AI Drafter 
TaxTMI 
TaxTMI 
2023 (3) TMI 706
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.... of the Income-tax Act, 1961("the Act") with respect to the international transactions rendered by the Appellant during AY 13-14. 2. The learned AO/learned TPO/Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The learned AO/learned TPO / Hon'ble DRP have erred in disregarding the economic analysis performed by the Appellant in the TP documentation in justification of the arm's length nature of the international transactions entered by it with its Associated Enterprises. 4. The learned AO/ learned TPO /Hon'ble DRP erred in considering losses on foreign exchange fluctuation as operating in nature. 5. The learned AO/learned TPO/Hon'ble DRP erred in not allowing adjustment on account of custom duty and surcharges incurred by the Appellant. 6. The learned AO/learned TPO/Hon'ble DRP erred in not allowing purchase price adjustment. 7. The learned AO/learned TPO/Hon'ble DRP erred in ignoring the fact that different companies adopt different rates for various asset categories while computing depr....
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....essee. Thus, in final assessment order, TPO made adjustment of Rs.5,67,47,747/-. Against this assessee is in appeal before us by way of above ground. 4. Ground Nos.1, 2 & 3 are general in nature, which do not require any adjudication. 5. Ground No.4 & 6 are with regard to not considering the losses on account of foreign exchange fluctuation as operating in nature and ground No.6 is with regard to not allowing purchase price adjustment. The assessee sought adjustment for the purchase price difference between the contracted price and the actual price of delivery due to forex fluctuation. The assessee also sought adjustment for fluctuation for reinstatement of foreign currency as per accounting standards. According to the assessee, TPO has not given any reason for reduction of purchase price adjustment except to state that it makes no sense. According to the Ld. A.R. the purchase of assessee have import component of 75% and there is a peak difference between the purchase price of the assessee and all the comparables. A proper comparability analysis should factor the same. It is also brought to our notice that loss due to the fluctuation which are in the revenue field are to be t....
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....al challenges, the assessee imports raw materials from its AEs. Therefore, it becomes necessary for the assessee to import raw materials from its AEs which is not the case for the comparable companies, thus, putting the assessee in a comparative disadvantage vis-a-vis the comparables. The TPO rejected the adjustment sought for the reason that the decision to import is a conscious decision taken by the assessee and in the absence of any external factors, beyond the control of the Assessee necessitating imports, no adjustment can be made. The TPO also observed that the import duty is a part of the cost of material which is always included at the time of pricing of the product and also that the assessee ought to have considered the customs duty component payable while negotiating the price at which the raw materials are imported. 26. The DRP has upheld the non-grant of customs duty adjustment on the basis that the arithmetic mean of margins under the TNMM method takes care of such difference. 27. The assessee submits that the import of raw materials is not a commercial decision but on the other hand is necessitated for reasons beyond the assessee i.e., by lack of cap....
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....s including the obvious benefits of better quality which is bound to reflect in higher sales margin. d. Import duty is part of the cost of material which is always taken into account in pricing a product. If the individual elements of cost were to be separately adjusted for differences between the tested party and the comparables, then the profit margin of all the companies would become uniform. e. The assessee company ought to have considered the customs duty component payable while negotiating the price at which the raw materials were imported from the AEs. 30. This issue came up for consideration before the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. v. DCIT, 84 taxman.com 69 wherein it was held as follows:- "5. Before us, ld. A.R submitted that 90% of the raw materials of the assessee are imported as such customs duty adjustments to be made and it includes Rs. 4.31 crores pertained to the customs duty in the manufacturing segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd. v. Asstt. CIT [2016] 73 taxmann.com 235 (Chen....
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....ss model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in publicdomain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assump....
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....In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar directions." 6.2. In view of the above, we remit the issue to the file of AO/TPO for fresh consideration on similar lines. 7. Ground No.7 which reads as follows:- The learned AO/learned TPO/Hon'ble DRP erred in ignoring the fact that different companies adopt different rates for various asset categories while computing depreciation and the data. pertaining to the same is not available in the public domain. Accordingly, the learned AO/learned TPO/Hon'ble DRP erred in not excluding depreciation while computing the operating margin of the Appellant and the comparable companies. 7.1 After hearing both the parties, we are of the opinion that similar issue was considered by this Tribunal in assessee's own case cited (supra), wherein it was held as under:- 10. "On the issue of depreciation adjustment, the assessee has submitted that if the rates of depreciation are different between the tested party and the comparable companies, an adjustment has to be made for the same in the comparability analysis.....
