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TMI Blog2021 (9) TMI 1467X X X X Extracts X X X X X X X X Extracts X X X X ..... O has erred in rejecting the Comparable Uncontrolled Price ("CUP") Method adopted by your appellant as the most appropriate method for the determination of the Arm's Length Price and wrongly adopting Transaction Net Margin Method. The DRP has erred in upholding this rejection of CUP method and disregarding prices quoted by London Metal Exchange ("LME") which is a global bench mark for commodity pricing 3. The TPO has erred in not considering the under utilization of manufacturing capacities of your appellant and the resulting idle costs which have been wrongly ignored while computing your appellant's margins. The DRP has erred in upholding the action of the TPO. 4. The TPO has erred in the application of functional similarity filter while selecting 5 wrong comparable companies, whose business and operations have nothing in common with that of your appellant. The DRP has erred in upholding the same. 5. The TPO has erred in failing to apply the imports filter and by selecting companies which have NIL or minimal imports as comparable to your appellant who had major imports during the year. 6. Without prejudice to Ground 7 below, the TPO has erred in not considering IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee Price and wrongly adopting Transaction Net Margin Method (TNMM) disregarding prices quoted by London Metal Exchange ("LME") which is a global benchmark for commodity pricing. 8. The ld. AR submitted that as per the Guidance note on Transfer Pricing issued by the Institute of Chartered Accountants of India, typical transactions where CUP method can be used are as follows:- a. Transfer of goods b. Provision of services c. Intangibles d. Interest on loans 9. Typical transactions where TNMM may be adopted are: a) Provision of services b) Distribution of finished products where resale price cannot be adequately applied c) Transfer of semi-finished goods 10. The major international transaction undertaken by the appellant with its AE is with respect to Transfer of goods. Hence, CUP is the MAM to be adopted since TNMM is not applicable in the case of transfer of goods. In case of commission for marketing services, the appellant had used TNMM as MAM. 11. The ld. AR submitted that the OECD in its Transfer Pricing Guidelines (2017) observes as under: Para 2.14 "The CUP method compares the price charged for property or services transferred in a control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the assessee, the LME is the world centre for the trading of industrial metals. The LME is the de facto price formation venue for industrial metals. The prices available on the LME platforms are used as the global reference and basis for physical trading as well as in valuation of portfolios. LME prices are trusted because the LME is the most liquid and the most traded industrial metals market in the world and its global network of warehouses ensures the price is truly effective of supply and demand. 17. The Company's business is in products manufactured out of copper and copper alloy metals, which are commodities. The prices of copper which is the base metal for such products are determined based on market prices and the commodity stock exchange. Accordingly, the prices on the LME have been considered. The AE sources the raw material such as Copper Cathode from the metal traders and uses this for manufacturing the final product which consists of Melting, Casting, Hot Rolling, Milling, Annealing, Cold Rolling, Annealing, Pickling and final Cold Rolling. Some of these processes are performed multiple times to reach the desired Mechanical Properties and finish of the St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... markets semi-finished metal products manufactured by its holding company and other group companies. The activities and functions of the AE includes sourcing of raw materials, i.e., the metal, manufacture of copper/ copper alloy coils, carrying out quality tests and finally exports the copper/ copper alloy strips to the appellant. It thereafter slits the copper alloy strips as per customer specifications and despatches it to the end customer. 