TMI Blog2017 (9) TMI 1776X X X X Extracts X X X X X X X X Extracts X X X X ..... was allocated to different companies by TACO; the said amount was paid by TACO and the assessee reimbursed the same. In respect of Jamshedpur office also, it was pointed out that the recovery of rent was made from the assessee and in view thereof, there was no requirement to deduct tax at source. In view of the evidence produced, we find merit in the plea of assessee and direct the Assessing Officer to allow the claim of assessee. TPA - MAM selection - CUP method v/s TNMM - Held that:- We find no merit in the plea of assessee in the absence of any third party evidence and we reject the plea of assessee in this regard. Similarly, in respect of import of machinery where the assessee had purchased the machinery from its associated enterprises on its specification, CUP method cannot be applied to benchmark its transactions. In respect of export of goods, wherein the assessee had made a comparison between the margins of associated enterprises segment with non-associated enterprises but because of import of raw material being utilized by both the segments and the same being tainted, then there is no merit in applying CPM method. In respect of payment of royalty and technical consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and comparable companies under TNMM method. not to be allowed - See VISHAY COMPONENTS PVT. LTD. VERSUS ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-7, PUNE [2017 (2) TMI 636 - ITAT PUNE]. Proportionate adjustment to be made while applying TNMM method only to the international transactions undertaken and not at the entity level - Held that:- We find that the issue is covered by the ratio laid down in CIT v. Thyssen Krupp Industries India (P.) Ltd. [2015 (12) TMI 1076 - BOMBAY HIGH COURT] and CIT v. Keihin Panalfa Ltd. [2016 (5) TMI 203 - DELHI HIGH COURT]. Hence, we direct the TPO to compute transfer pricing adjustment, if any, only with respect to international transactions. Computation of operating margins of assessee by considering the interest expenditure, loan processing charges and loss on disposal of assets as operating expenditure - Held that:- Issue of working of operating margins on account of loss on disposal of assets, loan processing charges and interest expenditure, whether is non-operating or operating in nature, has not been looked into either by the TPO or by the CIT (A). The assessee had raised this issue and hence, additional ground of appeal No.9 is admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - Dated:- 11-9-2017 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM For The Assessee : Shri K. Venkatachalam, Dinesh Supekar and Pavan R. Dudhediya For The Revenue : Shri Rajeev Kumar, CIT and Achal Sharma ORDER Ms. Sushma Chowla, JM The cross appeals filed by the assessee and the Revenue are against the order of CIT (A)-IT/TP, Pune, dated 20.02.2014 relating to assessment year 2005-06 passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. The cross appeals filed by the assessee and the Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The assessee in ITA No.886/PUN/2014 has raised the following grounds of appeal:- Based on the facts and circumstances of the case and in law, Yazaki India Limited (hereinafter referred to as the Appellant or YIL ) respectfully craves leave to prefer an appeal under section 253(1 )(a) of the Income tax Act, 1961 ( hereinafter referred to as the Act), against the order dated 20 February 2014 (received by the Appellant on 3 March 2014) passed by the Commissioner of Income Tax (Appeals)(hereinafter referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant. Prayer The Appellant prays that the transactional level analysis as submitted by the Appellant should be accepted. Ground 6: Application of TNMM as most appropriate method Based on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the following actions of Ld. Assessing Officer. 6.1 Selecting inappropriate comparables to benchmark the international transactions of the Appellant under TNMM. Prayer The Appellant prays that the Ld. AO/TPO should be directed to select appropriate comparable as submitted in the form of additional evidence to Ld. CIT (A). 6.2 Computing the operating margin of the Appellant after considering the extraordinary expenditure in relation to excise duty payment amounting to ₹ 52,678,000 as an operating expense. Prayer The Appellant prays that the excise duty payment amounting to ₹ 52,678,000 should be considered as extraordinary expenditure while calculating the operating margin of the Appellant. 6.3 Not allowing for depreciation adjustment for the difference between the Appellant vis-a-vis comparables. Prayer The Appellant prays th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the Appellant vis-a-vis comparable companies. It is prayed that an adjustment should be granted to the Appellant for its higher import content vis-a-vis comparable companies while determining the operating margin of the Appellant for transfer pricing analysis. The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 5. The Revenue in ITA No.1026/PUN/2014 has raised the following grounds of appeal:- 1. Whether on the facts and in the circumstances of the case, the Learned CIT (A)-IT/TP erred in directing that disallowance on account of payment of earlier assessment year s excise duty in current assessment year be added to M/s. Yazaki India Limited s profit for calculation of Profit Level Indicator (PLI). 