Income Tax Appellate Tribunal - Hyderabad
Zuari Cement Limited,Karnataka vs Acit., Circle-1, Nellore on 16 January, 2025
आयकर अपीलीय अधिकरण, है दराबाद पीठ
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad 'B' Bench, Hyderabad
BEFORE SHRI VIJAY PAL RAO, VICE PRESIDENT AND
SHRI MADHUSUDAN SAWDIA, ACCOUNTANT MEMBER
आ.अपी.सं /IT(TP)A No.630/Hyd/2024
(निर्धा रण वर्ा /Assessment Year:2014-15)
M/s. Zuari Cement Limited, Asst. Commissioner of Income Tax,
Kadapa, Andhra Pradesh. Vs. Circle 1, Nellore.
PAN:AAACZ1270E
(Appellant) (Respondent)
निर्धा ररती द्वधरध /Assessee by:
Shri Deepak Chopra, Advocate
and Shri Nitin Narang,C.A.
रधजस्व द्वधरध /Revenue by:: Shri Kumar Pranav, CIT-DR
सु िवधई की तधरीख /Date of hearing: 20/11/2024
घोर्णध की तधरीख /Pronouncement: 16/01/2025
आदे श/ORDER
PER MADHUSUDAN SAWDIA, A.M.:
This appeal is filed by M/s. Zuari Cement Limited, Kadapa ("the assessee"), feeling aggrieved by the final assessment order passed by the Learned Assessing Officer, Nellore ("Ld. AO"), dated 30.04.2024 as per the direction of Learned Dispute Resolution Panel ("Ld. DRP") for the A.Y. 2014-15 u/s. 143(3) r.w.s.
144C(13) of the Income Tax Act, 1961 ("the Act").
2. The assessee has raised the following grounds of appeal :
IT(TP)A No.630/Hyd/2024 2"1. That on the facts and circumstances of the case and in law, the order of assessment framed by the Office of the Deputy/ Assistant Commissioner of Income Tax, Circle 1, Nellore (hereinafter referred to as "Ld. AO") pursuant to the directions passed by the Hon'ble Dispute Resolution Panel (hereinafter referred to as "Hon'ble DRP") under Section 144C(5) of the Act, is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and void-ab-initio.
2. That the directions passed by the Hon'ble DRP are bad in law to the extent the same are prejudicial to the Appellant.
3. That the Hon'ble DRP/ Learned Transfer Pricing Officer ("Ld. TPO")/ Ld. AO has erred on the facts and in law in making the TP adjustment of INR 8,67,61,000 in respect of the international transactions and INR 1,08,670 on account of outstanding receivables.
Grounds on Transfer Pricing ("TP") Legal Ground
4. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred by completely disregarding the specific directions of the Hon'ble Income Tax Appellate Tribunal ("Hon'ble Tribunal") while proposing the TP adjustments and giving effect to the order of the Hon'ble Tribunal.
4.1. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred by exceeding the scope of TP assessment proceedings and proposed the TP adjustment beyond the scope of remand back, as per the order of the Hon'ble Tribunal.
4.2. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred in not taking cognizance of the IT(TP)A No.630/Hyd/2024 3 decision of the Hon'ble Tribunal in Appellant's own case wherein the Hon'ble Tribunal has allowed economic adjustment to the Appellate while computing the operating margin of the Appellate.
4.3. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO erred by undertaking a fresh comparable analysis when the same was not proposed by the Hon'ble Tribunal.
4.4. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred by completely disregarding the comparable benchmarking analysis undertaken in the previous TP order dated 31.10.2017 for the application of Transactional Net Margin Method, when there was no ground of appeal or any directions from the Hon'ble Tribunal.
4.5. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred in not taking cognizance of the decision of the Hon'ble Tribunal in Appellant's own case wherein the Hon'ble Tribunal has held foreign exchange loss as non-operating expenditure.
4.6. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred by re-characterizing the outstanding receivables as international transaction and proposing a TP adjustment in relation to this, when the ground of appeal of the Appellate for not treating the same as an international transaction and proposing any adjustment for this alleged transaction, has been upheld by the Hon'ble Tribunal.
5. That on facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO has erred in completely disregarding the specific directions of the Hon'ble DRP while proposing the TP adjustments and giving effect to the order of the Hon'ble DRP wherein the Hon'ble DRP accepted IT(TP)A No.630/Hyd/2024 4 Appellant's objections to reject Sagar Cement (M) Pvt Ltd as a valid comparable, as selected by the. Ld. TPO and further directed the Ld. TPO to verify the margins computation and recompute the same, if required based on facts and circumstances of the case.
