TMI Blog2023 (1) TMI 1199X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly considered the vehicles to be capital asset as these vehicles are admittedly put to use for the purposes of business. Under such circumstances, granting of depreciation is rightly been directed by Ld.CIT(A), which is in accordance with law. We do not find any infirmity in the view taken by Ld.CIT(A) and the same is upheld. Loss as declared in the revised return - AO did not consider the claim disallowance if interest as per the revised return - HELD THAT:- As decided in case of Goetze India Ltd. [ 2006 (3) TMI 75 - SUPREME COURT] this issue needs to be remanded to the Ld.AO to consider the loss as declared by the assessee in the revised return. Nature of expenditure - product development expenses - revenue or capital expenditure - HELD THAT:- As decided in own case [ 2022 (2) TMI 1338 - ITAT BANGALORE] it is necessary to find out as to whether the assessee has incurred all these expenses on its own account or on behalf of its AE. If the assessee has incurred expenses on behalf of the AE and the benefits of these expenses go the AE, then the Ld DRP was justified in disallowing this claim. If it is not so, then the assessee is required to prove that these expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y - DRP denied the claim as no details regarding the same were not furnished by the assessee - HELD THAT:- We direct the assessee to furnish all details to assist the Ld.AO/TPO to compute Working Capital Adjustment on actuals. We also draw support from the observation of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. [ 2018 (10) TMI 1796 - ITAT BANGALORE] - We thus remand this issue to the Ld.AO/TPO for considering the claim of the assessee of Working Capital Adjustment in accordance with the principles laid down supra. Adopting the foreign exchange revenue filter for excluding comparables having earnings in foreign currency exceeding 40 % as against 25% - HELD THAT:- Both sides submitted that Ground No.3-4 in revenue s appeal are also on the issue of arbitrary adoption of foreign exchange currency filter at 40%. It is submitted that this is the only issue raised by the revenue in its appeal. We have perused the submission advanced by both sides in light of records placed before us. As noted that, such filter has not been applied by the Ld.TPO. And there is no basis for adopting 40% filter, applied by the Ld.CIT(A). In the interest of jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld.CIT(A)-3, Bangalore for assessment year 2013-14 on following grounds of appeal: ITA No. 2611/Bang/2018 Based on the facts and circumstances of the case and in law, FMC India Private Limited (-FMC India- or the Company.' or the Appellant ) respectfully craves leave to prefer an appeal against the Order passed by the Commissioner of Income Tax (Appeals) - 3, Bangalore [hereinafter referred to as the CIT(A) ] under section 250 of the Income-tax Act, 1961 ( Act ) for Assessment Year ( AY ) 2013-14 dated 23 July 2018, on the following grounds: 1. The order of the learned AO/ CIT(A) is based on incorrect interpretation of law and therefore, is bad in law, and hence liable to be quashed. 2. Disallowance of vehicle registration and other expenses 2.1. The learned AO/ CIT(A) erred in law and facts, in treating the sum of INR 2,04,289 being expenditure incurred towards RTO charges and vehicle transfer charges as capital expenditure and thereby erred in not allowing the same under section 37(1) of the Act. 2.2. The learned AO/ CIT(A) failed to appreciate that expenditure incurred towards RTO charges and vehicle transfer is incurred wholly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata. 7. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, in relation to inclusion of Bharat Insecticides Limited, Bharat Rasayan Limited and Rallis India Limited as comparable based on unreasonable comparability criteria. 8. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, in relation to not making suitable adjustment to account for differences in level of working capital employed by comparables vis-avis the Appellant as contended by the Appellant. 9. The learned CIT(A) has erred, in law and in facts, by adopting foreign exchange revenue filter for excluding companies having earnings in foreign currency exceeding 40 percent of the turnover vis-a-vis 25 percent of the turnover. 10. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, not granting suitable adjustment as per Rule 10B on account of abnormal foreign exchange fluctuation loss suffered by the Appellant vis-a-vis comparables. 11. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, in relation to treatment of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40% arbitrarily which resulted in elimination of the companies (Bhagiradha Chemicals Inds Ltd and Sabero Organics Gujarat Ltd) that were selected by the tax payer in his own TP Study. 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. 