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TMI Blog2016 (4) TMI 1306X X X X Extracts X X X X X X X X Extracts X X X X ..... .21% by Asahi Glass Company Ltd., Japan; 22.01% by B.M. Labroo & Associates; 11.11% by Maruti Udyog Ltd.; and 44.66% by public at large. The assessee reported ten international transactions in Form no. 3CEB. On a reference made by the AO to the Transfer Pricing Officer (TPO), it was observed by the latter that the assessee was engaged in manufacturing two types of glasses, viz., toughened and laminated glass under its Automotive SBU division and mirror and reflective glasses under its Float glass SBU division. It was noticed from the Transfer pricing study report that the assessee was assuming complete risks relating to manufacturing, inventory, property, marketing, environment and warranty. The assessee was found to be purchasing raw material of glass, stores and spares and capital goods along with supply of technical know-how from its associated enterprises (AEs). Out of ten reported international transactions, five related to the Automotive division and the remaining five to the Float division. The TPO did not question the correctness of the arm's length price (ALP) of the international transactions under Automotive SBU division. He took up for consideration only the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... `environmental risks' as well, such expenditure of Rs. 12.44 crore could not be reduced from the operating costs. By considering extraordinary item of loss due to rainfall at Rs. 12.44 crore as an item of operating cost, the TPO recomputed OP/TC of the Float glass division at 3.24%. Thereafter, certain comparables were taken into consideration, whose mean margin was determined at 24.49%. Applying such rate as arm's length margin on the transacted value of the above referred four international transactions under dispute, the TPO recommended transfer pricing adjustment at Rs. 31.61 crore. The assessee raised certain objections before the Dispute Resolution Panel (DRP) against the draft order incorporating addition on account of transfer pricing adjustment. The DRP allowed certain relief. That is how, the AO vide his final order has made the addition of Rs. 23.76 crore which is disputed in the instant appeal. 4. We have heard the rival submissions and perused the relevant material on record. We have noted above that the TPO accepted all the transactions of Automotive division and royalty payment under Float glass division at ALP. The remaining four international transactions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth price. Sub-section (1) of the section provides that : "Any income arising from an international transaction shall be computed having regard to the arm's length price". Section 92C of the Act enshrines provisions relating to computation of arm's length price. Sub-section (1) of the section states that the arm's length price in relation to an international transaction shall be determined by any of the methods listed herein which include, inter alia, the transactional net margin method. Sub-section (2) of section 92C provides that the most appropriate method referred in sub-section (1) shall be applied for the determination of ALP `in the manner as may be prescribed'. Calculation of ALP under the TNMM has been prescribed under Rule 10B(1)(e) of the Income-tax Rules, 1962, which states that for the purposes of section 92C(2), the ALP in relation to the international transaction shall be determined as under : - `(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to international transaction. On going through the above sub-clauses of Rule 10B(1)(e), it becomes patent that as per the first step, the net profit margin 'realized' by the enterprise from an international transaction is to be computed. Use of the word 'realized' in the provision richly indicates that it is the calculation of actual operating profit margin of the assessee earned from international transaction, which is not any adjusted figure. Similar position can be traced from the language of sub-clause (iv), where again reference has been made to profit margin `realized' by the assessee from the international transaction. When we consider sub-clauses (ii) and (iii), it turns out that, firstly, the net operating margin actually realized from the comparable uncontrolled transaction is computed, which is determined in the same way as that of the assessee as per clause (i), that is, actual figures without making any adjustment. Then sub-clause (iii) talks of adjusting the actually realized margin of comparables to bring the same at par with the international transaction undertaken by the assessee, so as to iron out the effects of differences between the international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable uncontrolled transactions gains entry in to the final list of comparables to be considered for the purposes of sub-clause (ii) of rule 10B(1)(e). If, on the other hand, there are differences between the two, which are not capable of adjustment, then such otherwise broadly comparable uncontrolled transaction goes out of reckoning and does not gain entry in the final tally of comparables for the purposes of computing ALP of the international transaction as per the mandate of rule 10B(1)(e). In other words, role of sub-rule (3) to Rule 10B is only to filter out comparable uncontrolled transactions qualifying for inclusion in the determination of the ALP under Rule 10B(1). Mechanism for determining ALP under the TNMM has been enshrined in Rule 10B(1)(e) alone which clearly provides for making adjustments on account of differences between uncontrolled transaction and international transaction in the profit margin of comparables. Sub-rule (3) is neither a machinery provision in itself nor a part of the machinery for calculating arm's length price of an international transaction, which falls exclusively and in the sole domain of sub-rule (1). If we accept the contention of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it may, we have noted the details of such costs/loss, from which it is manifest that these expenses