M/s. Wieland Metals India Private Limited, Bangalore V. Principal Commissioner Of Income Tax, Ward- 7(1)(3), Bangalore

ITA 2394/BANG/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 4530 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 03-08-2021
• Assessment Year: 2015-2016
• Appeal Filed On: 21-11-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Transactions in derivatives; Tax effect; TDS; Set aside
• Section: 143(3); 201; 13; 22; 92CA; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER IT ( TP ) A NO. 2394 / BANG / 2019 ASSESSMENT YEAR : 2015 - 16 M/S. WIELAND METALS INDIA PRIVATE LTD., 18A & B, BOMMASANDRA INDUSTRIAL AREA, HEBBAGODI VILLAGE, ATTIBELE HOBLI, ANEKAL TALUK, BANGALORE. PAN: AAACW 7975K VS. THE INCOME TAX OFFICER, WARD 7(1)(3), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : S HRI K.P. SRINIVAS, CA RESPONDENT BY : SH RI PRADEEP KUMAR, C IT(DR) (ITAT ), BENGALURU. DATE OF HEARING : 03 .0 8 .202 1 DATE OF PRONOUNCEMENT : 22 .0 9 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE ASSESSING OFFICER PASSED U/S. 143(3) R.W.S. 144C(13 ) R.W.S. 92CA OF THE INCOME-TAX ACT, 1961 [THE ACT] DATED 30.9.2016 FOR THE ASSESSMENT YEAR 2015-16. 2. THE GROUNDS RAISED ARE AS FOLLOWS:- IT(TP)A NO.2394/BANG/2019 PAGE 2 OF 36 GROUND OF APPEAL TAX EFFECT 1. THE AO/TPO HAS GRIEVOUSLY ERRED IN MAKING AND THE DRP IN UPHOLDING THE TRANSFER PRICING ADJUSTMENT OF RS.4,09,89,945/- TO PRICES CHARGED BY YOUR APPELLANT. THERE IS NO TAX EFFEC T IN THE CURRENT YE AR SINCE THE ASSESSED INCOME HAS BEEN SET OFF AGAINST LOSSES BRO UGHT FORWARD FROM EARLIER YEARS. HOWEVER, CONSIDERING THE APPLICABLE TAX RATES FOR AY 2015- 16, THE TAX IMPACT IS RS. 1,32,99,188. 2. THE TPO HAS ERRED IN REJECTING THE COMPARABLE UNCONTROLLED PRICE ('CUP') 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 UPH OLDING THIS REJECTION OF CUP METHOD AND DISREGARDING PRICES QUOTED BY LONDON M ETAL EXCHANGE ('LME') WHICH IS A GLOBAL BENCH MARK FOR COMMODITY PRICING 3. 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. 4. THE TPO HAS ERRED IN THE APPLICATION OF FUNCTIONAL SIMILARITY FILTER WHILE SELECTING 5 WRONG COMPARABLE COMPANIES, WHOSE BUSINESS AND OPERATIONS HAVE NOTHING IN COMMON WITH THAT OF YOUR APPELLANT. THE DRP HAS ERRED IN UPHOLDING THE SAME. 5. THE TPO HAS ERRE D IN FAILING TO APPLY THE IMPORTS FILTER AND BY SELECTING COMPANIES WHICH HAVE NIL OR MINIMAL IMPORTS AS COMPARABLE TO YOUR APPELLANT WHO HAD MAJOR IMPORTS DURING THE YEAR. 6. WITHOUT PREJUDICE TO GROUND 7 BELOW, THE TPO HAS ERRED IN NOT CO NSIDERING IT SUPPORT AND MAINTENANCE CHARGES OF RS.72,44,263/- AS NON OPERATING IN NATURE WHILE COMPUTING THE NET OPERATING MARGINS OF YOUR APPELLANT. IT(TP)A NO.2394/BANG/2019 PAGE 3 OF 36 7. THE AO AND DRP HAS ERRED IN CONSIDERING RS.72,44,263/- INCURRED TOWARDS IT SUPPORT AND MAINTENANCE CHA RGES AS PRIOR PERIOD EXPENSES EVEN THOUGH THE LIABILITY TO PAY THE EXPENSES CRYSTALLISED ONLY DURING THE YEAR BASED ON INVOICES RECEIVED FROM THE VENDOR IN THE CURRENT YEAR. THERE IS NO TAX EFFEC T IN THE CURRENT YE AR SINCE THE ASSESSED INCOME HAS BEEN SET OFF AGAINST LOSSES BRO UGHT FORWARD FROM EARLIER YEARS. HOWEVER, CONSIDERING THE APPLICABLE TAX RATES FOR AY 2015- 16, THE TAX IMPACT IS RS.23,50,401/-. 8. YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, VA RY AND/ OR WITHDRAW ANY OR ALL OF THE ABOVE GROUNDS OF APPEAL. NA 9. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT MAY BE DIRECTE D THAT THE ORDER OF THE LEARNED ITO AS UPHELD BY THE HON'BLE DRP BE MODIFIED TO THE EXTENT APPEALED AGAINST. NA TOTAL TAX EFFECT RS.1,56,49,589/- 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF COMMERCIAL PRODUCTION OF SLITTING OF COPPER ALLOY COILS AS PER CUSTOMER SPECIFICATIONS W.E.F. SEPTEMBER 2012. THE COMPANY IS ALSO ENGAGED IN THE MARKETING OF PRODUCTS MADE OF COPPER ALLOYS MANUFACTURED BY THE HOLDING COMPANY AND OTHER GROUP COMPANIES. 4. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.11 .2015, DECLARING A LOSS OF RS.2,37,34,753/-. DURING SCRUTINY ASSESSMEN T, THE CASE WAS ALSO REFERRED TO THE TRANSFER PRICING OFFICER (TPO) WH O PASSED AN ORDER U/S 92CA OF THE INCOME TAX ACT, 1961 (THE ACT) PROPOS ING A TRANSFER PRICING ADJUSTMENT OF RS.4,09,89,945/-. CONSEQUENTLY, THE AO PASSED A DRAFT IT(TP)A NO.2394/BANG/2019 PAGE 4 OF 36 ASSESSMENT ORDER ON 03.12.2018 AFTER MAKING A CORPO RATE TAX ADJUSTMENT OF RS.72,44,263/- IN ADDITION TO THE TRANSFER PRICI NG ADJUSTMENT OF RS.4,09,89,945/- PROPOSED BY THE TPO. 5. ON APPEAL, DRP ISSUED ITS DIRECTIONS U/S 144C(5) ON 26-07-2019 CONFIRMING THE ADDITIONS PROPOSED BY THE AO IN THE DRAFT ASSESSMENT ORDER. ACCORDINGLY, THE AO VIDE ORDER U/S 143(3) R.W.S 144 C(13) R.W.S 92CA OF THE ACT DATED 30.9.2016 ISSUED THE FINAL ASSESSMENT ORD ER. AGGRIEVED BY THE SAID FINAL ASSESSMENT ORDER, THE ASSESSEE IS IN APP EAL BEFORE THIS TRIBUNAL. 6. GROUND NO.1 IS GENERAL IN NATURE REQUIRING NO AD JUDICATION. 7. GROUND NO.2 IS REGARDING REJECTION OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD ADOPTED BY THE ASSESSEE PRICE AN D WRONGLY ADOPTING TRANSACTION NET MARGIN METHOD (TNMM) DISREGARDING P RICES QUOTED BY LONDON METAL EXCHANGE ('LME') WHICH IS A GLOBAL BEN CHMARK FOR COMMODITY PRICING. 8. THE LD. AR SUBMITTED THAT AS PER THE GUIDANCE NO TE ON TRANSFER PRICING ISSUED BY THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA, TYPICAL TRANSACTIONS WHERE CUP METHOD CAN BE USED ARE AS FO LLOWS:- A. TRANSFER OF GOODS B. PROVISION OF SERVICES C. INTANGIBLES D. INTEREST ON LOANS 9. TYPICAL TRANSACTIONS WHERE TNMM MAY BE ADOPTED A RE: A) PROVISION OF SERVICES B) DISTRIBUTION OF FINISHED PRODUCTS WHERE RESALE PRIC E CANNOT BE ADEQUATELY APPLIED IT(TP)A NO.2394/BANG/2019 PAGE 5 OF 36 C) TRANSFER OF SEMI-FINISHED GOODS 10. THE MAJOR INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLANT WITH ITS AE IS WITH RESPECT TO TRANSFER OF GOODS. HENCE, CUP IS THE MAM TO BE ADOPTED SINCE TNMM IS NOT APPLICABLE IN THE CASE OF TRANSFER OF GOODS. IN CASE OF COMMISSION FOR MARKETING SERVICES, THE APPE LLANT HAD USED TNMM AS MAM. 11. THE LD. AR SUBMITTED THAT THE OECD IN ITS TRANS FER PRICING GUIDELINES (2017) OBSERVES AS UNDER: PARA 2.14 THE CUP METHOD COMPARES THE PRICE CHARGED FOR PROP ERTY OR SERVICES TRANSFERRED IN A CONTROLLED TRANSACTION TO THE PRICE CHARGED FOR PROPERTY OR SERVICES TRANSFERRED IN A C OMPARABLE UNCONTROLLED TRANSACTION IN COMPARABLE CIRCUMSTANCE S. IF THERE IS ANY DIFFERENCE BETWEEN THE TWO PRICES, THIS MAY IND ICATE THAT THE CONDITION OF THE COMMERCIAL AND FINANCIAL RELATIONS OF THE AES ARE NOT AT ARM'S LENGTH, AND THAT THE PRICE IN THE UNCONTROLLED TRANSACTION MAY NEED TO BE SUBSTITUTED FOR THE PRIC E IN THE CONTROLLED TRANSACTION. 12. FURTHER, REVISED OECD TRANSFER PRICING GUIDELIN ES (2017) HAS ADDITIONALLY INCORPORATED THE APPLICATION OF QUOTED PRICES UNDER THE CUP METHODOLOGY WHILE ESTABLISHING ARMS LENGTH NATURE OF COMMODITIES TRANSFER BETWEEN AES. THE GUIDELINES HAVE BROADENED THE APPLICABILITY OF THE CUP METHOD AND HAVE ALLEVIATED THE ARMS LENGTH DETERMINATION FOR COMMODITY TRANSACTIONS. PARA 2.19 OF THE GUIDELINES ASSERTS, UNDER THE CUP METHOD, THE ARMS LENGTH PRICE FOR COMMODITY TR ANSACTIONS MAY BE DETERMINED BY REFERENCE TO COMPARABLE UNCONTROLLED TRANSACTIONS AND BY REFERENCE TO COMPARABLE UNCONTROLLED ARRANGEMENTS R EPRESENTED BY THE QUOTED PRICE. 13. THE STEPS INVOLVED IN THE APPLICATION OF THIS M ETHOD ARE: IT(TP)A NO.2394/BANG/2019 PAGE 6 OF 36 I. IDENTIFY THE PRICE CHARGED OR PAID IN COMPARABLE UN CONTROLLED TRANSACTIONS; II. THE ABOVE PRICE SHOULD BE ADJUSTED FOR TRANSACTION LEVEL DIFFERENCES ON THE BASIS OF FUNCTIONS PERFORMED, AS SETS USED AND RISKS TAKEN (FAR) ANALYSIS AND ENTERPRISE LEVEL DIFFERENCES IF ANY; III. THE ADJUSTED PRICE IS THE ARMS LENGTH PRICE; 14. REASONABLE AND ACCURATE ADJUSTMENT CAN BE MADE FOR DIFFERENCES IN: A. TYPE AND QUALITY OF PRODUCTS B. DELIVERY TERMS C. VOLUME OF SALES AND RELATED DISCOUNTS D. PRODUCT CHARACTERISTICS E. CONTRACTUAL TERMS F. RISK INCURRED G. GEOGRAPHICAL FACTORS 15. TNMM METHOD WILL BE APPLICABLE TO TRANSACTIONS THAT INVOLVE THE PROVISION OF SERVICES OR DISTRIBUTION OF FINISHED P RODUCTS WHERE THE RESALE PRICE METHOD CANNOT BE ADEQUATELY APPLIED OR IN THE INSTANCE OF TRANSFER OF SEMI-FINISHED GOODS. HENCE, THIS METHOD IS NOT FOUN D APPROPRIATE FOR THE INTERNATIONAL TRANSACTIONS PRESENTLY UNDER CONSIDER ATION. IN VIEW OF THE SPECIAL CIRCUMSTANCE OF THE CASE, NET MARGIN FROM T HE TRANSACTION WILL NOT BE AN APPROPRIATE METHOD TO DETERMINE WHETHER THE I NTERNATIONAL TRANSACTION IS AT ARMS' LENGTH. IT(TP)A NO.2394/BANG/2019 PAGE 7 OF 36 REASON BEHIND SELECTING LONDON METAL EXCHANGE [LME ] PRICES AS THE COMPARABLE UNCONTROLLED PRICE 16. ACCORDING TO THE ASSESSEE, THE LME IS THE WORLD CENTRE FOR THE TRADING OF INDUSTRIAL METALS. THE LME IS THE DE FACTO PRICE FORMATION VENUE FOR INDUSTRIAL METALS. THE PRICES AVAILABLE ON THE LME PLATFORMS ARE USED AS THE GLOBAL REFERENCE AND BASIS FOR PHYSICAL TRADING AS WELL AS IN VALUATION OF PORTFOLIOS. LME PRICES ARE TRUSTED BECAUSE THE LME IS THE MOST LIQUID AND THE MOST TRADED INDUSTRIAL METALS MARKET IN THE WOR LD AND ITS GLOBAL NETWORK OF WAREHOUSES ENSURES THE PRICE IS TRULY EFFECTIVE OF SUPPLY AND DEMAND. 17. THE COMPANYS BUSINESS IS IN PRODUCTS MANUFACTU RED OUT OF COPPER AND COPPER ALLOY METALS, WHICH ARE COMMODITIES. TH E PRICES OF COPPER WHICH IS THE BASE METAL FOR SUCH PRODUCTS ARE DETER MINED BASED ON MARKET PRICES AND THE COMMODITY STOCK EXCHANGE. ACCORDINGL Y, THE PRICES ON THE LME HAVE BEEN CONSIDERED. THE AE SOURCES THE RAW MA TERIAL SUCH AS COPPER CATHODE FROM THE METAL TRADERS AND USES THIS FOR MANUFACTURING THE FINAL PRODUCT WHICH CONSISTS OF MELTING, CASTING, H OT ROLLING, MILLING, ANNEALING, COLD ROLLING, ANNEALING, PICKLING AND FI NAL COLD ROLLING. SOME OF THESE PROCESSES ARE PERFORMED MULTIPLE TIMES TO REA CH THE DESIRED MECHANICAL PROPERTIES AND FINISH OF THE STRIP, WHIC H IS THE FINAL PRODUCT. A PRESENTATION OF THE MANUFACTURING PROCESS AT WIELAN D GERMANY AND WIELAND INDIA IS FILED IN THE PAPERBOOK. 18. METAL PRICE PORTION CONSTITUTE SUBSTANTIAL PORT ION OF THE PURCHASE CONSIDERATION AND ALL PRICES FOR TRANSACTIONS ARE F IXED BASED ON THE METAL PRICE QUOTED ON THE LME. THE FABRICATION COST, WHIC H IS ALSO A PART OF THE PURCHASE CONSIDERATION, IS NOT SIGNIFICANT AND ACCO RDINGLY, THE SAME HAS BEEN COMPARED WITH THE RATES CHARGED TO UNRELATED P ARTIES. THE METAL PRICE IS FIXED BETWEEN THE COMPANY AND THE AE BASED ON TH E LME PRICES FOR A PARTICULAR METAL/ ALLOY PREVAILING AROUND 3 WEEKS P RIOR TO THE SCHEDULED DESPATCH DATE. AS LME PRICES ARE INDEPENDENT AND AR E DETERMINED BASED IT(TP)A NO.2394/BANG/2019 PAGE 8 OF 36 ON MARKET FACTORS, THE SAME HAS BEEN CONSIDERED FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF THE TRANSACTI ONS. 19. THE AE CHARGES NON-ASSOCIATED ENTERPRISES ALSO BASED ON THE LME RATES. LME RATES ARE ACCEPTED WORLDWIDE AND ALL TRA DES ARE INITIATED BASED ON LME RATES ONLY. LME PROVIDES THE MOST RELIABLE P RICE AT WHICH UNCONTROLLED COMPARABLE TRANSACTIONS ARE ENTERED IN TO SINCE IT IS AN INDEPENDENT ORGANISATION. THUS, THE EXTERNAL CUP, B Y WAY OF LME PRICES, WAS CHOSEN AS THE BASIS OF DETERMINATION OF THE TRA NSACTION PRICE IN THE INSTANT CASE. COMPUTATION OF LME AS CONSIDERED IN THE TP DOCUMENT ATION 20. THE PRICE AVAILABLE ON THE LME WEBSITE IS THE P RICE OF THE BASE METAL. THESE PRICES ARE AVAILABLE FOR THE FOUR BAS E METALS VIZ., COPPER (CU), ZINC (ZN), TIN (SN) AND NICKEL (NI). HISTORI CAL DATA OF LME PRICES ARE AVAILABLE FOR A COST ON THE WEBSITE OF LME. HOWEVE R, THIS IS AVAILABLE READILY ON THE WEBSITE OF THE AE OF THE APPELLANT. ( WWW.WIELAND.COM/METALINFO ). 21. THESE PRICES ARE THEN USED BY THE AE IN ARRIVING AT THE PRICES OF ALLOYS WHICH IS MANUFACTURED AND SENT TO THE INDIAN COMPANY. THERE ARE SEVERAL VARIETIES OF ALLOYS, BRASS, SPECIAL BRASS, BRONZE, ETC. THE PRICES CHARGED BY THE AE IS BASED ON THE LME PRICES OF THE RESPECTIVE METALS USED IN A PARTICULAR ALLOY. IN THIS CONNECTION, CER TAIN SAMPLE COPIES OF PURCHASE INVOICES, ALONG WITH THE METAL CALCULATION SHEETS WERE FILED WITH THE TPO AND DRP. THIS IS AVAILABLE IN PAGES 275 TO 294 OF THE PAPERBOOK. PRICES CHARGED BY AE 22. IT WAS SUBMITTED THAT WIELAND INDIA IS ENGAGED IN COMMERCIAL SLITTING OF COPPER AND COPPER ALLOY COILS AS PER CUSTOMER SP ECIFICATIONS. THE IT(TP)A NO.2394/BANG/2019 PAGE 9 OF 36 COMPANY ALSO MARKETS SEMI-FINISHED METAL PRODUCTS M ANUFACTURED BY ITS HOLDING COMPANY AND OTHER GROUP COMPANIES. THE ACTI VITIES AND FUNCTIONS OF THE AE INCLUDES SOURCING OF RAW MATERIALS, I.E., THE METAL, MANUFACTURE OF COPPER/ COPPER ALLOY COILS, CARRYING OUT QUALITY TE STS AND FINALLY EXPORTS THE COPPER/ COPPER ALLOY STRIPS TO THE APPELLANT. IT TH EREAFTER SLITS THE COPPER ALLOY STRIPS AS PER CUSTOMER SPECIFICATIONS AND DES PATCHES IT TO THE END CUSTOMER. 23. AS MENTIONED IN THE TRANSFER PRICING DOCUMENTAT ION, THE BASIS OF PRICING IS GIVEN BELOW: THE PRICE CHARGED BY THE AE FOR THE MATERIAL IMPORT ED BY WIELAND INDIA CONSISTS OF 2 ELEMENTS, VIZ., METAL PRICE AND FABRICATION PRICE . METAL PRICE = ALLOY METAL VALUE BASED ON THE PREVAI LING LME RATE + PREMIUM + MELTING LOSS OF 2%. PREMIUM IS THE ADDITION IN PRICE OVER AND ABOVE T HE CASH SELLER SETTLEMENT PRICE PUBLISHED ON A DAILY BASIS BY THE LME PAID BY METAL FABRICATORS TO VIRGIN METAL SUPPLIERS. IT IS A PART OF THE PURCHASE PRICE OF THE AE. MELTING LOSS IS THE LOSS WHEN AN ALLOY IS CAST US ING VIRGIN METAL OF THE CONSTITUENTS OF THE ALLOY. FABRICATION PRICE = COST OF MANUFACTURING/ PROCESSI NG + OVERHEADS + FINANCIAL EXPENSES + PROFIT OF THE AE 24. THE MAJOR COMPONENT OF COST IS THE METAL ALLOY COST, WHICH IS CONSIDERED BASED ON THE LME PRICES. 25. AS GIVEN IN THE TP DOCUMENTATION (PAGES 81-87 O F THE PAPER BOOK), THE BASE METAL PRICE WAS BENCH MARKED AGAINST LME P RICES. AS REGARDS IT(TP)A NO.2394/BANG/2019 PAGE 10 OF 36 FABRICATION PRICE, THE APPELLANT HAD FURNISHED DETA ILED WORKINGS OF PRICES CHARGED TO UNRELATED PARTIES IN PAGES 40-45 OF THE TP DOCUMENTATION (PAGES 88-93 OF THE PAPER BOOK). IT CONTAINS INFORM ATION WITH RESPECT TO PHYSICAL FEATURE OF THE COMMODITY SOLD. SINCE THE D ATA INVOLVED IS VERY VOLUMINOUS, THE APPELLANT HAD NOT INCLUDED ALL THE OTHER INFORMATION IN THE TP DOCUMENTATION. THIS WAS ONLY TO ESTABLISH THAT A DEQUATE MARGINS WERE EARNED BY THE APPELLANT ON THESE TRANSACTIONS. THE COMPANY HAD ALSO SUBMITTED A FEW SAMPLE INVOICES RAISED BY WIELAND G ERMANY ON OTHER UNRELATED PARTIES FOR SALE OF SIMILAR MATERIALS TO THEM (PAGES 295 TO 304 OF THE PAPER BOOK). AS CAN BE SEEN FROM IT, THE PRICES CHARGED TO THE COMPANY AND THE OTHER UNRELATED PARTIES ARE ON SIMI LAR TERMS (DELIVERY AT TERMINAL). THE APPELLANT PLACES RELIANCE ON JUDGEM ENTS IN THE CASE OF HINDALCO INDUSTRIES LTD. VS ACIT ([2015] 62 TAXMANN .COM 181 (MUMBAI TRIB) , LME PRICES WERE CONSIDERED AS A BENCHMARK AND CUP WAS ACCEPTED AS MAM FOR PURCHASE OF COPPER CONCENTRATES. IN THIS CASE ALSO, TREATMENT CHARGES WERE CHARGED BY THE AE. SIMILARLY IT WAS HELD IN ACIT VS MSS INDIA PRIVATE LIMITED (ITA NO. 393/PN/07). THE RELEVANT OBSERVATIONS ARE AS FOLLOWS:- 24. IN OUR CONSIDERED VIEW, ONCE IT IS NOT IN DISP UTE THAT THE BILLING BY THE AE FOR RAW MATERIALS SUPPLIED TO THE ASSESSEE IS DONE ON THE BASIS OF THE LONDON METAL EXCHANGE PRI CES PLUS CERTAIN MARK UP, THERE IS NO FURTHER NEED OF THE INTERNAL COMPARABLES SINCE LONDON METAL EXCHANGE, BEING AN INDEPENDENT ORGANIZATION ENTERING INTO TRANSPARENT AND ARMS LENGTH TRANSACTION WITH A NUMBER OF OTHER ORGANIZAT ION, PROVIDES THE MOST RELIABLE PRICES AT WHICH UNCONTROLLED COMP ARABLE TRANSACTIONS ARE ENTERED INTO. THE COMPARABLE PRICE S OF UNCONTROLLED TRANSACTIONS ARE AVAILABLE IN THE PUBL IC DOMAIN AND IN FACT THESE COMPARABLE PRICES ARE THE PRICES WHIC H ARE THE BASIS OF PRICES AT WHICH THE INTERNATIONAL TRANSACTIONS H AVE BEEN ENTERED INTO WITH THE ASSOCIATED ENTERPRISES. THE ONLY VARI ATION, WHICH WAS BETWEEN 2% TO 6%, IN THESE PRICES IS THE MARK U P FACTOR AND THAT MARK UP IS ATTRIBUTED TO THE COSTS OF SIGNIF ICANT SERVICE IN IT(TP)A NO.2394/BANG/2019 PAGE 11 OF 36 PROCURING THE RAW MATERIAL' AND FREIGHT AND INSURA NCE WHICH IS PAID BY THE ASSOCIATED ENTERPRISE'. THERE IS NO DIS PUTE ABOUT THIS POSITION AS EVIDENT FROM THE OBSERVATIONS MADE BY T HE TRANSFER PRICING OFFICER HIMSELF. IT IS NOT EVEN THE CASE OF THE REVENUE AUTHORITIES THAT THE CONSIDERATION PAID BY WAY OF T HIS MARK UP IS EXCESSIVE OR UNREASONABLE VIS--VIS, TO USE THE WOR DS OF THE TRANSFER PRICING OFFICER, SIGNIFICANT SERVICES PRO VIDED IN PROCURING THE RAW MATERIAL' AND FREIGHT AND INSURA NCE COSTS'. ONE OF THE OBJECTION TAKEN BY THE TRANSFER PRICING OFFI CER IS THAT THE SERVICE CHARGES CHARGED BY THE AE FROM OTHER UNCONT ROLLED TRANSACTIONS IS NOT AVAILABLE BUT THEN IT IS NOBODY 'S CASE THAT THE AE IS ENGAGED IN PROVIDING SIMILAR SERVICES TO UNRE LATED ENTERPRISES. THE EXTERNAL CUP, BY WAY OF LONDON MET AL EXCHANGE PRICES, IS THE BASIS OF DETERMINATION OF T RANSACTION PRICES AND ALL THAT THE TRANSFER PRICING OFFICER IS TO SEE IS WHETHER THE VARIATION IN SUCH PRICES VIS--VIS THE PRICES A T WHICH THE ASSESSEE HAS ENTERED INTO TRANSACTIONS WITH THE AE IS REASONABLY EXPLAINED. AS A MATTER OF FACT, RULE 10B(1)(A)(II) CATEGORICALLY PROVIDES THAT PRICE CHARGED FOR THE PROPERTY TRANSF ERRED IN COMPARABLE UNCONTROLLED TRANSACTION, WHICH LONDON M ETAL EXCHANGE PRICE INHERENTLY IS, TO BE ADJUSTED ON AC COUNT OF DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE PRICE IN THE OPEN MARKET. WHAT IS TRANSLATES INTO, ON THE FACTS OF THE PRESENT CASE, IS THAT THE ADJUSTMENT ON ACCOUNT OF SERVICES RENDERED BY THE AE AND THE INSURANCE AND FREIGHT CO STS ARE REQUIRED TO BE MADE TO THE LME PRICES. AN ADJUSTMEN T OF 2% TO 6%, FOR SUCH FACTORS, CANNOT BE SAID TO BE UNJUSTIF IED. AS LONG AS THE ASSESSEE HAS ENTERED INTO RAW MATERI AL PURCHASE TRANSACTION WITH THE AE AT AN ARMS LENGTH PRICE, IT IS OF NO CONSEQUENCE WHETHER OR NOT THE ASSESSEE MAKES SUFFI CIENT PROFITS ON MANUFACTURING PRODUCTS FROM SUCH RAW MATERIAL. T HERE ARE A NUMBER OF FACTORS GOVERNING THE PROFITS THAT THE AS SESSEE EARNS IN ITS BUSINESS AND MERELY BECAUSE THE ASSESSEE'S BUSI NESS RESULTS ARE NOT SHOWING PROFITS, OR SHOWING LESSER PROFITS THAN INDUSTRY AVERAGES, SUCH PROFITS PER SE CANNOT LEAD TO THE CO NCLUSION THAT IT(TP)A NO.2394/BANG/2019 PAGE 12 OF 36 PURCHASE OF RAW MATERIAL IS NOT AT AN ARMS LENGTH PRICE. ON THE GIVEN FACTS, PARTICULARLY WHEN THE COMPARABLE UNCON TROLLED PRICES OF THE RAW MATERIALS ARE READILY AVAILABLE, IT IS N OT AT ALL NECESSARY TO JUMP TO TNMM METHOD. THE ONLY FACTOR WHICH HAS P REVAILED ON THE TRANSFER PRICING OFFICER IN REJECTING THE ME THOD ADOPTED, OR CANVASSED, BY THE ASSESSEE IS THE FACT THAT THE ASSESSEE HAS INCURRED LOSS IN THE RELEVANT PREVIOUS YEAR, BUT, I N OUR HUMBLE UNDERSTANDING, SUCH A CONSIDERATION IS WHOLLY IRREL EVANT. THE TRANSACTIONAL NET MARGIN METHOD, ON A CONCEPTUAL NO TE, IS DESCRIBED AS ONE OF THE METHOD OF LAST RESORT AND I S PUT INTO SERVICE ONLY WHEN NO STANDARD OR TRADITIONAL METHOD OF ALP DETERMINATION IS APPROPRIATE FOR DETERMINATION OF A RMS LENGTH PRICE. AS LONG AS THE PRICES AT WHICH INTERNATIONAL TRANSA CTIONS ARE ENTERED INTO ARE ARMS LENGTH PRICES, IT IS HAR DLY RELEVANT WHETHER OR NOT THE AE HAS ENSURED THAT THE ASSESSEE MAKES REASONABLE PROFITS. AS MUCH AS HYPOTHETICAL INDEPEN DENCE OF THE TRANSACTIONS IT DOES NOT PERMIT ARTIFICIALLY LOW PR OFITS BY MANIPULATING PRICES AT WHICH TRANSACTIONS ARE ENTER ED INTO BY THE ASSOCIATED ENTERPRISES, IT DOES NOT ALSO REQUIRE TH AT THE TRANSACTIONS MUST ALSO BE ENTERED INTO SUCH A MANNE R AS TO ENSURE THAT THE ASSESSEE MUST MAKE REASONABLE PROFITS. THE QUESTION OF REASONABLENESS OR PROFITS IS RELEVANT ONLY WHEN TRA NSACTION PROFIT METHODS ARE APPLIED, BUT SUCH A SITUATION ARISES ON LY WHEN STANDARD OR TRADITIONAL METHODS FAIL. THAT IS NOT T HE SITUATION BEFORE US. WE ARE IN SESISN (SIC) OF A SITUATION IN WHICH TRADITIONAL METHOD IS NOT PROPERLY FAULTED WI TH AND THE PARAMETERS NECESSARY FOR APPLICATION OF THE SAME AR E AVAILABLE. THE CONSIDERATION ABOUT LOWER PROFITS HAVING BEEN E ARNED BY THE ASSESSEE, EVEN IF THAT BE SO, ARE NOT AT ALL GERMAN E TO THE OCCASION. 26. IT IS ALSO SUBMITTED THAT CUP (BASED ON LME PRI CES) WAS ACCEPTED AS MAM IN AY 2014-15 BY THE TPO. CONSIDERING THAT T HERE ARE NO CHANGES IN FACTS IN THE CURRENT YEAR, THE TPO OUGHT TO HAVE ACCEPTED CUP AS THE IT(TP)A NO.2394/BANG/2019 PAGE 13 OF 36 MAM FOR AY 2015-16 ALSO AND THE IMPORT TRANSACTIONS SHOULD HAVE BEEN TREATED AS AT ARMS LENGTH PRICE BASED ON THE CUP M ETHOD. 27. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TH E DRP HELD THE CUP METHOD REQUIRES STRINGENT COMPARABILITY OF CONTROLL ED TRANSACTION WITH THIRD PARTY TRANSACTION. EVEN THOUGH CUP IS THE MOST DIRE CT AND RELIABLE METHOD FOR COMPARISON, IT REQUIRES TRANSACTIONS WHICH ARE VERY CLOSELY SIMILAR AND COMPARABLE. IN THE INSTANT CASE, THE PURCHASE TRANS ACTIONS OF ASSESSEE WITH ITS AE FOR RAW MATERIAL (COPPER ALLOY COILS) I S THE CONTROLLED TRANSACTION. THE ASSESSEE PROPOSED TO COMPARE THE METAL PRICES O F LME. HENCE AT THE OUTSET, THESE TWO ARE NOT THE SAME. THE PROFIT COMP ONENT CAN BE DIFFERENT FROM COMPANY TO COMPANY. HENCE WHAT IS TAKEN AS COM PARABLE IS PURE METALS INDEXED BUT WHAT IS BEING COMPARED IS TOTALL Y DIFFERENT PRODUCT. HENCE, THERE ARE MULTIPLE VARIABLES LIKE THE TYPE O F METALS MIXED, RATION OF METAL AND FABRICATION PROCESS AND THE METAL PRICES CANNOT BE COMPARED WITH ALLOY PRICES. IN VIEW OF THE ABOVE, IT WAS SUB MITTED THAT THE DRP RIGHTLY UPHELD THE TPO'S METHOD OF ADOPTING TRANSACTIONAL N ET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. 28. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. AS PER THE DOCUMENTATION FURNISHED FOR THE ASSESSME NT YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAS ENTERED INT O THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (AES):- PARTICULARS AMOUNT (INR) METHOD PURCHASE OF MATERIALS - IMPORT (INCLUDING GOODS IN TRANSIT ) 5028,12,442 CUP INCOME FROM SALE OF SCRAP 90,89,789 CUP NAVISION SOFTWARE IMPLEMENTATION SERVICE 65,44,074 CUP MARKETING SERVICES COMMISSION 126,89,937 TNMM COMPENSATION/ FEE CHARGED FOR CORPORATE GUARANTEE 2,85,451 OTHER METHOD IT(TP)A NO.2394/BANG/2019 PAGE 14 OF 36 INVESTMENT IN EQUITY SHARE CAPITAL (INCLUDING SECURITIES PREMIUM) 231,00,000 OTHER METHOD IT MAINTENANCE, SUPPORT & SERVICES 85,90,787 OTHER METHOD REIMBURSEMENT OF EXPENSES INCURRED ON BEHALF OF THE COMPANY 1,45,210 OTH ER METHOD 29. THE FINANCIALS OF THE TAXPAYER FOR THE FY 2014- 15 AS PER P&L A/C ARE AS UNDER:- PARTICULARS AMOUNT (INR) REVENUE FROM OPERATIONS (NET) 6615,72,437 OTHER INCOME 9,71,286 TOTAL REVENUE 6625,43,723 EXPENSES COST OF MATERIALS CONSUMED 6232,97,320 CHANGES IN INVENTORIES OF METAL ALLOY SCRAP 11,02,6 60 EMPLOYEE BENEFIT EXPENSES 127,12,880 FINANCE COSTS 4,25,572 DEPRECIATION AND AMORTIZATION EXPENSE 108,06,113 OTHER EXPENSES 333,40,777 TOTAL EXPENSES 6816,85,322 PROFIT/ (LOSS) BEFORE TAX (191,41,599) 30. THE FINANCIALS OF THE TAXPAYER FOR THE F.Y. 201 4-15 AS WORKED OUT BY TPO ARE AS UNDER:- PARTICULARS AMOUNT (INR) REVENUE FROM OPERATIONS 6615,72,437 OPERATING INCOME 6615,72,437 TOTAL EXPENSES 6816,85,322 LESS: FINANCIAL COST 425572 OPERATING EXPENSES 6812,59,750 OPERATING PROFIT (196,87,313) OP/OR -2.98% IT(TP)A NO.2394/BANG/2019 PAGE 15 OF 36 31. ACCORDINGLY, THE TPO MADE ADJUSTMENT WITH REGAR D TO MANUFACTURING SEGMENT AS FOLLOWS:- MANUFACTURING SEGMENT PARTICULARS FORMULA AMOUNT (INR) TAXPAYER'S OPERATING REVENUE OR 66,15,72,437 TAXPAYER'S OPERATING COST OC 68,12,59,750 TAXPAYER'S OPERATING PROFIT OP -1,96,87,313 TAXPAYER'S PLI PLI=OP/OR -2.98% (+)3% OF THE TAXPAYER'S MARGIN A=[(100+PLI)*1.03]-100 -0.07% MEAN MARGIN OF COMPARABLE SET B 3.22 ADJUSTMENT REQUIRED (IF A< B) YES ARM'S LENGTH COST C = (100-B)*OR/100 64,02,69,805 OPERATING COST OC 68,12,59,750 EXCESS COST BEING ADJUSTMENT OC - N 4,09,89,945 32. IT IS ALSO BROUGHT ON RECORD BY THE ASSESSEE T HAT THE FUNCTIONS PERFORMED BY WIELAND METALS INDIA PRIVATE LIMITED A ND ITS ASSOCIATED ENTERPRISES WITH REGARD TO THE INTERNATIONAL TRANSA CTIONS ARE DETAILED BELOW: FUNCTIONS PERFORMED PURCHASE OF MATERIALS IMPORT (INCLUDING GOODS IN TRANSIT) WIELAND METALS INDIA PRIVATE LIMITED HAS COMMENCED COMMERCIAL PRODUCTION OF SLITTING OF COPPER AND COPPER ALLOY S TRIP COIL AS PER CUSTOMER SPECIFICATIONS W.E.F. SEPTEMBER 2012. THESE COPPER AND COPPER ALLOY STRIP COIL ARE PROCURED MAINLY FROM WIELAND WERKE AG AND SOME FROM WIELAND METALS SINGAPORE (PTE) LTD. IT(TP)A NO.2394/BANG/2019 PAGE 16 OF 36 RAISING OF PURCHASE ORDER WIELAND METALS INDIA PRIVATE LIMITED'S SALES DEPART MENT PROVIDES THE STOCK REQUIREMENT, ON THE BASIS OF CUSTOMER FORECAST, TO THE PURCHASE DEPARTMENT. BASED ON THIS STATEMENT, THE PURCHASE D EPARTMENT DETERMINES THE REQUIREMENTS OF PURCHASES AND PLACES PURCHASE O RDERS ON THE ASSOCIATED ENTERPRISES. AN ORDER CONFIRMATION IS GI VEN BY WIELAND WERKE AG AND OTHER AES AFTER RECEIPT OF EACH PURCHASE ORD ER. SOURCING OF MATERIAL S WIELAND METALS INDIA PRIVATE LIMITED IMPORTS MAJORL Y MASTER COILS FOR SLITTING THEM INTO CUSTOMER REQUIRED WIDTHS WHICH ARE PACKED IN SPECIAL PACKING MATERIAL (USING MOISTURE INHIBITING MATERIAL AND EU RO PALLETS) AND SUPPLIED TO CUSTOMERS. WHEN CUSTOMER REQUIREMENT IS VERY SMA LL AND NOT REGULAR, IN THIS CASE STRIPS AS PER CUSTOMER REQUIRED WIDTH IS IMPORTED AND SOLD FROM STOCK. BOTH ARE PROCURED FROM WIELAND WERKE AG AND OTHER AES. AS FAR AS WIELAND METALS INDIA PRIVATE LIMITED IS CONCERNED, THESE ARE SEMI-FINISHED GOODS THAT CAN BE SOLD TO END CUSTOMERS AFTER FURTH ER PROCESSING I.E. SLITTING, IN CASE OF MASTER COILS. THE FINAL FINISH ED GOODS I.E. SLIT COPPER AND COPPER ALLOY STRIP ARE SOLD TO THE END CUSTOMERS WH O ARE NOT ASSOCIATED ENTERPRISES AND ARE LOCATED IN INDIA. THE ENTIRE PROCESS OF SOURCING AND TRANSPORTATION O F RAW MATERIALS, NEEDED FOR PRODUCING THE STRIPS, TO AE'S PREMISES IS CARRI ED OUT BY WIELAND WERKE AG. WIELAND WERKE AG WILL MANUFACTURE THE REQUIRED MATERIALS BASED ON CUSTOMER REQUIREMENTS WHICH WILL VARY FROM CUSTOMER TO CUSTOMER. WIELAND METALS INDIA PRIVATE LIMITED HAS NO ROLE IN THIS FU NCTION. MANUFACTURE OF MATERIAL STRIPS AND SALE TO WIELAND METALS INDIA PVT. LTD. WIELAND WERKE AG HAS INVESTED IN STATE OF ART PRODU CTION TECHNOLOGY AND QUALITY TESTING SYSTEMS IN ORDER TO ENSURE HIGH QUA LITY PRODUCTS. THE ENTIRE IT(TP)A NO.2394/BANG/2019 PAGE 17 OF 36 PROCESS OF MANUFACTURE AND QUALITY TESTING OF THE C OPPER AND COPPER ALLOY STRIPS IS UNDERTAKEN BY THE WIELAND WERKE AG INVOIC ES AND EXPORTS THE COPPER AND COPPER ALLOY STRIP MASTER COIL TO WIELAN D METALS INDIA PRIVATE LIMITED ON DAT INCOTERMS 2010, ICD BANGALORE BASIS. THE PROCESS OF RECEIPT OF IMPORTED GOODS SUCH AS CLEARING AND FORW ARDING AT THE CUSTOMS IN INDIA IS UNDERTAKEN BY WIELAND METALS INDIA PRIV ATE LIMITED BY ENGAGING CUSTOMS AGENT. THE COPPER AND COPPER ALLOY STRIP MASTER COILS SO P URCHASED FROM WIELAND WERKE AG ARE SUBJECT TO SLITTING PROCESS BY WIELAND METALS INDIA PRIVATE LIMITED AND THEN SOLD TO END CUSTOMERS. ACTIVITIES RELATING TO MANUFACTURE AND EXPORT OF GO ODS MENTIONED IN THE PURCHASE ORDER THE WIELAND GROUP HAS MANUFACTURING FACILITIES IN G ERMANY, AUSTRIA, GREAT BRITAIN, USA AND SINGAPORE. THE ACTIVITY OF MANUFAC TURE OF PRODUCT AND EXPORT OF PRODUCTS TO THE CUSTOMERS IN ACCORDANCE W ITH THEIR PURCHASE ORDER IS CARRIED OUT BY THE WIELAND GROUP. THESE D OCUMENTS ARE SENT TO WIELAND METALS INDIA PRIVATE LIMITED. THE PRODUCTS ARE THEN THE PROPERTY OF THE CUSTOMER AND HENCE NO OTHER FUNCTIONS ARE CARRI ED OUT BY WIELAND METALS INDIA PRIVATE LIMITED WHEN THEY REACH THE CO NTRACTUAL TERRITORY. THE RESEARCH AND DEVELOPMENT FUNCTIONS ARE CARRIED OUT BY WIELAND WERKE AG. WIELAND METALS INDIA PRIVATE LIMITED DOES NOT CARRY OUT ANY FUNCTION RELATING TO MANUFACTURE OR RESEARCH AND DEVELOPMENT OF THESE PRODUCTS. 33. NOW THE ISSUE BEFORE US IS WITH REGARD TO TP AD JUSTMENT BY APPLYING TNMM BY THE TPO INSTEAD OF CUP METHOD ADOPTED BY TH E ASSESSEE AS MOST APPROPRIATE METHOD IN RESPECT OF DETERMINING O F ALP OF MANUFACTURING SEGMENT. AS SEEN FROM THE DETAILS OF INTERNATIONAL TRANSACTIONS, THE ASSESSEE IS IMPORTING RAW MATERIAL FROM ITS AE AND ALSO MAKING EXPORTS OF IT(TP)A NO.2394/BANG/2019 PAGE 18 OF 36 PRODUCTS TO THE CUSTOMERS IN ACCORDANCE WITH THE PU RCHASE ORDER WHICH IS CARRIED OUT BY WIELAND GROUP. THUS, IMPORT AS WELL AS EXPORT TRANSACTIONS ARE INTERLINKED AND CLOSELY LINKED. THE PRICE OF E XPORT IS NOT FREE FROM THE IMPACT OF THE IMPORT PRICE. THEREFORE, THE INTERNA TIONAL TRANSACTIONS IN RESPECT OF IMPORT OF RAW MATERIAL HAS DIRECT BEARIN G ON EXPORT OF GOODS. THE TPO HAS APPLIED TNMM BY TAKING ENTIRE TURNOVER OF THE ASSESSEE AND THEN PROPOSED AN ADJUSTMENT BEING THE DIFFERENCE BE TWEEN THE NET MARGIN OF ASSESSEE AS WELL AS COMPARABLE PRICE. SINCE THE SE INTERNATIONAL TRANSACTIONS ARE CLOSELY LINKED AND RATHER INTER-DE PENDENT HAVING A BEARING ON EACH OTHER, THEREFORE, FOR THE PURPOSE OF DETERM INING THE ALP IT IS APPROPRIATE TO TAKE COMPOSITE TRANSACTION AND APPLY TNMM AS THE MOST APPROPRIATE METHOD. CUP IS NO DOUBT A PREFERABLE M ETHOD OF DETERMINING ALP AS IT LEAVES NO SCOPE OF ANY POSSIBLE VARIATION S IN THE PROCESS OF COMPUTING ALP. HOWEVER, WHEN TRANSACTIONS ARE RELA TABLE AND INTER- RELATED, THEN IF A PARTICULAR TRANSACTION OUT OF TH E COMPOSITE TRANSACTIONS CANNOT BE TESTED UNDER CUP METHOD, THEN IT IS NOT P ROPER TO APPLY SEPARATE METHODS FOR DETERMINING THE ALP FOR EACH OF THE TRA NSACTION, PARTICULARLY WHEN INTERNATIONAL TRANSACTIONS ARE CLOSELY LINKED AND INTER-DEPENDING HAVING DIRECT BEARING ON THE PRICE OF EACH OTHER. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT IN THE GIVEN FACTS AND CIRC UMSTANCES OF THE CASE, THE TNMM WOULD BE THE MOST APPROPRIATE METHOD FOR D ETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE A SSESSEE WITH AE. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE DRP ON T HIS ISSUE AND THE SAME IS CONFIRMED. 34. GROUND NO.3 IS THAT THE TPO HAS NOT CONSIDERED THE UNDER- UTILIZATION OF MANUFACTURING CAPACITIES AND THE RES ULTING IDLE COSTS WHILE COMPUTING THE ASSESSEES MARGINS. 35. THE LD. AR SUBMITTED THAT ASSESSEES REQUEST F OR ADJUSTMENT OF CAPACITY UTILIZATION WHILE COMPUTING OPERATING MARG INS UNDER TNMM HAS IT(TP)A NO.2394/BANG/2019 PAGE 19 OF 36 NOT BEEN CONSIDERED BY THE REVENUE AUTHORITIES. THE TPO HAS IGNORED THE FACT THAT OPERATIONS WERE STARTED ABOUT 2 YEARS AGO AND HAD NOT REACHED ITS FULL CAPACITY UTILIZATION. DURING FY 2014-15, THE C OMPANY WAS OPERATING AT 33.62%. THUS, THE IDLE CAPACITY WAS 66.38%. THIS H AD TO BE ADJUSTED TO THE FIXED INFRASTRUCTURE RELATED COSTS AND SEMI-VAR IABLE COSTS. DETAILED COMPUTATION IN THIS REGARD WAS SUBMITTED TO THE TPO WHICH WAS NOT CONSIDERED (PAGE 209 OF PAPERBOOK). SINCE THE COMPA NY WAS OPERATING ONLY 33.62% OF ITS INSTALLED CAPACITY, THE COMPANY WAS NOT IN A POSITION TO ABSORB ITS ENTIRE FIXED COSTS IN TERMS OF INFRASTRU CTURE RELATED COSTS. ACCORDING TO THE LD. AR, THE SUMMARY OF FIXED COSTS THAT MUST BE CONSIDERED AS NON-OPERATING COSTS FOR ARRIVING AT T HE OPERATING EXPENSES FOR COMPUTING OPM USING TNMM IS GIVEN BELOW:- SL NO. NATURE OF EXPENSES COSTS RELATING TO IDLE CAPACITY (RS.) COMPUTATION OF IDLE COSTS AND REFERENCE TO PAPER BOOK 1 EMPLOYEE BENEFIT EXPENSES 50,98,793 ANNEXURE 1 OF SUBMISSIONS FILED ON 05-08-2018 TO TPO (PAGE 225 OF PAPER BOOK) 2 DEPRECIATION PLANT & MACHINERY 52,63,138 33.62% OF RS.79,28,627 BEING DEPRECIATION ON P&M (PAGE 17 OF THE PAPER BOOK ) 3 RENT - FACTORY 35,41,339 ANNEXURE 2 OF SUBMISSIONS FILED ON 05-08-2018 TO TPO (PAGE 226 OF PAPER BOOK) 4 ELECTRICITY CHARGES FACTO R Y 4,53,110 5 REPAIRS FACTORY BUILDING 3,37,436 6 REPAIRS MACHINERY 3,09,163 33.62% OF RS.4,65,74 1 (PAGE 21 OF PAPER BOOK) 7 INSURANCE OF ASSETS 15,05,163 33.62% OF RS.22,67, 462 (PAGE 21 OF PAPER BOOK) 8 TRANSPORTATION CHARGES 10,01,688 33.62% OF RS.15, 08,999 (PAGE 21 OF PAPER BOOK) TOTAL 1,75,09,830 36. THE LD. AR FURTHER SUBMITTED THAT IN ANY BUSINE SS ORGANISATION, CERTAIN COSTS ARE FIXED AND OTHERS VARY WITH OUTPUT . EG: DEPRECIATION, RENT AND MAINTENANCE COSTS OF FACTORY PREMISES, MAINTENA NCE COSTS ASSOCIATED WITH PLANT AND MACHINERY, ETC., CONTINUE TO BE INCU RRED REGARDLESS OF THE IT(TP)A NO.2394/BANG/2019 PAGE 20 OF 36 VOLUME OR PRODUCTION AT THE FACTORY. THUS, IT IS CO MMON KNOWLEDGE THAT PROFIT MARGINS CAN BE EARNED ONLY IF THE BUSINESS O PERATES AT AN OPTIMUM LEVEL OF ACTIVITY. SINCE THE COMPANY HAD UNDER-UTIL ISED ITS CAPACITY DURING THE FY 2014-15 DUE TO BUSINESS REASONS, ADJUSTMENTS SHOULD HAVE BEEN MADE WHILE COMPUTING ITS OPERATING PROFIT MARGINS. 37. IT WAS SUBMITTED THAT THE TPO AND THE DRP HAVE ERRED IN REJECTING THIS ADJUSTMENT SOUGHT BY THE APPELLANT ON THE CONT ENTION THAT SUFFICIENT DATA PERTAINING TO THE CAPACITY UTILIZATION OF COMP ARABLE COMPANIES SHOULD BE AVAILABLE TO SEE IF ANY MATERIAL DIFFERENCES EXI ST BETWEEN THE ASSESSEE AND COMPARABLE COMPANIES AND THAT IN THE ABSENCE OF SUCH DATA, IT IS NOT POSSIBLE TO GRANT ANY ADJUSTMENT. THE TPO AND THE D RP IGNORED THE VERY BASIC FACT THAT IMPUGNED AY WAS ONLY THE SECOND FUL L YEAR OF THE SLITTING OPERATIONS OF THE COMPANY, WHEREAS THE COMPARABLE C OMPANIES SELECTED BY THE TPO WERE ALREADY ESTABLISHED PLAYERS IN THE INDUSTRY. HENCE, IT WAS GROSSLY INCORRECT TO EVEN ASSUME THAT THOSE COMPANI ES WOULD ALSO REQUIRE IDLE CAPACITY ADJUSTMENT AS A 2 YEAR OLD COMPANY LI KE THE APPELLANT. 38. FURTHER, THE TPO AND DRP ERRED IN IGNORING THE FACT THAT IT IS NOT POSSIBLE FOR THE APPELLANT COMPANY TO GET DETAILS O F THE CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES SELECTED BY THE TPO TO MAKE A COMPARISON / ADJUSTMENT POSSIBLE, WHICH ARE NOT AVAILABLE IN PUB LIC DOMAIN. IN SUCH A SCENARIO, THE TPO AND DRP COULD HAVE EITHER SOUGHT INFORMATION FROM SUCH COMPANIES BASED ON THE POWERS VESTED IN THEM O R OUGHT TO HAVE MADE CERTAIN REASONABLE APPROXIMATIONS / ASSUMPTION S TO CONSIDER THE ADJUSTMENT SOUGHT BY THE APPELLANT RATHER. OUTRIGHT REJECTION OF THE ADJUSTMENT IS AGAINST THE BASIC INTEREST OF JUSTICE . 39. THE LD. AR SUBMITTED THAT SEVERAL BENCHES OF TH E TRIBUNAL TIME AND AGAIN LOOKED AT THIS ISSUE AND HAS DIRECTED THE TPO /AO TO ALLOW IT(TP)A NO.2394/BANG/2019 PAGE 21 OF 36 ADJUSTMENT FOR FIXED COSTS ON ACCOUNT OF LOWER CAPA CITY UTILIZATION AS FOLLOWS:- A) IN THE CASE OF ARISTON THERMO INDIA LTD ([2013] 36 TAXMANN.COM 501 (PUNE - TRIB.) , THE PUNE BENCH OF THE TRIBUNAL, WHILE DELIVERING THE JUDGMENT, HIGHLIGHTED THE ACTUAL OBJECTIVE OF COMPA RABILITY ANALYSIS AND ADOPTING THE MOST APPROPRIATE METHOD WHICH WAS TO D ETERMINE ALP OF THE INTERNATIONAL TRANSACTIONS AND TO EXAMINE WHETH ER THE PRICE CHARGED IN RELATION TO A CONTROLLED TRANSACTION IS COMPARAB LE TO AN UNCONTROLLED TRANSACTION OF SIMILAR NATURE. FURTHER, IT ALSO STA TED THAT NET PROFIT MARGIN OF THE TESTED PARTY, AS REFERRED TO IN THE RULES HA S NOT BEEN DEFINED AS SUCH TO BE SUCH PROFIT AS IS DRAWN FROM THE FINANCI AL ACCOUNTS. IT CAN BE SUITABLY ADJUSTED BY APPLYING APPROPRIATE ECONOMIC ADJUSTMENTS TO FACILITATE ITS COMPARISON WITH OTHER UNCONTROLLED E NTITIES / TRANSACTIONS BEFORE BEING CONSIDERED AS THE NET PROFIT MARGIN OF THE TESTED PARTY AS STATED BY THE RULES AS SUCH. THUS, THE TRIBUNAL HEL D THAT AS LONG AS THE ADJUSTMENT SOUGHT TO BE MADE IN THE PROFIT MARGIN O F THE TESTED PARTY ARE BASED ON COGENT AND SUFFICIENT REASONS AND SEEKS TO MAKE THE COMPARABILITY ANALYSIS WITH THE COMPARABLE UNCONTRO LLED TRANSACTIONS MORE MEANINGFUL, A MERE RESTRICTION OR ABSENCE OF A SPECIFIC PROVISION IN THE LEGISLATION DOES NOT OPERATE AS A BAR IN DOING SO. THE ITAT HELD AS UNDER IN PARA 12 OF THIS JUDGEMENT:- THEREFORE, IN OUR VIEW, HAVING REGARD TO THE PRECE DENTS AND THE AFORESAID DISCUSSION, IN THE PRESENT CASE A SSESSEE HAS TO SUCCEED IN PRINCIPLE FOR ADJUSTMENT ON ACCOU NT OF LOWER CAPACITY UTILIZATION, AND THE LOSS SUFFERED O N ACCOUNT OF UNABSORBED FIXED OPERATING COSTS INCURRED IN THE INITIAL YEAR. THE AFORESAID FACTORS, IN OUR VIEW, WARRANT A N APPROPRIATE ADJUSTMENT TO THE OPERATING MARGINS OF THE ASSESSEE TO FACILITATE A MEANINGFUL COMPARISON WITH THE COMPARABLE UNCONTROLLED TRANSACTIONS. IT(TP)A NO.2394/BANG/2019 PAGE 22 OF 36 B) IN THE CASE OF GLOBAL TURBINE SERVICES (ITA NO, 3484/DEL/2011 PA GES 754 TO 757) THE ITAT DELHI BENCH HELD AS FOLLOWS:- 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. THE SUITABLE ADJUSTMENT FOR NO N-UTILISATION OF CAPACITY IS TO BE TAKEN IN TO ACCOUNT AFTER CONSIDE RING THE ALP WHILE WORKING OUT TP ADJUSTMENT, THIS PROPOSITION HAS BEE N HELD BY COORDINATE BENCH IN THE CASE OF THE AMDOCS BUSINESS SERVICES P RIVATE LIMITED (SUPRA) AND VARIOUS OTHER CASES AS CITED HERE IN AB OVE. 11. IN THE GIVEN FACTS AND CIRCUMSTANCES IT WAS REQ UIRED ON THE PART OF THE LOWER AUTHORITIES TO HAVE GIVEN DUE EFFECT TO U NDER CAPACITY UTILIZATION OF THE ASSESSEE WHICH HAS NOT BEEN DONE TPO FOR ADJUSTMENT FOR ALP DETERMINATION. IN VIEW OF THE FACTS AND CIR CUMSTANCES WE ARE INCLINED TO SET ASIDE THE MATTER (EMPHASIS SUPPLIED) C) IN THE CASE OF TASTY BITES EATABLES LIMITED [[2015] 59 TAXMANN.COM 437 (PUNE - TRIB.), THE ITAT, PUNE BENCH HELD AS FOLLOWS:- 33. SO FAR AS THE ADJUSTMENT ON ACCOUNT OF CAPACIT Y UNDERUTILISATION IS CONCERNED, IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT CAPACITY UTILISATION OF THE ASSESSEE WORKS OUT TO 1 5% WHEREAS CAPACITY UTILISATION OF THE COMPARABLE COMPANY WAS 53%. THER EFORE, THE DIFFERENCE BETWEEN THE TWO IS SIGNIFICANT AND MATER IAL TO IMPACT THE PROFIT MARGIN OF THE ASSESSEE AND THE COMPARABLE COMPANYS ABILITY TO ABSORB THE FIXED OVERHEADS LIKE DEPRECIATION, SALARY AND W AGES, POWER, REPAIR ETC. IS LESS WHERE CAPACITY UTILISATION IS LOW AND THIS WOULD LEAD TO INCREASED COST AND LOWER PROFIT. 36.. WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE SHOULD BE GIVEN THE BENEFIT OF LOW CAPACITY UTILISATION. (EMPHASIS SUPPLIED) D) IN THE CASE OF MANDO INDIA STEERING [2014] 45 TAXMANN.COM 160 (CHENNAI - TRIB.) , THE CHENNAI TRIBUNAL HELD AS UNDER:- IT(TP)A NO.2394/BANG/2019 PAGE 23 OF 36 WE ARE OF THE CONSIDERED VIEW THAT UNDER-UTILIZATI ON OF PRODUCTION CAPACITY IN THE INITIAL YEARS IS A VITAL FACTOR WHI CH HAS BEEN IGNORED BY THE AUTHORITIES BELOW WHILE DETERMINING THE ALP COS T. THE TPO SHOULD HAVE MADE ALLOWANCE FOR THE HIGHER OVERHEAD EXPENDI TURE DURING THE INITIAL PERIOD OF PRODUCTION. . E) SIMILAR VIEWS HAVE BEEN TAKEN BY THE VARIOUS BENCHE S OF THE ITAT IN THE FOLLOWING CASES: GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. VS DC IT (15 (ITR-TRIB) 475) BANGALORE BENCH ACIT VS. M/S FIAT INDIA PVT. LTD., ITA NO. 1848/MUM ./2009 DATED 30.04.2010; SKODA AUTO INDIA (P.) LTD. VS. ACIT, 122 TTJ 699 (P UNE); EGAIN COMMUNICATION (P.) LTD. VS. ITO 118 TTJ 354 ( PUNE); AMDOCS BUSINESS SERVICES (P.) LTD. VS. DCIT 26 TAXM ANN.COM 120 (PUNE); AND, SCHEFENACKER MOTHERSON LTD. VS. ITO 123 TTJ 509 (DE LHI) 40. HENCE, BASED ON THE FACTS OF THE CASE AND JUDIC IAL PRECEDENTS SUBMITTED ABOVE, IT WAS SUBMITTED THAT THE IDLE CA PACITY ADJUSTMENT OUGHT TO HAVE BEEN ALLOWED WHILE ARRIVING AT THE OPERATIN G PROFIT METHOD SINCE THE COMPANY FUNCTIONED ONLY UP TO 33.62% OF ITS CAP ACITY. SINCE UNDER- UTILISATION OF CAPACITY DURING THAT YEAR WAS SIGNIF ICANTLY DUE TO MARKET FORCES, IGNORING THE SAME IN ARRIVING AT THE OPM WH ICH RELATES TO ACTUAL OPERATIONS ONLY IS GROSSLY INCORRECT. 41. THE LD. DR SUBMITTED THAT DRP HELD THAT AS POIN TED OUT BY THE TPO SUFFICIENT DATA PERTAINING TO THE CAPACITY UTILIZAT ION OF COMPARABLE COMPANIES SHOULD BE AVAILABLE TO SEE IF ANY MATERIA L DIFFERENCES EXIST BETWEEN THE ASSESSEE AND COMPARABLES. IN THE ABSENC E OF SUCH DATA IT IS NOT POSSIBLE TO GRANT ANY ADJUSTMENT. THEREFORE, TH E DIRECTIONS OF THE DRP ARE TO BE UPHELD. 42. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HAS NOT FURNISHED SUFFICIENT DATA PERT AINING TO CAPACITY IT(TP)A NO.2394/BANG/2019 PAGE 24 OF 36 UTILISATION OF COMPARABLE COMPANIES SO AS TO DETERM INE THE MATERIAL DIFFERENCE EXISTING BETWEEN THE ASSESSEE AND COMPAR ABLE. HENCE, WE REMIT THIS ISSUE TO THE FILE OF TPO WITH A DIRECTIO N TO THE ASSESSEE TO FURNISH NECESSARY DATA PERTAINING TO CAPACITY UTILISATION O F COMPARABLE COMPANIES AND FOR FRESH ADJUDICATION OF THE ISSUE BY THE TPO. 43. GROUNDS 4 TO 6 IS WITH REGARD TO SELECTION OF COMPARABLES BY THE TPO AND APPLICATION OF FILTERS. MANUFACTURING ACTIVITIES FILTER / FUNCTIONAL SIMILA RITY FILTER 44. IT WAS SUBMITTED BY THE LD. AR THAT ASSESSEE CO MPANY IS A SLITTING CENTRE WHICH IS NOT A FULL-FLEDGED MANUFACTURING PR OCESS UNLIKE THE COMPANIES SELECTED BY THE TPO WHICH ARE FULL-FLEDGE D MANUFACTURING COMPANIES. ALL THE COMPANIES SELECTED BY THE TPO AR E ESTABLISHED PLAYERS IN THE MARKET. THESE COMPANIES HAVE BEEN OPERATING IN INDIA SINCE A LONG TIME (5 TO 50+ YEARS) UNLIKE THE ASSESSEE WHICH SET UP ITS SLITTING CENTRE IN INDIA ONLY SINCE SEPT 2012. SO IT IS ONLY NATURAL T HAT THESE COMPANIES ARE EARNING MUCH HIGHER PROFITS THAN THE APPELLANT WHO IS STILL IN THE PROCESS OF RECOVERING THE SET UP AND INFRASTRUCTURE COSTS. TH E YEARS OF EXPERIENCE OF THE COMPANIES SELECTED BY THE TPO IS GIVEN BELOW, B ASED ON INFORMATION AVAILABLE IN THE PUBLIC DOMAIN AND THEIR WEBSITES:- NAME OF THE COMPANY ESTABLISHED SINCE YEARS OF EXPERIENCE IN 2015 GUPTA METALS SHEETS LIMITED 1989 26 RACHNA METAL INDUSTRIES PVT. LTD 1978 37 MULTIMETALS LIMITED 1962 5 3 METALS UNITED ALLOYS & FUSION PRODUCT LTD 2006 9 MADHAV COPPER LIMITED (PART OF MADHAV GROUP) 2010 5 45. THE OTHER OBJECTIONS RAISED BEFORE TPO AND DRP WERE AS UNDER:- IT(TP)A NO.2394/BANG/2019 PAGE 25 OF 36 SL NO . NAME OF THE COMPANY REMARKS / REASON FOR REJECTION AS COMPARABLE 1 GUPTA METAL SHEETS LTD FUNCTIONALLY DIFFERENT DEALING AND MANUFACTURING COPPER AND COPPER ALLOY SHEETS, STRIPS, FOILS AND NON-FERROUS ROLLED SEMIS INVOLVED IN TRADING ACTIVITIES AS PER FINANCIAL STATEMENTS REFER PAGE 413 OF THE PAPER BOOK INVESTMENT IN PLANT & MACHINERY IS VERY LIMITED THEREBY CONFIRMING THAT IT IS NOT A MANUFACTURING COMPANY VERY LARGE COMPANY WITH TURNOVER OF RS.391 CRORES AND THEREFORE NOT COMPARABLE TO THE APPELLANT COMPA NY NO IMPORT OF RAW MATERIALS 2 MADHAV COPPER LTD FUNCTIONALLY DIFFERENT PRODUCES EXTENSIVE RANGE OF ENAMELLED, SUBMERGIBLE WIRES, COPPER STRIPS PROFILE SUITABLE FOR ANY KNOWN APPLICATION IN TRANSFORMERS, MOTORS, ALTERNATORS, CONTACTORS, RELAYS, AUTO ELECTRICALS, SUBMERSIBLE P UMP, MOTOR, ALSO SUITABLE FOR USE IN HIGH SPEED COIL WIN DING MACHINES THE APPELLANT DOES NOT CATER TO THESE INDUSTRIES AN D HENCE THIS COMPANY IS NOT A COMPARABLE. NO IMPORT OF RAW MATERIALS 3 RACHNA METAL INDUSTRIES PRIVATE LIMITED THEIR PRODUCTS AND CLAD PRODUCTS OF VERY HIGH THICKNESS WHICH ARE NOT USED IN CONNECTOR MANUFACTURING USING HIGH SPEED STAMPING NO IMPORT OF RAW MATERIALS OTHER THAN CAPITAL GOODS AND TRADED GOODS WORTH RS.11.73 LAKHS 4 METALS UNITED ALLOYS & FUSION PRODUCTS LIMITED MANUFACTURING COMPANY ENGAGED IN CASTING, ANNEALING , DRAWING AND FINISHING OF COPPER BASE, NICKEL BASE, TIN BASE AND ZINC BASE ALLOYS AND NOT SIMILAR TO THE SL ITTING OPERATIONS CARRIED OUT BY THE ASSESSEE COMPANY THEIR PRODUCTS ARE ENAMELLED WIRE AND RODS NO IMPORT OF RAW MATERIALS 5 MULTIMETALS LIMITED HAS A WIDE RANGE OF PRODUCTS INCLUDING CAST, EXTRUD ED AND DRAWN TUBES, PIPES AND WIRE IMPORTED RAW MATERIALS IS ONLY ABOUT 29.85% OF TOTA L PURCHASES 46. THE LD. AR SUBMITTED THAT THUS, IT IS VERY CLEA R THAT THESE COMPANIES ARE NOT COMPARABLE TO THE ASSESSEE WHO IS IN THE BU SINESS OF SLITTING OF IT(TP)A NO.2394/BANG/2019 PAGE 26 OF 36 COPPER ALLOY COILS AS PER CUSTOMER SPECIFICATIONS. HOWEVER, THE TPO AND DRP HAS REJECTED ALL THESE CONTENTIONS. 47. THE LD. AR SUBMITTED THAT THE ADJUSTED OPM FOR AY 2015-16 WILL BE AS FOLLOWS:- PARTICULARS AMOUNT (RS.) AMOUNT (RS.) REVENUE FROM OPERATIONS (OR) (A) 66,15,72,437 TOTAL EXPENSES 68,16,85,322 LESS: FINANCE COSTS (4,25,572) LESS: IDLE COSTS DUE TO NON-UTILISATION OF CAPACITY (1,75,09,830) LESS: IT MAINTENANCE, SUPPORT AND SERVICES (DISCUSSED IN DETAIL IN GROUNDS 7 AND 8 BELOW) (72,44,263) OPERATING COSTS (OC) (B) 65,65,05,657 OPERATING PROFIT MARGINS (OP) (A)- (B) 50,66,780 OP/OR 0.76% 48. WITHOUT PREJUDICE TO THE CONTENTION THAT TNMM I S NOT APPLICABLE IN THE CASE OF THE APPELLANT COMPANY AND CUP IS THE MA M, IT WAS SUBMITTED THAT FROM THE ABOVE, THE OPM OF THE COMPANY IS 0.76 % AS AGAINST -2.89% COMPUTED BY THE TPO AND UPHELD BY THE DRP. THE AVER AGE MARGIN OF THE COMPARABLE COMPANIES SELECTED BY THE TPO IS 3.22%. THE OPM OF THE COMPANY IS WELL WITHIN THE +/-3% RANGE ALLOWED BY S EC 92C(2) OF THE ACT AND ACCORDINGLY REQUIRES NO ADJUSTMENT. 49. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE GONE THROUGH THE FOLLOWING OBSERVATIONS OF THE TPO:- GUPTA METAL SHEETS THE COMPANY IS ENGAGED IN MANUFACTURING AND SALE OF COPPER AND COPPER ALLOY SHEETS/STRIPS. IT(TP)A NO.2394/BANG/2019 PAGE 27 OF 36 THE COMPANY'S MANUFACTURING PLANT IS LOCATED IN REW ARI (HARYANA) WITH AN INSTALLED CAPACITY OF 14,500 TONN ES PER ANNUM AS ON MARCH 31, 2015. THE COMPANY MANUFACTURES STRIPS AND SHEETS IN VARIO US SIZES STARTING FROM 0.1 MM TO 14 MM TO ITS CUSTOMER BASE. THE COMPANY HAS SHOWN PLANT & EQUIPMENT WORTH RS. 2 7 CRORES IN ITS FINANCIAL STATEMENTS AND AN ADDITION OF 1.87 CR MADE DURING THE F.Y. 2014-15. THE IMPORT FILTER OBJECTION HAS BEEN DEALT WITH IN DETAIL. HENCE, THE TAXPAYER'S OBJECTIONS ARE REJECTED AND T HE COMPANY IS RETAINED AS A COMPARABLE. MADHAV COPPER LTD. THE COMPANY MANUFACTURES COPPER ENAMELLED, SUBMERGI BLE WIRES, COPPER STRIPS AND RODS ETC. IT IS NOT NECESSARY FOR THE COMPARABLE COMPANY AND THE TAXPAYER TO CATER TO THE SAME INDUSTRIES IN ORDER TO BE FUNC TIONALLY COMPARABLE. THE IMPORT FILTER OBJECTION HAS BEEN DEALT WITH IN DETAIL. IN VIEW OF THE ABOVE DISCUSSION, THE OBJECTIONS OF THE TAXPAYER ARE REJECTED, AND THE COMPANY IS RETAINED AS A COMP ARABLE. RACHANA METAL INDUSTRIES PVT. LTD. THE COMPANY IS INVOLVED IN COPPER ALLOY PRODUCTS SU CH AS RODS, TUBES, BUS BARS, STRIPS, PLATES, WIRES, PIPES, SHEE TS & CIRCLES. AS DISCUSSED EARLIER, TNMM DOES NOT REQUIRE STRICT PRODUCT COMPARABILITY SUCH AS THE DIFFERENCE IN THICKNESS O F THE COPPER AND COPPER ALLOY PRODUCTS PRODUCED. THE IMPORT FILTER OBJECTION HAS BEEN DEALT WITH IN DETAIL. IN VIEW OF THE ABOVE DISCUSSION, THE OBJECTIONS OF THE TAXPAYER ARE REJECTED, AND THE COMPANY IS RETAINED AS A COMP ARABLE. IT(TP)A NO.2394/BANG/2019 PAGE 28 OF 36 METALS UNITED ALLOYS & FUSION PRODUCTS LTD. THE COMPANY IS A COPPER-BASED ALLOY WIRE MANUFACTUR ING COMPANY. THE COMPANY IS ENGAGED IN MANUFACTURE OF W IRES OF VARIOUS COPPER-BASED ALLOYS BOTH IN ROUND AND FLAT PROFILES. IT IS REITERATED THAT TNMM DOES NOT REQUIRE STRICT PRODUCT COMPARABILITY SUCH AS THE DIFFERENCE IN THICKNESS O F THE COPPER AND COPPER ALLOY PRODUCTS PRODUCED. THE IMPORT FILTER OBJECTION HAS BEEN DEALT WITH IN DETAIL. IN VIEW OF THE ABOVE DISCUSSION, THE OBJECTIONS OF THE TAXPAYER ARE REJECTED, AND THE COMPANY IS RETAINED AS A COMP ARABLE. MULTIMETALS LTD. THE COMPANY IS A MANUFACTURER OF SEAMLESS EXTRUDED COPPER, COPPER ALLOY PRODUCTS IN THE FORM OF HOLLOWS, SECTI ONS, PROFILES AND RODS AS PER CUSTOMERS' REQUIREMENTS, HIGH PERFO RMANCE COPPER ALLOY WIRES, ETC. THE COMPANY'S MANUFACTURE OF A WIDE RANGE OF COPPER ALLOY PRODUCTS DOES NOT MAKE IT FUNCTIONALLY INCOMPARABLE TO THE TAXPAYER. AS DISCUSSED ABOVE, TNMM DOES NOT REQUIRE STRICT PR ODUCT COMPARABILITY SUCH AS THE DIFFERENCE IN THICKNESS O F THE COPPER AND COPPER ALLOY PRODUCTS PRODUCED. THE IMPORT FILTER OBJECTION HAS BEEN DEALT WITH IN DETAIL. IN VIEW OF THE ABOVE DISCUSSION, THE OBJECTIONS OF THE TAXPAYER ARE REJECTED, AND THE COMPANY IS RETAINED AS A COMP ARABLE. 50. WE DO NOT FIND ANY INFIRMITY IN THE FINDINGS OF THE DRP AND THE SAME IS CONFIRMED. IT(TP)A NO.2394/BANG/2019 PAGE 29 OF 36 APPLICATION OF FOREIGN CURRENCY EXPENDITURE FILTER / IMPORTS FILTER 51. THE LD. AR SUBMITTED THAT THE TPO HAD SELECTED 5 COMPANIES AS COMPARABLES TO THE ASSESSEE, EVEN THOUGH THEY HAD N OTHING IN COMMON TO THE COMPANY OR ITS FUNCTIONING. WHILE DOING SO, THE TPO HAD APPLIED WRONG FILTERS IN SELECTING THE COMPARABLE COMPANIES. NONE OF THE COMPANIES SELECTED BY THE TPO ARE COMPARABLE SINCE NONE OF TH EM ARE FULLY DEPENDENT ON IMPORTED MATERIALS FOR THEIR MANUFACTU RING ACTIVITIES. IN 4 CASES, THERE WERE NO IMPORTS AT ALL AND IN ONE CASE , THE IMPORTS ARE ONLY 29.85%. THUS, THERE IS WIDE DISPARITY IN THE FUNCTI ONING OF THE ASSESSEE VIS- -VIS THE FUNCTIONING OF THESE COMPANIES. 52. WITHOUT PREJUDICE TO THE CONTENTION THAT TNMM IS NO T THE MAM, IT IS SUBMITTED THAT CERTAIN BASIC FILTERS ARE TO BE APPL IED WHILE SELECTING COMPARABLE COMPANIES. IN THIS CASE, TRANSACTIONS / COMPANIES CANNOT BE COMPARED IF THERE ARE GEOGRAPHICAL DIFFERENCES. THU S, PURCHASES OF RAW MATERIALS PROCURED FROM OUTSIDE INDIA CANNOT BE COM PARED WITH INDIGENOUS PURCHASES DUE TO VARIATIONS IN QUALITY, PRICE, EXCH ANGE RATE DIFFERENCES, ETC. LOCATION SAVINGS ARISING OUT OF GEOGRAPHIC MARKETS FOR RAW MATERIALS HAVE TO BE CONSIDERED WHILE DETERMINING COMPARABILITY. 53. THE DRP HAS REJECTED THIS GROUND BY STATING IN PAGE 15 AS FOLLOWS:- IF THE RAW MATERIALS WERE MUCH CHEAPER IN INDIA, T HE PRUDENT ASSESSEE MUST HAVE PROCURED THEM LOCALLY INSTEAD OF IMPORTING THEM. HENCE, IT GOES TO SHOW THAT THE COST OF RAW M ATERIALS WAS NOT A DIFFERENTIATING FACTOR WHETHER ONE INDUSTRY I MPORTS OR NOT. HENCE IMPORTS FILTER IS NOT VERY RELEVANT OR CRITIC AL TO APPLY. 54. IT IS SUBMITTED THAT THE DRP GROSSLY ERRED IN O VERLOOKING THE BUSINESS MODEL OF THE ASSESSEE WHICH IS SIGNIFICANT LY DIFFERENT FROM THAT OF THE COMPANIES SELECTED BY THE TPO AS COMPARABLES. N O BENCH-MARKING EXERCISE IN TRANSFER PRICING ANALYSIS IS COMPLETE W ITHOUT MAKING CERTAIN IT(TP)A NO.2394/BANG/2019 PAGE 30 OF 36 ADJUSTMENTS THAT ARE REQUIRED FOR FUNCTIONAL DIFFER ENCES BETWEEN THE TESTED PARTY AND THE COMPARABLE. 55. THE DRP ALSO ERRED IN OVERLOOKING A FUNDAMENTAL PRI NCIPLE OF BUSINESS THAT COST IS NOT THE ONLY DETERMINING FACT OR FOR ANY BUSINESS DECISION. A PRUDENT BUSINESSMAN, INF ACT, PRIORITIZ ES QUALITY OVER COSTS. THE DRP HAS TRAVERSED BEYOND ITS POWERS BY STEPPING INT O THE SHOES OF A BUSINESSMAN BY DECIDING THAT THE PRUDENT ASSESSEE S HOULD HAVE INSTEAD PROCURED THE MATERIAL LOCALLY TO KEEP ITS COSTS LOW ER. IT WAS SUBMITTED THAT IF IT IS TO BE ACCEPTED THAT THE BUSINESS MODELS OF THE ASSESSEE AND COMPARABLE COMPANIES WERE THE SAME, IT IS VERY CLEA R THAT IT WAS ON ACCOUNT OF INITIAL STAGES OF BUSINESS THAT THE UNUS UALLY HIGH COSTS WERE INCURRED BY THE ASSESSEE COMPANY VIS-A-VIS ITS ACTU AL OPERATIONS. THE FOLLOWING CASE LAWS WERE RELIED ON IN SUPPORT OF TH E ASSESSEES CONTENTIONS:- (I) IN THE CASE OF ACIT VS GENESYS INTERNATIONAL CORP LIMITED (26 TAXMANN.COM 102 (MUM.) , THE MUMBAI ITAT HELD THAT IT WAS NECESSARY TO FIND POSSIBLE DIFFERENCES WITH REFERENCE TO GEOG RAPHICAL LOCATION OF THE PARTIES CHOSEN FOR COMPARISON. IN THE CASE OF COMPA NIES ENGAGED IN EXPORT OF GOODS OR SERVICES TO ITS AES OUTSIDE INDI A, THE INCOME TAX DEPARTMENT HAS ALWAYS APPLIED THE EXPORT TURNOVER F ILTER OF 75%. I.E. ONLY COMPANIES HAVING EXPORT BUSINESS OF 75% OF ITS TOTA L TURNOVER WERE ACCEPTED AS COMPARABLE COMPANIES. THIS RATIONALE IS TO BE APPLIED IN THE CASE OF IMPORT TRANSACTIONS. SINCE THE APPELLANT CO MPANYS PURCHASES ARE 100% FROM OUTSIDE INDIA, A FOREIGN CURRENCY EXPENDI TURE / IMPORTS FILTER OF 75% SHOULD BE APPLIED WHILE SELECTING THE COMPAR ABLE COMPANIES. HENCE, NONE OF THE COMPANIES SELECTED BY THE TPO AN D APPROVED BY THE DRP ARE COMPARABLE TO THE APPELLANT ON ACCOUNT OF T HIS FILTER. IT(TP)A NO.2394/BANG/2019 PAGE 31 OF 36 II) IN THE CASE OF GATES UNITTA INDIA COMPANY (P) LIMITED VS DY. CIT (2017- 84 TAXMANN.COM 69) , THE CHENNAI BENCH OF ITAT HAD HELD THAT THE BUSINESS MODEL OF AN AUTOMOTIVE BELT MANUFACTUR ER, HAVING 99 PERCENT IMPORT CONTENT IN RAW MATERIAL, NORMALLY CO ULD NOT BE SAME AS THAT OF COMPARABLE COMPANIES WHICH WERE HAVING IMPO RT CONTENT OF 29%. III) IN THE CASE OF SKODA AUTO INDIA (P) LIMITED VS ASST CIT (2009- 30 SOT 319) , THE PUNE BENCH OF ITAT NOTED THAT YEAR IN QUESTIO N WAS FIRST FULL YEAR OF ASSESSEES OPERATION IN WHICH IMPORT CONTENT OF RAW MATERIALS WAS AS HIGH AT 98.55% WHEREAS IMPORT CONTENT OF RAW MATERI AL IN CASES OF COMPARABLES SELECTED BY REVENUE AUTHORITIES RANGED FROM 26% TO 56.83%. THE BENCH HELD THAT AFORESAID VARIATION WAS PARTICU LARLY IMPORTANT BECAUSE BUSINESS MODEL OF A CAR MAKER HAVING 98.5% IMPORT C ONTENT IN RAW MATERIAL NORMALLY COULD NOT BE SAME AS OF A CAR MAKER HAVING IMPORT CONTENT OF 26% TO 56.84% AND THUS NO COMPARISONS WERE POSSIBLE BETWEEN THEM, UNLESS IMPACT OF IMPORT CONTENTS WAS ELIMINATED. 56. THE LD. DR RELIED ON THE DIRECTIONS OF THE DRP. 57. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS NOT ED THAT THE CONSUMPTION OF RAW MATERIALS IS THERE IN ALL OF THE COMPARABLE COMPANIES. THE TPO HAS NARROWED DOWN TO INDUSTRIES ENGAGED IN COPPER AND ITS ALLOYS. IF COPPER AND ALLOYS ARE AVAILABLE IN FOREI GN MARKETS MUCH CHEAPER THAN THE LOCAL MARKETS, THE COMPARABLES MUST HAVE I MPORTED THE RAW MATERIALS FROM ABROAD. IF THE RAW MATERIALS WERE MU CH CHEAPER IN INDIA, THE PRUDENT ASSESSEE MUST HAVE PROCURED THEM LOCALLY IN STEAD OF IMPORTING THEM. HENCE, IT GOES TO SHOW THAT THE COST OF RAW M ATERIALS WAS NOT A DIFFERENTIATING FACTORS WHETHER ONE INDUSTRY IMPORT S OR NOT. FUNCTIONAL IT(TP)A NO.2394/BANG/2019 PAGE 32 OF 36 ISSUES OF EACH COMPARABLE ARE IMPORTANT HERE. THE D RP COMPARED EACH OF THE FIVE COMPANIES WITH DETAILS AND FINALLY CONCURR ED WITH THE FINDINGS OF THE TPO. BEING SO, WE FIND NO INFIRMITY IN THE SAME AN D ACCORDINGLY UPHOLD THE ORDER OF DRP. 58. GROUND 7 AND 8 ARE REGARDING DISALLOWANCE OF IT SUPPORT AND MAINTENANCE CHARGES AS PRIOR PERIOD EXPENSES. THE LD. AR SUBMITTED THAT THE REVENUE AUTHORITIES ERRED IN CONSIDERING RS.72, 44,263/- INCURRED TOWARDS IT SUPPORT AND MAINTENANCE CHARGES AS PRIOR PERIOD EXPENSES EVEN THOUGH THE LIABILITY TO PAY THE EXPENSES CRYST ALLISED ONLY DURING THE YEAR BASED ON INVOICES RECEIVED FROM THE VENDOR IN THE CURRENT YEAR. 59. DURING THE YEAR, THE COMPANY HAD INCURRED A COS T OF RS.91,31,333/- TOWARDS IT MAINTENANCE, SUPPORT AND SERVICES. THIS INCLUDES RS.72,44,263/- BEING EXPENSES RELATING TO SERVICES PROVIDED IN EARLIER YEARS NOW ACCOUNTED AFTER DETAILED NEGOTIATION PROCESS OF SUCH COSTS WITH THE HOLDING COMPANY. SINCE THE LIABILITY TO PAY THE EXP ENSES TO THE PARTY WAS CRYSTALLISED DURING THE YEAR, THE EXPENSES ACCRUED IN THE BOOKS OF THE COMPANY DURING FY 2014-15. THUS, THE SAME CANNOT BE TREATED AS A PRIOR PERIOD EXPENSES SINCE IT AROSE DURING THE YEAR. 60. IN THIS CONNECTION, THE DETAILED LEDGER EXTRACT OF THE EXPENSES, THE COPY OF THE INVOICES FOR THESE EXPENSES WERE FILED WITH THE TPO VIDE SUBMISSIONS DATED 16-11-2018 (PAGES 670-710 OF PAPE R BOOK) AND BEFORE THE DRP. IT WAS SUBMITTED THAT A PERUSAL OF THE SA ME SHOWS THAT ALL THE INVOICES WERE RAISED DURING FY 2014-15 (RELEVANT TO AY 2015-16) AFTER THE COSTS WERE NEGOTIATED AND FINALIZED. R ELIANCE WAS PLACED ON THE FOLLOWING JUDICIAL PRECEDENTS:- (I) IN THE CASE OF SMCC CONSTRUCTION INDIA LIMITED (38 TAXMANN.COM 146 ), THE DELHI HIGH COURT HELD THAT THE PRIOR PERIOD EXP ENSES ARE ELIGIBLE FOR IT(TP)A NO.2394/BANG/2019 PAGE 33 OF 36 DEDUCTION DURING THE CURRENT YEAR PROVIDED THE LIAB ILITY WAS DETERMINED AND CRYSTALLIZED DURING THE RELEVANT YEAR. IT WAS H ELD AS UNDER:- THE EXPENDITURE OF RS. 31,55,228 HAS NOT BEEN CRYS TALLIZED DURING THE YEAR 2001-02 RELEVANT TO THE ASSESSMENT YEAR 2002-03, SUCH PRIOR PERIOD EXPENSES SHOULD HAVE BEEN DISALLO WED IS NOT BASED ON ANY MATERIAL THAT HAD COME TO THE KNOWLEDG E OF THE ASSESSING OFFICER. THE ASSESSING OFFICERS HAS PLACE D RELIANCE ON THE NOTES TO THE ACCOUNTS THAT WERE AVAILABLE AT TH E TIME OF THE SCRUTINY ASSESSMENT. BUT THE NOTES ALSO STATES THAT THE PRIOR PERIOD EXPENSES HAD CRYSTALLIZED/SETTLED IN THE YEAR. 61. ACCORDING TO THE LD. AR, THE FACTS OF THIS CASE ARE SQUARELY APPLICABLE TO THE INSTANT CASE ALSO SINCE THE LIABI LITY HAD CRYSTALLIZED DURING THE YEAR AND THE INVOICES WERE RECEIVED BY THE ASSE DURING THE YEAR FROM THE VENDOR. IN OTHER WORDS, A LIABILITY FOR AN EXPE NDITURE CANNOT BE DISALLOWED MERELY ON THE CONTENTION THAT THE SAME P ERTAINS TO TRANSACTIONS OF AN EARLIER YEAR. ANY EXPENDITURE INCURRED TO MEE T A LIABILITY ACCRUING AND CRYSTALIZING IN THAT YEAR OUGHT TO BE ALLOWED. IN T HE INSTANT CASE, THE ASSESSEE HAD NO MEANS OF KNOWING OR QUANTIFYING TH E EXPENDITURE THAT WILL BE CHARGED BY THE VENDOR UNTIL THE INVOICE WAS RECE IVED FROM THEM. THE AMOUNTS WERE QUANTIFIED, AND THE INVOICE WAS RAISED BY THE VENDOR AND RECEIVED BY THE APPELLANT IN AY 2015 16. ACCORDINGL Y, THE LIABILITY ALSO CRYSTALIZED IN AY 2015-16. IN THIS REGARD, THE LD. AR ALSO PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRECEDENTS:- I. PCIT VS. RAJASTHAN STATE SEED CORPORATION LTD. [201 7] 88 TAXMANN.COM 445 (RAJASTHAN) II. CIT VS. INDIAN PETROCHEMICALS CORPORATION LTD. [201 6] 74 TAXMANN.COM 163 (GUJARAT) III. DIT VS. APPAREL EXPORT PROMOTION COUNCIL [2010] 1 T AXMANN.COM 222 (DELHI) IV. DCIT VS. ENERCON INDIA LTD [2017] 82 TAXMANN.COM 33 4 (MUMBAI) IT(TP)A NO.2394/BANG/2019 PAGE 34 OF 36 62. THE LD. AR SUBMITTED THAT IT MAY ALSO BE NOTED THAT PRIOR TO INTRODUCTION OF THE INCOME COMPUTATION AND DISCLOSU RE STANDARDS, THE TAX ACCOUNTING STANDARD II DEFINED PRIOR PERIOD ITEMS AS MATERIAL CHARGES OR CREDITS WHICH ARISE IN THE PREVIOUS YEAR AS A RESUL T OF ERRORS OR OMISSIONS IN THE PREPARATION OF THE FINANCIAL STATEMENTS OF ONE OR MORE PREVIOUS YEARS . THUS, PRIOR PERIOD ITEMS ARE THOSE THAT OCCUR DUE T O ANY ERRORS OR OMISSIONS IN THE PREPARATION OF FINANCIAL STATEMENTS OF EARLI ER YEARS. IN THE INSTANT CASE, THERE WAS NO SUCH ERROR OR OMISSION AS THE LI ABILITY TO RECORD THE IT SERVICE / MAINTENANCE EXPENSES AS AN EXPENDITURE CR YSTALLISED ONLY IN AY 2015-16 UPON RECEIPT OF THE INVOICES FROM THE VENDO R AND THE SAME COULD NOT HAVE BEEN PROVIDED FOR ON AN ESTIMATE BASIS IN THE EARLIER YEARS. 63. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, IT WAS BROUGHT TO OUR ATTENTION THAT THESE EXPENSES WERE CONSIDERED AS TH AT RELATING TO THE CURRENT YEAR BY THE TPO WHILE COMPUTING THE NET OPE RATING MARGINS OF THE ASSESSEE. CONSEQUENTLY, THE TRANSFER PRICING ADJUST MENT PROPOSED IN THE ORDER U/S 92CA IS ALSO HIGHER TO THIS EXTENT. HENCE , THESE EXPENSES SHOULD NOT BE TREATED AS PRIOR PERIOD EXPENSES. 64. THE LD. DR RELIED ON THE ORDERS OF LOWER AUTHOR ITIES. 65. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED T HE RIVAL SUBMISSIONS. THE AO DISALLOWED THE CLAIM OF EXPENDI TURE TO THE TUNE OF RS. 72.44,263 RELATING TO THE EARLIER YEARS. THERE IS N O DISPUTE WITH REGARD TO THE FACT THAT THESE EXPENSES PERTAIN TO THE EARLIER YEARS. THE ASSESSEE CONTENDS THAT THESE EXPENSES ARE ACCOUNTED FOR IN T HIS YEAR AS THERE WERE PROTRACTED NEGOTIATIONS WITH REGARD TO THE COSTS AN D AFTER THE CRYSTALLIZATION OF THE SAME THE INVOICES WERE RAISED AND THESE EXPE NSES ARE ACCOUNTED IN THIS YEAR. THE ASSESSEE ALSO RELIED ON VARIOUS COUR T DECISIONS INCLUDING DELHI HIGH COURT DECISION IN THE CASE OF SMCC CONSTRUCTION INDIA LTD (38 TAXMANN.COM 146) WHEREIN THE COURT HELD THAT THE PRIOR PERIOD EXPEN SES IT(TP)A NO.2394/BANG/2019 PAGE 35 OF 36 CAN BE ALLOWED IF THE LIABILITY IS DETERMINED AND C RYSTALLIZED IN THE CURRENT YEAR. FROM THE DETAILS FURNISHED BY THE ASSESSEE, I T IS OBSERVED THAT ALL THESE EXPENSES ARE FROM THE RELATED GROUP CONCERNS AND ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO SHOW THAT THESE EXPENSES A CTUALLY CRYSTALLIZED DURING THE CURRENT YEAR, EXCEPT INVOICES FROM ITS A E. NO EVIDENCE FOR NEGOTIATIONS OR FINALIZATION OF TERMS IS PRODUCED. WE DON'T FIND ANY SUCH NEGOTIATIONS ARE REQUIRED FOR THE SHARING OF EXPEND ITURE AS MUCH OF THE EXPENSES ARE IN THE NATURE OF INFORMATION TECHNOLOG Y SERVICES MADE AVAILABLE TO THE ASSESSEE IN INDIA. APPARENTLY, NO TDS WAS EFFECTED. THERE IS NO DISPUTE THAT THESE EXPENSES ARE RELATED TO EA RLIER PERIOD AND THERE IS NO SUBSTANTIATION THAT THESE ARE CRYSTALLISED DURIN G THE CURRENT AY EXCEPT FOR THE RAISING OF INVOICES BY THE AE WHICH IS WITH IN THE AMBIT OF THE ASSESSEE. ACCORDINGLY, THE EXPENDITURE IS NOT RELAT ABLE TO THIS YEAR, AS THE SAME IS CRYSTALLIZED THIS YEAR. HENCE WE CONFIRM T HE DIRECTIONS OF THE DRP. 66. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF SEPTEMBER, 2021. SD/- SD/- ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 22 ND SEPTEMBER, 2021. / DESAI S MURTHY / IT(TP)A NO.2394/BANG/2019 PAGE 36 OF 36 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.