TaxTMI 
TaxTMI 
2022 (5) TMI 34
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment towards working capital adjustment (Grounds 8) (vii) Restricting adjustment towards AE transactions (Ground 9) [This addition was unilaterally added by the DRP] 3. Brief facts of the case are as follows: The assessee is a subsidiary of the Tokai Rika Company Ltd., based in Japan. The assessee is mainly engaged in manufacturing key sets and locks to automotive industry. The assessee has manufacturing facility. The assessee in its TP study, has adopted TNMM as the most appropriate method. The assessee has arrived at set of 2 comparable companies with an average OPM of 2.80% viz-a-viz that of 23.11 % of the assessee. The assessee made various adjustments to arrive at the OPM. Thus, in the TP study, it was concluded that international transactions are at arm's length. 4. The TPO rejected the comparables set taken by the assessee. The TPO conducted a fresh TP analysis and selected a set of 6 comparable companies and arrived at OPM of comparables at 4.37%. After rejecting the adjustments made by the assessee, the TPO arrived at OPM of the assessee at -10.82%. The TPO therefore proposed a TP adjustment of Rs. 4,69,48,996. 5. Aggrieved by the above TP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2021). * The assessee submitted that the working capital adjustment should be granted and placed reliance on the Bangalore Tribunal decision in the case of Huawei Technologies India Private Limited reported in 101 taxmann.com 313. * The Assessee has also argued that the TP adjustment should be restricted only to the international transactions. The Assessee submitted that the DRP has erred in computing the transfer pricing adjustment for the total operating costs. The Ld. Counsel for the Assessee submitted that the transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. The Assessee relied on the decision in the case of IKA India P. Ltd. 101 taxmann.com 276. 7. The learned Departmental Representative has filed a brief submission supporting the orders of the TPO and the DRP. 8. We have heard the rival submissions and perused the material on record. The assessee has submitted that the TPO has done fresh/TP analysis but did not furnish the search process and the accept/reject matrix, while selecting fresh set of comparables. The assessee has also s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal, it is clear if there is difference in depreciation in the case of assessee and the comparable cases, reasonable depreciation adjustment is to be made to determine the arm's length of the international transaction. On perusal of the TPO's order and the DRP's order, confirming the same, it is clear that the directions of the Tribunal in its earlier order has not been given effect to. The TPO has admitted that depreciation cost of the comparable companies is lesser than the assessee (since deprecation policy followed by comparable companies is as per Companies Act, whereas the assessee was showing higher rate of depreciation based on some agreement (see page 5 of the TPO's order). Hence, suitable depreciation adjustment ought to have been made by AO/TPO. Therefore, this issue is restored to the files of the AO/TPO. The AO/TPO is directed to allow depreciation adjustment if they notice the rate of depreciation are different in the case of the assessee and the comparable cases. Therefore, ground 4 is allowed for statistical purposes." 11. However, we observe that there is no analysis with respect to depreciation policy of the assessee and comparable cases. Theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hods and in the manner as is prescribed in Rule 10B of the Rules. Rule 10B in turn states that the most appropriate method would be one which inter alia provides the most reliable measure of ALP, and one of the important factors to be taken into account herein is the ability to make reliable and accurate adjustments. 24. The OECD Guidelines on this aspect is as follows:- Para 1.35 of the OECD Guidelines states as follows: "Where there are differences between the situations being compared that could materially affect the comparison, comparability adjustments must be made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 of the OECD Guidelines states as follows: ".... material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e has to be read with Rule 10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. In the following decisions it has been held that adjustment to the profit margins have to be made on account of underutilization of capacity: (i) In the case of M/s. Mando India Steering Systems Private Limited vs. Assistant Commissioner of Income Tax, [I.T.A. No. 2092/Mds 12012], the Tribunal upheld the contention of the taxpayer for making a suitable adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: "10. .......... We are of the considered view that underutilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production." (ii....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on is under:- "15.2 We agree with this contention of the counsel for the assessee. All the comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. The AO shall consider this fact also while determining the ALP and make the TP adjustments. With these directions, the appeal of the assessee is disposed of." 28. The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). 29. In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making "reasonably accurate adjustments" for eliminating any material....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act:" 32. In this regard, we find that the Mumbai ITAT in case of M/s. Kiara Jewellery P. Ltd. (I.T.A. No. 8109/Mum/2011), has directed the AO/TPO to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The relevant extract of the aforesaid decision is as under:- "11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd. (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of assessee company to the file of AO/TPO for deciding the same afresh keeping in view the said guidelines. If the exact details of capacity utilization of the comparable companies are not available in the public domain, the AO/TPO ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-claus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been e....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily workin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi-Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain.....