2. Brief Facts are as under: 2.1 The assessee sells its finished products to third parties in India and also resells the chemicals and formulations imported from FMC Corporation, USA. The assessee also imports raw materials (Lithium Metal) and finished goods for trading from FMC Corporation, USA and FMC Chemicals Ltd, UK. The assessee also provides certain support services to the various divisions of FMC. The assessee also provides development services to the API Hong Kong and application support services to the Health Nutrition (Pharma) division of FMC Corporation, USA. The support services provided by it are in the form of business development service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bursement of expenses 17,808,637 2.5 The Ld.TPO called for segmental details of the services rendered by the assessee. From the details filed, the Ld.TPO noted that the assessee is providing, Manufacturing, R D Services and Support services. The Ld.TPO noted that R D and Support Services, showed consistent high margins at net level, but in so far as Manufacturing segment, the assessee showed negative OP/sales as under: Particulars Manufacturing Sales of Products Other Services Unallocated Total (P L) R D Services Support Services as Non Operating Sales 2121026599 2121026599 Service Income 76593052 12875094 89468146 Other Income 11196281 11196281 Total Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/OC 18.90% 12.00% -4.13% 2.6 Assessee was called upon to explain the negative OP/Sales, to which the assessee responded by replying that assessee treated the forex loss as non operating and product development expenses was also considered as non operating in the Manufacturing segment. The Ld.TPO while computing the margin of assessee rejected the treatment of forex loss and product development loss as non operating. 2.7 The Ld.TPO noted that assessee used following three comparables : 1. Bhagiradha Chemicals and Industries Ltd. 2. Kilpest India Ltd. 3. Sabero Organics Gujarat Ltd. 2.8 The Ld.TPO also shortlisted 14 comparables and after considering the comparables of the assessee finalized following 13comparable with average margin of 7.66 %. The Ld.TPO thus computed the proposed adjustment being the shortfall at Rs.24,42,82,807/- 2.9 The Ld.AO while passing the final assessment order made further addition apart from the TP addition of Rs.24,42,82,807/- as under: Disallowance of Provision under sec.40(a)(i) Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law. 6.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional ground raised by the assessee vide application dated 05/04/2019. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 6.2 On the contrary, the Ld.CIT.DR though opposed admission of the additional grounds, could not bring anything on record which would challenge such a right available to assessee under the Act. We have perused the submissions advanced by both sides in light of records placed before us. The Ld.DR did not object for the additional grounds being admitted. 6.3 We note that one of the additional grounds is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. 6.4 Considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee. He relied on the orders passed by the Ld.CIT(A). We have perused the submissions advanced by both sides in the light of records placed before us. 9.3 The disallowance of Rs.2,29,289/- comprises of two components: i) Being Rs.25,000/- that was paid by the assessee as earnest money deposit with regards to Government tender applied during the period. ii) Balance of Rs.2,04,289/- is in respect of registration of new vehicles and or vehicles that was transferred from Andhra Pradesh to Karnataka. 9.4 In respect of Rs.25,000/- being the earnest money deposit there is a categorical observation by the Ld.CIT(A) that these are refundable deposits and therefore has been rightly treated as not revenue in nature which is disallowed by the Ld.CIT(A) u/s. 37(1). It is not in dispute that the said amount has not been expended for the purposes of business. Under such circumstances, the disallowance of Rs.25,000/- is not warranted. We therefore direct the Ld.AO to allow Rs.25,000/- as an expenditure incurred by the assessee for the purposes of its business. Coming to the registration expenses incurred by assessee to the extent of Rs.2,04,289/-, we note that the Ld.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee submitted before the AO that it has incurred these expenses with the intention of expanding the existing line of business. The assessee submitted that incurring of this kind of expenses is an integral part of profit earning process and it aids the assessee to continuously improve its portfolio of products. The assessee also relied upon the decision rendered by Chandigarh bench of ITAT in the case of Glaxo Smithkline Consumer Healthcare Ltd. v. Asstt. CIT [2007] 112 TTJ 94 and also the decision rendered by Hon'ble Karnataka High Court in the case of CIT v. Bharat Earth Movers Ltd. [1985] 23 Taxman 400 and also by Chennai bench of ITAT in the case of Dy. CIT v. Magnetic Meter Systems IndiaLtd. [2012] 25 taxmann.com 438. It was submitted that these expenses did not result in any enduring benefit to the assessee. 