2. Whether on the facts and in the circumstances of the case, the Learned CIT (A)-IT/TP is justified in directing that while disallowance on account of payment of earlier assessment year s excise duty in current assessment year be added to profit in calculation of Profit Level Indicator (PLI) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was penalty imposed at ₹ 11 lakhs and why the same should not be disallowed. The assessee in reply, pointed out that it had paid deficit Excise duty of ₹ 11.60 crores including the deficit of ₹ 5,26,75,000/- in respect of earlier years. The liability had crystallized during the year after search by the Excise Department and hence, it was provided for during the year and paid off till July, 2005 i.e. before due date for filing the return of income. The assessee claimed that Excise duty was a statutory duty and in any case, its deduction was governed under the provisions of section 43B of the Act. The assessee also clarified that it was neither fine nor penalty, hence, allowable. In respect of interest on deficit Excise duty of ₹ 1.07 crores, the assessee also claimed that the liability had crystallized during the year after search by the Excise Department, which was provided for during the year and paid off till July, 2005. Interest was paid under section 11AB of Central Excise Act, 1944 read with Rule 12 of CENVAT Rules 2002. The said interest was due because of delay in payment of Excise duty after the prescribed due date. Thus, the said interest was compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated for the period June, 2002 to May, 2004, in respect of sales effected to General Motors and Honda Siel Cars Ltd. The statutory records were also manipulated for the period June, 2004 to January, 2005 to show that the goods manufactured in 100% EOU were transferred to DTA unit for sales after processing, whereas no such transfer or processing had taken place in DTA unit, General Motors and Honda Siel Cars Ltd. It was thus, found that the claim of ₹ 10.93 crores, except for the amounts of ₹ 1.84 crores, out of ₹ 10.93 crores for the quarter ending 31.03.2003, in respect of sale entitlements for DTA sales was also false and misleading and in fact the assessee was not permitted to avail any such entitlement. The assessee had wrongly availed CENVAT credit. The Assessing Officer thus, found that the assessee had planned the entire fraud with the sole and malafide intention of misuse of duty free raw material for the manufacture of goods for sale to customers in DTA and to evade payment of Central Excise, Customs duties. The assessee was thus, found to have infringed the proviso to section 3(1) of CEA, 1944. Consequent to search, the assessee admitted the charges le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Excise / Customs Department including the interest payable on account of payment for these offences, as per the Assessing Officer, took the colour from offence and held that the said expenses were not allowable as business expenses under the Income Tax Act. The expenditure incurred in connection with or in relation to the activities which are prohibited in law, as per the Assessing Officer, could not be allowed as business expenditure because the business of removal and sale of articles or goods, without payment of said levies was both illegal and not allowed. 9. The second aspect which was considered by the Assessing Officer was whether or not the said expenditure on duty and interest was an admissible expense under section 43B of the Act. The expenses pertaining to previous years relating to assessment years 2003-04 to 2005-06 were part and parcel of expenses pertaining to previous year relating to assessment year 2005-06; they were not booked in the books of account of the assessee. Hence, the assessee claimed that they had crystallized only during the year and the same were claimed as deduction. Referring to various provisions of Central Excise Rules, 2002, the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 40(a) of the Act. 12. The next expenditure considered by the Assessing Officer was sales promotion expenses and miscellaneous expenses of ₹ 3,83,110/- which was reimbursed to TACO for expenses incurred by them. The assessee claimed that expenses of ₹ 1,37,595/- were on account of rent to Jamshedpur office. As the payment of rent attracts TDS provisions, the assessee was to deduct tax from the payment to TACO. Since the assessee had failed to so deduct, then sum of ₹ 1,37,595/- was added to the income of assessee. Further, ₹ 2,45,515/- was paid to TACO for technical fees for Mr. Shinohara from Japan. The payment of technical fees also attracts provisions of TDS and since no TDS was deducted, the same was added to the income of assessee. 