Factual Grounds - without prejudice to the above Legal Grounds
6. Ground on Rejection of the bona-fide TP Documentation/ Economic Analysis maintained by the Appellant.
6.1. That the Hon'ble DRP/ Ld. TPO/ Ld. AO erred on the facts and in law, in rejecting the economic analysis in the TP documentation filed by the Appellant in terms of the Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ("the Rules") and proceeded to make the TP addition based on re-determination of the arm's length price ("ALP") of the following international transactions namely:
a) International transaction (aggregated); and
b) Interest on Outstanding Receivables.
(Hereinafter referred as 'impugned transactions')
7. Grounds on Rejection of TP documentation of the Appellant by not considering the economic adjustment made by the Appellant.
7.1. The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred, in rejecting the economic adjustment claimed for the manufacturing operations of the Appellant.
7.2. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred in not taking cognizance of the decision of the Hon'ble Tribunal in Appellant's own case wherein the Hon'ble Tribunal has allowed economic adjustment to the Appellate.
IT(TP)A No.630/Hyd/2024 58. Grounds on Rejection of the contention of the Appellate in relation to foreign exchange loss.
8.1. The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred, by considering the loss arising on account of foreign exchange fluctuation as operating expenditure in nature while computing the operating margins of the Appellate.
8.2. That on facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. TPO/ Ld. AO has erred in not taking cognizance of the decision of the Hon'ble Tribunal in the Appellant's own case wherein the Hon'ble Tribunal has held foreign exchange loss as non-operating expenditure.
9. Grounds on Undertaking Incorrect Economic Analysis of the impugned international transactions pertaining to the manufacturing operations - INR 8,67,61,000.
9.1. The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred, by rejecting, without cogent reasons, the quantitative and qualitative screens/ filters applied and set of comparable companies arrived at by the Appellant in the TP documentation following a detailed and robust search methodology and proceeding to apply certain arbitrarily selected filters to arrive at his own comparable set based on frivolous grounds.
9.2. The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred, on facts and in law, by arriving at the final set of comparable companies without providing details on the comparable selected in the earlier TP order dated 31.10.2017 without providing any reasons for the same.
9.3The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred; on facts and in law, by arriving at the final set of comparable companies without providing IT(TP)A No.630/Hyd/2024 6 details on the comparable search/ accept-reject matrix undertaken to arrive at the final set of comparables, for application of TNMM.
9.4. The Hon'ble DRP/ Ld. TPO/ Ld. AO have erred, in not considering the correct computation of operating margins of certain companies used as comparable and of the tested party.
10. Ground on Failure to make appropriate adjustments to account for difference such as in the level of working capital employed, level of varying risk profile, etc. of the Appellant vis-à-vis of the comparable companies 10.1. The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred, by failing to make appropriate adjustments to account for differences in the level of working capital employed by the Appellant vis-à-vis of the comparable companies while redetermining the arm's length price of the impugned transaction carried on by the Appellant, when fresh comparables were introduced by the Ld. TPO.
11. Grounds on Incorrect Economic Analysis in relation to interest on outstanding receivables undertaken by the Ld. TPO - INR 1,08,670.
11.1. The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred in treating the outstanding receivables as international transaction and making an adjustment on account of notional interest.
11.2. The Hon'ble DRP/ Ld. TPO/ Ld. AO has erred in computing interest on outstanding receivables for the entire period of one year. 11.3. The Hon'ble DRP/ Ld. TPO/ Ld. AO has failed to appreciate that receivables period of 60 days in export sales would be considered normal considering the modalities involved in the shipment.
IT(TP)A No.630/Hyd/2024 711.4. That on facts and circumstances of the case and in law, Hon'ble DRP/Ld. TPO/ Ld. AO has failed to appreciate that same issue has already been decided in favor of the Appellant by Hon'ble Tribunal.
12. Other Grounds on Erroneous Computation.
12.1 Based on the facts and circumstances of the case and in law, Hon'ble DRP/ Ld. TPO/Ld. AO has erred in proposing to initiate penalty proceedings under section 270A of the Act, against the Appellant. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal.
For the above and for any other grounds, which may be raised at the time of hearing, it is prayed that necessary relief may be provided."
