FMI Automotive Components Private Limited, Gurgaon V. DCIT, Circle-7(1), New Delhi

ITA 584/DEL/2021

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 5273 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Assessment Year: 2016-2017
• Appeal Filed On: 25-05-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Depreciation; Transfer pricing; International transaction; Corroborative evidences; Set aside
• Section: 43B; 139; 234B; 250; 139(1); 13; 22; 92CA; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: I-1 NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER [THROUGH VIDEO CONFERENCING] ITA NO.584/DEL/2021 ASSESSMENT YEAR: 2016-17 FMI AUTOMOTIVE COMPONENTS PVT. LTD., PLOT NO. 1, SUB-PLOT -4,5,8 AND 9 MSIL, SUPPLIER PARK, PHASE-3A, IMT MANESAR, GURGAON, HARYANA VS. DCIT, CIRCLE-7(1), NEW DELHI PAN : AABCF1682P (APPELLANT) (RESPONDENT) ORDER PER O.P. KANT, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST FIN AL ASSESSMENT ORDER DATED 28/03/2021 FOR ASSESSMENT YE AR 2016- 17 PASSED BY THE NATIONAL E-ASSESSMENT CENTRE, DELH I, PURSUANT TO THE DIRECTION DATED 15/02/2021 OF LEARNED DISPUT E RESOLUTION APPELLANT BY SH. HIMANSHU S. SINHA, ADV. SH. BHUWAN DHOOPAR, ADV. RESPONDENT BY SH. SURENDER PAL, CIT(DR) DATE OF HEARING 06.09.2021 DATE OF PRONOUNCEMENT 24.09.2021 2 ITA NO.584/DEL/2021 PANEL (DRP). THE GROUNDS RAISED BY THE ASSESSEE ARE REPRODUCED AS UNDER: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE IMPUGNED ASSESSMENT COMPLETED VIDE ORDER DATED 28.03.2021 UN DER SECTION 143(3)/ 144C/ 143(3A)/ 143(3B) OF THE INCOME-TAX AC T, 1961 (THE ACT), IS ILLEGAL AND BAD IN LAW. 1.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE IMPUGNED ASSESSMENT AT AN INCOME OF INR 23,52,0 5,420 AGAINST AN INCOME OF INR 11,57,69,060 DECLARED BY T HE APPELLANT IN THE RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR. 2. THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS A ND IN LAW IN MAKING ADDITION TO THE RETURNED INCOME OF THE APPEL LANT OF INR 56,50,353 ON ACCOUNT OF ALLEGED DIFFERENCE IN ARMS LENGTH PRICE AND ACTUAL VALUE OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT DURING THE RELEVANT ASSESSMENT YEAR. 2.1 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN ARBITRARILY REJECTING THE BENCHMARKING ANALYSIS UND ERTAKEN BY THE APPELLANT FOR BENCHMARKING ITS INTERNATIONAL TRANSA CTION BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM). 2.2 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID ADDITION WITHOUT APPRECIATING THE CORRECT FAR ANALYSIS OF BUSINESS OF THE ASSESSEE. 2.3 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT WHILE APPLYING TNMM WITH EXTERNAL COMPARABLES, IN ORDER TO SATISFY COMPARABILITY CRIT ERIA PROVIDED UNDER RULE 10B(2) OF THE INCOME-TAX RULES, 1962 (T HE RULES) COMPANIES ENGAGED IN PROVIDING IDENTICAL BUSINESS O NLY OUGHT TO BE CONSIDERED AS COMPARABLE. 2.4 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID ADDITION WITHOUT APPRECIATING THAT EXPENDITURE INCURRED BY ASSESSEE TOWARDS TOOLS EXCL USIVELY PURCHASED FOR A RELATED PARTY WAS REQUIRED TO BE EX CLUDED FROM THE BENCHMARKING ANALYSIS. 2.5 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID ADDITION BY INCLUDING CERTAIN COMPARABLE COMPANIES WITHOUT APPRECIATING THAT SUCH COMPANIES DID NOT SATISFIED THE COMPARABILITY CRITERIA PROVIDED UNDER RULE 10B(2) OF THE RULES AND HAD DIFFERENT BUSINESS PROFILE THAN T HAT OF THE APPELLANT. 3 ITA NO.584/DEL/2021 2.6 THAT THE AO/ TPO ERRED ON FACTS AND IN LAW IN APPLYING ADDITIONAL FILTERS FOR SELECTION/ REJECTION OF COMPARABLE COMP ANIES, WITHOUT APPRECIATING THAT SELECTION OF COMPANY OUGHT TO BE ON THE BASIS OF FAR ANALYSIS. 2.7 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID ADDITION BY EXCLUDING CERTAIN COMPARABLE COMPANIES HAVING BUSINESS PROFILE IDENTICAL TO THE BUSINESS OF THE APPELLANT. 2.8 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN INCORRECTLY COMPUTING THE OPERATING PROFIT MARGIN O F THE ASSESSEE. 2.9 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID ADDITION BY INCURRING GROSS ER RORS IN BENCHMARKING ANALYSIS, WHICH ARE NOT TENABLE IN LAW . 2.10 THAT THE ASSESSING OFFICER/ TPO ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID ADDITION WITHOUT ALLOWING ADJU STMENT ON ACCOUNT OF HIGHER DEPRECIATION INCURRED BY THE APPE LLANT DURING THE RELEVANT ASSESSMENT YEAR ON ACCOUNT OF IDLE CAP ACITY. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING AN AMOUNT OF INR 11,03,93,150 ON ACCOUN T OF EXPENSES CLAIMED BY ASSESSEE IN THE PROFIT & LOSS A CCOUNT FOR THE RELEVANT ASSESSMENT YEAR ON AN AD-HOC BASIS, WITHOU T PROVIDING ANY COGENT REASONS FOR DOING SO. 3.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID DISALLOWANCE ON A FLIMSY BASIS WITHOUT BR INGING ON RECORD ANY INFORMATION/ MATERIAL/ EVIDENCE TO SUPPO RT THE SAME. 3.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKINGTHE AFORESAID DISALLOWANCE WITHOUT APPRECIATING THAT TH E SAME IS ILLEGAL IN NATURE AND HAS NO LEGS TO STAND AT ALL. 3.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKINGTHE AFORESAID DISALLOWANCE WITHOUT SPECIFYING THE LEGAL PROVISIONS UNDER WHICH SUCH DISALLOWANCE IS BEING MADE. 3.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING THE AFORESAID DISALLOWANCE BY MERELY COMPARING THE QUAN TUM OF PROFIT/ EXPENDITURE EARNED/ INCURRED BY THE ASSESSE E IN RELEVANT ASSESSMENT YEAR VIS A VIS THE PRECEDING ASSESSMENT YEAR, WHICH IS ILLEGAL AND UNSUSTAINABLE IN NATURE. 4 ITA NO.584/DEL/2021 3.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING THE AFORESAID DISALLOWANCE WITHOUT THERE BEING ANY LEGA L MANDATE AVAILABLE WITH THE ASSESSING OFFICER FOR DOING SO. 3.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING THE AFORESAID DISALLOWANCE WITHOUT APPRECIATING THAT TH E BOOKS OF ACCOUNTS OF THE APPELLANT ARE DULY AUDITED BY THE S TATUTORY AUDITORS AND TAX AUDITORS OF THE COMPANY WITHOUT PO INTING OUT ANY ADVERSITY/ IRREGULARITY THEREIN. 3.7 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING THE AFORESAID DISALLOWANCE WITHOUT APPRECIATING THAT TH E EXPENSES DEBITED BY THE APPELLANT IN PROFIT & LOSS ACCOUNT F OR THE RELEVANT ASSESSMENT YEAR WERE ALLOWABLE AS DEDUCTION UNDER T HE PROVISIONS OF SECTION 37( 1) OF THE ACT. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING AN AMOUNT OF INR 33,92,861 ON ACCOUNT O F ALLEGED NON-PAYMENT OF EXCISE DUTY LIABILITY. 4.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN DISALLOWING THE AFORESAID AMOUNT WITHOUT APPRECIATI NG THAT THE EXCISE DUTY LIABILITY UNDER CONSIDERATION WAS DULY DISCHARGED BY THE APPELLANT BEFORE FILING OF THE RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR VIDE REVERSAL/ REDUCTION OF AVAILAB LE CENVAT CREDIT TO THAT EXTENT. 4.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING THE AFORESAID DISALLOWANCE WITHOUT SPECIFYING THE L EGAL PROVISIONS UNDER WHICH SUCH DISALLOWANCE IS BEING MADE. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CHARGING INTEREST UNDER SECTIONS 234B AND 234C OF T HE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR VARY TH E ABOVE GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSE SSEE COMPANY HAS BEEN INCORPORATED ON 01/11/2007 AS A JO INT- VENTURE BETWEEN M/S FUTABA INDUSTRIAL CO. LTD. (IN SHORT FUTABA) AND MARUTI SUZUKI INDIA LTD. (IN SHORT M ARUTI) WITH EQUITY PARTICIPATION IN THE RATIO OF 51% AND 49% RE SPECTIVELY. THE COMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF MAN UFACTURING, 5 ITA NO.584/DEL/2021 SELLING AND DEALING IN ALL KIND OF AUTOMATIVE EXHAU ST SYSTEMS, COMPONENTS AND RELATED PART MANUFACTURED FROM ITS U NIT LOCATED IN MANESAR, HARYANA. 3. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FIL ED RETURN OF INCOME ON 29/11/2016, DECLARING TOTAL INCOME OF 11,57,69,060/-. THE RETURN OF INCOME FILED BY THE A SSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND STATUTORY NOTI CES UNDER THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) WERE ISSU ED AND COMPLIED WITH. IN VIEW OF THE INTERNATIONAL TRANSACTION CARR IED OUT BY THE ASSESSEE, THE ASSESSING OFFICER REFERRED THE MATTER OF DETERMINATION OF ARMS-LENGTH PRICE OF THOSE INTERN ATIONAL TRANSACTIONS TO THE LEARNED TRANSFER PRICING OFFICE R (TPO). THE LEARNED TPO IN HIS ORDER DATED 22/10/2019 PROPOSED ADJUSTMENT OF 56,50,353/-. IN THE DRAFT ASSESSMENT ORDER DATED 09/12/2019, THE ASSESSING OFFICER PROPOSED TRANSFER PRICING ADDITION OF 56,50,353/- ALONG WITH OTHER ADDITIONS, I.E., ADDI TION FOR FALL IN NET PROFIT RATIO (RS.11,03,93,150/-); D ELAYED PAYMENT OF EMPLOYEES CONTRIBUTION TO PF AND ESI (RS. 21,56,68 0/-); NON- SUBMISSION OF EVIDENCE OF EXCISE DUTY PAID BEFORE D UE DATE OF FILING OF RETURN OF INCOME (RS, 33,92,861/-) AND DI SALLOWANCE OUT OF EXPENSES (RS.16,87,95,310/-). THE LEARNED DRP VI DE ORDER DATED 15/02/2021 UPHELD THE DRAFT ORDER OF THE ASSE SSING OFFICER AND REJECTED OBJECTION OF THE ASSESSEE. PURSUANT TO THE ORDER OF THE LEARNED DRP, THE ASSESSING OFFICER HAS PASSED I MPUGNED FINAL ASSESSMENT ORDER. AGGRIEVED WITH THE SAID ORDER, TH E ASSESSEE IS BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUC ED ABOVE. 6 ITA NO.584/DEL/2021 4. BEFORE US, THE PARTIES APPEARED THROUGH VIDEO CONF ERENCING FACILITY AND FILED PAPER-BOOK AND OTHER DOCUMENTS P HYSICALLY AS WELL AS THROUGH EMAIL. 5. THE GROUND NO. 1 (ONE) AND 1.1 OF THE APPEAL ARE G ENERAL IN NATURE AND, THEREFORE, WE ARE NOT REQUIRED TO ADJUD ICATE UPON SPECIFICALLY. 6. THE GROUNDS NO. 2 TO 2.1 OF THE APPEAL RELATE TO T RANSFER PRICING ADJUSTMENT. THE ASSESSEE HAS CHALLENGED THE TRANSFER PRICING ADJUSTMENT MAINLY ON REJECTION OF THE BENCH MARKING ANALYSIS OF THE ASSESSEE, NOT APPRECIATING FAR ( FU NCTIONS CARRIED OUT, ASSETS EMPLOYED AND RISK UNDERTAKEN) ANALYSIS OF THE BUSINESS OF THE ASSESSEE, WRONG SELECTION OF COMPAR ABLES BY THE LEARNED TPO, WHILE BENCHMARKING NON-EXCLUSION OF EX PENDITURE INCURRED TOWARDS TOOLS EXCLUSIVELY PURCHASE RELATED PARTY, APPLYING ADDITIONAL FILTERS FOR SELECTION/REJECTION OF THE COMPARABLE AND WRONG REJECTION OF CERTAIN COMPARABL ES SELECTED BY ASSESSEE; NOT ALLOWING IDEAL CAPACITY ADJUSTMENT . 6.1 THE BRIEF FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE ASSESSING OFFICER OBSERVED FOLLOWING INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED EN TERPRISES (AES): S. NO. INTERNATIONAL TRANSACTION AMOUNT (IN INR) 1. AVAILING OF TECHNICAL GUIDANCE FOR TOOLS AND JIGS DESIGN 100,21,562 2. AVAILING OF OTHER TECHNICAL SERVICES 133,28,299 3. PURCHASE OF FIXED ASSETS 8,06,98, 142 4. IMPORT OF SPARES, RAW MATERIAL, FINISHED GOODS AND OTHER CONSUMABLES 53,24,543 5. PAYMENT OF ROYALTY 1,51,75,180 6. PAYMENT OF SERVICE FEE 1,93,22,582 7. PAYMENT OF INTEREST 8,13,634 8. REIMBURSEMENT OF EXPENSES TO AE 21,38,863 7 ITA NO.584/DEL/2021 6.2 THE ASSESSEE AGGREGATED INTERNATIONAL TRANSACTION AT SR. NO. 1 TO 6 OF THE LIST AS THE PRIMARY MANUFACTURING AC TIVITY AND BENCHMARKED THEM USING TNMM AS MOST APPROPRIATE MET HOD AT THE ENTITY LEVEL MARGIN OF THE ASSESSEE. THE ASSESS EE WORKED OUT RATIO OF OPERATING PROFIT TO OPERATING REVENUE (PRO FIT LEVEL INDICATOR OR PLI) AT 5.85 PERCENT. WHILE COMPUTING OPERATING PROFIT, THE ASSESSEE EXCLUDED EXPENSES ON TOOLS FOR MARUTI SUZUKI. THE ASSESSEE AFTER APPLYING VARIOUS FILTERS IN SELE CTION OF THE COMPARABLES, SELECTED THREE COMPARABLES, NAMELY, OM AX AUTOS LTD., MUNJAL AUTO INDUSTRIES AND TALBROS AUTO COMPO NENTS AND SUBMITTED THAT IN VIEW OF ENTITY LEVEL MARGIN OF TH E ASSESSEE BEING HIGHER THAN AVERAGE MARGIN OF THE COMPARABLES, THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WERE AT ARMS-LENGTH. THE LEARNED TPO REJECTED THE ADJUSTMENT MADE BY THE ASSESSEE FO R EXCLUSION OF TOOLS FOR MARUTI SUZUKI AND REWORKED THE MARGIN OF THE ASSESSEE (OP/OR) AS 0.92%. THE LEARNED TPO ALSO EXT ENDED THE LIST OF COMPARABLES SUITABLE IN THE CASE OF THE ASS ESSEE AND ADDED 10 COMPARABLES TO THE LIST OF THE COMPARABLES, MAKI NG FINAL LIST OF 13 COMPARABLES. THE WORKING CAPITAL ADJUSTED MEAN M ARGIN OF THOSE COMPARABLES HAS BEEN WORKED OUT TO 4.81% AS U NDER: S. NO. COMPANY NAME WC ADJUSTED OP/OR 1. OMAX AUTOS LTD. 1.18% 2. GAJRA GEARS PVT. LTD. 1.58% 3. TALBROS AUTOMOTIVE COMPONENTS LTD. 4.33% 4. AUTO IGNITION LTD. 4.41% 5. MINDA INDUSTRIES LTD. 4.41% 6. MUNJAL AUTO INDS. LTD. 4.63% 7. RANE T R W STEERING SYSTEMS PVT. LTD. 4.81% 8. INDIA NIPPON ELECTRICALS LTD. 6.49% 8 ITA NO.584/DEL/2021 9. SETCO AUTOMOTIVE LTD. 6.77% 10. R A C L GEARTECH LTD. 7.90% 11. J B M AUTO SYSTEM PVT LTD. (MERGED) 8.66% 12. SAKTHI AUTO COMPONENTS LTD. 9.54% 13. INDI SCHOTTLE AUTOPARTS PVT. LTD. 12.90% 35 TH PERCENTILE 4.41% MEDIAN 4.81% 65 TH PERCENTILE 6.77% 6.3 THE TRANSFER PRICING ADJUSTMENT OF 56,50,353/- HAS BEEN WORKED OUT BY THE LEARNED TPO AS UNDER: OPERATING REVENUE OF ASSESSEE A 4,462,034,405 ARMS LENGTH MARGIN (OP/OR) (%) (AS PROPOSED BY YOUR GOODSELF) B 4.81% ARMS LENGTH OPERATING PROFIT C=A*B 214623855 ARMS LENGTH OPERATING COST D=A - C 4,247,410,550 ACTUAL OPERATING COST OF THE ASSESSEE E 4, 421,042,264 DIFFERENCE F=E-D 173,631,714 AMOUNT OF INTERNATIONAL (EXCLUDING TRANSACTION PERTAINING TO PAYMENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWING AND REIMBURSEMENT OF EXPENSE TO AES) G 143,870,308 PROPORTIONATE COST (%) H=G/E 3.25% PROPOSED ADJUSTMENT U/S 92CA I=F*H 5,650,353 9 ITA NO.584/DEL/2021 6.4 BEFORE THE LEARNED DRP, THE ASSESSEE CONTESTED INC LUSION OF COMPARABLES BY THE LEARNED TPO, HOWEVER, THE LEARNE D DRP REJECTED OBJECTIONS OF THE ASSESSEE AND RETAINED TH E COMPARABLES SELECTED BY THE LEARNED TPO. 6.5 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE CHA LLENGED ALL THE 10 COMPARABLES SELECTED BY THE LEARNED TPO AND SUBMITTED THAT: (I) THE COMPARABLE SELECTED BY THE LEARNED TPO ARE FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE, AS THE LEARNED TPO HAS NOT EXAMINED FUNCTIONS OF THE COMPARABLES IN THE LIGHT OF DECISION OF THE TRIBUN AL IN THE CASE OF NISSIN BRAKE INDIA P. LTD. VS DCIT (2020) 116 TAXMANNN.COM 576 (DELHI TRIB.). HE HAS SUBMITTED THAT IN THE CASE OF NISSIN BRAKE (SUPRA), THE TRIBUNAL HAS HELD THAT IN AUTOMOTIVE