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TMI Blog2020 (12) TMI 1189X X X X Extracts X X X X X X X X Extracts X X X X ..... ding) and Furukawa Electric Co. Ltd and Furukawa Automotive Parts Inc. (jointly owning 51% shareholding). The assessee operates as a manufacturer of wiring harness and supplies the same to its customers which are mainly original equipment manufacturers operating in Indian Automobile Industry. For the purpose of manufacturing, the assessee has a plant at Bawal in Haryana where wiring harness for four wheelers and other components related to wiring harness for example couplers, terminals, relay box, junction box and steering roll connectors etc. are manufactured. 2.1 The return of income was filed declaring a loss of Rs. 34,41,93,072/- which was subsequently revised to a loss of Rs. 36,18,55,901/-. The case of the assessee was selected for scrutiny and since the assessee had entered into international transactions during the year under consideration, a reference was made in terms of section 92CA(1) of the Income Tax Act, 1961 (hereinafter called the Act) to the Transfer Pricing Officer (TPO) for determining the Arms Length Price (ALP) of the international transactions undertaken by the assessee. The international transactions of the assessee were as under:- Type Of International Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the returned loss of Rs. 361,855,901. 2. That the Hon'ble CIT (A) and Learned Transfer Pricing Officer ("Learned TPO") have failed to appreciate that the Appellant is a 51:49 percent Joint Venture between two unrelated parties (i.e. Furukawa group, Japan and Minda Capital Limited, India), and that all transactions undertaken by the Appellant are rationally driven with a view to protect the commercial & economic interest of the JV partners. 3. That the Hon'ble CIT (A) and Learned TPO have arbitrarily rejected the scientific transaction-by-transaction analysis carried out by the Appellant which was consistent with the Indian transfer pricing regulations prescribed under the Income Tax Act, 1961 and Income Rules 1962. Further the Learned TPO erred in law in re-determining a price of the impugned international transactions, without appreciating that the circumstances necessitating such re-determination as mentioned in sub-section (3) of section 92C did not exist. 4. Without prejudice, the Hon'ble CIT (A) and Learned TPO have erred on facts and in law in undertaking a fresh transfer pricing analysis using the Appellant as the "tested party" ignoring the fact that it was only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recovered due to a halt in production on account of such unforeseen circumstances and severe business exigencies. 8. That the Hon'ble CIT (A) and Learned TPO has grossly erred in restricting the quantum of adjustment warranted on account of abnormal expenses additionally incurred by the Appellant due to strike and labour unrest (such as excess offshore cost of production, rent for additional premises, legal expenses in relation to court proceedings for strike. other administrative and deputed personnel expenses etc.) to an ad-hoc 50 percent without giving any cogent basis for such determination. 9. That the Hon'ble CIT (A) and Learned TPO has erred in not giving due cognizance to the fact that during the subject year approximately 85 percent of the Appellant's purchases comprised of imports from AEs which were considered necessary and expedient by the Appellant to fulfill its contractual obligations even amidst such business exigency. The Hon'ble CIT (A) and Learned TPO failed to acknowledge that the Appellant incurred significant non-recurring costs (in the form of statutory levy on imported goods, such as basic customs duty amounting to INR 2 crores (approx.) and freight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. 15. That the Hon'ble CIT (A) and Learned AO have erred in making an addition by disallowing the 10% of the staff welfare expenses on account of being excessive and high as compare to the previous year. However, such expenses have already been benchmarked by the learned TPO by considering the entire cost base of the Appellant including the staff welfare expenses, which has resulted in economic double taxation in the hands of the Appellant. 16. The learned AO has erred on facts and circumstances of the case by initiating the penalty proceedings under section 271(l)(c) of the Act against the Appellant, which is bad in law." 2.5 Likewise, in assessment year 2010-11, the return of income was filed declaring a loss of Rs. 2,87,03,378/- which was subsequently revised declaring a loss of Rs. 3,39,77,500/-. After a reference was made to the Transfer Pricing Officer, an adjustment of Rs. 20,91,32,446/- was made on identical lines as in Assessment Year 2009-10. The assessee's appeal before the Ld. CIT (A) was dismissed in this assessment year as well and against this dismissal of the appeal, the assessee is before the Tribunal challenging the dismissal by raising the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot giving due cognizance to the fact that during the subject year approximately 64 percent of the Appellant's purchases comprised of imports from AEs which were considered necessary and expedient by the Appellant to fulfill its contractual obligations even amidst such business exigency. The Hon'ble CIT (A) and the Learned TPO failed to acknowledge that the Appellant incurred significant non-recurring costs (in the form of statutory levy on imported goods, such as basic customs duty and freight) which also need to be excluded while determining the net operating margin of the Appellant for the purpose of the transfer pricing analysis. 