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2023 (6) TMI 23
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....ms of such purchases are determined under the overall supervision of Komal SpA. 2. The 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 incl....
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.... 6. The Ld AO erred in excluding Bharat Gears as a comparable by holding that the same is a company having persistent loss without appreciating the fact that the company has made profits in the 3 year period considered and does not satisfy the criteria 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 Finish....
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....ries (India) Ltd. 31 32 23.85 35th percentile 11.83 10.58 Median 14.38 12.57 65th percentile 20.37 16.93 7. The TPO accordingly determined the TP adjustment as per below working:- Sl. No. Particulars Amount (in million) 1 Operating Revenue 54,16,37,364 2 Operating Cost 50,68,99,197 3 Operating Profit (Col.1-2) 3,47,38,167 4 OP/OR (CoI.3/1) 6.41% 5 OP/OC (Co1.3/2) 6.85% 6 Arm's Length OP/OR (Median of Comparables margin) 12.57% 7 Arm's Length OP (Co1.1*6) 6,80,83,816 8 Arm's Length Cost (Col. 1-7) 47,35,53,548 9 Adjustments (Co1.2-8) 3,33,45,649 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 d....
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....on of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following 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 ....
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....ibunal in case of Huawei Technologies India P. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein, it was held as under: "10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a 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 r....
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....to an international transaction [or a specified domestic transaction] if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to 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. 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 t....
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....ght be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: * A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) * This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is 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 Pa....
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.... Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital 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 comput....
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....erially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore, 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 ....
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....fits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not. ..." 19. The ld AR accordingly submitted that a plain reading of the subsection (1) shows that only transactions between two associated enterprises at least one ....
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....Other entity (resident/non-resident) regarding the assessee, OR b. The terms of the transaction between the assessee and the Other entity (resident/non-resident) is determined in substance by the Associated enterprise and the Other entity, without the assessee having any control over the terms. 23. The contention of the revenue is that the terms of transaction between the assessee and the other person is influenced by the AE and accordingly the transactions with local vendors is a deemed international transaction. The TPO has in the order u/s.92CA has stated that the transaction of purchase of raw material and components from local vendors in India and the terms of such purchases are determined under the overall supervision of Comer SpA. However we notice that this finding of the TPO is not supported by any evidences in terms of whether the terms of purchases from the local vendor is influenced by the AE and nothing has been brought on record by the revenue in this regard. The ld AR submitted that there is no such condition exists between AE and the assessee and the onus is on the revenue to prove the contrary since the assessee cannot asked to prove a negative fact. We....