23. As mentioned in the Transfer Pricing Documentation, the basis of pricing is given below: * The price charged by the AE for the material imported by Wieland India consists of 2 elements, viz., 'Metal Price' and 'Fabrication Price'. * Metal Price = Alloy metal value based on the prevailing LME rate + Premium + Melting loss of 2%. * 'Premium' is the addition in price over and above the cash seller settlement price published on a daily basis by the LME paid by metal fabricators to virgin metal suppliers. It is a part of the purchase price of the AE. * 'Melting loss' is the loss when an alloy is cast using virgin metal of the constituents of the alloy. * Fabrication Price = Cost of manufacturing/ processing + overheads + financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osts of ' significant service in procuring the raw material' and 'freight and insurance which is paid by the associated enterprise'. There is no dispute about this position as evident from the observations made by the Transfer Pricing Officer himself. It is not even the case of the revenue authorities that the consideration paid by way of this mark up is excessive or unreasonable vis-à-vis, to use the words of the Transfer Pricing Officer, 'significant services provided in procuring the raw material' and 'freight and insurance costs'. One of the objection taken by the Transfer Pricing Officer is that the service charges charged by the AE from other uncontrolled transactions is not available but then it is nobody's case that the AE is engaged in providing similar services to unrelated enterprises. The external CUP, by way of London Metal Exchange prices, is the basis of determination of transaction prices and all that the Transfer Pricing Officer is to see is whether the variation in such prices vis-à-vis the prices at which the assessee has entered into transactions with the AE is reasonably explained. As a matter of fact, Rule 10B(1)(a)(ii) catego ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the associated enterprises, it does not also require that the transactions must also be entered into such a manner as to ensure that the assessee must make reasonable profits. The question of reasonableness or profits is relevant only when transaction profit methods are applied, but such a situation arises only when standard or traditional methods fail. That is not the situation before us. We are in sesisn (sic) of a situation in which traditional method is not properly faulted with and the parameters necessary for application of the same are available. The consideration about lower profits having been earned by the assessee, even if that be so, are not at all germane to the occasion. 26. It is also submitted that CUP (based on LME prices) was accepted as MAM in AY 2014-15 by the TPO. Considering that there are no changes in facts in the current year, the TPO ought to have accepted CUP as the MAM for AY 2015-16 also and the import transactions should have been treated as at arm's length price based on the CUP Method. 27. On the other hand, the ld. DR submitted that the DRP held the CUP method requires stringent comparability of controlled transaction with third party transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (INR) Revenue from operations 6615,72,437 Operating Income 6615,72,437 Total Expenses 6816,85,322 Less: Financial Cost 425572 Operating Expenses 6812,59,750 Operating Profit (196,87,313) OP/OR -2.98% 31. Accordingly, the TPO made adjustment with regard to manufacturing segment as follows:- Manufacturing Segment Particulars Formula Amount (INR) Taxpayer's operating revenue OR 66,15,72,437 Taxpayer's operating cost OC 68,12,59,750 Taxpayer's operating profit OP -1,96,87,313 Taxpayer's PLI PLI=OP/OR -2.98% (+)3% of the Taxpayer's margin A=[(100+PLI)*1.03]-100 -0.07% Mean Margin of comparable set B 3.22 Adjustment Required (if A< B) Yes Arm's Length Cost C = (100-B)*OR/100 64,02,69,805 Operating Cost OC 68,12,59,750 Excess cost being adjustment OC - N 4,09,89,945 32. It is also brought on record by the assessee that the functions performed by Wieland Metals India Private Limited and its associated enterprises with regard to the international transactions are detailed below: Functions Performed Purchase of materials - import (including goods in transit) Wieland Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess of receipt of imported goods such as clearing and forwarding at the Customs in India is undertaken by Wieland Metals India Private Limited by engaging customs agent. The copper and copper alloy strip master coils so purchased from Wieland Werke AG are subject to slitting process by Wieland Metals India Private Limited and then sold to end customers. Activities relating to manufacture and export of goods mentioned in the purchase order The Wieland group has manufacturing facilities in Germany, Austria, Great Britain, USA and Singapore. The activity of manufacture of product and export of products to the customers in accordance with their Purchase order is carried out by the Wieland group. These documents are sent to Wieland Metals India Private Limited. The products are then the property of the customer and hence no other functions are carried out by Wieland Metals India Private Limited when they reach the contractual territory. The research and development functions are carried out by Wieland Werke AG. Wieland Metals India Private Limited does not carry out any function relating to manufacture or research and development of these products. 