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....ndia has held as follows:- 22. We have heard the submissions of the assessee and the ld. DR on the issue raised by the assessee in ground No.7. We shall first see the statutory provisions relevant to the issue. Rule 10B(1)(e) of the Rules states that adjustments should be made to account for: "...the differences, if any, between the international 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" 23. Rule 10B(2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. One such factor is conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 22. Rule 10B(3) of the Rules provide that: "An uncontrolled....
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.... a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied) 25. US transfer pricing Regulations on this aspect is as follows:- In addition, the US transfer pricing regulations, u/s 482 of the Internal Revenue Code (hereinafter referred to as 'the US regulations') also support the above. Regulation 1.482-1(d)(2) of the US regulation states as follows: "In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. For purposes of this section,....
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....Manufacturing Company Limited (IT(TP) A Nos. 97 & 493/Bang/2015) for AY 2010-11, the Tribunal held as follows: "10.4.1. We have heard the rival contentions and perused and carefully considered the submissions made and material on record; including the judicial pronouncements cited. The issue for consideration is whether adjustment for under-utilization of capacity is allowable in the case on hand and if so, the manner of computation thereof and the quantum of adjustment 10.4.5 In the above cited case of the Mumbai Tribunal i.e. Petro Araldite P. Ltd. (supra), the Tribunal has upheld the principle that adjustment for capacity under-utilization can be granted Following the decision of the ITAT, Mumbai in the case of Petro Araldite P. Ltd. (supra), we hold that any adjustment for capacity under-utilization can be granted" (iv) In the recent case of GE Intelligent Platform Private Limited (IT(TP)A No. 148/Bang/2015 and 164/Bang/2015) for AY 2010-11 was held as follows: "8 now the law is quite settled to the extent that once there is unutilized capacity or men power, such underutilization impacts margin and therefore, the adjustment should be made whi....
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....nce of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. The above view has also been upheld in the following decisions:- * Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) * Demang Cranes & Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 30. As far as data of comparable companies on capacity utilization being not available in public domain is concerned, it is practically not possible to obtain data on capacity utilization of comparable companies and consequently compute adjustment on the comparable companies, the operating cost of the tested party is adjusted for capacity utilization adjustment. 31. The assessee has under-utilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the cu....
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.... decided accordingly." 13. Accordingly, we set aside the issue to the files of the AO / TPO directing to follow the directions given in the case of IKA India (P.) Ltd. v. ACIT (supra)." 8.1. Respectfully following the above order of the Tribunal, we remit the issue to the file of AO/TPO on similar direction. 9. Ground No.11 is with regard working capital adjustment. 9.1 After hearing both the parties, we of the opinion that similar issue came for consideration before this Tribunal in assessee's own case, wherein the Tribunal held as under:- "14. The next grievance of the assessee is not granting of working capital adjustment. We have considered the rival submissions and perused the material on record, including the judicial pronouncements cited. We find that the assessee has filed the computation of working capital adjustment before the DRP, but the DRP has not considered the same. We also find that the Co-ordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Limited 101 taxmann.com 313 has discussed all the reasons on the issue and held that working capital shall be allowed; holding as under at paras 10 to 18 thereof:- "1....
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.... 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 the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capitalin the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if - (i) none of the differences, if any, between the transactions being co....
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....eriod 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 andlor 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 element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of in....
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....omparison 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 [20 13 J 38 taxmann.com 231/[2014 J 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able todemonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstan....
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....tified 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 1 OB(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 materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment c....
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..... The Ld. AR. pleaded to admit the additional ground on the reason that inadvertently assessee has not raised this ground on earlier occasion and all the facts are already on record which does not require any investigation of fresh facts and prayed that additional ground may be admitted. 11.2 After hearing both the parties, we are of the opinion that all the facts are already on record and there is no necessity of investigation of fresh facts otherwise on record. Accordingly, these additional grounds are admitted by placing the reliance on the judgement in the case of NTPC Vs. CIT reported in 229 ITR 383. After admitting the additional grounds, we are of the opinion that this issue squarely covered by the earlier order of the Tribunal in assessee's own case cited (supra), wherein it was held as under: 16. "On the issue of TP adjustment to be restricted to AE transactions, we find that the Assessee has rightly contended that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. The ITAT in the case of Continental Automotive Components India Private Limited IT(TP)A No713/Bang/2017 has held as follows: "53. ....