3. At the outset, the Learned Authorised Representative ("Ld. AR") submitted that, this is the second round of the appeal before the ITAT on the issue related to Transfer Pricing ("TP"). Earlier, the ITAT has passed an order for the year under consideration along with consolidated order passed for A.Ys. 2011-12 to 2014-15 vide order dated 27.06.2022. The grounds raised by the assessee related to TP issue in first round of the appeal before the ITAT is reproduced hereunder :
" I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another.
1. The learned Assessing Officer ('learned AO'), learned Transfer Pricing Officer ('learned TPO') and the Honourable Dispute Resolution Panel ('Hon'ble DRP') grossly erred in making a transfer pricing adjustment of INR 32,89,03,640/- with respect to the international transactions entered by the Appellant under section 92CA of the Income-tax Act, 1961 ('the Act').IT(TP)A No.630/Hyd/2024 8
2. The learned AO/ learned TPO/ Hon'ble DRP erred in not accepting the transfer pricing analysis undertaken by the Appellant in accordance with provisions of the Act read with Income-tax Rules, 1962 ('the Rules').
3. Economic adjustments in Transfer pricing ("TP') documentation 3.1. The learned AO/ learned TPO/ Hon'ble DRP erred in not giving cognizance to the commercial and business reasons for the losses incurred by the Appellant by attributing such losses to the transfer pricing of the international transactions entered by the Appellant with its Associated Enterprises ('AES') and thereby not appreciating the principles laid down in the Organisation for Economic Co-Operation and Development guidelines ('OECD Guidelines').
3.2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic adjustments (on account of lower sales realisation, higher cost of goods sold and other operating costs) claimed in the TP documentation maintained by the Appellant.
3.3. The Hon'ble DRP had disregarded the extensive evidence filed by the Appellant demonstrating that the losses incurred during the year were due to economic and political factors which have specifically affected the Appellant.
4. Technical know-how and related services fee - INR 18,93,17,767
4.1. The learned AO/ learned TPO/ Hon'ble DRP erred in concluding that the Arm's Length Price ('ALP') of the technical know-how and related service fee is Nil and thereby arriving at the TP adjustment amounting to INR 18,93,17,767/-.
4.2. The learned AO / learned TPO / Hon'ble DRP erred in questioning the commercial expediency of the Appellant in making such payment.
4.3. The learned AO/ learned TPO/ Hon'ble DRP erred in not taking cognizance of the evidences submitted by the Appellant to substantiate the payment of technical know-how and related service fee.
4.4. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the external Comparable Uncontrolled Transaction ('CUT') search performed by the Appellant to substantiate the ALP of the international transaction pertaining to payment of technical know-how and related service fee.
4.5. The learned AO/ learned TPO/ Hon'ble DRP further erred by inappropriate application of Comparable Uncontrolled Price ('CUP") method, without furnishing details of any CUP transactions.
4.6. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP having accepted Transactional Net Margin Method ("TNMM') for all the international transactions ought to have adopted TNMM for technical IT(TP)A No.630/Hyd/2024 9 know-how and related services fee also, as per the supplementary analysis performed by the Appellant.
4.7. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP ought to have excluded the payment towards technical know-how and related services fee from the operating cost while proposing the adjustment under TNMM especially considering that separate transfer pricing adjustment has been made with the application of CUP method.
4.8. The learned AO/ learned TPO/ Hon'ble DRP erred in not taking cognizance of the Appellant's own case for AY 2009-10 and AY 2010- 11 where the payment towards technical know-how and related services fee was determined at arm's length, under identical circumstances.
5. Sub-license fee for use of trademark - INR 7,61,39,203 5.1. The learned AO/ learned TPO/ Hon'ble DRP erred in concluding that there was no commercial benefit derived by the Appellant from paying a sub-license fee of INR 7,61,39,203 for the use of trademark of the AE and thereby erred in determining the ALP for this transaction as 'NIL'.
5.2. The learned AO / learned TPO / Hon'ble DRP erred in questioning the commercial expediency of the Appellant in making such payment.
5.3. The learned AO/ learned TPO/ Hon'ble DRP erred in not taking cognizance of the evidences submitted by the Appellant to substantiate the payment of sub-license fee.
5.4. The learned AO/ learned TPO/Hon'ble DRP erred in disregarding the external Comparable Uncontrolled Transaction ('CUT') search performed by the Appellant to justify the ALP of the international transaction pertaining to the payment of sub-license fee without giving any cogent reasons.
