Tribunal directs TPO to recalculate ALP, remands issues for fresh examination. Assessee prevails on working capital adjustments.

The Tribunal partly allowed the appeal, directing the TPO to recalculate the ALP. The issues of abnormal raw material consumption and inclusion of Leader Valves Ltd. were remanded for fresh examination. The adjustments for working capital and ECB interest were decided in favor of the assessee.

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Issues Involved:

1. Exclusion of abnormal raw material consumption.
2. Exclusion of certain comparables.
3. Inclusion of certain comparables.
4. Adjustment to the interest on External Commercial Borrowings (ECB).
5. Exclusion of working capital adjustment while computing the ALP.

Detailed Analysis:

Exclusion of Abnormal Raw Material Consumption:

The assessee claimed an 18% adjustment for abnormal raw material consumption during the AY 2007-08, arguing it was the first full year of operation with trial productions causing wastage. The TPO and DRP rejected this claim, stating it was not raised in the first round and lacked substantiation by subsequent years' financials. The Tribunal remanded the issue back to the TPO/AO for fresh examination, directing the assessee to provide relevant details and evidences.

Exclusion of Certain Comparables:

The TPO included Mazda Ltd. and Yuken India Ltd. as comparables, which the assessee contested. The DRP upheld the inclusion of these companies, noting that under TNMM, broad product range comparability suffices. The Tribunal agreed with the DRP, citing high-level functional comparability and broad product comparability, thus rejecting the exclusion of Mazda Ltd. and Yuken India Ltd.

Inclusion of Certain Comparables:

The assessee proposed including Leader Valves Ltd. during remand proceedings. The TPO and DRP rejected this, stating it was not raised initially and lacked evidence of passing the applied filters. The Tribunal, however, included Leader Valves Ltd., considering broad product comparability and high-level functional comparability, and noting the entire issue of comparability was set aside to the TPO in the first round.

Adjustment to the Interest on External Commercial Borrowings (ECB):

The TPO adjusted the interest rate on ECB from LIBOR + 1.5% to 4.92%, using the CUP method. The Tribunal, referencing the RBI Master Circular, held that the interest rate charged by the assessee was within arm's length as it conformed to the RBI guidelines (LIBOR + 150 basis points). The adjustment was thus deleted.

Exclusion of Working Capital Adjustment While Computing the ALP:

The Tribunal directed the AO to allow the working capital adjustment, following its previous decision in the assessee's own case for AY 2013-14. It emphasized that working capital adjustments improve the reliability of comparables and should be allowed as per Rule 10B(1)(e)(iii) of the Income-tax Rules.

Conclusion:

The Tribunal partly allowed the appeal, directing the TPO to recalculate the ALP as per the directions contained in the order. The issues of exclusion of abnormal raw material consumption and inclusion of Leader Valves Ltd. were remanded for fresh examination, while the adjustments for working capital and ECB interest were decided in favor of the assessee.

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