Birla Furukawa Fibre Optics Private Limited Vs Dy/ACIT (ITAT Panaji)
Panaji ITAT Deletes ₹20.34 Crore Transfer Pricing Adjustment: TPO Cannot Abandon Consistently Accepted CUP for TNMM When Internal & External CUP Comparables Are Available
The Panaji ITAT in Birla Furukawa Fibre Optics Pvt. Ltd. v. Dy./ACIT dealt with a ₹20.34 crore transfer-pricing adjustment for AY 2021-22. The assessee, a 50:50 joint venture between Universal Cables Ltd. and Furukawa Electric Co. Ltd., Japan, manufactures optical fibre. Its major international transaction was purchase of Preform Silica of about ₹64.38 crore from its AE, Furukawa Electric.
The assessee had consistently benchmarked its transactions under the Comparable Uncontrolled Price (CUP) method, which had also been accepted by the TPO in earlier years. For AY 2021-22, however, the TPO rejected CUP, adopted TNMM, selected Aksh Optifibre Ltd. as the sole comparable with a weighted-average margin of 8.73%, and proposed an aggregate TP adjustment of ₹20,34,17,040.
ITAT: Internal & External CUP Established Arm’s-Length Price
The Tribunal found that reliable internal as well as external CUP data were actually available. The assessee purchased Preform Silica from an unrelated Japanese supplier, Shin-Etsu Chemical Co. Ltd., at $113/kg for Type-D and $130/kg for Type-A2, while the corresponding prices paid to its AE were $81.41/kg and $130/kg. Thus, the AE prices were either lower than or equal to uncontrolled prices.
The ITAT therefore held that the purchases from the AE were at arm’s length under both Internal and External CUP. Where the CUP method had been consistently followed and accepted in earlier years, the nature of transactions remained the same and adequate comparable data were available, the TPO was not justified in suddenly substituting TNMM without any material change in facts. The Tribunal accepted the assessee’s CUP analysis and set aside the TPO’s rejection of CUP.
The ITAT separately examined the TPO’s TNMM analysis and found a fundamental factual error. The assessee manufactured only optical fibre, whereas the TPO proceeded on the erroneous assumption that it manufactured optical-fibre cables as well.
Aksh Optifibre, on the other hand, had diversified operations involving optical fibre, optical-fibre cables, fibre-reinforced plastic rods, impregnated glass roving reinforcement, ophthalmic lenses and other services. Crucially, segmental revenue and profitability data were unavailable. The Tribunal therefore held that Aksh was not functionally comparable and rejected it as a comparable even under TNMM.
Consequently, the ITAT deleted the entire transfer-pricing adjustment of ₹20,34,17,040 and allowed the assessee’s relevant grounds.
Cases Discussed
- Benetton India (P.) Ltd. vs. Deputy Commissioner of Income-tax (Delhi – Trib.), [2025] 174 com542 (Delhi – Trib.) [23-04-2025]
- Principal Commissioner of Income-tax vs. Willis Towers Waston India (P.) Ltd. (Punjab & Haryana), [2024] 166 com455 (Punjab & Haryana) [12-08-2024]
- Assistant Commissioner of Income-tax, LTU-2, Mumbai vs. Glenmark Pharmaceuticals Ltd. (Mumbai), [2019] 102 taxmann.com438 (Mumbai)[01-02-2019]
- Assistant Commissioner of Income-tax, Circle-11 (1), Mumbai vs. Viacom 18 Media (P.) Ltd. (Mumbai), [2019] 109 com233 (Mumbai)[08-02-2019]
- Elara Securities (India) Pvt Ltd, [TS-14-ITAT-2020 (Mum)-TP] – January 06, 2020
- Lubrizol India (P.) Ltd. vs. Additional Commissioner of Income-tax, LTU, Mumbai (Mumbai), [2020] 113 com3 (Mumbai)[20-11-2019]
- Rohm and Haas India Pvt Ltd, [TS-926-ITAT-2019(Mum)-TP] – September 25, 2019 ITAT: Adopts CUP-method, accepts comparable data from Customs Department’s Database for benchmarking imports/exports
- Carlyle India Advisors (P) Ltd. Assistant Commissioner of Income-tax, (Mumbai-Trib.), [2012] 102 com500 (Mumbai-Trib.) 20-11-2018
- Omni Active Health Technologies Ltd. vs. Deputy Ld. Commissioner of Income-tax, 7(3)(1), Mumbai, [2018] 92 com88 (Mumbai)[06-03-2018
- Labvantage Solutions (P.) Ltd. vs. Assistant Commissioner of Income-tax, Circle-2(1), Kolkata (Kolkata Trib.), [2018] 93 com440 (Kolkata Trib.) [11-05-2018]
- Toll Global Forwarding India Pvt Ltd, [TS-383-ITAT-2014 (DEL)-TP] – November 18, 2014 ITAT: Adopts realistic & purposive interpretation to ‘price’ under CUP; 6th method u/r 10AB retrospective
- Assistant Commissioner of Income-tax, Circle 1(2), Hyderabad vs. Ckar Systems (P) Ltd. (Hyderabad Trib.), [2013] 29 com145 (Hyderabad Trib.)/[2012] 20 ITR(T) 817 (Hyderabad – Trib.)/[2013] 55 SOT 553 (Hyderabad – Trib.)[19-10-2012]
- Knorr-Bremse India Pvt. Ltd., (TS-700-ITAT 2012 (DEL) -TP) October 31, 2012
- Assistant Commissioner of Income-tax 7(2), Mumbai vs. Sonata Software Ltd. (Mumbai), [2013] 29 com144 (Mumbai)/[2013] 55 SOT 533 (Mumbai)[29-08-2012]
- Adidas Technical Services (P.) Ltd. vs. Deputy Commissioner of Income-tax, Circle 1 (2), New Delhi (Delhi – Trib.), [2016] 69 com401 (Delhi – Trib.)[15-02-2016] Global Procurement Constant Ltd. (GPCL)
- Serdia Pharmaceuticals (India) (P.) Ltd. vs. Assistant Commissioner of Income-tax, Circle 7(2), Mumbai (Mumbai), [2011] 9 com13 (Mumbai)/[2011] 44 SOT 391 (Mumbai)/[2011] 136 TTJ 129 (Mumbai)[31-12-2010]
- Radhasoami Satsang vs. Commissioner of Income-tax (SC), [1992] 60 Taxman 248 (SC)/[1992] 193 ITR 321 (SC)/ [1991] 100 CTR 267 (SC)[15-11-1991]
FULL TEXT OF THE ORDER OF ITAT PANAJI
The captioned appeal at the instance of assessee pertaining to A.Y. 2021-22 is directed against the order dated 23.04.2025 framed by the Assessing Officer u/s.143(3) r.w.s. of the Income Tax Act, 1961 (in short ‘the Act’).
2. Brief facts of the case are that the assessee is a Private Limited company incorporated on 23.07.2009 under the Companies Act, 1956 as a Joint Venture company between Universal Cables Limited, Satna and the Furukawa Electric Company Limited, Japan vide Agreement dated 11.04.2009. The assessee manufactures single mode optical fibre at its manufacturing facility at Verna, Goa and these optical fibres are required for transmission of data in the Telecommunication sector. Return of income for A.Y. 2021-22 e-filed on 07.03.2022 declaring loss (-) Rs.16,34,35,670/-. Case selected for complete scrutiny through CASS for the following reason :
“Large international transaction(s) with very low Profit before Interest & Taxes even after more than 5 years of incorporation for Manufacturing Industry Sector having large asset base (T.P. Risk Parameter)”
3. Valid notices u/s.143(2) and 142(1) of the Act served upon the assessee. Since the issue involved international transaction, the case, referred to the ld. Transfer Pricing Officer (TPO) on 14.10.2022 who carried out the proceedings u/s.92CA(3). Ld. TPO observed that the assessee has entered into international transaction with its Associated Enterprise (AE) which was mainly regarding the purchase of Preform Silica at Rs.64.58 crore approx. from its AE and the total transactions for the year paid at Rs.65.39 crore approx. and receipt of Rs.0.70 crore. Ld. TPO noted that the operating profit/operating cost percentages (-) 6.97% and operating profit vs. operating Revenue is (-)7.49%. So far as the determination of the Arm’s Length Price (ALP) of the international transaction is concerned, ld. TPO observed that the assessee has applied Comparable Uncontrolled Price (CUP) method. The assessee submitted before ld. TPO that the amount paid for purchase of Preform Silica from the Associated Enterprise has been determined/computed by considering the economical, business factors and the pricing as emerged from Arm’s Length negotiations between Joint Venture partners viz., Universal Cables Limited and Furukawa Electric Company Limited, Japan acting as independent parties. Ld. TPO however was of the view that since no independent unrelated uncontrolled transactions have been considered for comparing with the said transactions and rejected the CUP method adopted by the assessee. Thereafter, ld. TPO proceeded to determine the ALP using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) by conducting independent search for comparables. In this process, Ld. TPO selected the final set of comparables, i.e. one party namely Aksh Optifibre Ltd. having a Weighted Average mean of 8.73% and applied the same on the financials of the assessee company, i.e. operating profit, operating revenue, operating cost and calculated the upward Transfer Pricing adjustment of Rs.20,34,03,631/-. Ld. TPO also suggested the addition for interest on delayed receivables at Rs.13,409/- which was calculated by following a formula for the interest on delayed trade receivable with reference to amount received beyond the credit period/not received within the credit period as per the Agreement. In totality, ld. TPO has proposed the adjustments u/s.92CA of the Act amounting to Rs.20,34,17,040/-. Based on the order of the ld. TPO, ld. Assessing Officer proposed the additions and finalised the assessment order u/s.143(3) r.w.s.144B of the Act on 08.11.2023.