5.5. The learned AO/ learned TPO/ Hon'ble DRP further erred by inappropriate application of Comparable Uncontrolled Price ('CUP') method, without furnishing details of any CUP transactions.
5.6. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP having accepted Transactional Net Margin Method ('TNMM') for all the international transactions ought to have adopted TNMM for sub-license fee also, as per the supplementary analysis performed by the Appellant.
5.7. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP ought to have excluded the payment towards sub-license fee from the operating cost while proposing the adjustment under TNMM especially considering that separate transfer pricing adjustment has been made with the application of CUP method.
IT(TP)A No.630/Hyd/2024 105.8. The learned AO / learned TPO / Hon'ble DRP erred in not following the Hon'ble ITAT's judgment on sublicense fee in Appellant's own case for AY 2009-10 wherein the Hon'ble ITAT had, under identical circumstances, held that rejecting the entire payment of sublicense fee without there being any analysis on the CUP method cannot be accepted.
6. Notional interest on outstanding trade receivables - INR 1,08,670 6.1. The learned AO/ learned TPO/ Hon'ble DRP erred in treating outstanding receivables as an international transaction and making an adjustment on account of notional interest.
6.2. The learned AO/ learned TPO/ Hon'ble DRP erred in not appreciating the fact that the Act provides for taxing real income whether received or accrued under the normal provisions and transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income.
6.3. The learned AO/ learned TPO/ Hon'ble DRP erred in not appreciating that the outstanding receivables cannot be treated as an international transaction without analyzing the pattern of arrangement over a period of time.
6.4. Without prejudice, the quantum of payables to AEs by the Appellant (wherein no interest has been charged by or paid to the AEs) during the FY 2013-14 far exceeds the receivables from AEs and if interest was to be charged for outstanding receivables/payables, the net effect would only be interest payable by the Appellant to the AES.
6.5. The learned AO/ learned TPO/ Hon'ble DRP have erred in adopting term deposit rates of interest of State Bank of India for computing notional interest on adhoc basis.
7. Intra-group payments 7.1. Without prejudice to the application of TNMM as the MAM, the learned AO/ learned TPO/ Hon'ble DRP erred in not giving cognizance to the alternate analysis performed under CUP method for the purchase of power, material purchase, sale of cement and clinker transactions; and the evidences submitted in connection with the intra-group payments to justify the arm's length price.
8. Treatment of foreign exchange fluctuation loss 8.1. The learned AO/ learned TPO/ Hon'ble DRP erred in re-computing the margin of the Appellant provided in the TP documentation, by treating foreign exchange fluctuation loss as operating expenditure."
IT(TP)A No.630/Hyd/2024 113.1 The Ld. AR further submitted that, in first round of appeal, the assessee had raised 8 grounds before the ITAT and the ITAT had allowed all the 8 grounds in favour of assessee. The order of the ITAT in the first round of appeal are reproduced as under :
" ITA NO.66/HYD/2019
78. Now, we will deal with ITA No.66/Hyd/2019 for the A.Y. 2014-15.GROUND NOS. 1 TO 8
In this appeal, assessee has raised as many as eight transfer pricing issues and five non-transfer pricing issues. We have already allowed transfer pricing grounds in our lead appeal for A.Y. 2011-12. Following the earlier orders for A.Y. 2009-10 and 2010-11 and the reasoning given while deciding appeal for A.Y. 2011-12, we allow the transfer pricing issues. Accordingly, ground nos. 1 to 8 are allowed."
3.2 The Ld. AR further submitted that, inspite of the allowance of all grounds on TP issues by the ITAT, the Learned Transfer Pricing Officer ("Ld. TPO")/Ld. AO again made fresh TP analysis and made upward adjustment of Rs.24,20,33,970/-, which is in violation of the order passed by the ITAT.
3.3 The Ld. AR also submitted that, they have raised 12 grounds in this appeal and following issues are involved out of their 12 grounds :
a) the first issue is regarding non-compliance of the order of ITAT dated 22.06.2022 by Ld. AO/Ld. TPO.
b) the second issue is regarding non-compliance of directions issued by Ld. DRP.
c) the third issue is related to not giving any effect with regard to economic adjustment.IT(TP)A No.630/Hyd/2024 12
d) the fourth issue is related to exclusion of forex loss from Operating Cost ("OC") for the purpose of calculation of Profit Level Indicator ("PLI").
e) the fifth issue is related to interest on trade receivables.