INDUSTRY, AUTO COMPONENTS CAN BE DIVIDED INTO TWO PARTS. FIRST ONE CORE COMPONENTS AND OTHERS ARE NON-CORE COMPONENTS. ACCORDING TO HIM, THE TRIBUNAL DIRECTED TO COMPARE ENTITIES ENGAGED IN MANUFACTURING OF RESPECTIVE COMPONENTS ONLY AND PRODUCTS OF ONE CATEGORY CANNOT BE TREATED AS BEING COMPARABLE IN TERMS OF MARKET POSITION TO THE OTHER. THE LEARNED COUNSEL SUBMITTE D THAT THIS ASPECT OF COMPARABILITY HAS NOT BEEN EXAMINED BY THE LEARNED TPO AND THEREFORE ISSUE OF TRANSFER PRICING ADJUSTMENT MAY BE RESTORED BACK TO THE FILE OF THE LEARNED AO/TPO FOR DECIDING AFRESH. (II) THE COMPARABLE COMPANIES SELECTED BY THE LD. TPO AR E ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITY (R & D ) 10 ITA NO.584/DEL/2021 WHICH OWN SIGNIFICANT AMOUNT OF INTANGIBLES ASSETS, WHEREAS, THE ASSESSEE COMPANY IS NOT ENGAGED IN ANY R & D ACTIVITY AND IN FACT PAYING ROYALTY TO ITS AE S FOR TECHNICAL KNOW-HOW, WHICH IT USES FOR MANUFACTURING EXHAUST SYSTEMS. HE SUBMITTED THAT IMPACT OF RESEAR CH AND DEVELOPMENT SHOULD ALSO BE EXAMINED BY THE LEARNED TPO. (III) THE CAPACITY UTILIZATION AND DEPRECIATION ISSUES HA VE ALSO NOT BEEN EXAMINED BY THE LEARNED TPO. HE SUBMITTED THAT DEPRECIATION COST OF ASSESSEE COMPAN Y IS SIGNIFICANTLY HIGHER THAN COMPARABLE COMPANIES, WHICH MAY HAVE UTILIZED THEIR CAPACITY IN AN EFFECT IVE MANNER LEADING TO EFFECTIVE UTILIZATION OF FIXED CO ST. (IV) THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE PURCHASED CERTAIN TOOLS EXCLUSIVELY UPON THE REQUES T OF MARUTI SUZUKI INDIA LTD, WHICH WERE CAPITALIZED AND INCLUDED AS PART OF FIXED ASSETS FOR CALCULATION OF DEPRECIATION. THE TOOLS WERE USED AND THEN SOLD TO MARUTI SUZUKI, THE DEPRECIATION BOOKED IN RESPECT O F SUCH TOOLS AND THE PROFIT FROM SALE OF SUCH TOOLS B OOKED REQUIRED ADJUSTMENT TO THE PLI OF THE ASSESSEE. THE ASSESSEE, ACCORDINGLY, REDUCED PROFIT ON SALE OF TH E FIXED ASSETS FROM OPERATING INCOME AND DEPRECIATION IN RESPECT OF SUCH TOOLS FROM OPERATING EXPENSES. HOWEVER, THE LEARNED TPO, WHILE DETERMINING OPERATI NG MARGIN OF THE ASSESSEE, TREATED PROFIT ON SALE OF T OOLS AS NON-OPERATING AND DEPRECIATION AS OPERATING IN NATU RE. THE LEARNED COUNSEL CONTENDED THAT IF DEPRECIATION ( 11 ITA NO.584/DEL/2021 RS. 3,13,78,409/-) IS CONSIDERED OPERATING, PROFIT ON SALES (RS.4,04,14,752/-) SHOULD ALSO BE CONSIDERED OPERATING AND IF THE PROFIT ON SALES IS CONSIDERED NON- OPERATING, THE DEPRECIATION ON THOSE TOOLS SHOULD A LSO BE CONSIDERED NON-OPERATING AS WELL. 6.6 ON THE CONTRARY, LEARNED DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES AND SUBMITTED THAT EACH AND EVERY COMPA RABLES HAS BEEN ADDED BY THE LEARNED TPO AFTER CAREFUL ANALYSI S OF THEIR FAR, WHICH HAS BEEN UPHELD BY THE LEARNED DRP AND, THEREFORE, TRANSFER PRICING ADJUSTMENT MUST BE UPHELD. REGARDI NG CONSIDERING SALE OF TOOL AS NON-OPERATING AND DEPRE CIATION AS OPERATING IN NATURE BY THE LEARNED TPO, THE LEARNED DR RELIED ON FINDING OF DRP AND SUBMITTED THAT PROFIT ON SALE OF FIXED ASSETS IS NOT PART OF REVENUE OPERATIONS AND THEREFORE LEARNE D TPO IS JUSTIFIED IN EXCLUDING THE SAME AS NON-OPERATING IT EMS WHEREAS THE DEPRECIATION HAS BEEN RIGHTLY CONSIDERED AS OPE RATING IN VIEW OF THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF PCIT VS KIRLOSKAR TOYOTA TEXTILE MACHINERY PRIVATE L IMITED (2019) 106 TAXMANN.COM 309 ( KARNATAKA) . 6.7 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES AND PERUSED RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS CARRI ED OUT MULTIPLE INTERNATIONAL TRANSACTIONS, WHICH INCLUDES, PURCHAS E OF FIXED ASSETS, AVAILING OF TECHNICAL GUIDANCE ON TOOLS AND JIGS DESIGN FROM FUTABA, AVAILING OF TECHNICAL SERVICES FROM YM P PRESS & DIES (THAILAND ) CO. P LTD; IMPORT OF THE SPARES, RAW MA TERIAL, FINISHED GOODS AND OTHER CONSUMABLES; PAYMENT OF ROYALTY AND PAYMENT OF SERVICE FEE ETC. THE FUNCTIONS PERFORMED AND RISK U NDERTAKEN 12 ITA NO.584/DEL/2021 UNDER DIFFERENT INTERNATIONAL TRANSACTIONS HAS BEEN REPORTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY (AVAILAB LE ON PAGE 367 TO PAGE 372 OF PAPER-BOOK). FOR READY REFERENCE, THE R ELEVANT ANALYSIS IS REPRODUCED AS UNDER: 4.2 AVAILING OF TECHNICAL GUIDANCE ON TOOLS AND JI GS DESIGN FROM FUTABA FMI HAS ENTERED INTO A LICENSE AGREEMENT WITH FUTAB A FOR GRANTING OF PROPRIETARY INFORMATION AND AVAILING OF TECHNICAL S UPPORT SERVICES FROM FUTABA IN RELATION TO THE INFORMATION AND TRAD EMARK OBTAINED ON LICENSE. THE SCOPE OF SERVICES INCLUDES THE FOLL OWING: PROVIDING INSTRUCTIONS FOR THE MANUFACTURE OR FABRI CATION OF THE PRODUCTS AND OPERATION METHOD; SUPERVISION OF INSTALLATION, WIRING AND PIPING OF E QUIPMENT OR JIG SUPPLIED BY FUTABA, PROVIDED THAT THE EXPENSES AT THE TIME OF EXECUTION WOULD BE BORNE BY FMI; SUPERVISION OF LOCAL TRYOUTS AND FINE TUNING OF DIE S, EQUIPMENT AND JIG PROVIDED BY FUTABA, PROVIDED THAT THE EXPEN SES AT THE TIME OF EXECUTION WOULD BE BORNE BY FMI; QUALITY CONFIRMATION OF FMI'S OFF-TOOL SAMPLE; INSPECTION, INSTRUCTION FOR ADJUSTMENT FOR OPERATIO N OF THE MANUFACTURE OR FABRICATION OF THE PRODUCTS; INSTRUCTION FOR INSPECTION AND PROCUREMENT OF MATER IAL AND COMPONENTS; OTHER ASSISTANCE AT THE REQUEST OF FMI. FOR THE SERVICES RECEIVED, FMI REMUNERATES FUTABA I N THE FOLLOWING MANNER: TECHNICAL SERVICE FEE IN THE FORM OF: DAILY ADVISORY FEE FOR DISPATCHING PERSONNEL IN THE AMOUNT OF JPY 72,000 PER DAY PER PERSON FOR THOSE WHO ARE MAN AGERS OR HOLD OTHER TITLE SENIOR TO MANAGERS, AND 48,000 YEN PER DAY PER PERSON FOR ALL OTHERS; SUM OF JPY 12,000 PER WORKING DAY PER PERSONNEL FOR THE TECHNICAL TRAINING PROVIDED BY FUTABA TO THE PERSON NEL OF FMI 13 ITA NO.584/DEL/2021 REIMBURSEMENT OF THE FOLLOWING COSTS INCURRED BY FU TABA IN RELATION TO THE DISPATCH OF THE PERSONNEL ON A TEMP ORARY BASIS TO FMI'S PLANT: BUSINESS CLASS ROUND AIR FARE FROM JAPAN TO INDIA; ACTUAL INLAND TRANSPORTATION EXPENSES WITHIN JAPAN AND INDIA; BOARDING EXPENSES IN THE AMOUNT OF JAPANESE YEN ('J PY') 5,500 PER DAY PER PERSON FOR THE DAYS ON WHICH LICE NSOR'S DISPATCHED PERSONNEL TRAVEL FROM JAPAN TO INDIA AND STAY IN INDIA TO GIVE SUCH TECHNICAL ADVICE AND GUIDANCE AN D TRAVEL FOR RETURN DIRECT TO JAPAN; AND ACTUAL ACCOMMODATION EXPENSES WITHIN INDIA; THE VALUE OF THE TRANSACTION IS AS UNDER: ASSOCIATED ENTERPRISE AMOUNT(INR) FUTABA INDUSTRIAL CO. LTD. (TOOLS & JIGS DESIGN) 1,00,21,562 FUTABA INDUSTRIAL CO. LTD. (TECHNICAL SERVICES) 1,13,95,386 TOTAL 2,14,16,948 (*THE ABOVE AMOUNT HAS BEEN CAPITALIZED BY FMI) 4.2.1 FUNCTIONS PERFORMED IN RESPECT OF AVAILING OF TECHNICAL SERVICES, THE O VERALL SCOPE OF SERVICES IS DETERMINED BY FMI IN CONSULTATION WITH FUTABA, WHO IS RESPONSIBLE FOR RECRUITING AND TRAINING THE NECESSA RY TECHNICAL PEOPLE WHO MAY BE REQUIRED TO RENDER TECHNICAL SERV ICES TO FMI. FOR THE PURPOSE OF EXECUTING THE ABOVE MENTIONED TECHNI CAL SERVICES, PERSONNEL OF FUTABA MAY BE REQUIRED TO MAKE VISITS TO INDIA. EXPENSES PERTAINING TO TRAVEL, ACCOMMODATION OTHER ALLOWANCES OF THESE PERSONNEL ARE BORNE BY FMI. HOWEVER, THESE PE OPLE ONLY MAKE INTERMITTENT VISITS AND CONTINUE TO BE EMPLOYED BY FUTABA. FUTABA IS ALSO RESPONSIBLE FOR ENSURING THAT THE PR OPRIETARY INFORMATION PROVIDED TO FMI IS FREE FROM ANY DEFECT OR ERROR. IF ANY DEFECT, ERROR OR MISTAKE IS FOUND IN PROPRIETARY IN FORMATION, THE SAME SHALL BE CORRECTED BY FUTABA AT ITS OWN COST. FMI I S RESPONSIBLE FOR ADHERING TO QUALITY SPECIFICATIONS AND MANUFACTURIN G AND ASSEMBLY PROCEDURES OF FUTABA. IT IS ALSO RESPONSIBLE FOR EN SURING THAT THE PRODUCTS MANUFACTURED ARE AS PER QUALITY SPECIFICAT IONS LAID DOWN BY FUTABA. 