13. Another adjustment made in the hands of assessee was on account of transfer pricing issue, wherein the Assessing Officer had made reference under section 92CA(1) of the Act. The Transfer Pricing Officer (TPO) vide order passed under section 92CA(3) of the Act, had proposed an upward adjustment of ₹ 14,09,92,866/- on account of international transactions, which was adopted by the Assessing Officer while frami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r held that the provisions of section 43B of the Act were not applicable because the assessee consciously did not pay the Excise duty and did not claim its deduction in the respective years. 15. In respect of disallowance under section 40(a)(i) of the Act, the assessee claimed that it did not deduct tax on payment of interest and royalty and in respect of other payments, since they were in the nature of reimbursement, no tax was to be deducted. The CIT (A) held that the assessee was not required to deduct taxes on creation of provision of interest and royalty. Regarding taxability of other transactions, it was noted that the said payments towards technical fees and rent to Jamshedpur office were not in the nature of reimbursement and the assessee was bound to deduct tax on source. In view thereof, the addition was confirmed. However, in respect of payment of technical fees, since the Assessing Officer had not examined the aspect of reimbursement, was held to be not sustainable. The findings of CIT (A) in respect of transfer pricing adjustment of ₹ 14.09 crores would be referred while deciding the TP issue. 16. The learned Authorized Representative for the assessee in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year and also made a provision for interest on Excise duty totaling ₹ 11.60 crores and claimed that the said Excise duty was paid before the due date for filing the return of income and hence, was allowable as deduction in the hands of assessee. The break-up of ₹ 11.60 crores is as under:- Amount (Rs.) Provision for excise duty for FY 2002-03 78,74,000 Provision for excise duty for FY 2003-04 4,48,01,000 Provision for excise duty for FY 2004-05 5,26,78,000 Provision for interest on excise duty 1,07,19,000 Total 11,60,72,000 20. The assessee had made Notes 2(d) to the Accounts of the year ending 31.03.2005 which reads as under:- In January, 2005, the central excise authorities had detected certain significant regulatory lapses in the manner in which goods manufactured in the Export Oriented Unit of the Company, were cleared to domestic customers and the consequent shortfall in payment of excise duties on such clearances. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessee on the ground that the assessee had systematically evaded the payment of Central Excise and the liability arose to the assessee on account of payments made for offences committed under various provisions of Customs Excise Act. The claim of assessee that the amount paid on account of Excise duty is duly allowable in its hands in the year of payment, in view of provisions of section 43B of the Act, was not accepted on the ground that the amounts which have been paid are not statutory dues but are due recoverable in respect of clandestine transactions. 22. Section 43B of the Act clearly provides that notwithstanding anything contained in any other provisions of the Act, deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax, duty, cess or fees, under any law for the time being in force, shall be allowed in the year of payment, irrespective of previous year in which liability to pay such sum was incurred by the assessee, according to the method of accounting regularly employed by him. It is further provided that nothing contained in section would apply in relation to any sum which is actually paid by the assessee on or be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum to the treasury of the Government. 23. It was further held by Shri Vimal Gandhi, President (then) concurring and supplementing as under:- Accrual of liability .. The scheme is that deduction would not be allowed on incurring of liability where mercantile system is followed but shall be allowed in the year in which the amount is actually paid. It does not appeal to reason that even after introduction of s.43B and its clear wording, the legislature can intend to insist upon the incurring of the liability as a condition for allowability of the deduction. 24. It was further held that there is no justification to examine the previous year in which liability to pay the sum was incurred when mandate is irrespective of the previous year in which liability was incurred and claim is to be allowed on the basis of actual payments. 