4. As far as the first issue is concerned, the argument of Ld. AR was in two folds. In their first agreement, the Ld. AR submitted that the ITAT vide its order dated 22.06.2022 had allowed all the grounds of the assessee related to TP issues. However, the Ld. AO/Ld. TPO without following the order of ITAT, has undertaken fresh TP analysis selecting different comparables and applying different filters, which is not allowed as per the order of ITAT. Accordingly, the Ld. AR submitted that the order of the Ld. AO/Ld. TPO should be rejected. In their alternate argument, the Ld. AR submitted that, the Ld. AO/Ld.TPO/Ld. DRP did not provide proper opportunity while undertaking fresh TP analysis. Accordingly, he prayed before the bench to reject the order of Ld. AO/Ld. TPO on this count also.
4.1 Per contra, the Ld. DR relying on the order of Ld. AO/Ld. TPO stated that, the ITAT had allowed all the TP grounds of the assessee relying on their findings for A.Y. 2011-12. The findings given by the ITAT for A.Y. 2011-12 are reproduced as under :
"17. Respectfully, following the decision of the Tribunal for A.Y. 2009-10, we are of the opinion that the international transactions of the assessee are required for benchmarking by applying TNMM method as most appropriate method instead of CUP method and accordingly IT(TP)A No.630/Hyd/2024 13 TPO is directed to apply TNMM as most appropriate method for benchmarking. Further on perusal of the record, we found that the TPO had no occasion to benchmark the transactions by applying TNMM, and thereafter applied CUP method. We accordingly send back these issues to the file of AO / TPO with the direction to work out the international transactions by applying TNMM as most appropriate method and determine the ALP. Accordingly, the grounds 2 to 4(d) raised by the assessee for A.Y. 2011-12."
4.2 The Ld. DR further submitted that, from the aforesaid finding of the ITAT, it is evidently clearly that, the ITAT had made a direction to Ld. AO/Ld. TPO to bench mark the international transactions by applying Transaction Net Margin Method ("TNMM") as Most Appropriate Method ("MAM") instead of Comparable Uncontrolled Price ("CUP"). Hence, there was no restriction made by the ITAT for making any fresh TP analysis by selecting different comparables and applying different filters. Accordingly, the Ld. AO/Ld. TPO has rightly followed the directions of ITAT and bench marked the international transactions by applying TNMM as MAM. Therefore, the Ld. DR prayed before the bench to uphold the order of Ld. AO/Ld. TPO.
4.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. As far as the first argument of the Ld. AR is concerned, we have gone through the grounds of appeal and order of the ITAT for A.Y. 2014- 15 in first round of appeal. We have also gone through the findings of the ITAT for A.Y. 2011-12 passed by the ITAT on 22.06.2022 (as reproduced above). On going through these documents, it is abundantly clear that, the ITAT had made a direction to Ld. AO/Ld. IT(TP)A No.630/Hyd/2024 14 TPO to bench mark the international transactions by applying the TNMM as MAM instead of CUP. Hence, there was no restriction made by the ITAT to examine the functional comparability of the entities selected by the assessee in its T.P. analysis study. The Ld. AO/Ld. TPO has rightly followed the directions of ITAT and bench marked the international transactions by applying TNMM as MAM. Therefore, we do not find any infirmity in the approach of Ld. AO/Ld. TPO while following the directions of the ITAT. Accordingly, we reject this argument of the assessee.
4.4 As far as the alternate argument of the assessee regarding not providing proper opportunity of being heard is concerned, we have gone through the directions of Ld. DRP, wherein from para no.2.2.12 to 2.2.26, the Ld. DRP has dealt with the objection raised by the assessee with regard to incorrect margin, selection of comparables and filters applied. Further, the same objection of not providing the opportunity was also rasied by the assessee before the Ld. DRP. The Ld. DRP at para no.2.2.11 has rejected the claim of the assessee in this regard, which is to the following effect :
"2.2.11 Further, with regard to the objection that the search matrix, accept / reject matrix with respect to comparables was not provided to the assessee, the panel finds this contention of the assessee as not tenable as the TPO issued a detailed show cause notice on 31.05.2023 along with the search matrix and accept / reject matrix. Hence, this ground of the assessee is hereby rejected."
4.5 On the basis of above factual matrix, we are of the opinion that, the claim of the assessee that no opportunity of being heard has been given by the Ld. AO/Ld. TPO/Ld. DRP is not sustainable. Accordingly, we reject this claim of the assessee.
