AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (8) TMI 1862
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.... i.e. profit to sales is Rs.14.04%. 3. Before the TPO: The volume of the said international transactions is of Rs.20,32,70,175/-. The details are given in para 4 of the order of the TPO. The TPO issued show cause notice to the assessee. In the show cause notice, the TPO proposed to reject the comparables and adopt the TNMM as MAM with OP/OC as PLI. As adopted CUP as MAM and OP/Sales as the PLI, the TPO selected 6 comparables which have the arithmetic mean of 10.04% (OP/OC). The OP/OC of the assessee for this year is minus (-) 01.64%. In reply, assessee objected to the said proposal of change in MAM, change in PLI, comparables, non-granting of the adjustments for capacity utilization etc. Arguing that the assessee is a start-up company, with huge capital infusion, assessee argued for grant of various adjustments. Without prejudice, the assessee submitted that the assessee earned the Forex Loss of Rs.2,51,23,996/- and the same needs to be considered in working out the Finance Cost of the operating cost. As per the assessee, the CUP is the MAM in this case. Eventually, the TPO considered the PLI at OP/Sales as adopted by assessee in its TP study and gave up his proposal in favour of....
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....e AO. The OP/Sales after giving effect to the above discussion is determined at 3.34% as determined in the table in para 3.4 of the submissions of the appellant. As the difference is more than 5%, the safe harbor rules do not apply in this case. The adjustment of 5.34% is therefore to be made to the transaction of purchase and sales with the AE adopting the transactional basis. Thus, the adjustment to the purchase side is Rs 75,54,898 and the adjustment to the sales is Rs 24,16,533. The adjustment made by the TPO is therefore restricted to Rs 99,71,431. Ground 1 is dismissed and ground 2 is allowed." 5. The CIT(A) considered assessee's request for working capital adjustment stating that the working supplied by the assessee in tabular form suffer from various presumptions/surmises (para 5.4 of the CIT(A)'s order). Absence of details of working capital adjustment of the assessee's comparables is the other appeal of it. Thus, the CIT(A) partly allowed the appeal of the assessee. 6. Aggrieved with the above, assessee (on working capital adjustment) and Revenue (on restricting the adjustment to the international transaction only) are in cross appeals before the Tribunal. 7. Now, we ....
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....for the assessee relied on the decision of the Co-ordinate Bench of the Tribunal in the case of DCIT vs. Emptoris Technologies India (P.) Ltd. [2015] 61 taxmann.com 439 (Pune - Trib.) and submitted that the Tribunal is in favour of allowing the working capital adjustments. In this regard, ld. AR relied on the contents of para 8 to 11 of the said order of the Tribunal (supra) in support of such adjustments. 13. On the other hand, ld. DR for the Revenue relied on the order of the Assessing Officer and the CIT(A). 14. We heard both the sides on this issue raised in ground no.2 i.e. working capital adjustments and find the similar issue was adjudicated by this Tribunal in the case of Emptoris Technologies India (P.) Ltd. (supra) and the said decision is relevant for the following proposition :- "Where assessee was providing services to its associated enterprises on 10 per cent mark-up on cost and working capital position of assessee was better in comparison to comparable companies, working capital to be made in hands of comparables adjustment was to bring same to level of assessee, while benchmarking international transactions entered into by assessee." 15. Considering the above ....
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.... to 28 of the said order of the Tribunal. In the said decision, the Tribunal granted relief to the assessee relying on the Jurisdictional High Court judgement in the case of CIT vs. Firestone International (P.) Ltd., 378 ITR 558. It is also discussed in the said decision of the Tribunal (supra), the judgement of Bombay High Court (supra) was approved by the Hon'ble Supreme Court in the same case vide SLP(C)CC No.22512/2015 dated 05.01.2016. 21. On the other hand, ld. DR for the Revenue relied on the order of the Assessing Officer. 22. On hearing both the sides, we find the contents of para 25 to 28 are relevant to extract and the same are extracted hereunder :- "25. Additional Ground: Before us, the assessee raised an additional ground (extracted above) stating that the adjustments were made identity level instead of international transaction only. The CIT(A) decided the issue by observing as under :- "2.6.3 I have considered the arguments of the Appellant. I find that the learned TPO has changed the transfer pricing method to TNMM from what was used by the Appellant (TNMM and RPM) therefore; onus is on the learned TPO to make the adjustment on the value of the international....
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....he international transactions with AEs was discussed at length in paras 45 to 49 in the said order of the Tribunal (supra). For the sake of completeness, the said paras 45 to 49 are extracted as follows :- "45. Ground 10 refers to incorrect computation of TP adjustments to the manufacturing activity. In this regard, referring to the manufacturing segment and sale affected in this segment, Sri Lohia read out that the total sale of this segment is Rs 23,32,42,565/- and the relatable cost of material is Rs 1528.65 lakhs, (of course, the assessee submitted a different figure of Rs 1557.39 lakhs in some other context). Thus, this cost of material (controlled and uncontrolled cost) of Rs 1557.39 lakhs includes the Rs 602.19 lakhs, relatable to the transactions with AEs ie controlled cost. As per the Counsel, revenue has erred in computing the TP adjustment on the entire manufacturing segment sales instead of computing the TP adjustment on those sales relatable to the import of the components and spares procured from the AEs only. While establishing the ALP on this segment, the AO worked out the said variance @ 4.77% (i.e. 7.18% - 2.41%) and worked out the corresponding quantum of adju....
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....lity analysis and not the entity level sales as wrongly considered by the TPO and relied upon by the DRP. In principle, such closure comparability analysis is needed in TNMM, when sales is used as a base for determining net profit margin. Thus, it is erroneous to bring relationship between the Rs 60,218,878/- and Rs 23,32,42,565/- ie the total sales. Assessee's failure to supply the data on relevant sales is no defense, when there are settled alternatives for adoption in such circumstances, well tested 'principle of proportionality' in our opinion should help. Thus, the base of sales does not need to be 'total sales'; but the proportionate sales relatable to the impugned international transactions. It is a commonsensical approach. 48. In this regard, we have perused the existing decisions relied upon by the assessee and the following extracts from some of the decisions are relevant and the same read as follows. A. Emersons Process Management India P td - ITA NO 8118/M/2010 AY-2006-07 -Pg 452 of Paper Book " 19. Fifthly, as has been consistently held by the coordinate benches, the transfer pricing adjustment is to be made with respect to international transaction and not th....
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....h operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the AO and further confirmed by the CIT(A) is reduced. We order accordingly." D. DCIT vs Starlite 133 TTJ 425 Mum AY 2002-03 Page Para 13 at 478 of the Paper Book "13. As in this case, TPO has not applied TNMM, as contemplated in the Act, we have no other alternative but to set aside her order........... We also agree with the arguments of learned counsel for the assessee that adjustments, if any, arising due to computation of ALP should be restricted only to the international transactions and not to the entire turnover of the assessee company. No addition can be made to local transactions under Chapter X of the Act. Such things are done only when the AO invokes s. 144. We direct the AO to restrict the adjustments, if any only to international transactions, which are found by him to have taken place at price other than ALP." E. Abhishek Auto Industries Ltd vs DCIT 136 TTJ 530 Del- para 8.2 at Page 494 of the Paper book: "8.2 It has not been disputed that provisions X, s. 92C deals with i....