AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 117
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....ant 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. 7. The Hon'ble DRP erred in sustaining the order of Ld TPO in respect of interest ....
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....e 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 under appeal is the first year of full commercial production and during this year the company carried out certa....
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....e 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 comparables at page 21 of the PB, which is extracted below:- COMPARITIVE PERCENTAGE OF MATERIAL CONSUMPTION ON SALES Particulars MazdaLtd Yuken India Ltd LeaderValves Ltd Wa....
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.... 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 comparables. However, he took into account the revised operating revenue and operating cost of Yuken India Ltd. to recompute the TP adjustment. 11. Before the DRP, the assessee objected to the decision of the TPO to include M/s Mazda Ltd and Yuken India Ltd and also the exclusion the new comparable M/s. Leader Valves....
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....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 the products manufactured by the assessee. Accordingly, it is prayed that this company may be excluded. Yuken India Ltd is a manufacturing company which manufactures Hydraulic Pumps, valves and other products. The valves produced by this company is similar to the assessee, however, the annual report of the company does not contain segment wise det....
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....ments 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 own case for AY 2013-14 in IT(TP)A No.1901/Bang/2017 dated 21.3.2022 has discussed in detail about the principles relating to TNMM which is extracted below:- "19. Before going into the merits of this case, we will first look into the legal position with regard to the TNMM used for determining the ALP between the AEs. The Transfer Pricing Regulations (i.e. Section 92C of the....
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.... 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 the considered view that that the contention of the assessee that the products of Trion Valves and the industry to which Triton Valves serve are not comparable with assessee is not tenable as the most appropriated method as chosen by the assessee for determination of ALP is TNMM." 17. Considering the above, we will now look into the inclusion and exclusion of comparables sought by the assessee. Exclusion of Mazda Ltd. 18. The overview of bu....
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....omparable 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 authorities that this issue was not originally raised in the first round of proceedings, we agree with the contention of the ld. AR that the entire issue of comparability of the companies was set aside to the TPO and it was open for the assessee to seek inclusion of this company based on a fresh TP study. We hold this issue in favour of the assessee. 21. The next issue in ground No.6 raised by the assessee is relating to exclusion of working capital adjustmen....
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....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 specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which th....
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.... 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 terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an....
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....anies 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 balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at ....
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....e 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. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could mat....
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....sessee 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% + 138 basis points resulting in a TP adjustment of Rs.1,32,114. In the remand proceedings, the TPO made the same addition stating that the assessee has not demonstrated anything new. The DRP upheld the order of the TPO. 24. Before us, the ld. AR submitted that the assessee has borrowed loans from its AE upon terms and conditions in accordance with the Guidelines of the Master Circular issued by the RBI. The RBI Circular at that point of time permitted the ECB to have an interest rate of LIBOR Plus 3%. It is submitted that this rate may be treated as being at Arm's Length. The ld. AR relies on the decision of the Bangalore ITAT in the case of Tuppadahalli Energy India Pvt. Ltd. v DCIT [IT(TP)A No. 2207/Bang/2016] and Hon'ble Karnataka High Court in the case of....