IT(TP)A No.630/Hyd/2024 154.6 In the result, the first issue of the assessee is dismissed.
5. In their second issue, the Ld. AR submitted that, the Ld. AO/Ld. TPO has erred in disregarding the specific directions of Ld. DRP while making the TP adjustment and giving effect to the order of Ld. DRP, wherein, the Ld. DRP accepted the objection of the assessee to reject the Sagar Cements (M) Pvt. Ltd. as a valid comparable and further directed the Ld. AO/Ld. TPO to exclude this company as comparable. Accordingly, the Ld. AR prayed before the bench to make suitable direction to the Ld. AO/Ld. TPO to follow the directions of Ld. DRP in this regard.
5.1 Per contra, the Ld. DR relied on the order of Ld. AO/Ld. TPO.
5.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through the para no.2.2.24.2 of the order of Ld. DRP, which are to the following effect :
" 2.2.24.2 Having considered the submission, the report of TPO and the rebuttal of the Assessee, the Panel perused the Annual report of the company and saw that it does not contain the Profit /Loss account and related schedules. In the absence Conclude of such data, it is not possible to compute the margins as well as conclude whether the company passes the applied filters of the TPO. Hence, the TPO is directed to exclude this company as a comparable."IT(TP)A No.630/Hyd/2024 16
5.3 On going through the above findings of Ld. DRP, it is abundantly clear that, the Ld. DRP has made the direction to Ld. AO/Ld. TPO to exclude Sagar Cements (M) Pvt. Ltd. from the list of comparables. Accordingly, we direct the Ld. AO/Ld. TPO to exclude Sagar Cements (M) Pvt. Ltd. from the list of comparables.
5.4 In the result, the second issue of the assessee is allowed.
6. With regard to the third issue, the Ld. AR submitted that, as per the earlier orders, the rate of sales realization decreases and rate of cost of goods sold increased in the year under consideration. The submissions of the assessee in this regard is reproduced as under :
" During the year ended March 31, 2014, the Appellant had earned low profitability. It is pertinent to note that in the preceding years, ZCL made reasonable profits. During FY 2013-14 there was a dip in the profitability. The Appellant had made economic adjustment in the transfer pricing documentation to substantiate and also reiterated the same in the submission made to the Ld. TPO. The adjustment was made on account of lower sales realization and higher costs of goods sold thereby resulting in reduction of overall profitability of the Company.
In this regard, the Appellant wishes to explain the reasons for such dip in the profitability in the below mentioned pointers:-
a) Decrease in sales price per unit and increase in the cost price per unit -
During the year under consideration, there was severe unrest in Andhra Pradesh on account of agitations in relation to division of erstwhile Andhra Pradesh into two states Telangana and Andhra Pradesh resulting into strikes, commotion frequent road blocks, etc. The entire economy of the state was hampered, especially the real estate took severe hit and both the cement demand and prices were affected by such unrest.
The Appellant has two manufacturing units in the state of erstwhile Andhra Pradesh and the customer base of ZCL is predominantly in Andhra Pradesh. Due to such unrest and civil disturbance, the demand in Andhra Pradesh decreased during FY 2013-14 as against the sale in the previous year. In order to make good the target sales, the Appellant considered selling its IT(TP)A No.630/Hyd/2024 17 product in unconventional market such as Orissa and West Bengal. It is pertinent to note that the comparable companies considered in the transfer pricing documentation has already captured a significant market share in the northern and western regions, hence in order to penetrate into such captured markets, ZCL was unable to sell the product at the same prices and was forced to reduce the sale price per unit which yielded very less margin as compared to the market in its Home State.
Further, in order to sell in the northern and western regions, the Appellant had to develop new market in those areas thereby incurring high advertisement costs also. However, the increase in costs due to change in market was not passed on to the customers and the entire burden was borne by the Appellant during the year.