4.2.2 RISK ANALYSIS 14 ITA NO.584/DEL/2021 FMI BEARS THE MARKET/ BUSINESS RISK IN RELATION TO MANUFACTURE AND SELLING OF PRODUCTS IN INDIA FOR WHICH THE TECHNICA L SERVICES HAVE BEEN AVAILED AS IT MAY BE SUBJECT TO ADVERSE MARKET CONDITIONS. FUTABAS BUSINESS RISK IS LIMITED TO THE EXTENT OF WORK OR SERVICES PROVIDED TO FMI THE PAYMENT MADE BY FMI TO FUTABA IS DENOMINATED IN JAPANESE YEN. HENCE, FMI IS EXPOSED TO THE INHERENT FOREIGN EXCHANGE RISK ARISING DUE TO FLUCTUATION IN THE EXCHANGE RATES. H OWEVER, SINCE FUTABA IS RECEIVING PAYMENT FROM ITS AE, IT BEARS L IMITED CREDIT AND COLLECTION RISK VIS-A-VIS INDEPENDENT SERVICE PROVI DERS. FMI ALSO BEARS THE SERVICE LIABILITY RISK AS IT IS LIABLE TO LITIGATION FOR ANY IDENTIFIED SHORTCOMINGS IN ITS PRODUCT DELIVERY TO THIRD PARTIES. FUTABA ALSO BEARS THE SERVICE LIABILITY RISK TO THE EXTENT OF THE TECHNICAL SERVICES PROVIDED BY IT TO FMI NOT RESULT ING IN THE DESIRED RESULTS FOR FMI. 4.3 AVAILING OF TECHNICAL SERVICES FROM YMP PRESS & DIES (THAILAND) CO. LTD. AND SHIMA TRADING CO. FMI HAS ALSO ENTERED INTO AN AGREEMENT WITH YMP PRE SS & DIES (THAILAND) CO. LTD. FOR GRANTING TECHNOLOGY, TECHNI CAL ASSISTANCE AND TECHNICAL KNOWHOW FOR MANUFACTURE AND SALES OF AUTO MOTIVE PARTS TO EACH OTHER. THE SCOPE OF SERVICES INCLUDES THE FOLL OWING: TECHNICAL ASSISTANCE FOR THE SCOPE, AREAS AND/OR IT EMS THAT PARTIES JUDGES AS POSSIBLE FROM TIME TO TIME DURING THE TERM OF THIS AGREEMENT TO MANUFACTURE AND FABRICATE PRODUCT S AT THE SITE. PARTIES WOULD ASSIST BY PROVIDING THE NECESSA RY TECHNICAL INFORMATION FOR THE MANUFACTURE OF PRODUC TS AND MORE PARTICULARLY: FURNISHING OF THE TECHNICAL INFORMATION IN RESPECT OF THE INSTALLATION OF THE PRODUCTION FACILITIES AND OPERA TION THEREOF, AND THE MANUFACTURE OF THE PRODUCTS; SUPPLY OF PRODUCTION ENGINEERING INFORMATION AND DO CUMENTS, SUCH AS METHOD, PROCESS, AND PROCESS LAYOUT FOR FAB RICATION AND ASSEMBLY OF PRODUCTS AND COMPONENT. SUPPLY OF CONCEPT DRAWING OR, DESIGN DRAWING FOR DI E, EQUIPMENT, JIG, C/F, AND ETC. WHICH ARE REQUIRED FO R PROCESS AND ASSEMBLY OF PRODUCTS AND COMPONENTS BY CHARGE. SUPPLY BY CHARGE OF NECESSARY ASSEMBLY EQUIPMENT, J IG, C/F, DIE SETTING AND SUPPLY OF INSPECTION STANDARD FOR P ARTS AND COMPONENTS 15 ITA NO.584/DEL/2021 SUPPLY OF PARTS AND COMPONENTS BY CHARGE INSPECTION INCLUDING TESTING OF PERFORMANCE OF PROD UCTS AND PARTS BY CHARGE DISPATCH OF THE TECHNICAL QUALIFIED STAFF AND SUPPO RT STAFF OF PARTIES IN ACCORDANCE WITH THE AGREEMENT. TRAINING OF TECHNICAL PERSONNEL OF PARTIES. TECHNICAL ASSISTANCE IN SOLVING PROBLEMS IN THE PRO CESS/ MANUFACTURE OF PRODUCTS FROM TIME TO TIME. FOR THE SERVICES RECEIVED, FMI REMUNERATES YMP IN T HE FOLLOWING MANNER: A DESPATCH FEE SHALL BE THE AMOUNT EQUIVALENT TO TH E BELOW AMOUNT EACH PER DAY/ONE TECHNICAL QUALIFIED STAFF A ND SUPPORT STAFF FOR THE NUMBER OF WORKING DAYS ELAPSE D FROM (AND INCLUDING) THE DATE OF ARRIVAL IN INDIA OR THA ILAND AND TO (AND INCLUDING) THE DATE OF DEPARTURE FROM INDIA OR THAILAND: JAPANESE STAFF US$ 250 LOCAL MANAGER, AND ABOVE MANAGER US$ 50 THE OTHER EMPLOYEE US$ 40 IN EVENT THAT TECHNICAL QUALIFIED STAFF OR SUPPORT STAFF OF FMI OR YMPPD'S SUPPLIER IS DISPATCHED, PARTIES SHALL PA Y 105% OF WHAT PARTIES ACTUALLY PAID TO PARTIES SUPPLIERS. FMI OR YMPPD SHALL BEAR BELOW EXPENSES FOR DISPATCH OF THEIR TECHNICAL QUALIFIED STAFF: HOTEL ACCOMMODATION EXPENSES AND MEAL EXPENSES IN I NDIA OR THAILAND. THE EXPENSES OF TRANSPORTATION FROM HOTEL TO SITE. THE EXPENSES OF MAIL, TELEPHONE, TELEGRAM, WIRE AND OTHER COMMUNICATION FOR PERFORMANCE OF TECHNICAL ASSISTAN CE AND COMMERCIAL SUPPORT THE EXPENSES OF TRAVELLING IN INDIA OR THAILAND FOR PERFORMANCE OF TECHNICAL ASSISTANCE AND SUPPORT. 16 ITA NO.584/DEL/2021 THE EXPENSES OF ROUND AIR PASSAGE AND LUGGAGE FROM INDIA TO BANGKOK AND BACK AGAIN TO INDIA COMPLYING WITH PART IES TRAVEL RULE. THE EXPENSES OF INTERPRETER (JAPANESE-THAI-ENGLISH) FOR TECHNICAL QUALIFIED STAFF AND SUPPORT STAFF IN INDI A OR THAILAND. FURTHER, WE HAVE BEEN INFORMED BY THE MANAGEMENT OF FMI THAT FMI HAS AVAILED TECHNICAL SERVICES FROM SHIMA TRADING C O. DURING THE F.Y. 2015-16. WE HAVE ALSO BEEN INFORMED THAT THE T ERMS OF THE AGREEMENT ARE SIMILAR TO THE TERMS MENTIONED FOR TH E ABOVE CONTRACTS (I.E. WITH FUTABA AND YMP). THE VALUE OF THE IDENTIFIED INTERNATIONAL TRANSACTI ON IS AS FOLLOWS: ASSOCIATED ENTERPRISES AMOUNT (INR) YMP PRESS & DIES (THAILAND) CO. LTD.* 332,934 SHIMA TRADING CO. 15,99,979 TOTAL 19,32,913 (INCLUDES RS.2,63,360 FORMING PART OF CAPITAL ASSE TS) 4.3.1 FUNCTIONS PERFORMED IN RESPECT OF AVAILING OF TECHNICAL SERVICES, THE O VERALL SCOPE OF SERVICES IS DETERMINED BY FMI. FOR THE PURPOSE OF E XECUTING THE ABOVE MENTIONED TECHNICAL SERVICES, PERSONNEL OF YM P MAY BE REQUIRED TO MAKE VISITS TO INDIA. EXPENSES PERTAINI NG TO TRAVEL, ACCOMMODATION OTHER ALLOWANCES OF THESE PERSONNEL A RE BORNE BY FMI. HOWEVER, THESE PEOPLE ONLY MAKE INTERMITTENT V ISITS AND CONTINUE TO BE EMPLOYED BY YMP. 4.3.2 RISK ANALYSIS FMI BEARS THE MARKET/ BUSINESS RISK IN RELATION TO MANUFACTURE AND SELLING OF PRODUCTS IN INDIA FOR WHICH THE TECHNICA L SERVICES HAVE BEEN AVAILED AS IT MAY BE SUBJECT TO ADVERSE MARKET CONDITIONS. YMP'S BUSINESS RISK IS LIMITED TO THE EXTENT OF WOR K OR SERVICES PROVIDED TO FMI THE PAYMENT MADE BY FMI TO YMP IS DENOMINATED IN US DOLLARS. HENCE, FMI IS EXPOSED TO THE INHERENT FOREIGN EXCHA NGE RISK ARISING DUE TO FLUCTUATION IN THE EXCHANGE RATES. HOWEVER, SINCE YMP IS RECEIVING PAYMENT FROM ITS AE, IT BEARS LIMITED CRE DIT AND COLLECTION RISK VIS-A-VIS INDEPENDENT SERVICE PROVIDERS. FMI ALSO BEARS THE SERVICE LIABILITY RISK AS IT IS LIABLE TO LITIGATION FOR ANY IDENTIFIED SHORTCOMINGS IN ITS PRODUCT DELIVERY TO THIRD PARTIES. 