8.1 The AO did not accept the explanations of the assessee. The AO took the view that these expenses would give enduring benefit to the assessee once the products developed by it are put to commercial use. The AO also examined the nature of expenses and noticed that these expenses have been incurred for registration studies of product Carbosulfan, vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in light of the above observation by the coordinate bench. Accordingly these grounds raised by the assessee stands allowed for statistical purposes. 13. Ground No.7 12 are raised by the assessee challenging the inclusion of following comparables: Bharat Insecticides Ltd., Bharat Rasayan Ltd., and Rallis India Ltd. 13.1 Before we undertake the comparability analysis, it is sinequa non to understand the FAR of the assessee vis-a-vis the comparables. The functional analysis as obverted by the Ld.TPO is as under: 2.1 As per the TP document, FMC India is a company incorporated in India on 6 April 20th having its registered and corporate office in Bangalore. FMC India imports chemicals and formulations (raw materials), from FMC Corporation, USA and processes them (through toll manufacturers) in India. FMC India sells its finished products to third parties in India, and also resells the chemicals and formulations imported from FMC Corporation, USA. The taxpayer also imports raw materials (Lithium Metal) and finished goods for trading (Lithium HMDS) from FMC corporation, USA and FMC Chemicals Ltd, UL (`FMC UK'). FMC India processes them and sells them to third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown at Rs. 261.88 crores in the profit loss account and the entire turnover pertains to pesticides formulation only as per information given at page Nos. 2370 2371. We also notice that this company has not reported any other operating revenues in the profit loss account available at page No. 2371, meaning thereby, the assessee has not carried out any toll manufacturing works during the year under consideration, as submitted by Ld. A.R. Accordingly, we are unable to appreciate the contentions of Ld. A.R. Accordingly, we do not find any other reason to exclude this company from the list of comparable companies. Accordingly, we confirm the order of the AO in including this company as comparable company. 13.2.4 We do not find any reason to differ from the above view and respectfully following the same we up hold the inclusion of this comparable in the final list. 13.3 Bharat Rasayan Ltd: 13.3.1 Assessee is seeking exclusion of this comparable by submitting that it is functionally different as it is engaged in diversified products. In support of this argument, assessee has relied on the website of the company wherein it is revealed that this company is engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be retained. We have perused the submissions advanced by both sides in the light of records placed before us. 13.3.5 We note that this comparable has only segmental head from which, the revenue is generated being gross sales and assessee also has not bifurcated its revenue from the sales in local market and export sales. As far as the products manufactured and sold are concerned, this comparable is also manufacturing similar products(pesticides) like that of assessee. We therefore do not find any reason to exclude this comparable from the final list. The Ld.AR pointed out that in Ground no. 12, assessee seeks to rectify the errors while computing the margins of this comparable. We therefore direct the Ld.AO to compute the margins of this comparable correctly and in accordance with law. 13.4 Rallis India Ltd: 13.4.1 This comparable is sought to be excluded by assessee for the reason that it is engaged in diversified business comprising of agri inputs, plant growth nutrients, seed and agri services. The Ld.AR submitted that this company is basically into a nonpesticide profile and therefore cannot be held to be functionally comparable with that of assessee which is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the working capital by the comparable companies and if so, c. How the cost of such working capital has had an impact on the margins of the comparable companies has been made to demonstrate the impact of the difference in working capital. First of all, the difference in working capital levels itself cannot be accurately measured as data with regard to the working capital employed by the assessee and the comparable companies is not available on a daily basis. Even if it is available, its impact on the profit margins cannot be measured. The DRP denied the claim as no details regarding the same were not furnished by the assessee. We direct the assessee to furnish all details to assist the Ld.AO/TPO to compute Working Capital Adjustment on actuals. We also draw support from the observation of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. vs. JCIT reported in [2019] 101 taxmann.com 313. We thus remand this issue to the Ld.AO/TPO for considering the claim of the assessee of Working Capital Adjustment in accordance with the principles laid down in Huawei Technologies India (P.) Ltd. vs. JCIT (supra). Accordingly this ground raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount is to be excluded while calculating operating results of the assessee and