4. Thereafter, the assessee filed a Writ Petition before the Hon’ble Jurisdictional High Court at Goa on 04.12.2023 on the ground that the final order has been passed without forwarding of Draft Assessment Order in terms of section 144C(1) of the Act. However, the Hon’ble Jurisdictional High Court disposed of the Writ Petition on 16.04.2024 quashing and setting the impugned order and remanding the matter to the ld. Assessing Officer to take corrective measures and pass fresh assessment order. In directions thereof, ld. Assessing Officer passed the fresh Draft Assessment Order proposing the additions/adjustments as proposed by the ld. TPO. The assessee filed objections against the proposed draft order on 03.07.2024 before the Dispute Resolution Panel (DRP). However, the assessee failed to get any relief and the additions proposed by the ld. TPO have been confirmed by the ld. DRP pursuant to which the ld. Assessing Officer has passed the impugned assessment order u/s.143(3) r.w.s.260 r.w.s.144B of the Act determining income of the assessee at Rs.3,99,81,370/- arrived at after making upward adjustment for ALP of international transaction at Rs.20,34,03,631/- and varition in respect of the issue of interest on delayed receivables at Rs.13,409/-.
5. Aggrieved assessee is now in appeal before this Tribunal by raising the following grounds of appeal :
“1. The learned Assessing Officer (AO), under the directions of the Dispute Resolution Panel (DRP), erred in law and on facts in completing the assessment by making additions of Rs. 20,34,03,631/- and Rs. 13,409/-on account of transfer pricing adjustments, and thereby determining a total income at Rs. 3,99,81,370/-as against the returned loss of Rs. 16,34,35,671/-, which is arbitrary, illegal, and without proper appreciation of facts and law.
2. The AO/Transfer Pricing Officer (TPO) erred in rejecting the Comparable Uncontrolled Price (CUP) method adopted by the Appellant for benchmarking international transactions with its Associated Enterprises (AEs), and applied the Transactional Net Margin Method (TNMM) without properly rebutting the merits of the CUP method, which was the Most Appropriate Method in the facts and circumstances of the case.
3. The Appellant contends that the major transaction with AEs during the AY 2021-22 was purchase of Preform of Silica Rod which was also imported from independent and unrelated parties. Therefore, there was direct comparison available. Further import data from customs database were also submitted as comparison of independent unrelated uncontrolled transactions. The data submitted by Appellant are also available in public domain of uncontrolled comparable companies and accordingly should have been accepted.
4. The TPO has erred in selecting inappropriate comparable company which was functionally dissimilar to the Appellant, and erred in ignoring judicial precedents requiring strict functional comparability even under TNMM thereby leading to an unjust and arbitrary adjustment. Appellant is manufacturing “Optical Fibre” only and whereas the comparable is manufacturing ‘Optical Fibre, Optical fibre cable, Fibre Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and Ophthalmic lens’ which is functionally different and not comparable to the functioning of the Appellant thereby completely violating the provisions of Rule 10B(2) of the Rules.
5. The AO/TPO/DRP have failed to appreciate that Appellant is a Company with 50:50 holding between Universal Cables Limited and Furukawa Electric Co., Ltd., Joint Venture (JV) partners together with their respective Affiliates. The decisions which both the partners to the Joint Venture would be taking, will not be different from what any independent party would have taken. The AO has failed to appreciate the structure of the JV which is in itself self regulated mechanism. The transactions are bound to be at arm’s length as the rates arise from a JV agreement after prolonged negotiations and deliberations between JV partners.
6. The Learned TPO has failed to provide the source of the financial data of certain companies which were relied upon for the purpose but not confronted to the Appellant during the TP scrutiny though specifically asked by the Appellant. Hence the adjustment using TNMM is completely arbitrary and has to be rejected and deleted.
7. The Ld. TPO has erred in law and on facts in applying interest rate @ 5.186% on trade receivable alleging delayed receipt of payments resulting in notional addition of Rs. 13,409/-. The Appellant submits that all the payments were received within due date rather before the due date. Therefore, there is no delay in receipts and hence no deemed / notional interest should have been added in the proposed addition.
8. That entire proceedings of assessment have been vitiated for want of serving the draft Assessment order under Section 144C of the Income Tax Act, 1961 (the Act) at the very first place. The non-compliance of statutory provisions of, inter alia, Section 144C is not curable. The impugned order having been passed in clear breach of statutory provisions is non-est and, therefore, unsustainable. The Hon’ble High Court of Bombay at Goa while passing the order dated 16.04.2024 referred and relied upon the judgments passed in respect of Section 144B and the order being erroneous in law was assailed by the Appellant before the Hon’ble Supreme Court in SLP (C) No. 14443/2024 and the Hon’ble Supreme Court has been pleased to issue the Notice, inter alia, to the Department and the said Special Leave Petition is not only pending consideration but the Hon’ble Supreme Court has also clarified that the Assessment Order, if any, passed in the meantime shall be subject to the outcome of the Special Leave Petition. Therefore, the present Appeal is being filed without prejudice to all rights and contentions of the Appellant as mentioned in the Special Leave Petition and any order passed or to be passed with regard to the assessment of Appellant is subject to the further orders and/or outcome of the Special Leave Petition filed by the Appellant before the Hon’ble Supreme Court. Appellant submits that judicial proprietary demands that outcome of the Special Leave Petition filed by the Appellant being SLP (C) No. 14443/2024 be awaited in order to avoid complexity of the legal issues.
9. The Appellant craves leave to add, alter, amend, substitute or withdraw any of the above grounds of appeal at the time of hearing.”
6. At the time of hearing, ld. Counsel for the assessee has not pressed the Ground No.7 raised by the assessee and therefore the said ground is dismissed as not pressed.
7. Ld. Counsel for the assessee made multifold arguments which can be categorised, firstly that Comparable Uncontrolled Price method is being consistently followed by the assessee and without indicating any mistake in the application of consistent method followed by the assessee, ld. Assessing Officer/Transfer Pricing Officer erred in applying the Transactional Net Margin Method. Secondly, that CUP is the Most Appropriate method applicable on the facts of the case. Thirdly, that ld. TPO while applying TNMM has taken a comparable namely Aksh Optifibre Limited which is not a correct comparable because the assessee is only engaged in manufacturing of Optical Fibre whereas the comparable Aksh Optifibre Limited is a Limited company having huge turnover and is engaged in manufacture and selling of Optical Fibre, Optical Fibre cables, fibre, Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and Opthalmic lens. It is also stated that no segmental data of this comparable company is available on public domain and therefore it is not a fit comparable.
8. Ld. Counsel for the assessee submitted that the Average rate of procurement by the assessee company of Preform Silica Type D Fibre is $81.41 per kg and Type A2 Fibre is $130 per kg. He submitted that the product code for the Preform Silica imported by the company falls under HS code 70022090. He further referred to the Average procurement by the companies in India of import of Preform Silica Type D Fibre and Type A2 Fibre. As per the bills of entries/shipping bills filed with Indian Customs (External CUP) are at $88.87 per kg and $271.50 per kg which are much above the average rate of procurement price paid by the company. Apart from the External CUP, ld. Counsel for the assessee referred to the Internal CUP and stated that the assessee company procured the very same raw material- Type D Fibre from an independent unrelated party, i.e. Shin-Essu Chemical Company Limited during the period July to October, 2020 at a price of $113 per kg as against the rate of $81.41 per kg paid to the Associated Enterprise. So far as other raw material namely A2 Fibre the price of purchase from Associate Enterprise as well as unrelated party is same, i.e. $130 per kg. Thus, ld. Counsel for the assessee concluded that the transactions undertaken by the assessee is at Arm’s Length Price as per both External CUP and Internal CUP method. Further, it was stated that the assessee relied upon the average rate of single mode Optical Fibre grade G652D as per the export-import data of optical fibre which is additional internal and external data to support that CUP is the most appropriate method. Further, the assessee company avails technical know-how and assistance from Furukawa Electric Company Limited, Japan and the company compensates by paying a running royalty @3% of the net ex-factory price of the product manufacture during the year and CUP method has been applied as in the similarly placed industry the royalty payable is at the acceptable rate. He also submitted that the transactions carried out during the year are similar to the transactions which have been carried between the assessee and the Associated Enterprise which also happens to be a Joint Venture partner and has been accepted by the Department in all the previous years.
9. Ld. Counsel for the assessee further submitted that the CUP method followed by assessee has been consistently accepted by the ld. TPO in the preceding assessment years and no adjustments were made when benchmarking was carried out using CUP method therefore without any change in facts, functions, assets or risks (FAR), ld. TPO cannot adopt a different method in the current year without recording specific reasons. It is stated that ld. TPO has accepted CUP method for A.Yrs. 2012-13, 2013-14 and 2016-17 as the most appropriate method. He submitted that since the nature of international transaction is the same, price mechanism remain unchanged, functions performed, assets employed and risks assumed is same and External and Internal CUP data using earlier years continues to be available, then it has been consistently followed in plethora of decisions that in absence of any such reasoning the change in most appropriate method is arbitrary and contrary to the principles of judicial discipline. Reliance placed on the following judicial precedents.
1. Assistant Commissioner of Income-tax, LTU-2, Mumbai vs. Glenmark Pharmaceuticals Ltd. [2019] 102 taxmann.com438 (Mumbai)[01-02-2019]
2. Omni Active Health Technologies Ltd. vs. Deputy Ld. Commissioner of Income-tax, 7(3)(1), Mumbai [2018] 92 com88 (Mumbai)[06-03-2018.
3. Radhasoami Satsang vs. Commissioner of Income-tax [1992] 60 Taxman 248 (SC)/[1992] 193 ITR 321 (SC)/ [1991] 100 CTR 267 (SC)[15-11-1991]
4. Benetton India (P.) Ltd. vs. Deputy Commissioner of Income-tax [2025] 174 com542 (Delhi – Trib.) [23-04-2025]
6. Lubrizol India (P.) Ltd. vs. Additional Commissioner of Income-tax, LTU, Mumbai [2020] 113 com3 (Mumbai)[20-11-2019]
7. Principal Commissioner of Income-tax vs. Willis Towers Waston India (P.) Ltd. [2024] 166 com455 (Punjab & Haryana) [12-08-2024]
10. The other submissions of the assessee stating that CUP method is the most appropriate method and that the final comparable selected by the ld. TPO for calculating the Arm’s Length Price as per Transacrtional Net Margin Method is not a correct comparable because Aksh Optifibre Limited is engaged in many other business activities and that segmental data is not available. These submissions are summarised as under :
“B.THE ASSESSEE IS A COMPANY WITH 50:50 HOLDING BETWEEN UNIVERSAL CABLES LIMITED AND FURUKAWA ELECTRIC CO., LTD (FEC), JV PARTNERS. THE DECISIONS WHICH BOTH THE PARTNERS TO THE JOINT VENTURE WOULD BE TAKING, WILL NOT BE DIFFERENT FROM WHAT ANY INDEPENDENT PARTY WOULD HAVE TAKEN. THE LD. AO HAS FAILED TO PPRECIATE THAT THIS FEATURE OF THE JV IS IN ITSELF SELF REGULATED MECHANISM. MAJOR TRANSACTION WITH FEC DURING THE AY 2021-22 WAS URCHASE OF PREFORM OF SILICA WHICH IS RAW MATERIAL FOR EXTRACTING OF OPTICAL FIBRE. IT IS BOUND TO BE AT ARM’S LENGTH AS THE RATES ARISE FROM A JV AGREEMENT AFTER PROLONGED NEGOTIATIONS AND DELIBERATIONS BETWEEN JV PARTNERS.
30. The Company, Birla Furukawa Fibre Optics Private Limited, is a Joint Venture Company between Universal Cables Limited, Satna (UCL) & Furukawa Electric Co., Ltd., Japan (FEC), in the equity sharing ratio of 50:50, through themselves and/or their affiliates/associates respectively. The Company was incorporated on 23rd July, 2009 and is manufacturing and selling Optical Fibre, which is used in Telecommunication sector for voice/data transmission.
31. The following agreements entered into between the JV partners and FEC with the Assessee are as under:-
i. The Joint Venture Agreement and amendments in this agreement, entered by and between UCL & FEC is enclosed with transfer pricing documentation under Appendix 1 (refer page No. 234 to 343 of paper book).
ii. Preform Supply Agreement dated 23rd December, 2009 & amendment, entered by and between the Assessee & FEC (Appendix 2 of TP documents) (refer page No. 344 to 363 of paper book)
iii. Technical Know-How and Assistance Agreement dated 22nd August, 2009 & amendment, entered by and between the Assessee & FEC (Appendix 3) (refer page 364 to 397 of paper book)
iv. Furukawa Distributor Agreement dated 23rd December, 2009, entered by and between the Assessee & FEC (Appendix 4 of TP documents. (refer page 398 to 414 of paper book)
32. The Joint Venture (JV) agreement has been entered into after prolonged negotiations and deliberations between UCL & FEC. Therefore, from the analysis of this JV structure, it would be noted that two independent parties with common objective have come together to undertake the manufacturing activity of optical fibre. The decisions which both the partners to the Joint Venture would be taking, will not be different from what any independent party would have taken.
33. The commercial and financial relationship between the Company and its associated entities owned by any one of the partners, whether it is supply of Preform of Silica or supply of Optical Fibre or payment of royalty would all be governed on commercial basis arising out of prolonged negotiations and cannot be said to be differing from those, which would be made between independent parties. For e.g. if any raw material is supplied by an equal JV partner to JV, he would supply at the prevailing market price as he would have done to any customer and if, in case he supplies at a price more than market price, it will be a disadvantage for other equal JV partner and it will not be acceptable to that partner. Similar would be the case vice versa a lower than market price will not be acceptable to the supplier of JV partner.
34. Hence, prima facie the transaction so entered by the Company with the AEs are bound to be at arm’s length.
35. During FY 2020-21, the Assessee has undertaken various International Transactions with its AEs. The chart showing international transactions are as under:
| S. No. | Associated Enterprise | International Transactions | Amount as per 3CEB (INR) | Amount as per RPT Schedule (INR) |
| (i) | Furukawa Electric Co., Ltd., Japan | Purchase of preform of Silica | 64,38,00,769 | 64,38,00,769 |
| (ii) | OFS Fitel, LLC | Purchase of preform of Silica | 20,31,746 | 20,31,746 |
| (iii) | Furukawa Electric Co., Ltd., Japan | Sale of finished goods | 59,98,759 | 59,98,759 |
| (iv) | Furukawa Electric Singapore Pte. Ltd. | Sale of finished goods | 7,12,576 | 7,12,576 |
| (v) | Furukawa Electric Co., Ltd., Japan | Royalty Payment | 80,15,796 | 80,96,863* |
| (vi) | Furukawa Electric Co., Ltd., Japan | Machine Repair | 48,722 | —* |
| (vii) | Furukawa Electric Co., Ltd., Japan | Guarantee Fee paid | 32,345 | —* |
| (viii) | OFS Fitel LLC | Commission received | 2,63,895 | 2,63,895 |
| Total | 66,09,04,608 | 66,09,04,608 |
36. As can be noted from the above, the major transaction with AE during the year under consideration was purchase of Preform of Silica, main raw material required for manufacturing of Optical Fibre.
37. In order to establish the arm’s length nature of the aforesaid transaction, the Assessee undertook a detailed functional and economic analysis/benchmarking analysis, which was appropriately captured in the TP Study Report (refer Page No. 167 to 414 of the paper book for a copy of TP Study Report).
38. The TPO in para 5.2 and 5.3 of the TPO order, has simply rejected the benchmarking of the assessee without pointing out a single infirmity in the submissions made by assessee, the comparative i.e. both direct internal and external CUP submitted by the assessee as well as the third-party data available in the public domain. The relevant portion of the TPO order is reproduced as under: –
*5.2 In the instant case, the taxpayer has used external CUP method as the Most Appropriate Method. However, it has not used the similar uncontrolled transactions to compare the said transaction. The taxpayer has just mentioned that the amount of INR 645,832,515/-, which is paid for purchase of silica preform from the AE, has been determined / computed by the taxpayer considering the economical, business factors, and the fact that pricing has emerged from arm’s length negotiations between Joint Venture Partners, viz., Universal Cables Ltd. and Furukawa Electric Co. Ltd. acting as independent parties and on application of Section 92C of Act. However, no independent unrelated uncontrolled comparable transactions have been considered for comparing with the said transaction. Therefore, TPO rejects this benchmarking and the TP study in this regard. TPO also rejects the CUP method as the Most Appropriate Method used by the taxpayer.
5.3 Due to the rejection of CUP method used by the taxpayer, there is a need to carry out fresh benchmarking analysis. The ALP as per the Transfer Pricing regulations in India is arithmetic average or median of the prices of the uncontrolled comparables. In view of the same, due to rejection of method, the consequent Arm’s Length price would also stand rejected.”
39. From the above paragraph, the assessee submits that the TPO being unable to find any infirmity in the detailed submissions filed by the assessee as well as the comparisons submitted by the assessee, has just moved with a predetermined mind to make the variation/addition in the case of assessee. The details submitted and the data relied upon by the assessee to justify the arm’s length price with regard to purchase of Preform of Silica from AE is re-iterated as under:-
i. The purchase price of Preform of Silica from AE by the Company is decided by the Board of Directors of the Company. During the year, there were six Directors in the Board of Directors of the Company and three Directors each nominated by UCL & FEC and their respective affiliates.
ii. The price of Preform of Silica is decided by the Board of Directors after elaborate and tough negotiation between UCL & FEC nominated Directors and considering the market scenario, prevailing domestic and international market conditions, international market price of Preform of Silica, USD/INR & USD/JPY exchange rates etc.
iii. We are again enclosing the list of details of Preform of Silica purchased during the year from AE along with sample copy of bills for your ready reference (refer page 574 to 615 of paper book).
iv. The average rate per kg. for procurement of raw material is as under:
| Particulars | Type | Rate |
| Preform of Silica | D Fibre | $ 81.41 per kg |
| Preform of Silica | A2 Fibre | $ 130 per kg |
v. We are also again enclosing the Preform of Silica import data for the period, from April 2020 to March 2021, relevant for the year under consideration (refer page No. 616 to 621 of paper book).
vi. This data has been taken by the Company from third party source, for which the Company is subscribing on yearly basis. The Company have an annual subscription from M/s Info Drive India Pvt. Ltd (Sales partner of Volza LLC, USA) which provides import/export data globally. Info Drive India is India’s leading and most trusted export-import market research company started in 1996 with an objective to fill the gap of authentic and meaningful information for Export-Import Trade.
vii. Custom Data taken from Info Drive is provided on actual shipment record basis i.e. from bill of entries/shipping bills filed with the Indian Customs. This data is available on Info Drive’s online portal where an end user/subscriber can access import-export data with the name of importer and exporter. The Company takes data from this portal and uses the same to analyse the competitor’s activities and price trends.
viii. The product code under which, Preform of Silica is imported by the Company falls under HS code 70022090. The average rate of Preform of Silica for D & A2 Fibre imported in India during the FY 2020-21 is as under:
| Particulars | Type | Rate |
| Preform of Silica | D Fibre | $ 88.87 per kg |
| Preform of Silica | A2 Fibre | $ 271.50 per kg |
ix. Therefore, the transaction is fully justified as at arm’s length price also as per the external CUP data made available by the assessee.
x. Further, the Company also procured the raw material i.e. Preform of Silica for manufacture of D Fibre’ from an independent unrelated party i.e. Shin-Etsu Chemical Co. Ltd., Japan during the period from July to October 2020 at a price of $ 113 per Kg, whereas transaction of purchase with AE is carried out at an average price of $81.41 per Kg. The Company also procured other grade of Preform of Silica which is for manufacture of ‘A2 Fibre’ from this unrelated party at a price of $ 130 per Kg. as against purchase from AE at a price of $ 130 per Kg. (to note that this is the agreed price with AE being the main supplier of Preform of Silica, ensuring steady supply with high and consistent quality). The invoices for import of Preform of Silica from the independent and unrelated party M/s Shin-Etsu Chemical Co. Ltd., Japan are also enclosed (refer page no. 622 To 627 of paper book). This is an additional direct internal CUP method to support that CUP method is the most appropriate and direct method to justify the transactions with Associate Enterprises are at arm’s length.
xi. The comparative chart of rates is as under:-
| Type Material | Rate of purchases by assessee from AE | Rate of purchase by assessee from Independent parties | Rate of purchase from Export Import | Remarks | |||
| Preform Silica –
D Fibre |
USD per kg | 81.41. | USD per kg | 113.40 | USD per kg | 88.87 | The purchase price from AE is lowest |
| Preform Silica-
A2 Fibre |
USD per kg | 130.00 | USD per kg | 130.00 | USD per kg | 271.50 | |
40. Unable to find any infirmity in the facts and submissions of the assessee, the Ld. TPO made the variation with a predetermined mind as can be seen from the TP Order itself. The assessee submits that since the comparable, both direct and indirect, are available, the CUP method applied by the assessee should be accepted and the transaction being at arm’s length price should be accepted as per the TP report submitted by assessee and thereon, the variations/additions made be deleted.
C. THE LD. TPO HAS ERRED IN LAW IN APPLYING TNMM METHOD WHEN CUP IS AVAILABLE WHICH IS THE MOST DIRECT AND APPROPRIATE METHOD TO JUSTIFY THE PRICES AS BEING AT ARM’S LENGTH FOR IMPORTS OF PREFORM OF SILICA FROM ITS AE. THEREFORE, THE APPROACH OF LD. TPO APPLYING TNMM IS WRONG AND BAD IN LAW AND SHOULD BE DISREGARDED.
41. It is again reiterated that internal as well as external CUP is available in this case and is considered as the most appropriate method to justify the prices as being at arm’s length for imports of Preform of Silica from its AE. It’s the most direct way of finding arm’s length conditions, as it uses the market price and also, it’s the OECD’s preferred choice for any analysis where comparable data is available.
42. In the present case, both internal and external comparable are available to justify the transaction at arm’s length price which is duly accepted by the department in all the earliest assessment years.
10.1. Reliance placed on the following case laws :
1. Serdia Pharmaceuticals (India) (P.) Ltd. vs. Assistant Commissioner of Income-tax, Circle 7(2), Mumbai [2011] 9 com13 (Mumbai)/[2011] 44 SOT 391 (Mumbai)/[2011] 136 TTJ 129 (Mumbai)[31-12-2010]
2. Assistant Commissioner of Income-tax 7(2), Mumbai vs. Sonata Software Ltd. [2013] 29 com144 (Mumbai)/[2013] 55 SOT 533 (Mumbai)[29-08-2012]
3. Assistant Commissioner of Income-tax, Circle 1(2), Hyderabad vs. Ckar Systems (P) Ltd. [2013] 29 com145 (Hyderabad Trib.)/[2012] 20 ITR(T) 817 (Hyderabad – Trib.)/[2013] 55 SOT 553 (Hyderabad – Trib.)[19-10-2012]
4. Assistant Commissioner of Income-tax, Circle-11 (1), Mumbai vs. Viacom 18 Media (P.) Ltd. [2019] 109 com233 (Mumbai)[08-02-2019]
5. Elara Securities (India) Pvt Ltd [TS-14-ITAT-2020 (Mum)-TP] – January 06, 2020
6. Rohm and Haas India Pvt Ltd [TS-926-ITAT-2019(Mum)-TP] – September 25, 2019 ITAT: Adopts CUP-method, accepts comparable data from Customs Department’s Database for benchmarking imports/exports
7. Toll Global Forwarding India Pvt Ltd [TS-383-ITAT-2014 (DEL)-TP] – November 18, 2014 ITAT: Adopts realistic & purposive interpretation to ‘price’ under CUP; 6th method u/r 10AB retrospective
8. Knorr-Bremse India Pvt. Ltd. (TS-700-ITAT 2012 (DEL) -TP) October 31, 2012
44. In view of the above, assessee submits that the approach of Ld. TPO rejecting the CUP without any basis and applying TNMM is wrong and bad in law and should be rejected and therefore, accordingly the variation/addition made by the Ld. TPO be deleted.
D. WITHOUT PREJUDICE TO THE ABOVE EVEN WHILE APPLYING TNMM THE LD. ΤΡΟ HAS ERRED IN SELECTING THE COMPANY WHICH ARE FUNCTIONALLY DIFFERENT, AS ASSESSEE IS MANUFACTURING “OPTICAL FIBRE” ONLY AND WHEREAS THE COMPARABLE IS MANUFACTURING ‘OPTICAL FIBRE, OPTICAL FIBRE CABLE AND FIBRE REINFORCED PLASTIC RODS (FRP)’ WHICH IS FUNCTIONALLY DIFFERENT AND NOT COMPARABLE TO THE FUNCTIONING OF ASSESSEE THEREBY COMPLETELY VIOLATING THE PROVISIONS OF RULE 10B(2) OF THE INCOME TAX RULES, 1962. THEREFORE, THE ADJUSTMENT PROPOSED BASED ON DATA OF COMPANY WHICH IS FUNCTIONALLY NOT COMPARABLE AS DONE BY THE LD. TPO IS WRONG AND BAD IN LAW. HENCE THE ADJUSTMENT SHOULD BE DELETED.
45. The assessee objected to the search process given in the show cause notice as under:
Wrong Keyword selected for initiation of search
46. The assessee submitted that the keyword selected, being the first step of search process, in the notice is “Fibre optics, Optical fibre cable”. Both the key words are difference from the product in which assessee company is dealing i.e. Optical Fibre.
47. The assessee’s product is ‘Optical Fibre’ which is used in Telecommunication sector for making Optical Fibre Cables and is known as Telecommunication Grade Optical Fibre’.
48. Whereas ‘fibre optics’ cover wide range of products which includes Optical Fibre, Plastic Fibre, Multi- Mode Fibre and other type of Fibre, used in Telecommunication sector for transmission of data, Medical sector to transmit pulses and other equipment in medical sectors. This can also find conflict with and confused with Optics/Optical parts and sub-parts which has various use and applications across the industry segments.
49. Optical Fibre Cable is completely different product, it is a product which is manufactured by using the Optical Fibre as its key raw material.
50. The assessee company is manufacturing Optical Fibre only as a standalone product at its manufacturing facility situated at Verna, Goa & not Optical Fibre Cables. Optical Fibre manufactured by the Company is rather a key raw material used by Optical Fibre Cable manufacturers, accordingly Optical Fibre Cable manufacturer are customers for the Company and not competitor/peers.
51. Therefore, the assessee submits that the 1st step and fundamental step in the search process, which is the basis for all the further exercise, itself is not relevant and therefore the subsequent search process cannot be applied in the case of assessee.
52. At 4.1 para, Ld. TPO (refer page No. 73 of paperbook) says that “the Taxpayer has reported international transactions in relation to manufacturing activity primarily with regards to purchase of silica preform required in production of optical fibre cables” whereas the Company is manufacturing Optical Fibre only & not cables, this is a material difference.
53. Further in para 7.1.1 of Ld. TPO order (refer page no. 77 of paperbook), the Ld. TPO mentioned that “The search process in Prowess Database was carried based on keywords relevant to the manufacturing of items such as “fibre optics and optical fibre cables”. These items are manufactured by the taxpayer company, as mentioned in the TP study report.” This is also factually incorrect as in Company’s TP report, we have mentioned that the Company is manufacturing ONLY Optical Fibre and not Optical Fibre Cables.
54. This shows that the Ld. TPO was not considering the facts of the case submitted by assessee from time to time and proceeded with a predetermined set of thoughts.
Comparable companies chosen by Ld. TPO – Functionally different
55. Aksh Optifibre Ltd:- As per the website of Aksh Optifibre Ltd.:
“Aksh is manufacturing Optical Fibre and Optical Fibre Cables from 1994 and added Fibre Reinforced Plastic Rods (FRP), a key raw material for Optical Fibre Cables in 2000. The two key raw materials, optical fibre and FRP rod, constituting 70% of cost of optical fibre cables are manufactured in-house. This makes Aksh as one of the most cost effective optical fibre cable manufacturer. Also, Aksh is now the largest FRP rod producer, supplying to all optical fibre cable manufacturers in 56 countries across continents.”
The above is extract from the Website, as reproduced. Furthermore, it is pertinent to note that the Ld. TPO himself has reproduced the Functional Profile of the Company – Aksh Optifibre. Below is the relevant Extract – AS HAS BEEN REPRODUCED BY THE TPO HIMSELF IN ITS ORDER.
“TPO’s Comments:
Functionally not comparable and diversified activities:
As per the information available in the Annual Report, The Company is engaged in optical fibre manufacturing business. Thus, the company is in the business of optical is functionally fibre manufacturing therefore, comparable to the Taxpayer. A screenshot in this regard is reproduced below: it
Corporate information
Aksh Optifibre Limited is a public Company domiciled in India and incorporated under the provisions of the Companies Act, 2013. Its shares are listed at The Bombay Stock Exchange Limited and The National Stock Exchange Ltd. in India. The registered office of the Company is located at F-1080, RIICO Industrial area, Phase- III Bhiwadi (Alwar) Rajasthan-301019, India.
The Company is engaged in the manufacturing and selling of Optical Fibre, Optical Fibre Cable, Fibre Reinforced Plastic Rods. Impregnated Glass Roving Reinforcement and ophthalmic lens. – The Company caters to both domestic and international markets. The Company also provides the E Governance services and FTTH services
56. From the above description, it’s clear that from the Functional Profile – as reproduced by the TPO itself that – Aksh is manufacturing Optical Fibre, Optical Fibre Cables and FRP & not only Optical Fibre whereas the assessee is manufacturing only Optical Fibre. The product mix detailing and the revenues and financials of individual product line have not been shared by the Ld. AO nor available in public domain. Therefore, as can be seen from above the it is clear that Aksh Optifibre Limited is a public limited company engaged in the manufacturing and selling of Opticle Fibre, Opticle Fibre Cable, Fibre Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and ophthalmic lens as well as provided E Governance and FTTH services. Therefore, Aksh is not a proper comparable as it is engaged in various businesses as enumerated above, and the assessee, on the other hand, being engaged in manufacturing only Optical Fibre.”
10.2 Reliance placed on the following judicial precedents:
1. Adidas Technical Services (P.) Ltd. vs. Deputy Commissioner of Income-tax, Circle 1 (2), New Delhi [2016] 69 com401 (Delhi – Trib.)[15-02-2016] Global Procurement Constant Ltd. (GPCL)
2. Labvantage Solutions (P.) Ltd. vs. Assistant Commissioner of Income-tax, Circle-2(1), Kolkata [2018] 93 com440 (Kolkata Trib.) [11-05-2018]
3. Carlyle India Advisors (P) Ltd. Assistant Commissioner of Income-tax, [2012] 102 com500 (Mumbai-Trib.) 20-11-2018
57. Therefore, as enumerated above, the complete financial results of Aksh cannot be compared with that of assessee, only the segmental data which is in itself not available for the Company – Aksh. Further, without prejudice to the above, applying External CUP in this also, it is submitted that as per custom data available (refer page No. 714 to 716 of paperbook), Aksh’s average purchase price of Preform of Silica for ‘D Fibre’ during FY 2020-21 is USD 102.9 per kg. as against average purchase price of USD 81.41 per kg from AE. Therefore, again the assessee is at arm’s length price when compared with the Import Price of Preform by Aksh Company.
58. Considering the higher purchase price of Preform of Silica as compared to the Company’s purchase price of Preform of Silica and technology wise, the Company’s plant is highly advanced with Japanese technology as compared to Aksh, we are sure that Aksh would have incurred losses in standalone manufacturing of Optical Fibre but this loss is off-setted with the profits earned in Optical Fibre Cables & FRP manufacturing business.
In any case, as this entity is not at all comparable with the business of the assessee as per TNMM approach, it should be not form the basis of comparison. Only External CUP (with respect to Aksh) can be applied as enumerated above, and therefore, as per that the assessee’s transaction of purchase of Preform is at arm’s length price. However the Ld. TPO unable to find any infirmity in the above submission, proceeded to make the addition on its own conjecture and surmises.
Non application of TNMM in case of assessee due to abnormal losses
59. In the FY 2020-21, the Company had a production capacity for manufacturing 1,20,00,000 km per annum of Optical Fibre i.e. 10,00,000 km per month. As against this capacity the Company manufactured only 35,49,402 KM during the FY 2020-21, which is only around 30% of the total available capacity.
60. It may be noted, that at the end of March 2020, wherein the Covid-19 pandemic had started settling in, Government of several countries across the world, including India, imposed strict lockdowns to control the spread of Covid-19 pandemic. This has severely impacted Company’s Optical Fibre production and Sales. Accordingly, the capacity utilization of the Company dropped to around 30% for the whole of FY 20-21. Even the world-wide economic activities were impacted by various variants of Covid-19 & dampened the market conditions in that period. During this time, the demand of Optical Fibre from Company’s customers decreased substantially.
61. Accordingly, the Loss incurred by the Company during the FY 2020-21 is not attributable to the price of Preform but mainly due to lower capacity utilization. As evident from the financial statements of FY 2020-21, there is margin in manufacturing activity but only due to lower capacity utilization, the margin from manufacturing activity is not able to recover fixed cost of the Company hence Company incurred loss in the FY 2020-21. Further the Company is manufacturing Optical Fibre, which is high technology driven product & require highly skilled employees/manpower. The Company has not laid off key workers and employees even though the capacity utilization was low at only around 30% during the financial year 2020-21 and inspite of pandemic to continue provide job to its employees at such difficult period of pandemic.
62. The Ld. TPO has not considered the above submissions of the assessee however proceeded with taking only one company in consideration i.e. Aksh Optifibre Ltd. and proposed to make addition of Rs. 20,34,17,040/- to Ld. AO on account of transfer pricing adjustment.
63. The assessee submits that the activities of comparable company M/s Aksh Optifibre Ltd. as selected by Ld. TPO are functionally different from the assessee company and therefore cannot be considered as comparable.
64. Against the assessee’s objections, the Ld. TPO has failed to appreciate the business of comparable company and simply rejected the assessee’s objection as under:-
“TPO’s Comments:
Functionally not comparable and diversified activities:
As per the information available in the Annual Report, The Company is engaged in optical fibre manufacturing is functionally business. Thus, the company is in the business of optical fibre manufacturing therefore, comparable to the Taxpayer. A screenshot in this regard is reproduced below: it
Corporate information
Aksh Optifibre Limited is a public Company domiciled in India and Incorporated under the provisions of the Companies Act, 2013. Its shares are listed at The Bombay Stock Exchange Limited and The National Stock Exchange Ltd. in India. The registered office of the Company is located at F-1080, RICO Industrial area, Phase- iit Bhiwadi (Alwar) Rajasthan-301019, India
The Company is engaged in the manufacturing and selling of Optical Fibre, Optical Fibre Cable, Fibre Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and ophthalmic lens. The Company caters to both domestic and international markets. The Company also provides the E Govemance services and FTTH services
Even from the above comment of the Ld. TPO, it is clear that Aksh Optifibre Limited is a public limited company engaged in the manufacturing and selling of Opticle Fibre, Opticle Fibre Cable, Fibre Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and ophthalmic lens as well as provided E Governance and FTTH services.
65. As submitted above, as per custom data available (refer page No. 714 to 716 of paperbook), their average purchase price of Preform of Silica for ‘D Fibre’ during FY 2020-21 is USD 102.9 per kg. as against average purchase price of USD 81.41 per kg from AE.
66. Considering the higher purchase price of Preform of Silica as compared to the Company’s purchase price of Preform of Silica and technology wise, the Company’s plant is highly advanced with Japanese technology as compared to Aksh, we are sure that Aksh would have incurred losses in standalone manufacturing of Optical Fibre but this loss is off-setted with the profits earned in Optical Fibre Cables & FRP manufacturing business.
67. The Ld. TPO itself has quoted ITAT decision in sub-para iv of para 12.14 (refer page No. 87 of paperbook), “The ITAT in the case of M/s Chiron Behring Vaccines Pvt Ltd (2011-TII-30-ITAT-Mum-TP) has held that TNMM requires comparison of net margin realized from International Transaction and not comparison of operating margin of the enterprise as a whole. According to the ITAT, transaction by transaction approach has to be adopted.”
68. As Aksh is engaged in manufacturing of several products, including Optical Fibre, Optical Fibre Cables, FRP Rods & other services, whereas the Company is manufacturing only Optical Fibre so considering this decision, it can be said that comparison of full business data with us is not justifiable. Ld. TPO should have compared only the Optical Fibre business of Aksh with our business. We have given Preform import Data of Aksh in our reply submitted on 27th September, 2023 & their Preform of Silica purchase price is higher than our purchase price. Therefore, applying External CUP in this case, our transaction is at arm’s length price.
69. In view of the above submissions and facts of the case, the assessee submits that CUP method, as selected by the assessee and also accepted in earlier years, is the most appropriate and direct method to justify the transactions with Associate Enterprises are at arm’s length and accepted in all the years in respect of same transactions.
70. Further the assessee submits that following are the some discrepancies found in the Ld. TPO order which clearly reflects that no attention was given to the facts of the case and order was passed in a casual manner: –
i. The Ld. TPO statement at para 10.1 “TNMM is used as the most appropriate method both by the taxpayer as well as the TPO” is completely wrong. The Company never accepted TNMM in any communication to TPO. Furthermore, on perusal of Form 3CEB, it can be seen that assessee has always used CUP Method to benchmark its transaction with AE.
ii. The Ld. TPO statement at para 11, the arm’s length price of the services rendered by the taxpayer to AE(s)” is also wrong. The major portion of AE transactions is purchase and Sales of materials. The rendering of service is miniscule/nominal portion with AE’s transactions.
iii. Further the Ld. TPO statement at end of para 11, The above shortfall of Rs. 20,34,03,631 / is to be treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer’s international transactions” is also wrong. The Company is not in software development segment but in manufacturing segment.
71. Furthermore, it is submitted that upon perusal of the Hon’ble DRP’s Order, The Learned DRP, being unable to point out any infirmity or deficiency in the documentary evidences and detailed submissions furnished by the assessee has mechanically affirmed the variation/addition proposed by the Learned TPO. The conclusions of the DRP are purely based on conjecture, surmise and assumptions, and not on any objective findings or cogent reasoning as mandated under law.
72. The observations of the DRP appearing at Page 6 of its order are reproduced below:
“Further, the import-export data used or provided by assessee company is having different grade and specifications. Therefore, the assessee company should have made adjustment on these accounts. However, the assessee company has used this data without making any adjustment on accounts of Geographical differences, grade and specification of product, mode of freight etc. Hence, the external CUP data as provided by assessee company cannot be relied upon as a valid benchmark.”
73. In this regard, the assessee respectfully submits as under:
A. No Finding Recorded by DRP – Order is Non-Speaking
74. The Learned DRP has made a sweeping assertion that the import data submitted by the assessee pertains to different grades, different specifications, and different geographies. However, the DRP has not recorded a single finding, example, document reference, or material evidence to substantiate this allegation.
75. The DRP has not identified:
a. Which entry differs in grade,
b. Which item differs in specification,
c. What geographical deviation exists,
d. Or how such alleged differences render the CUP data incomparable.
76. A mere allegation without any analysis cannot render the assessee’s data unreliable. The DRP’s order is thus devoid of reasoning and is liable to be set aside.
B. Assessee’s External CUP Data Is Fully Comparable
(i) Grade & Specification
77. The assessee has consistently submitted before both the TPO and DRP that it imports only two grades of Preform Silica from its AE in Japan-Grade “D” and Grade “A2”.
78. The external CUP data submitted was customs-filed import data (refer page No. 616 to 621 of paperbook) in respect of the same two grades (“D” and “A2”). Thus, the grades/specifications of the CUP data and the AE import transactions are identical.
79. Despite this, the DRP just so as to confirm the variation in the case of assessee, has incorrectly alleged “different grade and specification” without identifying any such difference. This indicates a complete non-application of mind and a mechanical affirmation of the TPO’s order.
80. Hence, there is no difference, let alone any “material difference,” with respect to grade or specification.
(ii) Geographical Differences
81. Notably, Aksh an external party alleged to be a comparable company by the TPO has also imported Grade D Preform Silica from Japan from Shin-Etsu Chemical Co. Ltd. at USD102.92 (refer page No. 714 to 716 of paperbook), whereas the assessee purchased the same grade at USD 81.41 from its ΑΕ.
This clearly demonstrates that the assessee’s transaction is at arm’s length, being significantly lower than the independent party price.
82. The DRP again failed to record any material showing geographical differences, further reinforcing the lack of reasoned adjudication.
C. DRP’s Observations on Internal CUP
The DRP has further rejected the internal CUP by alleging differences in:
1. Economies of scale and bulk discounts
2. Purchase patterns (spot vs. long-term)
3. Freight and logistics cost differences
4. The assessee submits as under:
83. Assessee’s Price Is Lower Than Internal CUP – No Profit Shifting Possible
84. The DRP itself admits that the assessee’s purchase price from its AE is lower than prices under internal CUP (DRP itself (Pg 6) states assessee enjoys Discounted Pricing & therefore, has lower purchase price). Once the AE price is lower than the uncontrolled price:
There is no possibility of profit shifting to foreign jurisdiction, and No transfer pricing adjustment is warranted, as held in multiple judicial precedents.
85. Thus, on this ground alone, the adjustment should have been deleted.
36. Findings Recorded by DRP Are Merely on its own Conjecture and Surmises
(i) Economies of Scale / Bulk Purchases
86. The DRP alleges that the AE enjoys bulk discounts due to large order volumes.
87. However, Aksh, an uncontrolled party that also imports in bulk from the Japanese supplier (Shin-Etsu), pays a higher price (USD102.92) compared to the assessee (USD81.41).
89. Thus, bulk purchase adjustments actually support the assessee, not the Revenue.
(ii) Purchase Pattern – Spot vs. Long-Term Supply
90. The DRP alleges that AE transactions involve long-term stable pricing, whereas non-AE transactions are spot purchases.
91. This is also incorrect because:
-
- The Preform Silica industry has few suppliers internationally (majorly Japanese & Chinese suppliers) and few importers in India, making long-term exclusive contracts commercially impractical.
- Prices regularly fluctuate, and all buyers-AE or non-AE-import at market-driven prices.
- The assessee’s agreement with AE itself mandates price renegotiations to take place in regularly held Board Meetings and in no case the gap between any such meeting be more than 6 months, which negates any allegation of fixed long-term pricing.
(iii) Freight and Logistics Adjustments
-
- Almost all independent entities, including Aksh, import from the same country (Japan).
- Shipment sizes differ marginally but do not produce material pricing differences, as evidenced by customs data.
- DRP has again provided no computation, quantification, or basis showing how freight or logistics differences materially affect comparability.
D. DRP Has Confirmed Adjustment Without Reason or Evidence
-
- The assessee has submitted complete import data,
- The data pertains to identical products (Grade D and A2),
- Independent party prices are higher than the AE price,
- No cogent reasoning is recorded by DRP.
92. In absence of any objective finding from the DRP, the adjustment made by the TPO and confirmed by DRP is arbitrary, unreasonable and unsustainable in law and therefore, the variation as made by the TPO is liable to be deleted.
93. Furthermore, The Ld. TPO has erred in law and on facts in applying interest rate @ 5.186% on trade receivable alleging delayed receipt of payments resulting in notional addition of Rs. 13,409/-.
94. The assessee submits that all the payments are received within due date rather before the due date. Therefore, there is no delay in receipts and hence no deemed / notional interest should have beenc charged and proposed for addition.
95. With regard to notional interest adjustment of trade receivable, the assessee submitted that the due date of payment is 60 days from the date of invoice/from the date of Airway bill. The details of invoices and payments received are submitted to the Ld. TPO in the desired format (refer page no. 717 of paperbook). From the details, the Ld. TPO has failed to appreciate that all the payments are received within due date rather before the due date. Therefore, there is no delay in receipts and hence no deemed / notional interest can be charged.
96. There was a delay of only 3 days in one of the small invoice that too has been compensated from making early payment against other invoices. Complete details for the same were submitted to Ld. TPO and the Hon’ble DRP.
97. The Ld. TPO statement at para 12.17 (refer page no. 88 of paperbook) mentioned that “The Taxpayer also failed to show that the delay in payment of receivables was compensated by the AE through a set off in any other transaction” is also wrong. From the table submitted to Ld. TPO, it’s clear that the delay in payment under one invoice is set-off from making early payment against other invoice and the overall no interest is receivable from Furukawa Electric Co., Ltd, Japan.
98. Without prejudice, the interest rate @ 5.186% taken by TPO in para 13.2 is also on the higher side. The opportunity cost for the Company is LIBOR+0.625% (spread charged by Japanese Banks) as the Company has availed USD loan from Japanese banks in that year and the sale invoice raised to FEC is also in USD. During the Covid-19 period the FED also reduce US interest rate & during the FY 2020-21, the LIBOR was in the range of 0.25% to 0.30% only so we have taken opportunity cost as 0.925% & not 5.186% taken by Ld. TPO.
Conclusion
99. In view of the above submission, the Assessee humbly submits that:-
i. The Company is a Joint Venture Company between Universal Cables Limited, Satna, (M P. Birla Group) (UCL) & Furukawa Electric Co., Ltd., Japan (FEC), in the equity sharing ratio of 50:50. The JV agreement has been entered into after prolonged negotiations and deliberations between UCL & FEC. Therefore, from the analysis of this JV structure, it would be noted that two independent parties with common objective have come together to undertake the manufacturing activity of optical fibre. The decisions which both the partners to the Joint Venture would be taking, will not be different from what any independent party would have taken.
ii. The assessee is having internal as well as external CUP. The Assessee procured Preform of Silica from third independent party during the year. Custom data is also provided by M/s Info Drive India which is India’s leading and most trusted export-import market research company started in 1996 with an objective to fill the gap of authentic and meaningful information for Export-Import Trade. Custom Data taken from Info Drive is provided on actual shipment record basis i.e. from bill of entries/shipping bills filed with the Indian Customs.
iii. The above comparable and CUP method is accepted by the department is all the earlier assessment years. CUP is considered as the most appropriate method to justify the prices as being at arm’s length also it’s the OECD’s preferred choice for any analysis where comparable data is available which is applicable in this case.
iv. The Ld. TPO has failed to appreciate the facts and details submitted and rejected the CUP method without their being any basis.
v. Without prejudice, the Ld. TPO has applied TNMM without providing the search matrix to the assessee. Further the Ld. TPO has considered M/s Aksh Optifirbe Ltd. as comparable company which is functionally different from the assessee.
Aksh Optifibre is manufacturing Opticle Fibre, Opticle Fibre Cable, Fibre Reinforced Plastic Rods, Impregnated Glass Roving Reinforcement and ophthalmic lens as well as provided E Governance and FTTH services whereas the assessee is manufacturing only Optical Fibre.
As submitted above, as per custom data available (refer page 714 to 716 of paper book), their average purchase price of Preform of Silica for ‘D Fibre’ during FY 2020-21 is USD102.9 per kg. as against average purchase price of USD 81.41 per kg from AE.
Considering the higher purchase price of Preform of Silica as compared to the Company’s purchase price of Preform of Silica and technology wise, the Company’s plant is highly advanced with Japanese technology as compared to Aksh, we are sure that Aksh would have incurred losses in standalone manufacturing of Optical Fibre but this loss is off-setted with the profits earned in Optical Fibre Cables & FRP manufacturing business.
vi. The Loss incurred by the Company during the FY 2020-21 is not primarily attributable to the price of Preform but mainly due to lower capacity utilization. As evident from the financial statements of FY 2020-21, there is margin in manufacturing activity but only due to lower capacity utilization, the margin from manufacturing activity is not able to recover fixed cost of the Company hence Company incurred loss in the FY 2020-21.
vii. The notional interest proposed by TPO on trade receivable is wrong as all the payments are received well within the time except a delay of only 3 days in one of the small invoice that too has been compensated from making early payment against other invoices.
On the basis of above submissions / contentions, the Assessee requests your Honor to kindly delete the addition/variations made by the Ld.AO/TPO as confirmed by the Hon’ble DRP.
PRAYER
Pass necessary orders and directions thereby quashing the impugned order passed by the Ld. DRP; and
Pass necessary orders and directions thereby deleting the additions Confirmed by the Ld. DRP; and
Pass necessary orders and directions quashing the demand notice issued against the appellant; and
Pass necessary orders and directions thereby deleting any interest and penalty proceedings initiated against the applicant and provide consequential relief to the appellant;
And
Pass any such other order(s) that the Hon’ble ITAT deems fit and proper and in the current facts and circumstances of the case.”
11. On the other hand, ld. Departmental Representative vehemently argued supporting the impugned order and also referred to the orders of the ld. Dispute Resolution Panel as well and ld. Transfer Pricing Officer.
12. We have heard the rival contentions and perused the record placed before us and also carefully gone through decisions referred and relied upon by Ld. Counsel for the assessee. We note that in the instant case Transfer Pricing adjustment is mainly been made for the purchase of Preform Silica by the assessee from its Associate Enterprise namely Furukawa Electric Company, Japan which is also a Joint Venture partner and the purchases are at Rs.64,38,00,769/-. Assessee has been consistently following Comparable Uncontrolled Price method (CUP) with the available data for calculating the Arm’s Length Price based on the Internal CUP as well as External CUP method. In the previous year, CUP method has been accepted by the ld. TPO and no adjustment has been proposed. For the year under consideration, ld. TPO has rejected the CUP method and applied Transactional Net Margin Method and has only selected one final comparable namely Aksh Optifibre Limited.
13. We will first move on to examine whether ld. AO/TPO erred in applying the TNMM inspite of the fact that there have been no change in the facts and nature of business of the assessee company and the purchase transactions of very same product took place in the past and ALP has been calculated as per the CUP method but still ld. TPO has adopted a different method as the Most appropriate method. We note that the average rate of procurement by the assessment company of Preform Silica Type D Fibre is at $81.41 per kg and Type A2 Fibre is at $130 per kg. Majority of purchase of Preform Silica are made by the assessee from its Associated Enterprise. However, the imports of the very same raw material is also made from independent unrelated parties during the year which is Shin-Etsu Chemical Company Limited, Japan.
14. We note that the CUP method is a Traditional Profit technique used to evaluate whether the price charged in a transaction between the related Corporate entities matches and what independent parties would charge in the open market, i.e.Arm’s Length transaction. The CUP method can be applied using Internal CUP, i.e. comparable in question the purchases and sells the same item to/from an independent party outside and secondly External CUP when two completely independent companies take a comparable transaction in the open market. On the other hand, Transactional Net Margin Method is applied in order to check if the net profit margin between related company matches with the profits of an independent firm which considers the net operating profit against the base costs, sales or assets like sales, cost or asset earned by a tested party in a controlled transaction with that of independent comparable companies and under TNMM.
15. We note that when the issue relates to calculation of ALP for a particular transaction of purchase or sale and there is sufficient information available about the Internal CUP as well as External CUP, then in such scenario, CUP method is the Most Appropriate Method. In the instant case, the assessee has provided the data under the External CUP about the average rate of procurement by companies in India as per the data from bill of entries/shipping bills filed with Indian Customs. In other words, the imports made by various companies across the country of the very same item under HS Code 70022090 and as per the data available with the Indian Customs, the average price of import of Preform Silica Type D Fibre is $88.87 per kg and Type A2 Fibre at $271.50 per kg. These rates are much higher than the average purchase price paid by the assessee to its Associated Enterprise. In other words, the assessee has paid less price than the average rate of imports by other companies in India as per the data available with Indian Customs and therefore there is no loss to the Revenue.
16. Now taking into consideration, the internal CUP, we note that the assessee has purchased the Preform Silica from an independent unrelated party namely Shin-Etsu Chemical Company Limited, Japan and the price is paid for Type D Fibre and Type A2 Fibre at $113 per kg and $130 per kg which are either less or equal to the price paid by the assessee to its Associated Enterprise. Therefore as per the Internal CUP and External CUP the transaction of purchase of Preform Silica by the assessee from its Associate Enterprise is at Arm’s Length Price. Now once a method namely CUP has been consistently being followed by the assessee in the past and there being similar nature of transaction as well as the parties and there being no change in the asset base of the assessee and such method have been consistently accepted by the Revenue authorities for calculating ALP, rejection of the CUP method followed by the assessee and application of another method namely TNMM cannot be held to be justified as the ld. TPO has not followed the Rule of Consistency.
17. We observe that in the case of Lubrizol India Pvt. Ltd. Vs. ACIT reported in (2020) 113 com3 (Mumbai), the Coordinate Bench, Mumbai Bench held that when there is no change in facts and law, changing of consistently applied TNMM Method to CUP Method is not justified.
18. Hon’ble Punjab and Haryana High Court in the case of CIT Vs. Willis Towers Waston India (P) Ltd. reported in (2024) 166 taxmann.com455 has concurred with the view taken by the Tribunal holding that when for the previous assessment years the Tribunal held the CUP method to be the most appropriate method and the factual matrix reveals the same, there was no occasion for the TPO to adopt a new method.
19. In light of the above decisions and on the facts of the present case, we are of the considered view that ld. TPO erred in applying the TNMM method disregarding the fact that the CUP method has been consistently being followed by the assesee and all the relevant data required for arriving at the ALP as per the CUP method are available on record and ld.TPO grossly erred in deviating from the CUP method and applying the TNMM method which apparently is not appropriate because transaction of purchase of raw material in question has been carried out by the assessee at ALP duly supported by the Internal and External CUP method and the data available on record for the very same product which has been purchased by the assessee. Therefore, since both Internal and External CUP comparables are available, applying the CUP method is hereby accepted and therefore we hold that ALP calculated by the assessee by applying CUP method is correct and the impugned finding of rejecting CUP and applying TNMM is set aside.
20. Even though we have affirmed the application of CUP method, still for academic purpose, we also deal upon the TNMM method applied by the ld. TPO. We note that the assessee company manufactures only Optic Fibre and not the Optical Fibre cables where the ld. TPO has observed that the assessee has reported international transaction in relation to the manufacturing activity primarily with regard to the purchase of Preform Silica required for production of Optical Fibre cables. We find that this is a wrong observation of ld. TPO because the assessee is only manufacturing Optical Fibre and not Optical Fibre cables. It has been demonstrated by the ld. Counsel for the assessee that Optical Fibre is a flexible thin hair like strand of high-purity glass or plastic that carries data via pulses of light whereas optical fibre cable is the complete finished assembly that contains one or more of these fibers wrapped inside heavy protective layers, strongly pressed and outer jackets for safe field deployment. In short, Optical fibre is the bare microscopic transmission medium whereas Optical fibre cable is the finished commercial product enclosing the fibre. Therefore, ld. TPO grossly erred in even examining the actual manufacturing activity of the assessee and has moved on to apply TNMM method by selecting Aksh Optifibre Limited. For selecting a comparable under TNMM method the precondition is that the comparable company should be engaged in similar type of business activity. Now the assessee in the instant case is manufacturing Optical Fibre whereas Aksh Optifibre Limited is a Public Limited company engaged in the manufacture of Optical Fibre, Optical Fibre cable, Fibre reinforced plastic rods, Impregnated Glass roving Reinforcement and Opthalmic lens and also providing E-governance FTTS services. We further notice that as per the Audited financial statement of Aksh Optifibre Limited placed in the paper book, there is no segmental data of the Revenue generated from various activities as well as the profit margin for a particular segment. In the audited balance sheet only the figure of Gross Revenue is mentioned. It is also not in dispute that the assessee is a Private Limited company and the comparable company is a Limited company having huge turnover. Taking into consideration all these aspects and also that the comparable company is engaged in many more business, in our considered view the alleged comparable is not functionally comparable with the assessee’s profile and therefore the said selection of comparable by the ld. TPO is hereby rejected.
21. We find support from the decision of Coordinate Bench, Delhi in the case of Adidas Technical Services (P) Ltd. Vs. DCIT reported in (2016) 69 com40 wherein the Tribunal held that when the comparable company profile is not functionally similar and there is no segmental data available, the company has to be excluded from the list of comparables. Similar view has been taken by the Coordinate Bench, Kolkata in the case of Labvantage Solutions (P) Ltd. Vs. ACIT reported in (2018) 93 taxmann.com 400
22. In light of the above decisions and our discussion made hereinabove impugned finding is reversed and the Transfer Pricing adjustment of Rs.20,34,17,040/- made by the ld. Assessing Officer applying the TNMM method as against the CUP method consistently applied by the assessee is hereby deleted. Relevant grounds of appeal raised by the assessee on this issue are allowed.
23. Remaining grounds being general, consequential, premature or infructuous, needs no adjudication.
24. In the result, the appeal of the assessee is partly allowed as per terms indicated hereinabove.
Order pronounced on this 07th day of August, 2026.