are otherwise of revenue nature, which fact has been conceded by the ld. AR as well. These include loss of raw materials due to flood and loss on write off of metal bath and HT panel etc. apart from plant revival expenses incurred for repair of plant. The assessee is a listed company and has availed loans from financial institutions. Insurance is an important aspect and a precondition for availing of credit facilities from financial institutions. If there is a loss incurred to the extent of Rs. 12.44 crore due to flood etc., naturally, the assessee must have been compensated by insurance company for such loss. It is not the case of the assessee that Insurance claim is a non-operating revenue item. So, if there is loss by means of such costs, there will be corresponding income by means of insurance claim as well. As both the items are of operating nature, they will find their place in the computation of operating profit. 5.8. There is another important aspect of the matter, which is quite significant. It can be noticed that the assessee bears all risks including environmental ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal goods' amounting to Rs. 124.82 crore, which resides in Schedule of fixed assets. Fourth international transaction is `Fees for technical and consultancy services' amounting to Rs. 16.50 crore, which is in two parts, namely, Rs. 15.50 crore for capital work-in-progress and Rs. 1 crore for unit in operation. In so far as fees for technical services for capital work-in-progress is concerned, the same has again been capitalized by the assessee in its Schedule of fixed assets. These two items, namely, `Purchase of capital goods' at Rs. 124.82 crore and `Fees for technical & consultancy services' at Rs. 15.50 crore have been capitalized by the assessee and hence cannot be considered for making transfer pricing adjustment under the TNMM. Since operating profit is computed by considering the items of operating costs alone, the value of these two items which are capital in nature and have been capitalized in the balance sheet, cannot be included in the base amount for applying the operating profit margin rate of the comparables for computing the amount of transfer pricing adjustment. We, therefore, direct to exclude them from the base amount of Rs. 148.78 crore for applying the mean pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by him and the companies were selected from the economic activity with product name 'Float glass.' Such search process threw up five companies as comparable. The assessee was given opportunity to raise objections, if any, against the comparability of these five companies. After entertaining the objections raised on behalf of the assessee, the TPO shortlisted three companies as comparable, namely, Gujarat Guardian Ltd. (Profit margin of 46.57%); Hindustan National Glass (14.78%) and Saint Gobain Glass India (12.13%). The assessee is aggrieved against the exclusion of remaining two companies, namely, Bharat Glass Tube Ltd., and Triveni Glass Ltd. Apart from that, the assessee is also against the inclusion of Gujarat Guardian Ltd., which, in its opinion, ought to have been excluded. We will consider these companies one by one. (i) Bharat Glass Tube Ltd. 8.1. The TPO has discussed the assessee's objections as regards this company in para 5.7 of his order in which it has been recorded that the turnover of this company was only Rs. 40 crore, whereas the turnover of the assessee company stood at Rs. 683 crore. The TPO further recorded that no objections were raised on the functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the assessee was deficient as the assessee did not make a functional comparison which was sought to be made before the Hon'ble High Court. Thus, it is manifest from this judgment of the Hon'ble Delhi High Court in ST Microelectronics (supra) that functional comparability has to be necessarily considered before including or excluding a company from the list of comparables. Nowhere has it been laid down in this case that a company with higher or lower turnover can be excluded merely for this reason. We, therefore, do not find any relevance of this judgment in so far as the issue before us is concerned. Resultantly, following the ratio laid down in Cryscapital Investment Advisors (supra) and Rampgreen Solutions Pvt. Ltd (supra,) Bharat Glass Tube Ltd. is directed to be included in the final set of comparables. (ii) Triveni Glass Ltd. 9.1. It has been noticed in para 5.10 of the TPO's order that Triveni Glass Ltd. suffered loss from operations. The TPO has further recorded that this company was persistent loss making company and, hence, was not a good comparable. The assessee is aggrieved against the exclusion of this company. 9.2. After going through the relevant material, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arat Guardian Ltd. was not paying, was also found untenable because Gujarat Guardian Ltd. was paying technical know-how fees to its associated enterprise. That is how, the TPO treated this company as comparable. 10.2. After considering the rival submissions and perusing the relevant material on record, we find the assessee's objections unsustainable. The TPO has thoroughly dealt with all the objections raised by the assessee, such as, earning of dividend income by Gujarat Guardian, difference in power consumption and payment of royalty/fees for technical services, etc. The ld. AR has not brought any material on record to fortify his contention about difference in power consumption rates of the assessee vis-à-vis this company. Accordingly, we are of the considered opinion that the TPO was right in including this company in the list of comparables. 11. In view of the foregoing discussion, we set aside the impugned order on the question of addition towards transfer pricing adjustment of Float glass division and remit the matter to the file of AO/TPO for recalculating the ALP and consequential addition, if any, in respect of the four international transactions as directed here ..... X X X X Extracts X X X X X X X X Extracts X X X X
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