7. The Hon'ble CIT (A)/Learned TPO erred in computing the operating margins of the Appellant and has erroneously considered certain item of income/ expenses arising from the ordinary course of business, as non-operating in nature. 8. The Hon'ble CIT (A)/Learned TPO has erred in not allowing benefit of 5 percent range as provided under the proviso to Section 92C(2) of the Act. 9. The Hon'ble CIT (A)/Learned TPO has erred in the facts and circumstances of the case and in law in rejecting the Appellant's claim to use multiple year data for computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maruti for the loss borne by it due to non supply of wiring harness on time. It was submitted that, accordingly, the assessee had to incur excess costs such as purchase at a higher cost, air freight, custom duty etc besides incurring abnormal costs on account of labour unrest and strike. 3.1 It was submitted by the Ld. AR that due to various reasons, if the operating margin of the assessee was to be calculated then due adjustment on account of each such factor needed to be quantified and allowed. It was further submitted that if it is not so done, then the operating margin of the assessee would not be a true indicator of the assessee's transfer price. It was submitted that it was due to these reasons that the assessee preferred the use of the AE as the tested party. 3.2 It was submitted that explanations along with relevant evidences had been submitted before the TPO but the TPO had subjectively brushed aside all the submissions of the assessee and had rejected the assessee's claim for use of the AE of the tested party for the determination of arms length of its international transactions. It was further submitted that the TPO had introduced a set of 99 comparable without proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under for ready reference:- Particulars Amount (Rs) Basic custom duty paid by the appellant (A) 2,37,96,210 Imported goods as % of total raw material consumption in case of appellant (B) 85% Imported goods as % of total raw material consumption in case of comparable companies (C) 14.22% Adjusted import duty (D = A*(C/A) 39,82,198 Excess import duty paid (A-D) 1,98,14,011 3.6 Likewise, the Ld. AR submitted that due to strike and labour unrest the assessee had to incur excessive costs on freight and as per the assessee's calculation the assessee had to incur an excess expenditure of Rs. 6,57,98,823/- with respect to freight on air transport . It was also submitted that suitable adjustment with respect to material cost also needed to be allowed because in view of the production facilities having been halted, the assessee had to requisition the manufactured products from its AEs for which extra cost had to be incurred. The Ld. AR submitted that suitable adjustment with respect to material cost also needed to be allowed. Apart from this, it was also the submission of the Ld. AR that suitable adjustment towards pre-operative expenses also needed to be allowed as the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee should be allowed the benefit of working capital adjustment. 4.0 With respect to ITA No. 5445/Del/2016 for assessment year 2010-11, the Ld. AR submitted that the arguments advanced by him for assessment year 2009-10 would also apply mutatis mutandis in assessee's appeal for assessment year 2010-11 and that for the sake of brevity, the arguments were not being repeated. The Ld. AR submitted that the issues in assessment year 2010-11 being identical to issues in assessment year 2009- 10, a similar view may be taken in both the appeals of the assessee. 5.0 In response, the Ld. CIT (DR) drew heavy support from the observations and findings of the Ld. CIT (A) while dismissing the assessee's appeal and submitted that the Ld. CIT (A) has given a categorical finding that the data given by the assessee to butteress its contentions were insufficient, evidences filed were sketchy and quantitative details were not available in the audit report. The Ld. CIT (DR) submitted that the findings of the Ld. CIT (A) were findings of facts and the same deserved to be appreciated while considering the merits of the assessee's appeal with respect to the number of comparables selected by the TPO. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 We note that the TPO has not pointed out any deficiency in either the functional analysis undertaken by the assessee for the purpose of selection of tested party or in the reliability of data furnished by the assessee for undertaking benchmarking analysis taking the associated enterprise as the tested party. Accordingly, no cogent reason has been provided by the TPO for rejection of the associated enterprise as the tested party. From a perusal of Rule 10B(l)(e) it is seen that the Rules do not give priority to the selection of either the assessee or the associated enterprise as the tested party. The OECD guidelines on transfer pricing provide that the entity with simpler functional profile and for which most reliable comparables can be found should be selected as the tested party for the purpose of the benchmarking analysis: "3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one parly to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex...... " 6.6 Accordingly, while selecting the tested party for the purpose of applying the TNMM, the functional profile of the transacting entities is required to be taken into consideration and the entity having simpler functional profile i.e. the entity not assuming significant risks and employing non-routine intangibles should be selected as the tested party. We note that the assessee's objection being selected as a tested party were not dealt in the proper perspective by the Ld. CIT (A) and, therefore, this i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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