TaxTMI 
TaxTMI 
2023 (6) TMI 23
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....he assessee filed the return of income for the AY 2017-18 which was processed by CPC u/s. 143(1)(a) vide order dated 2.8.2018 determining an income of Rs.42,89,810. The case was selected for scrutiny on the TP risk parameters i.e., deemed international transactions by persons other than AE in pursuance of a prior agreement and accordingly a reference was made to the TOPO for computation of ALP in relation to the international transactions. The TPO made an adjustment of Rs.3,33,45,649 and the AO passed draft assessment order incorporating the TP adjustment. Aggrieved, the assessee raised its objections before the DRP whereby the TP adjustment was enhanced to Rs.6,63,31,365. Aggrieved by the order of assessment, the assessee is in appeal before the Tribunal. 3. The assessee raised the following grounds:- 1. The impugned order is opposed to law and facts of the case insofar as it is prejudicial to the interest of the Appellant. 2. The order of the Ld. AO and the order of the Ld. DRP under whose directions the impugned assessment order is passed is invalid and bad in law for including Non Associated Enterprise (AE) transactions for the purpose of making upward adjustments to ALP. ....
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....to be classified as a persistent loss making company. 7. The Ld AO erred in not considering the adjustments to the respective Working Capital position of the Assessee and the Comparable Entities in the computation of the ALP. 8. The Operating Margin of Comparables computed by the Ld. AO is erroneous inasmuch as he has not considered the correct financial information of comparable entities. 4. During the year under consideration, the assessee has entered into the following international transactions. Particulars Amt (Paid) Amt (Recd) Method Purchase of raw material and components 25,32,49,585 TNMM Purchase of Fixed Assets 21,987 TNMM Trade Payable 20,50,35,309 TNMM Royalty Expense 1,60,93,000 CUP Royalty payable 1,60,93,000 CUP Reimbursement of expenses 95,441 Other Sale of Finished goods - manufacturing activity 52,62,82,000 TNMM Sale of Services - manufacturing activity 50,000 TNMM Trade Receivables - manufacturing activity 21,38,19,375 TNMM Purchase of raw material and components- Manufacturing activity 23,14,13,396 TNMM Trade payables - manufacturing act....
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....5,649 8. The issues contended by the assessee through various grounds is summarised below - (i) Ground no.1 - General (ii) Ground no.2 - Inclusion of non-AE transactions for the purpose of ALP (iii) Ground no.3 to 6 - Inclusions and exclusions based on Turnover filter, functional similarity /dissimilarity, persistent loss filter (iv) Ground no.7 - Working capital adjustment (v) Ground no.8 - Considering incorrect margin of comparables 9. Ground 1 being general does not warrant specific adjudication. During the course of hearing the ld AR presented arguments with regard to turnover filter and working capital adjustment. The ld AR further submitted that if the issue of inclusions and exclusions are adjudicated and remitted back based on these two contentions then the rest of the grounds in this regard would become academic. 10. The ld AR submitted that the turnover of the assessee is Rs.52 crores and the TPO while applying the turnover filter did not apply the upper turnover filter of Rs.200 crores. 11. The ld DR submitted that the DRP while considering the objections raised by the assessee has applied the turnover filter of 10 times and therefore supported the order of....
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....lowing the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as....
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.... specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--- (a) to (d)............. (e)transactional 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 ....
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....n market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises 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 Paragraph 13 to 16 of ....
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....also given in the said guidelines. 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 s 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: ....
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....apital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-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 Anal is 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 nontrade 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 wor....
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....refore, in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore, the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 15. We accordingly remit the issue of TP adjustment made back to TPO for a denovo consideration with a direction to keep in mind the above decisions of the coordinate bench with regard to application of turnover filter and working capital adjustment for determination of ALP, taking into account the details submitted by the assessee after allowing an opportunity of hearing to the assessee. It is ordered accordingly. 16. In view of the above decision with regard to TP adjustment, ground no.8 has become academic not warranting a separate adjudication. 17. Ground No.2 is with regard Inclusion of non-AE transactions for the purpose of ALP. In this regard it is submitted that the assessee sold a substantial portion of its product to only one company namely Ajax Fiori India Private Limited which is a resident in India. During the year under consideration the assessee had purchases not only from its Associate Enterprises but also f....
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....y submitted that a plain reading of the subsection (1) shows that only transactions between two associated enterprises at least one of whom is a non-resident can be treated as international transactions and that the Associated enterprises have been defined under section 92A of the Act to include entities where control or substantial interest is held by another entity. 20. The ld AR submitted that Ajax Fiori is a private limited company incorporated in India, jointly held by AJAX Engineering, India and Fiori S.p.A, Italy and these entities are not connected to the Comer group which controls the assessee company. Therefore, Ajax Fiori is not an associated enterprise to the assessee according to any of the clauses of 92A(2). Further, the entity is an Indian company and therefore a Resident under the Income tax Act. Thus, section 92B(1) is not attracted in respect of the transactions with this entity. The ld AR Comer group (i.e. the AE of the Assessee) and Ajax Fiori in respect of sale made by Comer India and that the terms and conditions of the sale of finished goods to Ajax Fiori is determined between Comer India and Ajax Fiori. The purchases from local resident vendors are on Princ....