In support of the above contentions placed by the Appellant, the year-wise comparison of sales realization per metric ton, cost per metric ton and profit before interest and taxes as reported in the financial statement of the Appellant is provided below for better understanding -
Year 2011 2012 2013 2014 2015
Sales 3,267.22 3,717.67 3,838.00 4,139.00 4,8600.00
realization
per metric
ton
Cost per 3,267.22 3,717.67 3,838.00 4,139.00 4,860.00
metric ton
Financial 2011-12 2012-13 2013-14 2014-15 2015-16
Year
Profit 21,261.98 14,639.75 (440.05) 6,501.14 13,291.67
before
interest and
taxes as
reported in
financial
statement
of ZCL (in
INR lakhs)
IT(TP)A No.630/Hyd/2024 18
Therefore, the Appellant wishes to submit that it is clearly evident from the above table that the profitability of the Appellant was affected very badly in FY 2013-14 due to difficult economic circumstance explained above and in the succeeding years the company's profitability and revenues stabilized.
b) Increase in transportation cost- the Appellant's manufacturing units are in Andhra Pradesh and Appellant's highest revenue is generated from sales made in Andhra Pradesh, since the Company's major market share is in its Home State. However, in the year under consideration, the Appellant changed its market of sale to West Bengal and Orissa thereby incurring significant transportation costs.
Moreover, cement being a heavy material the transportation cost due to increase in distance led to higher operating costs and the costs pertaining to such sales were not passed on to the customers. Alternatively, comparable companies considered in the TP documentation of the Appellant for FY 2013- 14 have sales all over India and hence the impact was not severe in their result.
Therefore, the Appellant submits that due to loss of home market and developing the new market, additional cost of transportation, lower realization in far off market resulted in abnormal loss during the year under consideration and hence necessary adjustment while determining the operating profit of the Company for FY 2013-14 is warranted.
c) Addition in manufacturing capacity but reduction in demand - During the year, the demand of cement in southern India was subdued throughout the year 2014 partly due to political uncertainty and partly due to overcapacity in the region. Based on the page no. 7 & 8 of report of 'Global Cement Magazine' March 2015, cement production capacity in the south of India is around 110 metric ton per year while the demand was only 70 metric ton per year. Consequently, cement producers trimmed their capacity utilization to 55
- 65% and held on to prices to prevent losses.
In addition to the above, from February 2014 other cement producers in the southern region of India like Ramco Cements, Chettinad Cement, The India Cements and Dalmia Bharat started exporting cement to Myanmar in order to revive from the depression in the demand in local market of India. However, the Appellant was unable to capture the export market and hence had to bear the depression in local market.
In the relevant period, several cement companies in Andhra Pradesh and Telangana closed plants or began to operate on a campaign basis mainly due to the unrest in the localities and low demand in South Indian region. Among the plants that halted operations temporarily was Panyam Cements' 400,000 ton per year capacity plant in Nandyal, Andhra Pradesh whereas the IT(TP)A No.630/Hyd/2024 19 Appellant did not halt its operations and continue to produce at the same capacity.
As a result, the fixed costs of the Appellant could not be recovered fully thereby contributing to the loss incurred by the Appellant.
To support the above, the industry report is attached (refer item 8 of the paper book - Page 205). Thus, the primary reasons for the losses were not international transactions, but the economic factors which were domestic and could not be attributed to the related party transactions."
6.1 The Ld. AR, on the basis of their aforesaid reproductions, submitted that, the reasons as cited above, causes the reduction of overall profit of the company during the year under consideration. Therefore, the assessee had made economic adjustment in their TP documentation. However, Ld. AO/Ld. TPO did not allow the economic adjustment while calculating the PLI. In support of their submission, the Ld. AR placed their reliance on the order of Hon'ble Punjab and Haryana High Court in the case of Honda Motorcycle & Scooters India (P) Ltd. Vs. ACIT (2017) 77 taxmann.com 119 (P&H), wherein, the Hon'ble High Court has held that the adjustment on account of strike in the organisation was required to be adjusted in the calculation of net operating profit margin. Therefore, the Ld. AR prayed before the bench for making necessary direction to Ld. AO/Ld. TPO to consider economic adjustment for the calculation of PLI.
6.2 Per contra, the Ld. DR relied on the order of Ld. AO/Ld. TPO.
6.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through the decision of Hon'ble High Court of Punjab & IT(TP)A No.630/Hyd/2024 20 Haryana in the case of Honda Motorcycle & Scooters India (P) Ltd. Vs. ACIT (supra) relied on by the assessee. In our opinion, the same is not applicable to the case of the assessee as the facts causing decrease in profitability are different. In that case, workers strike was a cause confined to the assessee only and was not affecting the industry as a whole. However, in the case before us, the factor causing the decrease in the profitability are general economic and market conditions affecting the industry as a whole and not to the assessee only. The economic adjustment, those related to market conditions are not mandatory in the law. They are discretionary and depends on the facts and circumstances of each case. The reason causing decrease in the profitability, as cited by the assessee, are affecting the industry as a whole and not to the assessee only. In case, where the assessee suffered the unique adverse condition not faced by the comparables or the industry as a whole, then only such adjustment is required. However, no such reasons has been brought to our notice by the Ld. AR, that the assessee suffered unique adverse conditions, not faced by the comparables. Therefore, in our considered opinion, no such economic adjustment is required in the case of the assessee. Accordingly, we reject the contention of the assessee.
