TaxTMI 
TaxTMI 
2016 (6) TMI 590
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....f other Federal Mogul products including wiper blades, glow plugs, ignition coils, engine parts, oil seals and antifriction bearings. The assessee filed its return declaring Nil income. Such return was accompanied by audit report in Form No. 3CEB divulging nine international transactions including purchase of raw material components, purchase of trading material, sale of finished goods, sale of semi finished goods and commission received. The assessee used Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit level indicator (PLI) of Operating Profit/Sales. It computed its Operating profit margin to sales at 3.34%. Five companies were chosen as comparables with an average profit rate of 1.77%. That is how, the assessee declared that all of its international transactions were at arm's length price (ALP) under the TNMM on entity level. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the ALP of the international transactions reported by the assessee. The TPO did not dispute the application of the TNMM as the most appropriate method with the PLI of OP/Sales. He, however, made alternations in the comparables selected by t....
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....ows total sales of goods at Rs. 54.28 crore with sale of finished goods at Rs. 49.70 crore and sale of traded goods at Rs. 4.58 crore. Apart from that, the assessee earned commission amounting to Rs. 60.42 lac on sale of products on behalf of its AE. On a specific query about any agreement under which the assessee undertook to do manufacturing, trading and commission business with its AE, the ld. AR submitted that no such formal agreement was entered into. This has not been controverted by the ld. DR with any cogent material. As such, we proceed to determine the comparability of the company challenged by the ld. AR on the premise that the assessee is engaged in manufacturing and trading of spark plugs, wiper blades, ignition coils and engine parts, etc. in addition to indenting business. 4. We have noted above that the TPO refused to consider the comparability or otherwise of Kusalava International Ltd. on the reason that he eschewed to consider new companies, despite there being seven other comparable companies found by him on search. He, however, made a passing reference on page 15 of his order that Kusalava International Ltd. entered into a phase of losses which was different....
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....omparable nor the other seven companies included in the above Table selected by him as comparable on fresh search. This stand was taken by the TPO for not considering any fresh comparables proposed either by the assessee or searched by him. Once we accept the contention advanced on behalf of the assessee and proceed to consider Kusalava International Ltd. as comparable, which was put forth by the assessee during the course of the proceedings before the TPO, it is, but natural that we should also consider the other seven companies selected by the TPO as comparable in the fresh search which were excluded because he was not entertaining any fresh comparables. If we accept the objection of the ld. AR for considering only Kusalava International Ltd. as comparable and ignoring those seven selected by the TPO and incorporated in his order, it would distort the overall comparability and amount to blowing hot and cold in the same breath. Obviously, this cannot be permitted. Once we are proposing to consider the comparability or otherwise of Kusalava International, it is just, fair and equitable to also consider the other seven companies selected by the TPO from the angle of comparability. A....
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....e the TPO or before the DRP. Referring to the Annual report of this company, it was argued that the same was functionally similar. The ld. DR opposed the inclusion of this company in the list of comparables. 9. In an earlier para, we have restored for fresh consideration of Kusalava International Ltd. and seven other companies to the TPO after allowing due opportunity to the assessee. While carrying out this exercise, the TPO is also directed to consider the comparability or otherwise of Design Auto Systems and then deal with it accordingly. II. WORKING CAPITAL ADJUSTMENT 10. The next issue raised by the ld. AR is about not granting of working capital adjustment. The assessee requested for allowing working capital adjustment which was refused by the TPO. The assessee remained unsuccessful before the DRP as well. Now the same is challenged before us. 11. We have heard the rival submissions and perused the relevant material on record. We are not inclined to accept the view canvassed by the authorities that the working capital adjustment cannot be allowed because the assessee failed to demonstrate that the difference in the working capital deployed was making a difference ....
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....th price by the TPO on the last page of his order divulges that he took Operating profit amounting to Rs. 4,42,38,699 at a margin of 8.82%. This has been calculated by the TPO on entity level figures of the assessee, including those concerning unrelated transactions. By applying the arithmetic mean of the comparables at 8.82%, the TPO proposed a transfer pricing adjustment of Rs. 2,74,69,498/-. The ld. AR contended that no transfer pricing adjustment is possible in respect of transactions with non-AEs. 14. It is uncontroverted, as is also apparent from the TPO's order, that the transfer pricing adjustment has been made by considering the total sales effected by the assessee in respect of transactions with the associated enterprises (AE) and non-AEs. An addition towards transfer pricing adjustment is made by comparing the assessee's profit rate from the international transaction with that of comparable uncontrolled transactions. Under the TNMM, the process is simple in initially finding out the operating profit margin of the assessee and then the average adjusted operating profit margin of comparable cases. Such adjusted profit margin of the comparables constitutes benchm....