25. The learned Departmental Representative for the Revenue on the other hand, had placed reliance on the ratio laid down by the Mumbai Bench of Tribunal in Chetna Zarda Co s. case (supra), wherein the assessee had suppressed its sales which were discovered in search conducted by the Excise Department, then the assessee s claim of paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er / TPO in respect of transfer pricing adjustment at ₹ 14,09,92,866/-. The assessee has raised the first issue of rejecting the transactional level analysis as documented in transfer pricing study report and selecting TNMM method as most appropriate method to benchmark the international transactions of assessee. This is by way of ground of appeal No.5. Further, vide ground of appeal No.6, the assessee has raised the issue of application of TNMM method as the most appropriate method and in selection of certain comparable concerns to benchmark the international transactions of assessee and rejection of additional evidences filed by the assessee before the CIT (A) in respect of set of comparable companies selected by the assessee. 30. The next issue raised vide ground of appeal No.6.2 i.e. computation of operating margins by considering extraordinary expenditure in relation to Excise duty payment of ₹ 5.26 crores as not part of operating expenses. 31. The learned Authorized Representative for the assessee fairly pointed out that in case the said expenditure is allowed as business expenditure, then this ground of appeal would become academic in nature. 32. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, TP adjustment of ₹ 14,09,92,866/- was made in the hands of assessee. The said approach of the TPO was upheld by the CIT (A). 37. The assessee is in appeal against the order of CIT (A) and has pointed out that CUP method should be adopted as the most appropriate method in the hands of assessee. In this regard, the learned Authorized Representative for the assessee pointed out that the assessee had applied CUP method on the basis of price list of associated enterprises which could be used as comparable. The assessee has furnished written submissions in this regard and has stressed that CUP method be applied to benchmark its international transactions of import of raw material and machinery. The learned Authorized Representative for the assessee was time and again asked to file evidence of associated enterprises having sold its goods to other parties on the basis of said price list or to file any other evidence establishing its claim that the associated enterprises were transacting on the basis of said price list. However, the learned Authorized Representative for the assessee had failed to file any such evidence before us. 38. The learned Departmental Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceptable to the assessee. In respect of selection of two new concerns, the learned Departmental Representative for the Revenue pointed out that the assessee is adopting cherry picking approach and two concerns being not functionally comparables, the financials of said concerns cannot be applied. 39. We have heard the rival contentions and perused the record. The assessee has entered into following international transactions with its associated enterprises and the assessee applied CUP method to benchmark its international transactions:- S. No. Nature of Transaction Amount (Rs.) ALP Method 1 Import/purchase of raw- materials and Spares 57,37,98,913/- CUP 2 Sales 19,98,70,649/- Cost Plus 3 Import of Plant Machinery 2,42,76,876/- CUP 4 Royalty on Tech. Know-how 67,27,128/- CUP 5 Technical Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in applying CUP method in the absence of valid CUP, was not accepted. Further, there was no price list for capital equipment which was evident from the company certificate dated 14.07.2008 which stated that the price was based on present cost structure. As far as export of goods was concerned, the assessee claimed that contribution or margins in respect of exports to associated enterprises and sales to other enterprises had been worked out and that the margin alone on exports to associated enterprises was more than the margins earned on other sales, demonstrates that the price charged to associated enterprises was at arm s length. The TPO rejected the said plea of assessee because of tainted transaction of import of goods and hence, Cost plus Method was found to be not acceptable. The assessee also claimed that the payment of royalty and technical fees were approved by the Government of India and hence, at arm s length price. The said plea of assessee was also not accepted by the TPO on the ground that the approval granted by the RBI was towards agreement of licence and technical assistance with Yazaki Corporation, Japan and consequent payment of royalty and technical fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment could not be said to be free from controlled transactions and hence, it becomes tainted. The CIT (A) upheld the order of TPO in not using CUP method. Similarly on benchmarking of transaction of royalty and technical fees, the CIT (A) observes that the assessee has failed to justify the absence of benchmarking done by it and hence, the order of TPO in rejecting transfer pricing methods used by the assessee and applying TNMM method was upheld. He further went on to decide the issue of admission of additional evidence in terms of new set of comparable companies. The CIT (A) held that where the TPO had applied the comparables which were selected by the assessee, then at this juncture, the assessee could not raise a plea that the same should not be applied. In