6.4 In the result, the third issue of the assessee is dismissed.
7. With regards to the fourth issue, the Ld. AR submitted that, the loss arising on account of forex foreign exchange fluctuations are IT(TP)A No.630/Hyd/2024 21 not in the nature of the OC and therefore should be excluded from OC while calculating the PLI.
7.1 Per contra, the Ld. DR relied on the order of the Ld. AO/Ld. TPO.
7.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through the para no.2.4.1 of Ld. DRP, wherein, the Ld. DRP, relying on the decision of Bangalore Bench of ITAT in the case of Sap Lab India (P) Ltd. Vs. ACIT (2011) 8 taxmann.com 207, rejected the claim of the assessee. We have also gone through the decision of ITAT in the case of Sap Lab India (P) Ltd. Vs. ACIT (supra), wherein, at para no.42 of the order, the ITAT held that, the foreign exchange fluctuations gain is nothing but an integral part of the sale proceeds of an assessee carrying on export business and the same cannot be excluded from the computation of operating margin. Further, no evidences have been produced by the assessee that the loss arising on account of forex foreign exchange fluctuations is not in the nature of OC. Respectfully following the decision of ITAT in the case of Sap Lab India (P) Ltd. Vs. ACIT (supra), we hold that, the loss arises to the assessee on account of foreign exchange fluctuation is in the nature of OC. However, we clarify that the same is also to be considered for comparables. Hence, we uphold the decision of Ld. AO/Ld. TPO. Accordingly, we reject this contention of the assessee.
7.4 In the result, the fourth issue of the assessee is dismissed.
IT(TP)A No.630/Hyd/2024 228. With regards to the fifth issue, the Ld. AR submitted that, the Ld. AO/Ld. TPO has made mistake in treating the outstanding receivables as separate international transcation and made an adjustment of Rs.1,08,670/- on account of notional interest. Further, the Ld. AO/Ld. TPO has erred in computing the interest on outstanding receivables for the entire period of one year instead of period of 60 days which is normally considered in the case of export sales. Accordingly, the Ld. AR prayed before the bench for grant of appropriate relief to the assessee.
8.1 Per contra, the Ld. DR relied on the order of Ld. AO/Ld. TPO.
8.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through the provisions contained under Explanation to section 92B of the Act, which has been inserted by Finance Act, 2012 w.e.f. 01.04.2002. We are of the considered opinion that, after introduction of Explanation to section 92B of the Act, it is settled that, trade receivables is an international transaction liable for separate bench marking. Therefore, in our considered opinion, there is no infirmity in the order of Ld. AO/Ld. TPO in treatment of trade receivables as separate international transaction. Accordingly, we reject this contention of the assessee. However, so far as the claim of the assessee is concerned, that the notional interest on trade receivables should not be charged for the entire period of one year, in our opinion, the normal credit period provided by the assessee to the non-
IT(TP)A No.630/Hyd/2024 23Associated Enterprises should be excluded for the calculation of notional interest on trade receivables in the case of Associated Enterprises also. Accordingly, we make a direction to Ld. AO/Ld. TPO to exclude the normal credit period provided to non-Associated Enterprises for the purpose of calculation of notional interest on trade receivables. Accordingly, this claim of the assessee is partly allowed for statistical purposes.
8.3 In the result, the fifth issue of the assessee is partly allowed.
9. To sum up, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 16th Jan., 2025.
Sd/- Sd/-
(VIJAY PAL RAO) (MADHUSUDAN SAWDIA)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad.
Dated: 16.01.2025.
* Reddy gp
Copy of the Order forwarded to :
1. M/s. Zuari Cement Limited, Adventz Centre, 2nd Floor, No.28, Cubbon Road, Bengaluru-560 001
2. DCIT/ACIT, Circle 1, Nellore.
3. Pr.CIT, Tirupati.
4. DR, ITAT, Hyderabad.
5. Guard file.
BY ORDER,