17 ITA NO.584/DEL/2021 YMP ALSO BEARS THE SERVICE LIABILITY RISK TO THE EX TENT OF THE TECHNICAL SERVICES PROVIDED BY IT TO FMI NOT RESULTING IN THE DESIRED RESULTS FOR FMI. 4.4 IMPORT OF SPARES, RAW MATERIALS, FINISHED GOODS A ND OTHER CONSUMABLES DURING FY 2015-16, FMI IMPORTED CERTAIN SPARE PARTS , FINISHED GOODS AND CONSUMABLES FROM STC IN RESPECT OF ITS MA NUFACTURING PLANT. THE VALUE OF SPARES AND CONSUMABLES IMPORTED ARE GI VEN BELOW: ASSOCIATED ENTERPRISES AMOUNT(INR) SHIMLA TRADING COMPANY LTD. 53,24,543 4.5 PAYMENT OF ROYALTY FMI ENTERED INTO AN AGREEMENT WITH FUTABA FOR GRANT OF A NON- EXCLUSIVE LICENSE FOR THE USE OF PROPRIETARY INFORM ATION FOR THE ENGINEERING, MANUFACTURING AND SALE OF PRODUCTS AND THE TRADEMARK OF FUTABA FOR USE ON THE PRODUCTS, PACKING, ADVERTI SEMENT DOCUMENTS AND OTHER RELATED DOCUMENTS. THE PROPRIETARY INFORMATION AND THE TRADEMARK WERE THE EXCLUSIVE PROPERTY OF FUTABA DEVELOPED BY IT OVER TIME AS PAR T OF ITS RESEARCH AND DEVELOPMENT EFFORTS. IN RELATION TO THE PROPRIE TARY INFORMATION, FUTABA PROVIDES FMI WITH THE FOLLOWING ASSISTANCE: THE NECESSARY PROPRIETARY INFORMATION FOR THE MANUF ACTURE OF THE PRODUCTS, AND MORE PARTICULARLY: DEVELOPMENT, DESIGNING, AND DETERMINATION OF SPECIFICATION OF THE PRODUCTS; FURNISHING OF PROPRIETARY INFORMATION IN RESPECT OF THE INSTALLATION OF PRODUCTION FACILITIES AND OPERATION THEREOF, AND MANUFACTURE OF THE PRODUCTS. SUPPLY OF DESIGNS, DRAWINGS OF COMPONENTS; SUPPLY BY CHARGE OF NECESSARY ASSEMBLY EQUIPMENT JI G, CHECKING FIXTURE, DIE SETTING, AND SUPPLY OF INSPEC TION STANDARDS FOR PARTS AND COMPONENTS; SUPPLY BY CHARGE OF PARTS AND COMPONENTS; INSPECTION INCLUDING TESTING OF PERFORMANCE OF THE PRODUCTS AND PARTS AND COMPONENTS BY CHARGE; AND 18 ITA NO.584/DEL/2021 TECHNICAL ASSISTANCE IN SOLVING PROBLEMS IN THE PROCESS/MANUFACTURE OF THE PRODUCTS FROM TIME TO TI ME. FOR THE USE OF THE PROPRIETARY INFORMATION AND TRADEMAR K AND RELATED SERVICES, FMI IS REQUIRED TO PAY ROYALTY TO FUTABA AT THE RATE OF 2 PERCENT OF THE NET EX-FACTORY SALE PR ICE. NET EX- FACTORY SALE PRICE MEANS THE BASIC PRICE OF THE PRO DUCTS EXCLUSIVE OF THE COST OF RAW MATERIAL, LOCALLY PURC HASED PARTS AND IMPORTED PARTS, EXCISE DUTY, SALES TAX, FREIGHT , AND INSURANCE. DURING FY 2015-16, FMI HAS PAID THE FOLLOWING AMOUN T AS ROYALTY TO ITS AE: ASSOCIATED ENTERPRISE AMOUNT (INR) FUTABA INDUSTRIAL CO. LTD. 15,175,180 4.6 PAYMENT OF SERVICE FEE FMI HAS ENTERED INTO AN AGREEMENT WITH FUTABA FOR S ECONDMENT OF PERSONNEL FOR PROVIDING TECHNICAL SERVICES, INCLUDI NG BUT NOT LIMITED TO, MANAGERIAL, TECHNICAL, PRODUCTION, MARKETING, P URCHASING, AND ADMINISTRATIVE SERVICES TO FMI. THE IMPORT TERMS AN D CONDITIONS OF THE AGREEMENT ARE GIVEN BELOW: THE SCOPE OF WORK PERFORMED BY PERSONNEL INCLUDES P ROVISION OF TECHNICAL INPUTS, ADVICE, GUIDANCE, SUPERVISION, EXECUTION, ETC, IN WHOLE OR PART. THE PERSONNEL WORK FOR FMI ON FULL TIME BASIS DURIN G THEIR RESPECTIVE DISPATCHED PERIOD. THESE PERSONNEL, DURI NG THEIR STAY IN INDIA, WORK UNDER THE SUPERVISION AND CONTR OL OF FMI. FOR THEIR SERVICES, FMI PAYS A SERVICE FEE TO FUTAB A ON A LUMP SUM FEE PER MONTH PER EMPLOYEE BASIS, WHICH, EFFECT IVELY, ONLY INCLUDES THE COST OF THE PERSONNEL SUCH AS SALARY A ND OTHER BENEFITS. DURING THE EMPLOYMENT WITH FMI, THE PERSONNEL ARE S UBJECT TO THE EMPLOYMENT POLICIES, RULES, REGULATIONS, AND CO DE OF CONDUCT OF FMI. IN RESPECT OF AVAILING OF SUPPORT S ERVICES, THE OVERALL SCOPE OF SERVICES IS DETERMINED BY FMI, AND FUTABA IS RESPONSIBLE FOR RECRUITING THE NECESSARY QUALIFIED PEOPLE TO RENDER SUPPORT SERVICES TO FMI. THE PAYMENT OF SERVICE FEE MADE BY FMI TO FUTABA IS DENOMINATED IN JAPANESE YEN. HENCE, FMI IS EXPOSED TO THE INHERENT FOREIGN EXCHANGE RISK ARISING DUE TO FLUCT UATION IN THE EXCHANGE RATES. 19 ITA NO.584/DEL/2021 THE VALUE OF TRANSACTION INVOLVING AVAILING OF PROF ESSIONAL SERVICES BY FMI IS GIVEN BELOW: ASSOCIATED ENTERPRISE AMOUNT (INR) FUTABA INDUSTRIAL CO. LTD. 19,322,582 6.8 THE ASSESSEE HAS BENCHMARKED ITS INTERNATIONAL TRA NSACTION ON AGGREGATE BASIS UNDER TRANSACTIONAL NET MARGIN M ETHOD (TNMM) AS MOST APPROPRIATE METHOD. THIS METHOD HAS BEEN ACCEPTED BY THE LEARNED TPO. THE LEARNED TPO HAS AL SO ALLOWED WORKING CAPITAL ADJUSTMENT TO THE MARGIN (PLI) SOUG HT BY THE ASSESSEE. THE DISPUTE IS REGARDING SELECTION OF COM PARABLES BY THE LEARNED TPO. ACCORDING TO THE LEARNED COUNSEL OF TH E ASSESSEE, THE COMPARABLES CHOSEN BY THE LEARNED TPO ARE ENGAG ED IN MANUFACTURING OF NON-CORE COMPONENTS AND, THEREFORE THOSE COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF NISSIN BREAKS INDIA PRIVATE LIMITED (SUPRA). FOR READY REFERENCE, THE FINDING OF THE TRIBUNAL IN THE SAID CASE IS REPRODUCED AS UNDE R: 18. THE ENTITIES ARE EXAMINED AS TO THEIR RELEVANC E AND COMPARABILITY. 1. ADMACH AUTO INDIA LTD.: THE COMPARABLE MANUFACTURES SHEET METAL COMPONENTS AGAINST THE BRAKE SYSTEM MANUFACTURED BY THE ASSESSEE COMPANY. AS PER RULE 10TA(B) AND RULE 10TA (H) OF THE INCOME TAX RULES, 1962, A SEPARATE DEFINITIONS HAVE BEEN LAID DOWN FOR CORE AUTO COMPONENTS AND NON-CORE AUTO COMPONEN TS. AS PER RULE 10TA(B)(3), THE CORE AUTO COMPONENTS MEANS, SU SPENSION BREAKING PARTS INCLUDING BRAKE AND BRAKE ASSEMBLIES, BRAKE LINING, SHOCK ABSORBERS AND LEAF SPRINGS AND RULES 10TA(H) DEFINES 'NON-CORE COMPONENTS' MEANS AUTO COMPONENTS OTHER T HAN CORE AUTO COMPONENTS. SINCE, THE BUSINESS OF THE ASSESSEE IS 'CORE AUTO C OMPONENTS', WE HOLD THAT IT CANNOT BE COMPARED WITH AN ENTITY WHIC H IS IN THE 20 ITA NO.584/DEL/2021 BUSINESS OF 'NON-CORE AUTO COMPONENTS'. THIS COMPAR ABLE CANNOT BE CONSIDERED FOR THE STUDY. 2. ASK AUTOMOTIVE PVT. LTD.: THE TURNOVER OF THE COMPANY IS RS.937 CRORES COMPARE TO THE TURNOVER OF RS.220 CRO RES OF THE ASSESSEE COMPANY. HENCE, IT WAS ARGUED THAT IT CANN OT BE A RIGHT COMPARABLE. FURTHER, THE COMPARABLE INCURRED EXPEND ITURE ON R&D ACTIVITIES WHEREAS THE ASSESSEE COMPANY DOESN'T HAV E ANY R&D CENTRE IN INDIA . WE FIND THAT THE BRAKE SHOES MANUFACTURING WHICH IS A CORE AUTO COMPONENTS CONSISTS OF 28.97% OF THE TOTAL TURNOVER OF THE COMPANY WHICH IS APPROXIMATELY RS.270 CRORES. H ENCE, THE TURNOVER IS NOT AN IMPEDIMENT FOR COMPARATIVE STUDY . WE ALSO FIND THAT THE R&D EXPENDITURE INCURRED BY THE ASK AUTOMO TIVE PVT. LTD. IS VERY MINIMAL WHICH WOULD NOT ALTER THE COMPARISO N TO A CONSIDERABLE EXTENT. HENCE, WE HOLD THAT ASKAPL MAY BE CONSIDERED AS A CORRECT COMPARABLE. 3. GABRIEL INDIA LTD.: THIS COMPANY IS PRIMARILY INTO MANUFACTURING OF FRONT FORKS AND SHOCK ABSORBERS. S INCE, THEY ARE NON-CORE AUTO COMPONENTS OWING TO THE DIFFERENCE IN THE PRODUCTS MANUFACTURING IT CANNOT BE TREATED AS A RIGHT COMPA RABLE. 4. BRAKES INDIA PVT. LTD.: THE PRODUCT LINE IS SIMILAR TO THAT OF THE ASSESSEE. HOWEVER, THE TURNOVER OF THIS COMPARABLE IS 16 TIMES TO THAT OF THE ASSESSEE'S TURNOVER. IN GENERAL THAT TH E TURNOVER FILTER IS ADOPTED TO AVOID SELECTION OF HIGH-END COMPANIES WI TH THAT OF MINNOWS IN A SIMILAR LINE OF BUSINESS. THE RANGE CA NNOT BE FIXED AND HOW TO ADOPT THE FILTER DEPENDS ON THE FACTS OF EACH CASE. HIGH TURNOVERS CANNOT BE REJECTED PRIMA FACIE WHILE LOW TURNOVERS ARE ACCEPTED WHEN IT SUITS TO THE PARTIES WITHOUT OBJEC TIONS FROM EITHER OF THE SIDES. AN ACCEPTABLE RANGE WOULD BE THE TURNOVE R OF THE TAXPAYER AND THE RANGE OF THE UPPER LIMIT AT TEN TI MES AS WELL AS THE LOWER LIMIT AT TEN TIMES (1/10) WITH A MARGIN OF VA RIATION MAY BE CONSIDERED AS A RIGHT COMPARABLE. SINCE, IN THIS CA SE THE TURNOVER IS 16 TIMES WHICH IS WELL BEYOND THE MARGINS FOR A RIG HT COMPARISON AND ELICITING CORRECT RESULTS. HENCE, WE HOLD THAT BIPL MAY NOT BE CONSIDERED AS A COMPARABLE IN THE INSTANT CASE. 5. MUNJAL SHOWA LTD.: THE COMPANY IS ENGAGED IN THE MANUFACTURING OF SHOCK ABSORBERS, STRUTS AND REAR C USHIONS. SINCE, THE PRODUCT LINE IS DIFFERENT THE PROFITS CANNOT BE COMPARABLE AND HENCE CANNOT BE CONSIDERED AS A RIGHT COMPARABLE. 