARMS LENGTH COMMISSION OF CORPORATE GUARANTEE AT 0.5%. THE LD. DR OF REVENUE COULD NOT POINT OUT ANY DIFFERENCE IN FACTS IN THE PRESENT YEAR. HENCE RESPECTFULLY FOLLOWING THIS TRIBUNAL ORDER IN ASSESSEES OWN CASE, WE DIRECT THE AO/TPO TO ADOPT THE ARMS LENGTH COMMISSION OF CORPORATE GUARANTEE AT 0.5%. GROUND NO. 9 IS ALLOWED. 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE. SD/- SD/- (LALIET KUMAR) (ARUN KUMAR GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 05 TH APRIL, 2019. /MS/ COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.