respect of new concerns selected, the CIT (A) held that re-search was not permitted every time, new companies would be thrown up for consideration and the additional evidence filed by the assessee was not accepted. Even on merits, where Ellora Trading Ltd. did not have annual report for financial year 2005-06, the plea of assessee was rejected. In respect of Minda S A I Ltd., the assessee failed to furnish the company s a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applied to benchmark its transactions. In respect of export of goods, wherein the assessee had made a comparison between the margins of associated enterprises segment with non-associated enterprises but because of import of raw material being utilized by both the segments and the same being tainted, then there is no merit in applying CPM method. In respect of payment of royalty and technical consultancy fees and interest on delayed payments, the assessee has not raised any issues either before the CIT (A) or before us and in view thereof, we reject the application of CUP method by the assessee and uphold the approach of the TPO in applying TNMM method on aggregate basis. 43. The next issue which arises is the selection of TNMM method as most appropriate method on aggregated basis. Without prejudice to its claim of applying CUP method, the learned Authorized Representative for the assessee pointed out that when the TPO proposed that TNMM method is to be applied, the assessee gave its list of comparables and also pointed out that the comparable companies were submitted on without prejudice basis, though the assessee believed that the business of said comparables was not compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable in assessment year 2007-08 by the TPO. In respect of Minda S A I Ltd., the assessee pointed out that the said concern has been selected as comparable by the TPO in the transfer pricing order for assessment year 2009-10. In respect of royalty, it was pointed out that out of total revenue of ₹ 72.49 crores, royalty income was only ₹ 6,29,611/- which was miniscule and hence, it should not be a deciding factor for rejecting the said concern. It was further pointed out that the figures for financial year 2004-05 should not be compared with the figures for financial year 2003-04. 45. The assessee is aggrieved by the order of CIT (A) in rejecting the additional evidence by stating that there was an attempt to have a second innings against the adjustment proposed by the TPO. In this regard, reliance was placed on the decision of Chennai Bench of Tribunal in SL Lumax Ltd. v. Asstt. CIT [2013] 140 ITD 158. The assessee is aggrieved by the decision of CIT (A) in not allowing it to select the comparables which were functionally comparable and make the adjustment relying on companies which were engaged in business other than the business of assessee. In this regard, reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, certain mistakes were made and initial set of comparables were selected by the assessee but strictly on without prejudice basis. It was pointed out before the CIT (A) that these concerns were not comparable on account of various reasons which are incorporated in the order of CIT (A). The TPO applied the margins of said concerns and benchmarked the arm s length price of international transactions undertaken by the assessee. The grievance of assessee is that all those concerns whose margins have been applied to benchmark its international transactions are engaged in the business though in the automobile industry but under different sub-heads, whereas the two concerns which have been selected by the assessee i.e. Ellora Trading Ltd. and Minda S A I Ltd. as additional evidence before the CIT (A) are engaged in similar business as that of the assessee i.e. manufacturing of wiring harnesses in automobile sector. The next plea of the assessee before us is that the comparables as per fresh search should be taken to benchmark the international transactions of the assessee. 49. We find that the issue of selection of new comparables arose before the Special Bench of Chandigarh in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cturing segment had applied TNMM method to benchmark its international transactions, wherein certain comparables were selected by the assessee and it was pleaded that the international transactions undertaken by the assessee were at arm s length price. However, the TPO conducted fresh search and selected certain other companies also; one of which was Tibrewala Electronics Ltd., against the same, the assessee is in appeal. 13. The Tribunal in ITA No.133/PN/2011 relating to assessment year 2006- 07, vide order dated 25.05.2012 had decided the issues relating to transfer pricing adjustment, but thereafter, the assessee moved Miscellaneous Application No.82/PN/2013, relating to assessment year 2006-07. The Tribunal vide order dated 02.08.2013 in the said Miscellaneous Application observed that the grounds of appeal Nos.2, 3, 5, 9, 12, 13 and 15 were not adjudicated by the Tribunal in the first round, thereafter, the Tribunal vide order dated 16.05.2016 adjudicated the aforesaid issues. The issue arising by way of ground of appeal No.2 i.e. fresh search conducted by the TPO and selection of Tibrewalal Electronics Ltd. was also adjudicated in the second round of proceedings by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolled transactions i.e. transactions entered into by other concerns in similar circumstances. This documentation is to be compiled by the assessee by way of transfer pricing report in order to justify the arm s length price of its international transactions. 16. Under section 92C of the Act, it is provided that arm s length price in relation to international transaction shall be determined by following any of the methods prescribed therein which is the most appropriate method, having regard to the international transaction or class of transactions or class of associated persons or functioned performed by such persons or such other relevant entities as the Board may prescribe. Sub-section (2) therein provides that the most appropriate method shall be applied for determination of arm s length price in the manner as may be prescribed. Section 92C(3) of the Act reads as under:- 92C. (1) (2) .. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction [or specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing him to produce or cause to be produced, any evidence on which he may rely upon in support of computation made by him of the arm s length price in relation to international transaction. After hearing such evidence including any information or documents referred to in section 92C(3) of the Act and after considering such evidence as the TPO may require on specified date and also taking into account relevant material which he has gathered and confronted to assessee, the TPO has to pass an order in writing. Hence, under the provisions of the Act, the machinery to pass an order for determination of arm s length price of an international transaction entered into by any person is so provided. It is not only the evidences which are relied upon by the assessee in support of its computation of arm s length price of its international transaction but also any other evidence which the TPO may require on some specified points or the information which may be gathered by the TPO can be used by the TPO to determine the arm s length price of international transaction. Undoubtedly, the assessee is the first person who is to collect the information and documents in respect of its international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ked up by the TPO are functionally comparable to the assessee and the data which has been compiled by the TPO relates to assessment year 2006-07, and was confronted to the assessee and merely because the data came into public domain at a later date, the same cannot be ignored. The TPO has power to use any data which comes into his possession and Section has not provided any fetters to the collections of data on a particular date or otherwise and use of such data; in the absence of which, there could not be curtailment of powers to be exercised by the TPO for determining arm s length price of international transaction. Merely because, the financial results of a concern which were functionally similar to the assessee came into public domain on a later date, but relate to the year in which the international transaction had been undertaken, cannot be rejected on the surmise that they were not available on the date of compilation of documentation and / or came in the public domain later. The argument of learned Authorized Representative for the assessee before us is that if the TP proceedings of a particular case had been taken up on an earlier date when no such data was available, woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the relevant information and documents relating to prices charged and profit earned with related and unrelated customer. (ii) If the Assessing Officer has determined an ALP, other than the price declared by the assessee, Assessing Officer has to prove that the price determined by him is reliable and reasonable and confirms the statutory requirement unless the case is covered by situation No. (iii) below. (iii) In case of failure on the part of the taxpayer to comply with the statutory provisions, the tax authorities would have to determine the ALP. In such a situation, burden of proof on tax authorities is much reduced. 21. Thereafter, the conclusion of the Tribunal was that the taxpayer had to cooperate with the tax authorities by furnishing relevant information. Further, where the authorities were of the view that arm s length price was not correctly determined by taxpayer, then the same could be substituted by arm s length price on the basis of material or information furnished by the assessee or collected by the Revenue authorities. It was further held that such arm s length price had to be determined by keeping in mind the provisions of the Act and also th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case. 22. The above said proposition has been laid down by the Special Bench of Bangalore Tribunal while interpreting the transfer pricing provisions and the principle laid down by the Special Bench of Tribunal is applicable to the issue before us. The learned Authorized Representative for the assessee before us has placed reliance on the ratio laid down by Hon ble Bombay High Court in Scindia Steam Navigation Co. Ltd. v. CIT (supra), wherein the issue was the applicability of amended provisions of the Act. The question arising before the Hon ble Bombay High Court was that in case any provision has been amended later, were such amended provisions to be applied while completing assessment of the year which was pending as on the date, on which the amendment was brought in or as per the provisions which were applicable to the relevant year. The Hon ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this regard, without going into various issues raised by the CIT (A) and the learned Departmental Representative for the Revenue in rejection of two concerns, we find that in respect of Ellora Trading Ltd., the assessee had taken the said concern to be functionally comparable in its TP study report during assessment year 2007-08 and the TPO has not passed any adverse comments on the acceptability of the same. In respect of Minda S A I Ltd., the TPO himself in the transfer pricing order for assessment year 2009-10 had taken the said company as functionally comparable. Once the said concerns are accepted to be functionally comparable in subsequent years and unless it is brought on record that the functions performed by the said concerns in the year under consideration were different than the functions performed in later years, then the said concerns cannot be rejected to be comparable. Accordingly, we hold so. 53. In respect of other aspects pointed out by the CIT (A) i.e. in respect of Minda S A I Ltd., annual report is not available, the learned Authorized Representative for the assessee has drawn attention to page 528 of the Paper Book and pointed out that the annual repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn, affect the net profits in the open market and hence, the economic adjustment should be made for difference in accounting policies. The assessee before us is engaged in asset intensive industry, wherein the gross value of plant machinery is to the tune of ₹ 93 crores and the cost of total assets is ₹ 117 crores (gross value). 34. Another aspect to be noted is that in addition to the depreciation, the assessee has also claimed heavy repairs and maintenance expenditure i.e. on building of ₹ 77.66 lakhs, on plant machinery of ₹ 3.28 crores and others of ₹ 1.41 crores. In such an incident, where depreciation is significant cost, then a prudent businessman would not ignore the same while benchmarking its cost. 35. Further, in the initial years when the asset is new then, the depreciation to be allowed is higher but for the same machinery, depreciation would be lower as the asset ages. When age of materially same asset is relatably less then depreciation incidence could be much higher. For example, where the value of asset is 100 and the rate of depreciation is 30, then depreciation would be 30; in second year of acquisition, depreciation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was at arm s length or not. The factors which go to influence price, cost or profits are / were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by the IT regulations. There is no way to dislodge the claim of the tax payer. The context and purpose of legislation and facts of the case overwhelmingly approve adoption of cash profit only. This case was relied upon by the assessee in support of its proposition that cash PLI or PBDIT is the appropriate PLI. 19.4.3 We find that the above finding of the Tribunal was given as the case of revenue was not clear and the TPO had rejected cash PLI without assigning any reasons. Subsequently, the Mumbai, ITAT, in the case of Fiat India Pvt Ltd (supra) held that in an asset intensive industry where assets are the key drivers, excluding depreciation would not lead to any meaningful outcome and PBIT and not PBDIT is to be taken for computing PLI. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the same is not applicable being factually different. Accordingly, where the fixed assets drives revenues of manufacturing enterprise and where depreciation is significant cost component to be accounted for, then such depreciation could not be disregard for transfer pricing purposes while benchmarking international transaction under TNMM method. The exclusion of depreciation would distort the comparability analysis, therefore, cash profit or PBDIT could not be adopted as the PLI. 38. The Delhi Bench of Tribunal in a later decision in DCIT v. Sumi Motherson Innovative Engineering Ltd. (2014) 150 ITD 195 (Delhi), where the company manufactured models, dyes, molted components and provided consultancy services to associate enterprises, held that under TNMM method, net profit margin was the starting point for determining arm s length price. It was further held that net profit margin was synonymous to net operating profit, which meant profit from business activity after considering all direct and indirect costs and after excluding non-operating incomes and expenses. Thus, all operating expenses were required to be taken into account. The Tribunal thus, held that the assessee in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y High Court in CIT v. M/s. Welspun Zucchi Textiles Ltd. in Income Tax Appeal No.1286 of 2014, judgment dated 06.01.2017, where the question raised before the Hon ble High Court was as under:- (ii) Whether on the facts and in the circumstances of the case and despite the prescription of parameters of comparability by Rule 10B(2) of the Income Tax Rules, 1962, the Tribunal was correct in law, in directing the inclusion of DEPB in turnover and depreciation in net profit for the purpose of profit margin of comparables and assessee? 