33. Now the issue before us is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons were started about 2 years ago and had not reached its full capacity utilization. During FY 2014-15, the company was operating at 33.62%. Thus, the idle capacity was 66.38%. This had to be adjusted to the fixed infrastructure related costs and semi-variable costs. Detailed computation in this regard was submitted to the TPO which was not considered (Page 209 of Paperbook). Since the company was operating only 33.62% of its installed capacity, the company was not in a position to absorb its entire fixed costs in terms of infrastructure related costs. According to the ld. AR, the summary of fixed costs that must be considered as non-operating costs for arriving at the Operating Expenses for computing OPM using TNMM is given below:- Sl no. Nature of expenses Costs relating to idle capacity (Rs.) Computation of idle costs and reference to Paper book 1 Employee Benefit Expenses 50,98,793 Annexure 1 of submissions filed on 05-08-2018 to TPO (Page 225 of Paper book) 2 Depreciation - Plant & Machinery 52,63,138 33.62% of Rs.79,28,627 being depreciation on P&M (Page 17 of the Paper book) 3 Rent - Factory 35,41,339 Annexure 2 of submissions filed on 05-08-2018 to TPO (Pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is against the basic interest of justice. 39. The ld. AR submitted that several Benches of the Tribunal time and again looked at this issue and has directed the TPO/AO to allow adjustment for fixed costs on account of lower capacity utilization as follows:- a) In the case of Ariston Thermo India Ltd ([2013] 36 taxmann.com 501 (Pune - Trib.), the Pune Bench of the Tribunal, while delivering the judgment, highlighted the actual objective of comparability analysis and adopting the Most Appropriate Method which was to determine ALP of the international transactions and to examine whether the price charged in relation to a controlled transaction is comparable to an uncontrolled transaction of similar nature. Further, it also stated that net profit margin of the tested party, as referred to in the Rules has not been defined as such to be such profit as is drawn from the financial accounts. It can be suitably adjusted by applying appropriate economic adjustments to facilitate its comparison with other uncontrolled entities / transactions before being considered as the net profit margin of the tested party as stated by the Rules as such. Thus, the Tribunal held that as long as the adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power, repair etc. is less where capacity utilisation is low and this would lead to increased cost and lower profit. 36........ we are of the considered opinion that the assessee should be given the benefit of low capacity utilisation. ......" (Emphasis supplied) d) In the case of Mando India Steering [2014] 45 taxmann.com 160 (Chennai - Trib.), the Chennai Tribunal held as under:- "We are of the considered view that under-utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. ......." e) Similar views have been taken by the various benches of the ITAT in the following cases: * Genisys Integrating Systems (India) Pvt. Ltd. Vs DCIT (15 (ITR-Trib) 475) - Bangalore Bench * ACIT vs. M/s Fiat India Pvt. Ltd., ITA No. 1848/Mum./2009 dated 30.04.2010; * Skoda Auto India (P.) Ltd. vs. ACIT, 122 TTJ 699 (Pune); * Egain Communication (P.) Ltd. vs. ITO 118 TTJ 354 (Pune); * Amdocs Business Services (P.) Ltd. vs. DCIT 26 taxmann.com 120 (Pune); and, * Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upta Metals Sheets Limited 1989 26 Rachna Metal Industries Pvt. Ltd 1978 37 Multimetals Limited 1962 53 Metals United Alloys & Fusion Product Ltd 2006 9 Madhav Copper Limited (Part of Madhav Group) 2010 5 45. The other objections raised before TPO and DRP were as under:- Sl no. Name of the Company Remarks / Reason for rejection as comparable 1 Gupta Metal Sheets Ltd Functionally different * Dealing and manufacturing copper and copper alloy sheets, strips, foils and non-ferrous rolled semis * Involved in trading activities as per Financial statements - Refer Page 413 of the Paper book * Investment in Plant & Machinery is very limited thereby confirming that it is not a manufacturing company * Very large company with turnover of Rs.391 crores and therefore not comparable to the appellant company * No import of raw materials 2 Madhav Copper Ltd Functionally different Produces extensive range of enamelled, submergible wires, Copper Strips Profile suitable for any known application in Transformers, Motors, Alternators, Contactors, Relays, Auto electricals, Submersible Pump, Motor, also suitable for use in high speed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Metal Sheets The company is engaged in manufacturing and sale of copper and copper alloy