TaxTMI 
TaxTMI 
TaxTMI 
2021 (12) TMI 141
X X X X Extracts X X X X
X X X X Extracts X X X X
....aged in the business of manufacture of plastic, closure capping system, capper closure system, etc. During the relevant previous year, the assessee operated in 3 segments viz., manufacturing, trading and services. It is not in dispute that the international transaction in the trading and services sector has been accepted by the TPO as at arm's length. The dispute is only with regard to determination of ALP in respect of manufacturing carried out by the assessee. 3. As far as the manufacturing segment is concerned, the assessee filed a Transfer Pricing (TP) study adopting Transaction Net Margin Method (TNMM) as the Most Appropriate Method(MAM) and adopting operating profit / operating cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison of assessee's margin with comparable companies. The assessee chose 7 comparable companies whose average profit margins were 6.69%. The assessee's OP/OC was computed at 7.54% and the assessee claimed that the price received from AE was at arm's length. 4. The Transfer Pricing Officer (TPO) to whom the Assessing Officer (AO) made a reference u/s.92CA of the Act, however recomputed the PLI and arrived at OP/OC margin of -36.8....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acity, the adjustment on account of capacity utilization cannot be allowed. The TPO thereafter proceeded to compute the ALP as follows: Arm's Length Mean Margin on cost 7.84% Operating Cost 149,585,610 Arm's Lengh Price (ALP) 161,313,122 107.84% of Operating Cost) Price Received 94,483,840 Shortfall being adjustment u/s 92CA: 6,68,29,282 5% of price received 4724192 6. Aggrieved by the draft Assessment Order dated 20.03.2016, wherein the addition of Rs. 6,68,29,282 was suggested by the TPO on account of determination of ALP, the Assessee preferred objections before the Dispute Resolution Panel (DRP). The DRP passed its directions dated 27.12.2016. The DRP upheld the rejection of TP documents of the assessee and the conclusion of the TPO regarding use of multiple year data. On the inclusion of the 7 comparables chosen by the assessee in its TP study, the DRP agreed with the conclusion of the TPO. The findings of the DRP in this regard were as follows: "The assessee objected to the rejection of the following companies selected by it in its TP study, by the TPO:- Sl. No. Comparable Functional Profile ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee's contention that out of the 37 companies selected by the TPO, the above 3 companies are functionally comparable. Accordingly, we direct the Assessing Officer to decide the ALP of the manufacturing segment of the assessee company taking the mean margin of 6.92% based on the above 3 comparables instead of 7.84% considered by the TPO. The above objections are disposed accordingly." Thus, the DRP retained only the aforesaid 3 comparable companies chosen by the TPO. 8. The assessee had objected to the TPO not granting working capital adjustment. The DRP, however, rejected the contention for the reasons given in para 2.7 of its order which reads as follows: ''Having considered the submissions, it is noticed by us that the TPO has considered the finance cost, in the case of the assessee company, as non-operating. In such circumstances, similar treatment to the comparables takes care of the differences of working capital. Therefore, in our view, no separate adjustment on account of working capital is required to be given. However, we direct the Assessing Officer to consider the margin of the comparables also considering the finance cost as non-operating in nature....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ALP for the international transaction of manufacturing segment. The DRP also held that since the assessee did not produce evidence for reimbursement. The payment of royalty under section 37 also. The sum to be disallowed in this regard was quantified in this regard at a sum of Rs. 79,50,790/-. This figure was subsequently rectified by an order dated 27.12.2016 by the DRP by adopting the correct amount of royalty which is Rs. 45,94,003/-. 12. Another objection before the DRP was that the payment under the transfer pricing, regulations can be made only to the value of the international transactions whereas the TPO has made the adjustment even in respect of transaction with unrelated parties. On this objection, the DRP called for a remand report from the TPO and the DRP concluded as follows: "Having considered the submission of the assessee, we fail to understand the logic of the TPO while passing the order under section 92CA(3) of the Act, and also while submitting the remand report, in which he continued to protect the adjustment of Rs. 6,68,29,282/- made by him against the AE's part in the operating cost of Rs. 1,19,18,712/-, other than the purchase of fixed assets and roya....