6. FOUNDATION BRAKE MANUFACTURING PVT. LTD.: THE COMPANY HAS BEEN SHOWING LOSSES CONTINUOUSLY FOR THE LAST T HREE YEARS AND DOESN'T CROSS THE PROPOSED FILTER, HENCE CANNOT CON SIDERED AS A RIGHT COMPARABLE. 21 ITA NO.584/DEL/2021 6.9 WE FIND THAT THE TRIBUNAL (SUPRA) INVOKING SAFE HA RBOUR RULES FOR INTERNATIONAL TRANSACTION (RULES 10TA TO 10G) HELD FUNCTIONAL DISSIMILARITY OF COMPARABLE COMPANIES. T HE TERM CORE AUTO COMPONENTS HAS BEEN DEFINED IN RULE 10TA(B) A S UNDER: DEFINITIONS. 10TA . FOR THE PURPOSES OF THIS RULE AND RULE 10TB TO RULE 10TG, (A) ... ( B ) 'CORE AUTO COMPONENTS' MEANS, ( I ) ENGINE AND ENGINE PARTS, INCLUDING PISTON AND PI STON RINGS, ENGINE VALVES AND PARTS COOLING SYSTEMS AND PARTS AND POWER TRAIN COMPONENTS; ( II ) TRANSMISSION AND STEERING PARTS, INCLUDING GEARS , WHEELS, STEERING SYSTEMS, AXLES AND CLUTCHES; ( III ) SUSPENSION AND BRAKING PARTS, INCLUDING BRAKE AN D BRAKE ASSEMBLIES, BRAKE LININGS, SHOCK ABSORBERS AN D LEAF SPRINGS; 6.10 FURTHER, NON-CORE COMPONENTS HAS BEEN DEFINED UN DER RULE 10TA(H) AS UNDER: DEFINITIONS. 10TA . FOR THE PURPOSES OF THIS RULE AND RULE 10TB TO RU LE 10TG, (A) (B) (C) (D) (E) (F) (G) (H) 'NON-CORE AUTO COMPONENTS' MEAN AUTO COMPONENTS OTHER THAN CORE AUTO COMPONENTS; 6.11 FURTHER, IN TABLE BELOW RULE 10TD(2), SAFE HARBO UR LIMIT OF OPERATING PROFIT MARGIN FOR CORE AUTO COMPONENTS AN D NON-CORE AUTO COMPONENT HAS BEEN LISTED AT SERIAL NO. 10, 11 AND 12% AND 22 ITA NO.584/DEL/2021 8.5% RESPECTIVELY. THUS, IT IS EVIDENT THAT THE CBD T HAS IDENTIFIED DIFFERENCE IN OPERATING PROFIT MARGIN OF THE COMPAN IES ENGAGED IN MANUFACTURING OF THE CORE COMPONENTS VIS--VIS NON- CORE COMPONENTS. IN SUCH CIRCUMSTANCES, IN PRINCIPLE, TH E COMPANIES ENGAGED IN MANUFACTURING OF CORE COMPONENTS CANNOT BE COMPARED ON FAR ANALYSIS WITH COMPANIES ENGAGED IN MANUFACTURING OF NON-CORE COMPONENTS. HOWEVER, ON P ERUSAL OF ORDER OF THE LOWER AUTHORITIES, WE FIND THAT FEW CO MPARABLE COMPANIES ARE ENGAGED IN MANUFACTURING OF CORE COMP ONENTS WHEREAS OTHER ARE ENGAGED IN MANUFACTURING OF NON-C ORE COMPONENTS. THE ASSESSEE ITSELF HAS SUBMITTED BEFOR E THE LEARNED DRP THAT THE COMPANY SETCO AUTOMOTIVE LTD IS ENGA GED IN PRODUCTION OF DRIVE TRANSMISSION AND STEERING PART S, WHICH IS ONE OF THE CORE COMPONENTS. THE LEARNED DRP HAS NOTED T HAT ASSESSEE IS ALSO ENGAGED IN MANUFACTURING OF POWER TRAIN COMPONENTS UNDER ENGINE PARTS. REGARDING JBM AUTO SYSTEMS PRIVATE LIMITED THE ASSESSEE HAS CLAIMED BEFORE T HE LEARNED DRP THAT IT WAS ENGAGED IN MANUFACTURING OF SHEET METAL COMPONENTS AND TOOLS AND DIES FOR AUTOMOBILES, WHICH FALLS IN THE NATURE OF NON-CORE COMPONENTS. THE LEARNED DRP HAS ACCEPTED AUTO IGNITION LTD AS FUNCTIONALLY COMPARABLE ON THE GRO UND THAT IT IS ENGAGED IN MANUFACTURING AND EXPORT OF HEAVY DUTY A UTO ELECTRIC COMPONENTS FOR COMMERCIAL VEHICLES, TRACTORS OFF-RO AD VEHICLES ETC. THE COMPANY RANE TRW STEERING SYSTEMS PRIVATE LIMITED HAS BEEN RETAINED BY THE LEARNED DRP ON THE GROUND THAT COMPANY IS ENGAGED IN MANUFACTURING OF SUSPENSION S YSTEMS, VALVE TRAIN COMPONENTS, VICTION METAL PRODUCTS, DIE-C ASTING PRODUCT ANY STEERING GEAR VALVE. THE COMPANY MINDA INDUSTRIES 23 ITA NO.584/DEL/2021 LTD. HAS BEEN OBSERVED AS ENGAGING MANUFACTURING O F SWITCHES, LIGHTNING, BATTERIES AND BLOW MOULDING PRODUCTS FOR TWO WHEELERS AS WELL AS FOUR WHEELERS. THE COMPANY INDIA NIPPON ELECTRICALS LTD. HAS BEEN RETAINED AS COMPARABLE ON THE GROUND THAT IT IS ENGAGED IN MANUFACTURING OF ELECTRONIC IGNITION SYS TEM FOR TWO WHEELERS, PORTABLE ENGINES FOR THREE WHEELERS, FLYW HEEL MAGNETO GENERATOR, CAPACITOR DISCHARGE IGNITION UNIT ETC. T HE COMPANY INDO SCHOTTLE AUTO PARTS PRIVATE LIMITED IS ENGAG ED IN MANUFACTURING OF COLLETS, MECHATRONIC, VALVES, FUEL SYSTEM, TURBOCHARGER ETC. THE COMPANY SAKTHI AUTO COMPONEN TS LTD. IS ENGAGED IN MANUFACTURING OF IRON CASTING. THE COMPA NY GAJRA GEARS PRIVATE LIMITED IS ENGAGED IN MANUFACTURING AUTOMOTIVE GEARS. THE COMPANY RACL GEARTECH LTD. MAINLY MANU FACTURE AUTOMOTIVE GEARS AND COMPONENTS. THE COMPANY HAS AL SO DIVERSIFIED IN THE FIELD OF INDUSTRIAL GEARS FOR EL ECTRICAL SWITCHGEARS AND CIRCUIT BREAKS, WINCHES AND CRANES ETC. 6.11 AS FAR AS ISSUE OF THE SELECTION OF COMPARABLES B Y LEARNED TPO IS CONCERNED, IN BACKGROUNDS OF ABOVE DISCUSSIO N, WE ARE OF THE OPINION THAT THE DECISION OF THE TRIBUNAL IN TH E CASE OF NISSIN BRAKE (SUPRA) WAS NOT AVAILABLE BEFORE THE LEARNED TPO AND THEREFORE HE COULD NOT EXAMINE THE COMPARABILITY ON THE BASIS OF FUNCTION OF MANUFACTURING OF CORE OR NON-CORE AUTO COMPONENTS. IN THE CIRCUMSTANCES, WE FEEL IT APPROPRIATE TO RES TORE THE ISSUE OF EXAMINING COMPARABILITY OF THE ASSESSEE WITH OTHER 10 COMPANIES TO THE FILE OF AO/TPO WITH THE DIRECTION TO EXAMINE PRODUCT MANUFACTURED BY COMPARABLE COMPANIES AND VERIFY WHE THER SAME FALLS UNDER CORE COMPONENT OR NON-CORE COMPONENT AN D THEREAFTER DECIDE THE COMPARABILITY ON VERIFICATION OF COMPONE NTS 24 ITA NO.584/DEL/2021 MANUFACTURED BY THE ASSESSEE. THE LEARNED AO/TPO MA Y ALSO EXAMINE OTHER OBJECTIONS OF THE ASSESSEE OF RESEARC H AND DEVELOPMENT ACTIVITIES CARRIED OUT BY THE COMPARABL E COMPANIES IN ACCORDANCE WITH LAW. 6.12 AS FAR AS ARGUMENTS OF LEARNED COUNSEL OF THE AS SESSEE ON THE ISSUE OF DENIAL OF CAPACITY UTILIZATION/EXCESS DEPRECIATION ADJUSTMENT IS CONCERNED, WE FIND THAT LEARNED DRP H AS OBSERVED AS UNDER: 3.2.5 IT IS ALSO ARGUED BY THE ASSESSES THAT DURIN G THE YEAR, THE ASSESSEE HAD IDLE CAPACITY DUE TO WHICH THE ENTIRE FIXED COSTS SUCH AS DEPRECIATION COULD NOT BE ABSORBED. IT IS STATED THAT DEPRECIATION COST OF THE ASSESSEE IS SIGNIFICANTLY HIGHER THAN C OMPARABLE COMPANIES WHO MAY HAVE UTILIZED THEIR CAPACITY IN A N EFFECTIVE MANNER LEADING TO EFFECTIVE UTILIZATION OF FIXED CO STS. ACCORDINGLY, IT STATED THAT THE PROFIT MARGINS OF THE COMPARABLE CO MPANIES NEEDED TO BE ADJUSTED ON ACCOUNT OF CAPACITY UTILIZATION. 3.2.5.1 THE PANEL HAS CONSIDERED THE SUBMISSION. IT IS NOTICED THAT THIS CLAIM HAS BEEN MADE BY THE ASSESSEE MEREL Y BY WAY OF AVERMENTS, WITHOUT PROVIDING EVIDENCE OF DECLINE IN SALES ON ACCOUNT OF ECONOMIC FACTORS WHICH FORCED ANY SUCH UNDERUTIL IZATION OF ITS INSTALLED CAPACITY. THERE IS ALSO NO EVIDENCE VIS-A -VIS THE COMPARABLES WHETHER SUCH FACTORS RESULTED IN ANY SU CH SIMULTANEOUS EFFECTS ON THE WORKING OF THE COMPARAB LES. THE TABULAR CHART WHICH HAS BEEN FILED IN THE SYNOPSIS BEFORE T HE PANEL IS MERELY BASED ON PRESUMPTION WITHOUT ANY PROOF OR DOCUMENTA RY EVIDENCE. IT IS NOT CLEAR AS TO HOW THE ASSESSEE HAS WORKED OUT THE TESTED PARTY MARGINS AFTER THE SO-CALLED CAPACITY ADJUSTMENTS IN THE ABSENCE OF RELEVANT DATA. THESE ADJUSTMENTS ARE NOT ROUTINE AN D CANNOT BE CLAIMED ON THE BASIS OF PRESUMPTIONS AND SURMISES. THE LAW IN THIS REGARD WAS EXPLAINED BY THE BANGALORE BENCH OF THE HON'BLE ITAT IN TAVANT TECHNOLOGIES INDIA (P) LTD V DCIT [2017] S3 TAXMANN.COM 105 (BANGALORE - TRIB.) IN THE FOLLOWING WORDS 7. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD, WE NOTE THAT THE ASSES SEE HAS CLAIMED THE ADJUSTMENT ON ACCOUNT OF UNDER-UTILISAT ION OF CAPACITY AND PARTICULARLY >N ACCOUNT OF COST OF EMP LOYEES AND COST OF RENTAL WHICH REMAINED UNUTILIZED. HOWEVER, THE ASSESSEE HAS NOT GIVEN THE PROPER DETAILS AS WELL A S EVIDENCES TO SHOW THE LEVEL OF CAPACITY OF UTILIZAT ION OF THE ASSESSEE AS WELL AS COMPARABLE COMPANIES. THE LEARN ED 25 ITA NO.584/DEL/2021 AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMI TTED THAT IT WAS NOT FEASIBLE FOR THE ASSESSEE TO GIVE ALL TH E DETAILS OF THE COMPARABLE COMPANIES REGARDING CAPACITY UTILIZA TION. WE DO NOT FIND ANY MERIT IN THE CLAIM OF THE ASSESSEE WHEN THE ASSESSEE FAILED TO PRODUCE THE RELEVANT DETAILS REG ARDING THE LEVEL OF CAPACITY UTILIZATION OF EACH AND EVERY COM PARABLE COMPANY IN COMPARISON TO THE ASSESSEES CAPACITY UT ILIZATION. THEREFORE IN THE ABSENCE OF NECESSARY DETAILS AND E VIDENCES, THIS GROUND OF THE ASSESSEE'S APPEAL IS REJECTED.' 3.2.5.2 THE PANEL, ACCORDINGLY, FINDS NO MERIT IN T HE CONTENTION OF THE ASSESSEE AND REJECTS THE SAME. 6.13 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE IN HIS SUBMISSION HAS SUBMITTED A CHART OF ADJUSTMENT ON A CCOUNT OF CAPACITY UTILIZATION ON THE BASIS OF THAT DEPRECIAT ION TO SALES RATIO. WE DIRECT THE LEARNED TPO TO EXAMINE THE CLAIM OF T HE ASSESSEE OF CAPACITY UTILIZATION IN VIEW OF THE DATA SUBMITTED BY THE ASSESSEE. AS FAR AS ISSUE OF INCORRECT COMPUTATION OF OPERATI NG MARGIN OF THE ASSESSEE IN VIEW OF CONSIDERING PROFIT ON SALE OF THE TOOLS AS NON-OPERATIVE AND DEPRECIATION OF ALL THOSE TOOLS A S OPERATIVE IS CONCERNED, THE LEARNED DRP HAS ADJUDICATED AS UNDER : 3.2.4 THE ASSESSEE HAS RAISED A CONTENTION THAT TH E TPO HAS EXCLUDED DEPRECIATION AND PROFIT ON THE SALE OF ITS ASSETS WHILE CALCULATING THE OPERATING PROFIT. IT IS STATED THAT THE ASSESSEE PURCHASED CERTAIN TOOLS EXCLUSIVELY FOR MARUTI, WHI CH WERE INCLUDED IN FIXED ASSETS FOR CALCULATION OF DEPRECIATION. TH ESE TOOLS WERE SOLD TO MARUTI BY THE END OF THE YEAR AT A PROFIT. THE P ROFIT AND DEPRECIATION ON SUCH SALE WAS REDUCED BY THE TPO WH ILE COMPUTING THE ASSESSEES PROFITABILITY DURING THE YEAR. 3.2.4.1 THE PANEL HAS CONSIDERED THE SUBMISSION. SI NCE THE PROFIT ON SALE OF ITS ASSETS DOES NOT PERTAIN TO THE REVENUE SIDE THE TPO HAS RIGHTLY EXCLUDED THE SAME. FURTHER, THERE IS NO QUE STION OF ALLOWING DEPRECIATION EITHER ON SUCH FIXED ASSETS AND THE TP O HAS TAKEN A CONSISTENT AND LEGALLY CORRECT VIEW. AS FAR AS DEPR ECIATION IS CONCERNED, THE MATTER IS COVERED AGAINST THE ASSESS EE BY THE 26 ITA NO.584/DEL/2021 JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN PCI T VS. KIRLOSKAR TOYOTA TEXTILE MACHINERY (P.) LTD. {2019} 106 TAXMN MANN.COM 309 (KARNATAKA). 6.14 SINCE SALE OF ASSET IS NOT PART OF REGULAR REVENUE OPERATION IN THE CASE OF THE ASSESSEE AND, THEREFORE, PROFIT GENERATED ON SAME CANNOT BE PART OF REVENUE OPERATION OF THE ASS ESSEE. IN OUR OPINION, THE LEARNED DRP HAS CORRECTLY HELD THE PRO FIT ON SALE OF A SET AS NON-OPERATIVE ITEM. AS FAR AS THE DEPRECIATI ON ON OPERATIVE EXPENSE IS CONCERNED, THE LEARNED DRP HAS HELD TO B E OPERATIVE IN VIEW OF ASSETS USED FOR THE PURPOSE OF THE BUSINESS , AND THUS DEPRECIATION IS PART OF EXPENDITURE CONNECTED WITH BUSINESS OPERATION OF THE ASSESSEE. THE DEPRECIATION IS ALSO JUSTIFIED AS OPERATING EXPENSE, BECAUSE PROFIT EARNED ON EMPLOYI NG THE TOOLS IN THE BUSINESS IS PART OF PROFIT EARNED ON MANUFAC TURING PROCESS WHICH IS PART OF OPERATING REVENUE. WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LEARNED DRP ON THE ISSUE AND ACCOR DINGLY, WE REJECT THIS CONTENTION OF THE ASSESSEE TO REFER THI S MATTER BACK TO THE LEARNED TPO. THE GROUNDS NO. 2.4 AND 2.8 OF THE APPEAL ARE ACCORDINGLY DISMISSED AND OTHER GROUNDS FROM 2.1 TO 2.10 EXCEPT GROUND NO. 2.4 AND 2.8 ARE ALLOWED FOR STATISTICAL PURPOSES. 7. THE GROUND NO. 3 TO 3.7 OF THE APPEAL RELATE TO DI SALLOWANCE MADE ON THE BASIS OF LOW NET PROFIT RATE OF THE ASS ESSEE DURING THE YEAR UNDER CONSIDERATION AS COMPARED TO PRECEDING Y EAR. 7.1 THE FACTS QUA THE ISSUE IN DISPUTE ARE THAT ASSESS ING OFFICER OBSERVED THAT IN THE YEAR UNDER CONSIDERATION, THER E IS A FALL IN NET PROFIT RATIO BY 2.18%, WHICH IS EQUIVALENT TO 11,03,93,150/-. THE ASSESSEE EXPLAINED THAT SAID FALL IN NET PROFIT RATE IS DUE TO INCREASE IN COST OF THE MATERIAL CONSUMED, INCREASE IN THE ENTRIES 27 ITA NO.584/DEL/2021 OF THE FINISHED GOODS AND WORK IN PROGRESS AND INCR EASE OF EMPLOYEES BENEFIT EXPENSES DUE TO REGULAR HIKE IN S ALARY OF THE EMPLOYEES. BUT ACCORDING TO THE ASSESSING OFFICER, NO CREDIBLE EVIDENCE OF ABOVE AVERMENTS WERE SUBMITTED BEFORE H IM AND THEREFORE HE MADE ADDITION OF 11,03,93,150/-. THE LEARNED DRP UPHELD THE DISALLOWANCE OBSERVING AS UNDER: 3.3.3 THE PANEL HAS CONSIDERED THE SUBMISSION. TH E GRIEVANCE OF THE AO IS THAT THERE WAS NO EVIDENCE FURNISHED IN R ESPECT OF INCREASED EXPENDITURE. THE AO HAS SPECIFICALLY RETU RNED A FINDING IN PARA 7.2 OF HIS ORDER THAT NO DETAILS IN RESPECT OF THE FOLLOWING EXPENSES WERE FURNISHED BY THE ASSESSEE: S. NO. FY 2015 - 16 FY 2014 - 15 I. CONSUMPTION OF STORES RS.1,55,98,131/- RS.11,88, 52,947/- II CONSUMABLES RS.13,55,43,387/- RS.11,88,52,947/- III REPAIR & MAINT. (BUILDING) RS.39,81,240/- - IV. RATES & TAXES RS.14,58,979/- RS.6,19,802/- V. SELLING & DISTRIBUTION RS.60,30,866/- RS.52,01,4 14/- VI. MISCELLANEOUS EXPENSES RS.61,82,707/- RS.51,91 ,306/- TOTAL RS.16,87,95,310/- 3.3.3.1 IN THAT VIEW OF THE MATTER, THE PANEL HOLDS THAT THERE IS NO EVIDENCE IN RESPECT OF EXPENDITURE OR OTHER REASONS TO JUSTIFY A DECLINE IN NP RATIO AND THE AO HAS RIGHTLY MADE AN ADDITION OF RS.11,03,93,150/- ON THAT ACCOUNT. ANY CLAIM OF EXP ENDITURE IS TO BE SUPPORTED BY NECESSARY EVIDENCE AS REQUIRED BY THE ASSESSING OFFICER IN THE ABSENCE OF WHICH MERE ENTRIES OF THE SE EXPENSES IN THE BOOKS OF ACCOUNT AND AUDITED BY A CHARTERED ACCOUNT ANT DO NOT OBVIATE TIRE REQUIREMENT OF FURNISHING SUPPORTING E VIDENCE IN RESPECT OF SUCH EXPENSES; OR CURTAIL, RESTRICT OR DELIMIT T HE POWER OF THE ASSESSING OFFICER TO CALL FOR SUPPORTING EVIDENCE A S BY DOING SO HE IS NOT GOING INTO THE QUESTION OF COMMERCIAL EXPEDIENC Y OF THE EXPENDITURE NOR IS HE EXAMINING WHETHER THE EXPENDI TURE IS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINES S IN TERMS OF SECTION 37. THE EVIDENCE OF EXPENDITURE IS REQUIRED TO ASSERT IN WHETHER THE EXPENDITURE HAS BEEN INCURRED AT ALL AN D IF YES, WHAT IS THE EXTENT OR QUANTUM OF THAT EXPENDITURE. THE QUES TION OF ITS BEING INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ARISES AT A STAGE SUBSEQUENT TO THAT. THAT STAGE HAS NOT READ IED IN THIS CASE. THE PANEL, THEREFORE, IS NOT INCLINED TO INTERFERE WITH THE ORDER OF THE 28 ITA NO.584/DEL/2021 AO, IN THE ABSENCE OF EVIDENCE IN SUPPORT OF EXPEND ITURE. THE OBJECTION STANDS REJECTED ACCORDINGLY. 