hence will also not form part of operating margin of the assessee. The Ld.AR at the outset submitted that the exchange loss pertaining to ECB loan as the percentage of turnover works out to be 3.64%. The Ld.AR by way of written submission filed in the paper book submitted as under: 12. The learned TPO/ AO have erred, in law and in facts, in not granting suitable adjustment as per Rule 10B on account of abnormal foreign exchange fluctuation loss suffered by the Appellant vis-a-vis comparables. The Assessee during FY 2012-13, has incurred the foreign exchange fluctuation loss amounting to INR 9,09,50,569. Of the above, INR 1,37,45,729 is relating to borrowings of the Assessee, i.e., financing activity pertaining to exchange loss in relation to External Commercial Borrowing ('ECB') loan, not pertaining to operating activities of FMC India. Therefore, the same shall not form part of operating results of the Assessee and should not be taken into account for computation of operating margins of the Assessee. Accordingly, post considering the exchange loss pertaining to ECB loan as non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an adjustment to the extent of 4.38%. 18.4 On the contrary, the Ld.DR relied on the observation of the DRP which is scanned and reproduced as under: 10.0 Vide ground of appeal 12 the appellant has argued that Foreign exchange loss should he considered as nonoperating in nature. The appellant has made detailed submissions on this issue. 10.1 The submissions of the appellant have duly been considered. The issue has been discussed in detail by the TPO on page 4 of her order. In relation to treatment of foreign exchange fluctuation gain/loss , the jurisdiction bench of ITAT in the case of SAP LABS India (P) Ltd v Asstt CIT [2011] 44 SOT 156 (Bang), held that the foreign exchange fluctuation income cannot be excluded from the computation of the operating margin of the assesseecompany. In the case of Petrofac Engineering Services India (P) Ltd v ITO [20141 46 taxmann.com 126 (Chennai - Trib), ITAT held that in case of international transactions entered into by assessee with its AE, foreign exchange gain/loss is a relevant factor in computation of assessee's ALP. The Madras High Court in the case of CIT v. Pentasoft Technologies Ltd.[2012] 347 ITR 578420137 33 taxmann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing decisions: decision of Hon ble Delhi Tribunal in case of Honda Trading Corporation India Pvt.Ltd., in ITA No.5297/Del/2017 by order dated 08/03/2013 decision of Hon ble Mumbai Tribunal in case of Pengea3 and Legal Database Systems Pvt.Ltd. in ITA numbers to 128/M/2014, 1958/M/2014 by order dated 06/03/2017 decision of Hon ble Bombay High Court in case of CIT versus in the sun Unilever Ltd reported in (2016) 72 taxman.com 325 decision of Cochin Bench of the Tribunal in case of US Technology International Pvt. Ltd. vs. ACIT in IT(TP)A No. 592/Coch/2018 for AY 2014-15 dt. 11.12.2019 18.6 He submitted that the comparable companies have not incurred similar kind of expenditure. The Ld.AR thus submitted that, appropriate adjustment therefore is called for on account of differences between the uncontrolled and controlled transactions. We have perused the decisions relied by the LD.AR. 18.7 Rule 10B(1)(e) of the Rules states that adjustments should be made to account for the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations on this aspect is as follows:- Regulation 1.482-1(d)(2) of the US regulation states as follows: In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. For purposes of this section, a material difference is one that would materially affect the measure of an arm's length result under the method being applied. The Indian transfer pricing regulations, OECD Guidelines and the US transfer pricing regulations call for an adjustment to be made in case of material differences in the transactions or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin. While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench of this Tribunal in case of CISCO Systems (India) (P.) Ltd. reported in (2014) 50 taxmann.com 280 18.12 The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustment relevant data for comparables may either not be available in public domain or may not be readily determinable based on information available in public domain. Whereas it may be possible to make equally reliable and accurate adjustment of the tested party whose data is easily accessible. The purpose and intent of comparability analysis, is to examine as to whether, or not, the values stated for the international transactions are at arms length. It means, it is an exercise to ascertain, whether the price charged in case of a controlled transaction is comparable to the price charged under the uncontrolled transaction of similar nature. In our view the regulations do not cast any restriction to provide adjustment to be made on the tested party. Therefore if the data in respect of uncontrolled transactions are not sufficiently available in order to iron out the differences, the adjustment is to be made in the hands of the tested part ..... 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