TaxTMI 
TaxTMI 
2023 (1) TMI 117
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....ncurred on raw materials by the Assessee during the relevant assessment year, which is the first active year of operation. 3. That the Hon'ble DRP erred in sustaining the order of the Ld.TPO by including M/s Mazda Ltd as a comparable without appreciating the fact that the products manufactured by the said company is entirely different form that manufactured by the Appellant. 4. That in computation of ALP, the Hon'ble DRP erred in not directing the Ld TPO to include M/s Leader Valves as a comparable even though the company is in the same industry as that of the Assessee. 5. That the Hon'ble DRP erred in sustaining the order of Ld TPO by including M/s. Yuken India Limited as comparable and in doing so it failed to appreciate that the valves manufactured by the comparable company is only one of the product in the products list, and no separate figures for the relevant segment are available in the Annual report of that company. 6. That in the Computation of the ALP, the Hon'ble DRP erred in not directing the Ld. TPO to consider the adjustments to the respective Working Capital position of the Appellant and the Comparable Entities. ....
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....the assessee in the following paragraphs. Exclusion of abnormal raw material consumption 4. The assessee made an adjustment of 18% towards abnormal raw material consumption during the AY 2007-08 as it is the first full year of operation of the company. The TPO while considering the issue during the remand proceedings did not allow the adjustment for the purpose of computation of ALP. The DRP was of the view that this claim was not made by the assessee in the first round and the assessee cannot raise this plea in the second stage of proceedings, as the TPO cannot travel beyond the scope of boundaries in the set aside proceedings. On merits, the DRP rejected the claim of the assessee on the ground that consumption of raw material in subsequent years is not coming down in the linear method and in fact rising in the FY 2009-10. The DRP also analysed the scrap sale of the assessee from AY 2007-08 to 2010-11 and was of the view that it did not support the claim of the assessee for an adjustment. Aggrieved, the assessee is in appeal before the Tribunal. 5. The ld. AR has filed written submissions the extract of which is given below :- (i) It is submitted that the year un....
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....o consider an allowance of 18% to the margins of the assessee in arriving at the ALP. 6. The ld. DR submitted that this is a fresh adjustment made by the assessee during the remand proceedings and the TPO/DRP were right in rejecting the adjustment as this issue was not before the Tribunal in the first round and hence the TPO cannot travel beyond the scope of the set aside proceedings. The ld. DR supported the findings of the DRP on merits of the issue and submitted that the financial of the subsequent years are not filed by the assessee to substantiate its claim that the raw material consumption was abnormal during the AY 2007- 08 alone. 7. We have considered the rival submissions and perused the material on record. The assessee was incorporated during 2005 and FY 2006-07 (AY 2007-08) is the first full year of operation. The assessee is in the business of manufacture of hydraulic valves for automobiles and industrial machinery, which according to the assessee, is a highly competitive market. The assessee imports raw materials from its AE and exports the finished products to the AE. The ld. AR drew attention to the comparative percentage material consumption on sales of the co....
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....ngth. The TPO rejected 9 out of 10 companies and added one more comparable to arrive at the arithmetic mean as under:- (Data used 31.03.2007) Rs. in Crores Sl. No. Name of the Company Operating Revenue Operating Cost Operating Profit Op. Profit/Cost% Op. Profit/Sales% 1. Mazda Ltd. (Segmental) 8.62 7.66 0.96 12.53% 11.14% 2. Yuken India Ltd. (Tax payer's) 100.15 86.29 13.86 16.06% 13.84% Arithmetic Mean. 12.70% 12.49% 10. During the remand proceedings, the assessee made submissions before the TPO based on fresh search to include one more comparable i.e., M/s. Leader Valves. The assessee also submitted that the companies included in the original assessment i.e., Mazda Ltd. & Yuken India Ltd. need to be excluded as they are functionally not comparable. Without prejudice the assessee submitted the revised financials of operating revenue and operating cost of Yuken India Ltd for the consideration of the TPO in case the company is included as a comparable. The TPO rejected the assessee's contentions with respect to inclusion and exclusion and retained the original co....