sheets/strips. The company's manufacturing plant is located in Rewari (Haryana) with an installed capacity of 14,500 tonnes per annum as on March 31, 2015. The company manufactures strips and sheets in various sizes starting from 0.1 mm to 14 mm to its customer base. The company has shown Plant & Equipment worth Rs. 27 Crores in its financial statements and an addition of 1.87 Cr made during the F.Y. 2014-15. The import filter objection has been dealt with in detail. Hence, the taxpayer's objections are rejected and the company is retained as a comparable. Madhav Copper Ltd. The company manufactures copper enamelled, submergible wires, copper strips and rods etc. It is not necessary for the comparable company and the taxpayer to cater to the same industries in order to be functionally comparable. The import filter objection has been dealt with in detail. In view of the above discussion, the objections of the taxpayer are rejected, and the company is retained as a comparable. Rachana Metal Industries Pvt. Ltd. The company is involved in copper allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is wide disparity in the functioning of the assessee visà- vis the functioning of these companies. 52. Without prejudice to the contention that TNMM is not the MAM, it is submitted that certain basic filters are to be applied while selecting comparable companies. In this case, transactions / companies cannot be compared if there are geographical differences. Thus, purchases of raw materials procured from outside India cannot be compared with indigenous purchases due to variations in quality, price, exchange rate differences, etc. Location savings arising out of geographic markets for raw materials have to be considered while determining comparability. 53. The DRP has rejected this ground by stating in Page 15 as follows:- "If the raw materials were much cheaper in India, the prudent assessee must have procured them locally instead of importing them. Hence, it goes to show that the cost of raw materials was not a differentiating factor whether one industry imports or not. Hence imports filter is not very relevant or critical to apply." 54. It is submitted that the DRP grossly erred in overlooking the business model of the assessee which is significantly different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that year in question was first full year of assessee's operation in which import content of raw materials was as high at 98.55% whereas import content of raw material in cases of comparables selected by revenue authorities ranged from 26% to 56.83%. The Bench held that aforesaid variation was particularly important because business model of a car maker having 98.5% import content in raw material normally could not be same as of a car maker having import content of 26% to 56.84% and thus no comparisons were possible between them, unless impact of import contents was eliminated. 56. The ld. DR relied on the directions of the DRP. 57. We have heard the rival submissions. It is noted that the consumption of raw materials is there in all of the comparable companies. The TPO has narrowed down to industries engaged in copper and its alloys. If copper and alloys are available in foreign markets much cheaper than the local markets, the comparables must have imported the raw materials from abroad. If the raw materials were much cheaper in India, the prudent assessee must have procured them locally instead of importing them. Hence, it goes to show that the cost of raw materials was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crutiny assessment. But the notes also states that the prior period expenses had crystallized/settled in the year." 61. According to the ld. AR, the facts of this case are squarely applicable to the instant case also since the liability had crystallized during the year and the invoices were received by the asse during the year from the vendor. In other words, a liability for an expenditure cannot be disallowed merely on the contention that the same pertains to transactions of an earlier year. Any expenditure incurred to meet a liability accruing and crystalizing in that year ought to be allowed. In the instant case, the assessee had no means of knowing or quantifying the expenditure that will be charged by the vendor until the invoice was received from them. The amounts were quantified, and the invoice was raised by the vendor and received by the appellant in AY 2015 16. Accordingly, the liability also crystalized in AY 2015-16. In this regard, the ld. AR also placed reliance on the following judicial precedents:- i. PCIT vs. Rajasthan State Seed Corporation Ltd. [2017] 88 taxmann.com 445 (Rajasthan) ii. CIT vs. Indian Petrochemicals Corporation Ltd. [2016] 74 taxmann.com 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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