42. The Hon ble High Court held that the depreciation is to be included as operating expenses to determine the operating cost of the assessee and the comparables. The question before the Hon ble High Court was the comparability between profit margins of assessee and the comparables in view of the parameters of comparability under Rule 10B(2) of IT Rules. The Hon ble High Court has held as under:- 4, . (a) . (b) . (d) We find that so far as exclusion of DEPB benefit in arriving at the operating profit of the respondent assessee is concerned, the order of the Tribunal for the Assessment Years2005-06 and 2007-08 were ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only to the international transactions undertaken and not at the entity level. 58. We find that the issue is covered by the ratio laid down by the Hon ble Bombay High Court in CIT v. Thyssen Krupp Industries India (P.) Ltd. [2016] 381 ITR 413 and also by the ratio laid down by the Hon ble High Court of Delhi in CIT v. Keihin Panalfa Ltd. [2016] 381 ITR 407. Hence, we direct the TPO to compute transfer pricing adjustment, if any, only with respect to international transactions. The ground of appeal No.8 is thus, allowed. 59. Now, coming to the additional grounds of appeal raised by the assessee, wherein the assessee has challenged the computation of operating margins of assessee by considering the interest expenditure, loan processing charges and loss on disposal of assets as operating expenditure i.e. additional ground of appeal No.9 and in considering the scrap sales income as non-operating in nature. Further, vide ground of appeal No. 10, the assessee is aggrieved by the order of CIT (A) in not allowing economic adjustment on account of non CENVAT, customs duty on account of wire imports made by the assessee vis- -vis comparables. 60. The learned Authorized Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 27.34 crores, the assessee pointed out that even in subsequent years i.e. 2010-11, scrap sales has been considered as operating income, the same may be so included. 63. The learned Departmental Representative for the Revenue pointed out that no such ground of appeal was raised before the lower authorities and there is no merit in fresh claim being made. He also pointed out that whatever treatment is to be given in assessee s hand, the same should be given in the hands of comparables also. 64. We find this issue of working of operating margins on account of loss on disposal of assets, loan processing charges and interest expenditure, whether is non-operating or operating in nature, has not been looked into either by the TPO or by the CIT (A). The assessee had raised this issue and hence, additional ground of appeal No.9 is admitted. The learned Authorized Representative for the assessee points out that the interest expenses and loss on disposal of assets has been held to be non-operating in the hands of assessee in later years. Accordingly, we direct the Assessing Officer / TPO to verify this plea of assessee. In case, similar expenditure has not been taken as non-operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, that is no so in the present case. Even on merits of the case, the assessee company was incorporated in 1997 and the production was started in 1999. The financial year in appeal is 2004-05 and the assessee is asking for adjustment on account of import content. We find no merit in the plea of assessee, in view of the ratio laid down by the Delhi Bench of Tribunal in Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448. 68. The learned Authorized Representative for the assessee on the other hand, has placed reliance on the ratio laid down by the Pune Bench of Tribunal in Demag Cranes Components (India) (P.) Ltd. v. Dy. CIT [2012] 49 SOT 610 (Pune) and the Mumbai Bench of Tribunal in Capgemini India (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 330. The learned Authorized Representative for the assessee sought adjustment in the hands of assessee in this regard. It is settled that the adjustment, if any, has to be made in the hands of comparables and hence, in the totality of the above said facts and circumstances, there is no merit in the claim of assessee in this regard. Reliance placed on the ratio laid down by the Pune Bench of Tribunal in Skoda Auto India (P.) Ltd. v. Asstt. C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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