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.... Fluid power products. Segmental results are not required when overall range is very similar. Hence there is no merit in assessee's argument." "The assessee contents that M/s Leader Valves should be included as comparable as it is having similar products line. However it is seen that assessee is proposing this comparable for the first time before DRP and this ground was not taken in the first round even before ITAT. The grounds referred by the ITAT to the TPO does not include this comparable. Further it was never a comparable in the assessee's study also. There is no evidence that it passed the filters applied by TPO and it is not part of TPO search matrix. Hence there is no merit in the argument put forth by the assessee." 12. Before us, the ld. AR submitted that :- Mazda Limited is an engineering company having one of the largest number of steam jet vacuum system and condensers sold for the process of power industry. This company specialises in supplying equipment to various Industries like Power, Chemicals, Bulk Drug Industries and also caters to needs of Refineries, Sugar and Food industries. These devices are used in Jets and have no connection with th....
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....re the TPO may not be in a position to directly apply the findings of the ITAT regarding comparables in earlier year to the current year. Further the DRP held that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The working capital requirements and impact depends on various factors such as business cycles, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc., all of which cannot be captured in the year end Receivable and Payable position. Further, the assessee had failed to demonstrate such material differences so as to warrant an adjustment and the DRP upheld the TPO's reasoning." 15. The ld. DR supported the order of the DRP and submitted that the assessee's ground may be dismissed. 16. We have considered the rival submissions and perused the material on record. The assessee followed TNMM as the Most Appropriate Method [MAM] for the determination of ALP. The coordinate Bench of this Tribunal in the assessee's ....
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....he net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction] ;" 20. Under TNMM, the net profit of a controlled transaction of an associated enterprise (tested party) is determined and this net profit is then compared to the net profit realized by comparable uncontrolled transactions of independent enterprises. As opposed to other transfer pricing methods, the TNMM requires transactions to be "broadly similar" to qualify as comparable. "Broadly similar" in this context means that the compared transactions don't have to be exactly like the controlled transaction. This increases the amount of situations where the TNMM can be used and thus TNMM is the most commonly used methodology applied and accepted for determining the ALP. When TNMM is used for determining the ALP, it is not necessary for the comparable company and the taxpayer to cater to the same industries in order to be functionally comparable. Further TNMM does not require strict product comparability. Therefore we are of....
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....rities. This issue is decided against the assessee. Inclusion of M/s. Leader Valves 20. During the course of remand proceedings, the assessee did a fresh search of comparables and submitted that the list of comparables before the TPO which included this company, Leader Valves. The TPO rejected this comparable. The DRP also rejected it stating that this ground was not before the TPO or the ITAT in the earlier proceedings and no evidence as to how this comparable was chosen was furnished before the TPO. We notice that Leader Valves Ltd. is involved in manufacturing of industrial valves, coils, boiler mounting and forge fittings. The range of products include gun metal/bronze valves, cast steel valves, forged steel valves, cast iron valves, boiler mounting valves. The company serves industries in oil & gas, power, marine & water, steel & mining, chemical & fertilizres, HVAC, etc. Applying the principles laid down by the Tribunal in assessee's own case (supra), we are of the considered view that Leader Valves Ltd. should be included as a comparable, considering the broader product comparability and high level of functional comparability. As regards the objection of the revenue au....
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....able 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-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction); (f)** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the ....
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.... 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 explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit....
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....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 working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balanc....
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.... 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. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. ....
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....denying the working capital adjustment to the assessee. We accordingly direct the AO to allow the working capital adjustment. The assessee appeal on this ground is allowed." 22. Following the above decision of this Tribunal, we direct the AO to allow the working capital adjustment to the assessee. This ground of the assessee is allowed. 23. The next ground pertains to the adjustment to the interest on External Commercial Borrowings (ECB). The assessee has taken ECB from its AE at an interest rate of LIBOR + 1.5%. In the original proceedings, the assessee submitted before the TPO that RBI has mentioned the highest cap on the spread above the LIBOR and the banks in India charge interest on ECB not less than LIBOR + 1.5%. Therefore, the interest charged by the assessee is within arm's length. The TPO rejected this claim stating that RBI is the agency only to deal with foreign exchange management and not arm's length nature of interest charged on loans. He relied on the decision of Coca Cola India Inc. v. ACIT (2008 TIOL 658 HC P&H-IT) in this regard. The TPO proceeded to adopt CUP rate and computed the interest @ 4.92% i.e., average of 6 months EURO LIBOR for 2006-07 at 3.54% + ....