7.2 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE REF ERRED TO PAGE 301 OF PAPER-BOOK, VOLUME 2 (SCHEDULE OF OTHER EXPENSES) AND SUBMITTED THAT THERE IS A LOSS ON FOREIGN CURRE NCY TRANSACTION OF 4,52,88,087/- WHICH IS MAIN REASON OF LOW NET PROF IT RATE IN THE YEAR UNDER CONSIDERATION AND THIS ASPECT HAS NO T BEEN EXAMINED PROPERLY BY THE LEARNED ASSESSING OFFICER. THE LEARNED COUNSEL RELIED ON THE DECISION OF THE HONBLE SUPRE ME COURT IN THE CASE OF PCIT VS RG BUILDWELL ENGINEERS, REPORTED IN (2018) 99 TAXMAN.COM 284(SC) AND SUBMITTED THAT NO AD-HOC DISALLOWANCE IS PERMITTED. 7.3 ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT T HE ASSESSEE FAILED TO SUBSTANTIATE ITS AVERMENTS WITH CREDIBLE EVIDENCES AND, THEREFORE, LOWER AUTHORITIES ARE JUS TIFIED IN MAKING ADDITION FOR LOW NET PROFIT RATE. HE FURTHER SUBMIT TED THAT THE ASSESSEE HAS COME UP WITH A NEW REASON FOR LOW NET PROFIT, WHICH NEEDS TO BE EXAMINED BY THE ASSESSING OFFICER. 7.4 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON T HE ISSUE IN DISPUTE. THE LOWER AUTHORITIES HAVE SUSTAINED TH E ADDITION MAINLY DUE TO NON-FURNISHING OF DOCUMENTARY EVIDENC E IN SUPPORT OF CLAIM OF INCREASE IN COST OF MATERIAL AND EMPLOY EES BENEFIT. BUT BEFORE US, THE ASSESSEE HAS SUBMITTED ONE NEW REASO N OF THE LOWER NOT NET PROFIT RATE AS LOSS ON ACCOUNT OF FOR EIGN CURRENCY TRANSACTION, WHICH WAS NOT INCURRED IN IMMEDIATELY PRECEDING ASSESSMENT YEAR. BOTH THE PARTIES AGREED THAT ISSUE NEED TO BE EXAMINED BY THE ASSESSING OFFICER, ACCORDINGLY, WE SET ASIDE THE FINDING OF THE LOWER AUTHORITIES AND RESTORE THE IS SUE TO THE FILE OF 29 ITA NO.584/DEL/2021 THE LEARNED ASSESSING OFFICER FOR EXAMINATION AND V ERIFICATION OF CONTENTIONS RAISED BY THE ASSESSEE OF FOREIGN CURRE NCY TRANSACTION LOSS DURING THE YEAR UNDER CONSIDERATION. THE GROUN DS OF THE APPEAL ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURP OSES. 8. THE GROUND NO. 4 TO 4.2 OF THE APPEAL RELATES TO N ON- PAYMENT OF EXCISE DUTY LIABILITY. 8.1 THE ASSESSING OFFICER DISALLOWED THE CLAIM OF PAYM ENT OF THE EXCISE DUTY OF 33,92,861/- IN VIEW OF THE COMMENT OF THE AUDITOR IN TAX AUDIT REPORT THAT IT WAS NOT POSSIBLE FOR HI M TO GIVE THE DATE OF PAYMENT OF EXCISE DUTY. THE LEARNED DRP UPHELD T HE DISALLOWANCE OBSERVING AS UNDER: 3.2.7.1 THE ASSESSEE SUBMITS THAT THE BALANCE OF E XCISE DUTY UNPAID AS AT THE END OF THE PREVIOUS YEAR AMOUNTING TO INR 33,92,861/- WAS PAID SUBSEQUENT TO THE YEAR-END TH ROUGH THE CREDIT OF CENVAT AND NO AMOUNT WAS PAID IN CASH. TH E ADJUSTMENTS WERE MADE ON DIFFERENT DATES SUBSEQUENT TO THE YEAR -END BUT BEFORE THE DUE DATE OF FILING OF THE TAX RETURN UNDER SECT ION 139 OF THE ACT AND ACCORDINGLY A PARTICULAR DATE OF PAYMENT COULD NOT BE ASCERTAINED REFERENCE SHOULD ALSO BE MADE TO THE TA X AUDIT REPORT WHEREIN THE TAX AUDITOR HAS REPORTED NIL OUTSTANDIN G BALANCE BUT HAS NOT PROVIDED ANY CERTAIN DATE OF PAYMENT. IT IS FURTHER STATED THAT AS PER SECTION 43B OF THE ACT, ANY TAX DUTY, C ESS OR FEE, BY WHATEVER NAME CALLED, UNDER ANY AW FOR THE TIME BEI NG IN FORCE, IS ALLOWABLE AS DEDUCTION IF THE SAME IS 'ACTUALLY PAI D' ON OR BEFORE THE DUE DATE AS SPECIFIED IN SECTION 139 OF THE ACT. AC CORDINGLY, ANY TAX WHICH IS ACTUALLY PAID ON/BEFORE THE DUE DATE OF FU RNISHING THE TAX RETURN AS SPECIFIED U/S 139 OF THE ACT SHALL BE ALL OWABLE AS DEDUCTION. FURTHER AS PER THE PROVISIONS OF EXCISE LAWS, THE LIABILITY OF EXCISE DUTY MAY BE DISCHARGED BY PAYMENT IN CASH WELL AS THROUGH ADJUSTMENTS FROM THE INPUT CREDITS AVAILABL E AND PERMISSIBLE UNDER LAW. THE TERM 'ACTUAL PAYMENT' SH ALL ALSO INCLUDE THE ADJUSTMENT OF EX.ISE DUTY FROM THE INPUT CREDIT BALANCES AVAILABLE. RELIANCE IS PLACED ON EICHIER MOTORS LTD . V UNION OF INDIA [1999] 106 ELT 3 (SC) AND ITAT DELHI BENCH DECISION IN THE CASE OF CIT V KAISER INDUSTRIES LTD. ACCORDINGLY, IT IS SUB MITTED THAT THE AO BE DIRECTED TO CONSIDER THE AMOUNT OF EXCISE DUTY A S PAID AND DELETE THE DISALLOWANCE AS STATED IN PARA 6.1 & 6.2 OF THE DRAFT ASSESSMENT ORDER. 30 ITA NO.584/DEL/2021 3.2.7.2 THE PANEL HAS CONSIDERED THE SUBMISSION IN THE CASE, THERE IS NO EVIDENCE OF PAYMENT OF EXCISE DUTY OR ANY EVI DENCE OF CREDIT OF CENVAT AND RELATED RECONCILIATION IN THIS REGARD TH E SUPREME COURT DECISION IN ETCHER MOTORS LTD, FOLLOWED IN KAISER I NDUSTRIES LTD BY THE ITAT, MERELY SAYS THAT SETTING OF MODVET CREDIT IS AS GOOD AS DUTY PAID. HOWEVER, IT DOES NOT REMOVE THE REQUIREM ENT OF GIVING EVIDENCE IN RESPECT O; SUCH CREDIT AND REQUISITE RE CONCILIATION TO DRAW AN INFERENCE OF ACTUAL SETTING OF THE CREDIT TOWARD S THE PAYMENT OF EXCISE DUTY. ACCORDINGLY IN THE ABSENCE OF EVIDENCE IN THIS REGARD, THE PANEL IS NOT INCLINED ACCEPT THE OBJECTION OF T HE ASSESSEE OR INTERFERE WITH THE ACTION OF THE AO. THE OBJECTION IS, ACCORDINGLY, REJECTED. 8.2 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE REF ERRED TO PAGE 83 OF THE PAPER-BOOK AND SUBMITTED A RECONCILI ATION OF CENVAT CREDIT TAKEN AND UTILIZED. THE LEARNED COUNS EL OF THE ASSESSEE SUBMITTED THAT ISSUE MAY BE RESTORED TO TH E FILE OF THE ASSESSING OFFICER FOR DECIDING IN THE LIGHT OF DECI SION OF THE HONBLE SUPREME COURT IN THE CASE OF EICHERS MOTORS LTD (SUPRA), WHEREIN IT IS HELD THAT PAYMENT OF EXCISE DUTY BY WAY OF ADJUSTMENT AGAINST MODVAT/CANVAT CREDIT IS VALID. O N THE CONTRARY, THE LEARNED DR DID NOT OBJECT FOR RESTORI NG THE ISSUE FOR VERIFICATION TO THE FILE OF THE ASSESSING OFFICER O F THE RECONCILIATION OF CENVAT CREDIT TAKEN AND UTILISED BY THE ASSESSEE . 8.3 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON T HE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. THE ISSUE IN DISPUTE REGARDING PAYMENT OF EXCISE DUTY AROSE D UE TO ABSENCE OF EVIDENCE ON RECORD OF THE LOWER AUTHORITIES. NOW , BEFORE US, THE ASSESSEE HAS SUBMITTED THAT ACTUAL PAYMENT OF EXCIS E LIABILITY UNDER SECTION 43B OF THE ACT ALSO INCLUDE ADJUSTMEN T OF EXCISE DUTY FROM THE INPUT CREDIT BALANCE AVAILABLE. THE L EARNED COUNSEL SUBMITTED THAT SUCH ADJUSTMENT WAS MADE BEFORE THE DUE DATE OF 31 ITA NO.584/DEL/2021 FILING OF RETURN UNDER SECTION 139(1) OF THE ACT AN D, THEREFORE, ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 43B OF THE ACT. THE ASSESSEE HAS SUBMITTED A RECONCILIATION CHART O F CENVAT CREDIT TAKEN AND UTILIZED TO SUPPORT THAT EXCISE DU TY WAS PAID IN TERMS OF PROVISION OF SECTION 43B OF THE ACT AND CL AIMED THAT DEDUCTION IS JUSTIFIED. IN VIEW OF THE FACTS AND CI RCUMSTANCES OF THE CASE AND INTEREST OF SUBSTANTIAL JUSTICE, WE RE STORE THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR DECID ING AFRESH AFTER VERIFICATION OF RECONCILIATION CHART OF CENVAT CRED IT TAKEN AND UTILIZED ALONG WITH SUPPORTING DOCUMENTARY EVIDENCE IN THE LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF EICHERS MOTORS LTD (SUPRA). THE GROUNDS OF THE APPE AL OF THE ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PU RPOSES. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH SEPTEMBER, 2021 SD/- SD/- (AMIT SHUKLA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 24 TH SEPTEMBER, 2021. RK/- (DTDC) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI