M/s. Hyundai Construction Equipment India P. Ltd., Pune V. Assistant Commissioner of Income-tax, Pune

ITA 584/PUN/2016

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 3901 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 04-05-2021
• Assessment Year: 2011-2012
• Appeal Filed On: 31-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: AND OTHER
• Keywords: Depreciation; Transfer pricing; Rectification of order; International transaction; Question of law; Bad and doubtful debts; Set aside
• Section: 143(3); 201; 72; 13; 22; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C , PUNE VIRTUAL COURT BEFORE SH RI R.S. SYAL, VICE PRESIDENT AND SH RI S .S. VISWANETHRA RAVI , J UDICIAL MEMBER I TA NO. 537 /PUN/20 1 6 / ASSESSMENT YEAR : 20 1 1 - 1 2 ACIT, CIRCLE 9, PUNE VS. M/S . HYUNDAI CONSTRUCTION EQUIPMENT INDIA PRIVATE LIMITED PLOT NO.A - 2, CHAKAN MIDC, PHASE - II, CHAKAN - TALEGAON ROAD, VILLAGE - KHALUMBRE, TAL - KHED, PUNE 410501 PAN: AABCH8756Q APPELLANT RESPONDENT ITA NO. 584 /PUN/20 16 / ASSESSMENT YEAR : 20 11 - 12 M/S. HYUNDAI CONSTRUCTION EQUIPMENT INDIA PRIVATE LIMITED PLOT NO.A - 2, CHAKAN MIDC, PHASE - II, CHAKAN - TALEGAON ROAD, VILLAGE - KHALUMBRE, TAL - KHED, PUNE 410501 PA N: AABCH8756Q VS. ACIT, CIRCLE 9, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THESE C ROSS APPEAL S - ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE - ARE DIRECTED AGAINST THE FINAL A SSESSMENT A SSESSEE BY S HRI M.P. L OHIA RE VENUE BY S HRI AVADESH KUMAR DATE OF HEARING 0 3 - 0 6 - 202 1 DATE OF PRONOUNCEMENT 04 - 0 6 - 202 1 ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 2 O RDER DATED 2 9. 01 .201 6 PASSED BY THE ASSESSING OFFICER (AO) U/S. 143(3) READ WITH SECTION 144C(13) OF THE I NCOME - TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 201 1 - 1 2 . 2 . THE ASSESSEE HAS RAISED TWO ADDITIONAL GROUNDS, WHICH READ AS UNDER: GROUND OF APPEAL 8 FOLLOWING INCORRECT METHODOLOGY FOR COMPUTING CAPACITY UTILIZAT ION ADJUSTMENT THE LEARNED AO ERRED IN GRANTING CAPACITY UTILIZATION ADJUSTMENT BY CONSIDERING ONLY DEPRECIATION AS FIXED COST INSTEAD OF FOLLOWING THE METHODOLOGY PRESCRIBED IN HONBLE MUMBAI ITATS RULING IN CASE OF PETRO ARALDITE PRIVATE LIMITED [(2014 ) 160 TTJ 319 (MUMBAI TRIB)] WHICH IS AFFIRMED BY HONBLE BOMBAY HIGH COURT AND WHICH IS FURTHER CONSIDERED IN APPELLANTS OWN CASE FOR AY 2009 - 10 AND AY 2010 - 11. GROUND OF APPEAL 9 RECOMPUTATION OF LOSSES TO BE CARRIED FORWARD IN CASE RESULTANT TRANSF ER PRICING ADJUSTMENT IS LESS THAN VOLUNTARY ADJUSTMENT OFFERED IN TURN OF INCOME THE APPELLANT REQUESTS YOUR HONORS TO DIRECT THE LEARNED AO/TPO TO RECOMPUTED LOSSES TO BE CARRIED FORWARD IN CASE RESULTANT TRANSFER PRICING ADJUSTMENT AFTER ADJUDICATION O F ALL OTHER GROUNDS OF APPEAL IS LESS THAN VOLUNTARY TRANSFER PRICING ADJUSTMENT OFFERED IN RETURN OF INCOME. 3 . THE HONBLE SUPREME COURT IN NATIONAL THERMAL POWER COMPANY LTD. VS. CIT (1998) 229 ITR 383 (SC) HAS OBSERVED THAT T HE PURPOSE OF THE ASSESSM ENT PROCEEDINGS BEFORE THE ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 3 TAXING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON - TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUCTION IS DENIED, WE DO NOT SEE ANY REASON WHY THE ASSESSEE SHOULD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESPECT OF THAT ITE M . ANSWERING THE QUESTION POSED BEFORE IT IN AFFIRMATIVE, THEIR LORDSHIPS HELD THAT ON THE FACTS FOUND BY THE AUTHORITIES BELOW, IF A QUESTION OF LAW ARISES (THOUGH NOT RAISED BEFORE THE AUTHORITIES) WHICH HAS BEARING ON THE TAX LIABILITY OF THE ASSESSE E , THE TRIBUNAL HAS J URISDICTION TO EXAMINE THE SAME. HAVING GONE THROUGH THE SUBJECT MATTER OF THE ADDITIONAL GROUND S TAKEN BY THE ASSESSEE, IT IS APPARENT THAT THE SAME RAISES A PURE QUESTION OF LAW. WE, THEREFORE, ADMIT THE SAME AND WILL TAKE UP FOR A DJUDICATION AT THE APPROPRIATE STAGE. 4 . T HE L D. AR DID NOT PRESS GROUND NOS.1, 2, 4 AND 5 TAKEN IN THE MEMORANDUM OF APPEAL . OUT OF THE THREE ASSAILED COMPARABLES MENTIONED IN THE GROUND NO.3, THE L D. AR PRESSED ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 4 ONLY TWO COMPARABLES, NAMELY, BEML AND JCB INDIA. THE GROUNDS ARE , THEREFORE, DISMISSED AS NOT PRESSED . 5 . THE ISSUE RAISED THROUGH GROUND NO.3 OF THE ASSESSEES APPEAL IS IN THE REALM OF TRANSFER PRICING ADJUSTMENT IN THE MANUFACTURING SEGMENT OF THE ASSESSEE. SUCCINCTLY, THE FACT UAL MATRIX OF T HE CASE IS THAT THE ASSESSEE HAS BEEN ENGAGED IN THE MANUFACTURE AND DISTRIBUTION OF HEAVY EARTHMOVING EQUIPMENTS AND PARTS. RETURN WAS FILED DECLARING TOTAL INCOME AT N IL. THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM'S LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTIONS. IN THE INSTANT APPEAL , WE ARE CONCERNED WITH THE INTERNATIONAL TRANSACTIONS UNDER THE MANUFACTURING SEGMENT CO NSISTING OF I MPORT OF RAW MATERIALS /COMPONENTS AT RS.2,13,83,58,162; PAYMENT FOR TECHNOLOGY /KNOW - HOW AT RS.46,81,000; AND PAYMENT FOR TECHNICAL FEES /ROYALTY AT RS.3,35,91,074. THE ASSESSEE APPLIED THE TRANSACTIONAL NET MARGINAL METHOD (TNMM) AS THE MOST APPROPRIATE ME THOD FOR DEMONSTRATING THE ABOVE THREE INTERNATIONAL TRANSACTION S , UNDER THE OVERALL MANUFACTURING ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 5 ACTIVITY , TO BE AT ALP . THE ASSESSEE COMPUTED ITS OWN PROFIT LEVEL INDICATOR (PLI) OF OP/ REVENUE AT 0.5176% AND THE AVERAGE ADJUSTED PLI OF THE COMPARABLES AT 2.48%. THE DIFFEREN CE BETWEEN 2.48% AND 0.5176% WAS VOLUNTARILY OFFERED AS TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.7,93,92,988. THE TPO COMPUTED THE ASSESSEES PLI UNDER THE MANUFACTURING SEGMENT AT 0.221 2 % AS AGAINST THE AVERAGE PLI OF FINAL FOUR COMPARABLES AT 8.302 7 %. THE AMOUNT OF ADJUSTMENT WAS WORKED OUT AT RS.34 ,5 5 , 0 9 ,967. SINCE THE ASSESSEE HAD ALREADY OFFERED A SUM OF RS.7.93 CRORE AS SUO MOTU TRANSFER PRICING ADJUSTMENT, THE TPO PROPOSED FURTHER ADJUSTMENT OF RS.26,61,16,979. THE ASSES SEE ASSAILED THE DRAFT ORDER INCORPORATING THE ABOVE ADJUSTMENT BEFORE THE DISPUTE RESOLUTION PANEL (DRP). AFTER GIVING EFFECT TO DIRECTIONS GIVEN BY THE DRP, THE AO MADE AN ADDITION OF RS.9,12,61,487 IN THE FINAL ASSESSMENT ORDER, AGAINST WHICH THE ASSESS EE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 6. THE ASSESSEE SEEKS EXCLUSION OF TWO COMPA NIES FROM THE LIST OF COMPA RABLES DRAWN BY THE TPO, NAMELY , BHARAT EARTH MOVERS LIMITED AND JCB INDIA LIMITED . THE OTHER ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 6 COMPARABLE, NAMELY, TELCO , APART FROM TH E ONE COMPARABLE CHOSEN BY THE ASSESSEE , NAMEL Y , ACTION CONSTRUCTION EQUIPMENT LIMITED , IS NOT IN DISPUTE . WE WILL D EAL WITH THE TWO COMPARABLES CHALLENGED BEFORE THE TRIBUNAL AD SERIATIM . I. BHARAT EARTH MOVERS LIMITED 7. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. THE ASSESSEE OBJECTED TO ITS INCLUSION ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFERENT AND FURTHER IT WAS A GOVERNMENT COMPANY WITH FIXED CUSTOMER BASE. FOLLOWING HIS ORDER FOR THE A.Y. 2010 - 11 , THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. NO REPRIEVE WAS ALLOWED BY THE DISPUTE RESOLUTION PANEL (DRP) . T HE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL. 8 . AFTER CONSIDERING THE RIVAL SUBMISSIONS THROUGH VIRTUAL COURT AND THE RELEVANT MATERIAL ON RECORD, IT IS FOUND A S AN ADMITTED POSITION THAT BEML IS A GOVERNMENT COMPANY. T HE MUMBAI BENCH OF THE TRIBUNAL IN THYSSENKRUPP INDUSTRIES INDIA PRIVATE LIMITED VS. ADDL. CIT (ITA NO.6460/MUM/2012), VIDE ITS ORDER DATED 27.02.2013 EXCLUDED ENGINEERS INDIA LTD ., INTER ALIA , ON T HE GROUND THAT IT WA S A GOVERNMENT COMPANY ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 7 AND PROFIT MOTIVE CAN NEVER BE A RELEVANT CONSIDERATION IN THE GOVERNMENT UNDERTAKINGS. THIS ORDER PASSED BY THE TRIBUNAL WAS ASSAILED BY THE REVENUE BEFORE THE HON'BLE BOMBAY HIGH COURT. VIDE ITS JUDGMENT DATED 28.03.2016, THE HON'BLE BOMBAY HIGH COURT HAS REFUSED TO ADMIT THE QUESTIONS OF LAW ON THIS ASPECT OF THE MATTER. FURTHER, THE DELHI BENCH OF THE TRIBUNAL IN INTERNATIONAL SOS SERVICES INDIA P. LTD. VS. DCIT (ITA NO.1631/DEL/2014) VIDE ITS ORDER DATED 08. 12.2015, FOLLOWED THE DECISION OF THE MUMBAI BENCH OF THE THYSSEN KRUPP INDUSTRIES INDIA PRIVATE LIMITED VS. ADDL. CIT (SUPRA) AND ORDERED TO EXCLUDE APITCO LTD. ON THE GROUND OF IT BEING A GOVERNMENT COMPANY. THE REVENUE PREFERRED APPEAL AGAINST TH E ORD ER. THE HON'BLE DELHI HIGH COURT, VIDE ITS JUDGMENT DATED 30.05.2017, REFUSED TO ADMIT ANY QUESTION OF LAW ARISING FROM THIS ASPECT OF THE MATTER. STILL FURTHER, THE MUMBAI BENCH OF THE TRIBUNAL IN ANOTHER DECISION IN SHELL INDIA MARKETS PVT. LTD. VS. ACI T (ITA NO.193/MUM/2013), VIDE ITS ORDER DATED 10.12.2014, ORDERED TO EXCLUDE RITES LTD. AND WAPCOS LTD. (SEG) ON THE SAME REASONING THAT THESE WE RE GOVERNMENT UNDERTAKINGS. THE ABOVE DISCUSSION BOILS DOWN ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 8 THAT A GOVERNMENT UNDERTAKING CANNOT BE CONSIDERED AS COMPARABLE. 9 . IT IS STILL FURTHER OBSERVED THAT THE TPO WENT ON TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLES BY FOLLOWING HIS VIEW CANVASSED FOR THE A.Y. 2010 - 11. THE ASSESSEE AGITATED SUCH ORDER OF THE EARLIER YEAR BEFORE THE TRIBUNAL. VIDE ORDER DATED 11.06.2019, THE TRIBUNAL IN ITA NO.565/PUN/2015 AND 644/PUN/2015 UPHELD THE EXCLUSION OF BEML , BEING A GOVERNMENT COMPANY , FROM THE LIST OF COMPARABLES. A COPY OF SUCH ORDER HAS BEEN PLACED AT PAGE 310 ONWARDS OF PAPER BOOK. IN VIEW OF THE AB OVE POSITION, WE HOLD THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN INCLUDING BEML IN THE LIST OF COMPARABLES. WE, THEREFORE, DIRECT TO EXCLUDE IT FROM THE FINAL TALLY OF COMPARABLES. II. JCB INDIA LIMITED 10. THE TPO PROPOSED TO INCLUDE THIS COMPANY I N THE LIST OF COMPARABLES. THE ASSESSEE OBJECTED TO ITS INCLUSION BY URGING THAT THE FINANCIAL DATA OF JCB INDIA LIMITED FOR THE RELEVANT YEAR WAS NOT AVAILABLE AT THE TIME OF MAKING THE T RANSFER PRICING REPORT AND FURTHER THAT THIS COMPANY WAS ALSO INVOL VED ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 9 IN RENDERING D ESIGN SERVICES. THE TPO OBSERVED THAT THE ASSESSEE ITSELF INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. SINCE THE FINANCIAL DATA OF THIS COMPANY FOR THE RELEVANT YEAR WAS AVAILABLE AT TH E TIME OF FINALIZING THE TRANSFER PRICING PROCEEDINGS, HE INCLUDED IT IN THE SCHEDULE O F COMPARABLES. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP , WHICH HAS BROUGHT IT BEFORE THE TRIBUNAL. 11 . HAVING HEARD RIVAL SUBMISSIONS AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD, IT IS SEEN THAT ONE OF THE REASONS TAKEN UP BY THE ASSESSEE TO AVOID THE INCLUSION OF JCB INDIA LTD. WAS THE NON - AVAILABILITY OF ITS DATA FOR THE YEAR UNDER CONSIDERATION AT THE TIME OF PREPARING TRANSFER PRICING STUDY REPORT. SUCH DATA BECAME AVAILABLE AT THE TIME OF THE TRANSFER PRICING PROCEEDINGS AND THE TPO HAS TAKEN COGNIZANCE OF THE SAME FOR THE PURPOSES OF INCLUSI ON. THUS, THE OBJECTION DOES NOT SURVIVE ANY MORE. 1 2. THE ASSESSEE ALSO ARGUED FOR T HE EXCLUSION OF JCB INDI A LTD. ON THE GROUND OF AN EXTRAORDINARY FINANCIAL EVENT OF AMALGAMATION TAKING PLACE DURING THE YEAR . WE HAVE SCANNED ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 10 THROUGH THE ANNUAL REPORT OF TH E COMPANY . T HE FA CTUM OF AMALGAMATION OF JCB MANUFACTURERS LIMITED WITH THE JCB INDIA LIMITED HAS BEEN TAK EN NOTE AT PAGE 42 OF ANNUAL REPORT UNDER POINT NO.11, MENTIONING THAT JCB MANUFACTURING LIMITED AMALGAMATED WITH JCB INDIA LIMITED UNDER THE S CHEME BECOMING EFFECTIVE JUNE 23, 2010 (THE EFFECTIVE DATE) OPERATI VE RETROSPECTIVELY FROM APRIL 1, 2009 , THE APP OINTED DATE AS PER THE S CHEME. IT IS FURTHER MENTIONED IN THE REPORT THAT : A CCORDINGLY, ALL THE ASSETS, LIABILITIES AND RESERVES OF THE TRANSFEROR COMPANY AS ON APRIL 1, 2009 WERE RECORDED BY THE COMPANY AT THEIR RESPECTIVE AMOUNTS. FROM THE ABOVE NAR RATION OF THE FACTUAL PANORAMA ABOUT THE AMALGAMATION OF JCB MANUFACTURER LIMITED WITH JCB INDIA LIMITED, IT IS CRYSTAL CLEAR THAT THOUGH THE S CHEME OF AMALGAMATION BECAME EFFECTIVE FROM 23.06.2010 , BUT IT OPERAT ED RETROSPECTIVELY FROM 1.4.2009 WHEN ALL TH E ASSETS , LIABILITIES AND RESERVES ETC. OF TRANSFERORS COMPANY WERE TRANSFERRED TO THE BOOKS OF ACCOUNTS OF JCB INDIA LIMITED ON 01.04.2009. THUS, T HE DATE OF THE AMALGAMATION AND TRANSFER OF ASSETS AND LIABILITIES OF JCB MANUFACTURERS LIMITED WITH JCB I NDIA LIMITED , BEING , ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 11 1.4.2009 FALLS IN PREVIOUS YEAR RELEVANT TO THE A.Y. 2010 - 11. AS AGAINST THAT, WE ARE INSTANTLY DEALING WITH THE A.Y. 2011 - 12 . WHEN THESE FACTS WERE CONFRONTED, THE L D. AR FAIRLY CONCEDED THE POINT. AS THE EXTRAORDINARY FINANCIAL EVEN T OF AMALGAMATION HAPPENED IN THE PRECEDING YEAR AND GOT RECORDED IN THE BOOKS OF ACCOUNTS IN SUCH PRECEDING YEAR ITSELF , THE COMPANY C ANNOT BE REMOVED FROM THE LIST OF COMPARABLES FOR THE CURRENT YEAR ON THIS SOLE REASON, IF IT IS OTHERWISE FUNCTIONALLY S IMILAR. 13 . THE NEXT CONTENTION OF THE L D. AR WA S ABOUT THE FUNCTIONAL DISSIMILARITY OF JCB INDIA LIMITED. HE SUBMITTED THAT THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS UNDER THE M ANUFACTURING SEGMENT AND ALSO THE TRADING SEGMENT . BOTH THE SEGMENTS WERE SEPARATELY BENCHMARKED BY THE ASSESSEE AND THE TPO DID NOT DISPUTE THE CORRECTNESS OF THE ALP DETERMINATION OF THE T RADING SEGMENT. THE LD. AR SU BMITTED THAT JCB INDIA LIMITED W A S ENGAGED IN M ANUFACTURING , TRADING AND DESIGN SERVICE S AND THE ACCOUNTS WERE MAINTAINED ON A COMBINED BASIS AND , AS SUCH , THE TPO WENT WRONG IN ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 12 CONSIDERING JCB INDIA LTD. AS COMPARABLE ON ENTITY LEVEL WITH THE LONE MANUFACTURING SEGMENT OF THE ASSESSEE. 14 . A FEEBLE ATTEMPT WAS ALSO MADE TO CANVASS THAT EVEN THE PRODUCTS UNDER T HE MANUFACTURING ACTIVITY OF JCB INDIA LTD. WERE DIFFERENT FROM THAT OF THE ASSESSEE. IT WAS STATED THAT THE BALLABGARH UNIT OF JCB WAS INVOLVED IN MANUFACTURING BACKHOE LOADER S , WHEREAS THE PUNE UNIT WAS INTO MANUFACTURING EXCAVATORS. THE LD. AR SUBMITTED THAT THE ASSESSEE WAS ENGAGED ONLY IN THE MANUFACTURE OF EXCAVATORS. WHEN ASKED TO STATE THE FUNCTIONAL DIFFERENCE S BETWEEN BACKHOE LOADERS AND EXCAVATORS, THE LD. AR FAILED TO POINT OUT ANY. IT IS COMMON KNOWLEDGE THAT B ACKHOE LOADER IS A SPECIES OF THE OVERALL GENUS OF EXCAVATORS THOUGH RELATIVELY LOWER - PRICED. B ACKHOE LOADERS AND EXCAVATORS ARE BROADLY SIMILAR PRODUCTS . U NLIKE THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP) WHERE PRODUCT SIMILARITY IS A SINE QUA NON , THE TNMM RECOGNIZES BROADER SIMILARIT Y OF THE PRODUCTS/SERVICES IN INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. THUS, WE JETTISON THIS CONTENTION ADVANCED ON BEHALF OF THE ASSESSEE. ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 13 15. NOW WE ESPOUSE THE NEXT ARGUMENT OF THE LD. AR ABOUT JCB INDIA LTD. HAVING BO TH MANUFACTURING AND TRADING ACTIVITIES IN A COM BINED MANNER, THEREBY RENDERING IT FUNCTIONALLY DIFFERENT FROM THE ASSESSEE INVOLVED ONLY IN THE MANUFACTURING ACTIVITY UNDER THIS SEGMENT. WE HAVE GONE THROUGH THE A NNUA L REPORT OF JCB INDIA LIMITED. NOTE NO .13 GIVES PARTICULARS OF OPENING STOCK, P URCHASES, S ALES AND C LOSING STOCK FOR EACH CLASS OF GOODS DEALT WITH BY THE COMPANY. SALE OF THE M ANUFACTUR ED PRODUCTS IS RS.4272.90 CRORE (QUANTITY 23200) AND THAT OF THE T RADING PRODUCTS IS RS.7.56 CRORE (QUANTITY 58). I T IS CLEAR FROM THESE FIGURES THAT THE T RADING SALE OF JCB INDIA LTD. IS ONLY 0.17% OF THE M ANUFACTURING SALE . THE LD. AR SUBMITTED THAT TH E COMPANY WAS ALSO RENDERING D ESIGN SERVICES AND THE AMOUNT OF SUCH SERVICE CHARGES IS RS.7.90 CRORES. THUS S E R VICE CHARGES CONSTITUTE 0.18% OF THE MANUFACTURING SALE. B OTH THE TRADING SALE AND SERVICE CHARGES ACCOUNT FOR JUST 0.35% OF THE M ANUFACTURING SALE . 16 . ORDINARILY, A MANUFACTURING SALE CANNOT BE COMPARED EITHER WITH TRADING SALE ALONE OR A COMBINAT ION OF TRADING AND ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 14 MANUFACTURING SALES . THIS RULE HOLDS TRUE WHEN THERE IS A REGULAR AND CONSIDERABLE TRADING ACTIVITY. IT CAN BE SEEN THAT T HE ASSESSEES OWN M ANUFACTURING TURNOVER FOR THE YEAR IS RS.404.49 CRORE AS AGAINST THE T RADING TURNOVER OF RS.142. 21 CRORES . TRADING SALES ARE MORE THAN 1/3 RD OF THE M ANUFACTURING SALES. SINCE TRADING AC TIVITY IS REGULARLY PURSUED BY THE ASSESSEE AND FORMS A REASONABLY GOOD PERCENTAGE OF THE MANUFACTURING ACTIVITY, THE ASSESSEE, ON ENTITY LEVEL, C OULD NOT HAVE BEEN TR EATED A S A COMPARABLE TO ANOTHER LONE MANUFACTURING COMPANY . PER CONTRA, I F TRADING ACTIVITY OF A COMPANY FORMS A MINIMAL AND INCONSIDERABLE PORTION WITH THE OVERWHELMING FUNCTIONALLY SIMILAR MANUFACTURING ACTIVITY, THEN SUCH A COMPANY CANNOT BE RULED OUT FOR A COMPARISON WITH A COMPANY ENGAGED ONLY IN MANUFACTURING ACTIVITY. 17. AT THIS JUNCTURE, WE CONSIDER IT APT TO QUOTE RULE 10B(3) OF INCOME - T AX RULES, 1962 (HEREINAFTER REFERRED TO AS THE RULES) AS UNDER: - RULE 10B(1).... ........ (3) AN UNCO NTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION IF ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 15 ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKEL Y TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES . 18 . ON GOING THROUGH THE PRESCRIPTION OF THE ABOVE RULE, IT TRANSPIRES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF THE DIFFERENCES, IF ANY, BETWEEN THE TWO ARE NOT LIKELY TO MATERIALLY AFFECT THE PRICE CHARGED OR PAID OR REASONABLY ACCUR ATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. THE CASE UNDER CONSIDERATION IS A CLASSIC EXAMPLE WHICH FITS WITHIN THE PRESCRIPTION OF RULE 10B(3) INASMUCH AS JCB INDIA LIMITED IS OTHERWISE FUNCTIONALLY SIMILAR TO THE AS SESSEE COMPANY TO THE EXTENT OF 99.65% OF ITS BUSINESS OPERATIONS. IT IS JUST 0.35% OF ITS M ANUFACTURING ACTIVITY ( NOT EVEN OF THE OVER ALL OPERATIONS THAT WOULD FURTHER REDUCE THE PERCENTAGE OF TRADING ACTIVITY ETC.), WHICH IS DIFFERENT. T HE POSITION WOULD HAVE BEEN DIFFERENT IF THE PERCENTAGE OF TRADED PRODUCTS OR SERVICES HAD BEEN SOMEWHAT HIGHER JUSTIFYING THE EXCLUSION OF THE JCB ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 16 INDIA LTD. FROM THE SET OF COMPARABLES. IN THAT SCENARIO OF A COMBINED PROFIT OF JCB INDIA LTD. , ONE WOULD HAVE BEEN UNABLE TO ASCERTAIN THE IMPACT OF THE PROFIT FROM TRADING OR SERVICE ACTIVITIES ON THE PROFIT FROM THE M ANUFACTURING ACTIVITY , WHILE BENCHMARKING THE ASSESSEES M ANUFACTURING SEGMENT. IF JCB INDIA LTD. HAD BEEN IN THE SHOES OF THE ASSESSEE WITH PERCENTAGE OF TRAD ED ITEMS AT ABOUT 35% OF THE MANUFACTURED ITEMS, IT WOULD HAVE UNHESITATINGLY MERITED EXCLUSION. SINCE THE PERCENTAGE OF TRADING AND DESIGN SERVICE ACTIVITIES OF JCB INDIA LTD. IS MINIMAL, THAT IS, LESS THAN ONE HALF PER CENT OF THE MANUFACTURING ACTIVITY , SUCH A DIFFERENCE IS NOT LIKELY TO MATERIALLY AFFECT THE PROFIT OF THE OTHERWISE FUNCTIONALLY SIMILAR MANUFACTURING ACTIVITY OF THIS COMPANY . 19. IN CIT VS. MERCER CONSULTING (INDIA) P. LTD. (2017) 390 ITR 615 (P&H) , ONE OF THE FILTERS WAS THAT THE EXPORT REVENUE SHOULD NOT BE LESS THAN 75% OF TOTAL TURNOVER. ONE OF THE COMPARABLES CHOSEN BY THE ASSESSEE HAD EXPORT REVENUE TO TURNOVER AT 74.45%, WHICH GOT EXCLUDED BY THE TPO ON THE BASIS OF THIS FILTER. THE TRIBUNAL ORDERED ITS INCLUSION BY ACCEPTING THAT A DEVIATION OF 0.55% WAS IMMATERIAL. WHEN THE ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 17 MATTER CAME UP BEFORE THE HONBLE HIGH COURT, IT APPROVED THE VIEW POINT OF THE TRIBUNAL BY HOLDING THAT: `THE CASE COULD NOT HAVE BEEN REJECTED MERELY BECAUSE THERE WAS A DEVIATION OF 0.55%..... A MINUSC ULE DIFFERENCE CANNOT RESULT IN THE REJECTION OF THE CASE IF IT IS OTHERWISE COMPARABLE. ANSWERING THE APPREHENSION OF THE REVENUE, IT WAS HELD: `INDEED EVEN THE TPO WOULD BE ENTITLED TO REFER TO CASES WHICH DEVIATE FROM THE FILTER BY FINALLY HOLDING THA T: `WHEN EXPORT FILTER OF 75% WAS APPLIED, A LITTLE LESS THAN 75% IN A CASE OF A COMPARABLE DOES NOT MAKE ANY DIFFERENCE, IF THE COMPANY IS OTHERWISE SIMILAR . IT HAS TO BE ACCEPTED AS COMPARABLE. THE FACTS OF THE EXTANT CASE ARE MORE OR LESS SIMILAR AS T HE ISSUE HEREIN IS ALSO OF SELECTION OR REJECTION OF A COMPARABLE ON THE GROUND OF AN INFINITESIMAL SMALL INCLUSION OF ABOUT 0.35% TURNOVER OF TRADING AND SERVICE ACTIVITIES IN THE OTHERWISE 99.65% TURNOVER OF THE MATCHING MANUFACTURING ACTIVITY. AS SUCH, WE ARE UNABLE TO COUNTENANCE THE CONTENTION OF THE ASSESSEE FOR THE EXCLUSION OF JCB INDIA LTD. ON THE SOLE REASON OF IT HAVING 0.35% NON - MANUFACTURING ACTIVITY, WHEN ITS 99.65% MANUFACTURING ACTIVITY IS SIMILAR TO THAT OF THE ASSESSEE. ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 18 2 0. WITHOUT PREJU DICE TO OUR ABOVE DECISION ON MERITS, WE ALSO TAKE NOTE OF THE FACT THAT T HE ASSESSEE DETERMIN ED THE ALP OF ITS M ANUFACTURING SEGMENT FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND SUO MOTU INCLUDED JCB INDIA LIMITED IN THE LIST OF COMPARABLES , WHICH PO SITION WAS NOT TINKERED WITH BY THE TPO AND GOT FINALLY MERGED IN THE LIST OF COMPARABLES. ON A POINTED QUERY, T HE LD. AR FAIRLY ADMITTED THAT THERE WA S NO NOTICEABLE DIFFERENCE IN THE FUNCTIONAL PROFILE OF JCB INDIA LIMITED FOR THE CURRENT YEAR VIS - - VIS THE P RECEDING YEAR. 2 1 . IN VIEW OF THE FOREGOING DISCUSSION, WE UPHOLD THE INCLUSION OF JCB INDIA LIMITED IN THE LIST OF COMPARABLES. AT THE SAME TIME, THE TPO IS DIRECTED TO CARRY OUT REASONABLY ACCURATE ADJUSTMENT TO THE PROFIT OF JCB INDIA LTD. SO AS TO ELIMINAT E THE EFFECT OF A MICROSCOPIC DIFFERENCE DUE TO TRADING SALES AND SERVICE INCOME . NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED AN OPPORTUNITY OF HEARING. 22 . THE FIRST ADDITIONAL GROUND IS THE ADOPTION OF INCORRECT METHODOLOGY FOR COMPUTI NG CAPACITY UTILIZATION ADJUSTMENT. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE MUTATIS MUTANDIS SIMILAR TO ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 19 THOSE OF THE PRECEDING YEARS WHERE THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL. IN ITS ORDER FOR THE A.Y. 2010 - 11, THE TRIBUNAL DEALT WITH THE CAPACITY UTILIZATION ADJUSTMENT RAISED THROUGH GROUND NO.4 AND DECIDED THROUGH PARA 7 OF ITS ORDER RESTORING THE MATTER TO THE FILE OF AO TO BE DE ALT WITH IN ACCORDANCE WITH ITS ORDER FOR THE IMMEDIATELY PR ECEDING ASSE SSMENT YEAR VIZ. , A.Y. 2009 - 10. RESPECTFULLY FOLLOWING THE TRIBUNAL ORDER S IN THE ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING TWO YEARS, WE SET ASIDE TH E IMPUGNED ORDER ON THIS COUNT AND REMIT THE MATTER TO THE FILE OF AO /TPO FOR RE - COMPUTING WORKING CAPITAL ADJUSTMENT IN CONSONANCE WITH THE METHODOLOGY PROVIDED BY THE TRIBUNAL IN ITS ORDER FOR THE EARLIER YEAR S. 23 . THE SECOND ADDITIONAL GROUND RAISED BY THE ASSESSEE IS FOR ALLOWING ADJUSTMENT TOWARDS VOLUNTARY TRANSFER PRICING ADDITION OFF ERED BY THE ASSESSEE IN THE COMPUTATION OF TOTAL INCOME. IN THIS REGARD, WE DIRECT THE TPO TO ALLOW NECESSARY RELIEF QUA THE SUO MOTU TRANSFER PRICING ADJUSTMENT OFFERED BY THE ASSESSEE , IF THE RESULTANT TRANSFER PRICING ADDITION TURNS OUT TO BE MORE THAN THAT. ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 20 24 . GROUND NO.1 OF THE REVENUES APPEAL IS AGAINST THE DIRECTION GIVEN BY DRP FOR TAKING 0.52% AS PLI OF THE ASSESSEE, WHEN CORRECT PLI OF THE ASSESSEE , AFTER CONSIDERING FOREIGN EXCHANGE (NET) AND WRITTEN BACK OF EXCESS PROVISION FOR DOUBTFUL DEBTS AS NON - OPERATING INCOME , C A ME TO 0.2212%. 25 . THERE IS NO DISCUSSION ON THIS ISSUE IN THE ORDER OF THE TPO. THE DRP RECORDED AT PARA 6.3 OF ITS DIRECTIONS THAT THE ASSESSEE COMPUTED ITS MARGIN FR OM MANUFACTURING OPERATIONS AT 0.52% AND THE TPO ALSO CON SIDERED THE SAME MARGIN IN HIS SHOW CAUSE NOTICE. HOWEVER, WHILE FINALIZING THE TRANSFER PRICIN G ORDER, THE TPO ADOPTED MARGIN OF ASSESSEE FROM THIS SEGMENT AT ( - ) 0.22% WITHOUT PROVIDING COMPUTATION FOR THE SAME. IT HAS ALSO BEEN MENTIONED IN THE SAME P ARA THAT THE ASSESSEE FILED A RECTIFICATION APPLICATION BEFORE THE TPO. IN THIS BACKDROP OF THE FACTS, THE DRP ACCEPTED THE CONTENTION OF ASSESSEE AND ACCORDINGLY DIRECTED THE TPO TO TAKE ASSESSEES PLI AT 0.52%. 26. I T IS OBSERVED THAT THE ASSESSEE FI LED A RECTIFICATION APPLICATION ON THIS SCORE WAY BACK ON 13.02.2015. A C OPY OF SUCH AN APPLICATION HAS BEEN PLACED AT PAGE 72 OF THE APPEAL ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 21 FOLDER. DESPITE SUCH APPLICATION, THE LD. AR STATED THAT THE TPO HAS NOT PASSED ANY RECTIFICATION ORDER FOR A PER IOD OF MORE THAN SIX YEARS. THE LD. DR ALSO COULD NOT PLACE ON RECORD ANY RECTIFICATION ORDER HAVING PASSED BY THE TPO ON THIS ISSUE. IN SUCH CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE DRP WAS FULLY JUSTIFIED IN DIRECTING THE TPO TO CONSIDE R ASSESSEES MARGIN AT 0.52% AS AGAINST ( - ) 0.22% ADOPTED BY THE TPO IN HIS ORDER. 2 7. THE LAST ISSUE TAKEN UP BY THE REVENUE IS AGAINST THE DIRECTION OF THE DRP TO COMPUTE TRANSFER PRICING ADJUSTMENT ON PROPORTIONATE BASIS. T HE TPO WHILE C OMPUTING THE T RANSFER PRICING ADJUSTMENT TOOK ENTITY LEVEL FIGURE S . 28 . THIS ISSUE IS FAIRLY SETTLED BY A JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. PHOENIX MECANO (INDIA) PVT. LTD. (2019) 414 ITR 704 (BOM.) , H OLDING THAT THE TRANSFER PRICING ADJ USTMENT MADE AT ENTITY LEVEL SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTIONS ONLY. I T IS PERTINENT TO MENTION THAT THE DEPARTMENTS SLP AGAINST TH IS JUDGMENT HAS SINCE BEEN DISMISSED BY THE HONBLE SUPREME COURT IN CIT VS. PHOENIX MECANO (INDIA) PV T. LTD. (2018) 402 ITR 32 (ST.). ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 22 SIMILAR VIEW HAS BEEN ESPOUSED BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KRUPP INDUSTRIES PVT. LTD. (2016) 381 ITR 413 (BOM.) AND CIT VS. TARA JEWELS EXPORTS (P). LTD. (2010) 381 ITR 404 (BOM.) . WE, ERGO , DIRE CT TO RESTRICT THE TRANSFER PRICING ADDITION ONLY TO THE EXTENT OF INTERNATIONAL TRANSACTIONS IN THIS SEGMENT. 29 . TO SUM UP, THE TRANSFER PRICING ADDITION MADE IN THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF THE AO /TPO FOR RE - COMPUTING THE TRANSFER PRICING ADJUSTMENT IN THE MANUFACTURING ACTIVITY SEGMENT IN ACCORDANCE WITH TH E DIRECTIONS AND OBSERVATIONS GIVEN HEREINABOVE. 30 . IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSED AND THAT OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH JUNE , 202 1 . SD/ - SD/ - ( S.S. VISWANETHRA RAVI ) ( R.S.SYAL ) JUDICIAL MEMBER VICE PRESIDENT PUNE ; DATED : 4 TH JUNE , 2021 GCVSR ITA NO S . 537 & 584 /PUN/20 16 HYUNDAI CONSTRUCTION EQUIPMENT I NDIA PVT. LTD. 23 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE DRP - 3, MUMBAI 4. THE CIT (IT/TP) , PUNE 5. , , / DR C , ITAT, PUNE 6. / GUARD FILE / BY ORDER, / / TRUE C O PY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAF T DICTATED ON 0 3 - 0 6 - 202 1 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 03 - 0 6 - 202 1 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOU NCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *