AI Drafter 
TaxTMI 
TaxTMI 
2023 (2) TMI 1237
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....s referred to TPO to determine the ALP in respect of the international transactions the assessee had with its AEs. The TPO made an adjustment of Rs. 34,89,00,000 on the basis of which the draft assessment order was passed by the AO. 3. Aggrieved, the assessee raised objections before the DRP. The DRP rejected the grounds raised by the assessee but directed the TPO to adopt the correct figure for TP adjustment. Accordingly, the TP adjustment was modified to Rs. 32,04,00,000. The assessee is in appeal against the final order of assessment passed pursuant to the directions of the DRP. 4. The assessee raised the following grounds :- "The grounds mentioned herein below are independent and without prejudice to the other grounds preferred by the Appellant. 1. That on facts and circumstances of the case and in law, the order passed by the Learned AO pursuant to the directions of the Hon'ble Dispute Resolution Panel - 2, Bangalore (Hon'ble Panel' or `Hon'ble DRP'), and the order of the Learned Joint Commissioner of Income tax, Transfer Pricing- Circle 2(1), Bangalore (Teamed TPO') to the extent prejudicial to the Appellant, is bad in law and f....
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....le Panel erred in not granting capacity utilization adjustment to the Appellant by not appreciating that proportionate overheads incurred for unutilized capacity cannot be treated as operating expense while computation of operating margin of the Appellant. 12. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in not granting depreciation adjustment to the Appellant ignoring the fact that the depreciation policy differs from company to company and has a significant impact on the computation of margins if an adjustment is not considered to this effect. 13. That the Learned AO has erred in not considering the relief provided by the Hon'ble DRP to the Appellant in the assessment order on account of the following ground: * The Hon'ble Panel has directed the Learned AO/ TPO to consider the weighted average operating margin of UMW Industries Limited as per its annual report. 14. Based on the facts and circumstances of the present case and in law, the order passed by the Learned AO being not in conformity with the mandatory directions issued by the Hon'ble DRP under section 144C(5) of the Act, is bad in ....
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....in progress (761) Employee benefit expenses 3,558 Finance cost 17 Depreciation and amortization 1,421 Other Expenses 4,167 Total Expenses 40,060 Operating Profit 1,221 OP/OC 3.05% OP/ OR 2.96% 9. The TPO recomputed the segmental financials by treating the duty drawback as non-operating as below:- Particulars Amount (in Rs) Revenue from operations 41,281 Less: Other Income 1,317 Add: Net gain on foreign currency transactions and translation 206 Total Revenue from Operations 40,170 Expenses Total Expenses 40,060 Less: Finance cost 17 Total Operating Expenses 40,043 Operating Profit 127 OP/OC 0.32% OP/OR 0.32% 10. The TPO rejected the comparables chosen by the assessee and conducted a fresh search to arrive at the following final set of comparables:- Sl. No Company Name Weighted Average 1 Prashant Texmach Pvt. Ltd 2.74 2 Meera Industries Ltd 4.19 3 Lakshmi Machine Works Ltd 6.41 4 Lohia Corp Ltd 11.43 5 UMW Industries Ltd 20.59 MEAN 9.0 11. Accordingly, the TPO arrived at the TP adjustment as....
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....er order of DRP in assessee's own case, it was held that the same should be excluded from the tested party as well as the comparables and on the same line in the present year also, the issue was decided on that line. Now we have the benefit of later judgment of Hon'ble Bombay High Court rendered in the case of CIT Vs. Welspun Zucchi Textiles Ltd. (supra) which is dated 06.01.2017. In this judgment, it was held that DEPB benefit is operating revenue includable in arriving at operating profit in TP analysis. Hence by respectfully following this judgment of Hon'ble Bombay High Court, we hold that the export incentives should be included in the operating profit of the assessee as well as the comparables. But it should be ensured that such export incentive is in respect of turnover of the present year only because if the export incentive is relatable to the turnover of an earlier year then the same cannot be included in the present year profit for TP analysis because in that situation, the profit will remain included in the numerator, but the corresponding turnover will not remain included in the denominator and this will give absurd result. Hence we direct the AO/TPO to decide the issu....
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....e principal business activity of the company is manufacturing of guidance wire. 22. Also we notice that the major part of the revenue derived by the company is from sale of guidance wire. We also notice from the annual report (pg. 1493 of paper book) that one of the major suppliers for the company is Bharat Dynamics which is a Govt. of India Enterprise, which is a manufacturing base for guided weapon systems. Therefore we see merit in the submission of the ld AR that the company supplies the guided wire for defence activities and therefore not comparable with the assessee who supplies machinery to textile industry. We also notice that the TPO and the DRP have considered the profile of the company as manufacturer of other machinery for textiles, apparel and other industries (page 11 to DRP order), whereas as per the annual return, the extract of which is reproduced above, the company is engaged in the manufacture of guidance wire and miniature control cable. In view of the discussion, we hold that the functional profile of UMW Industries Ltd. is different from that of the assessee and therefore not comparable. The AO/TPO is directed to exclude the company from list of comparables....
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....s more than 3% of which FY 2015-16 and 2013-14 are less than 3%. Therefore, the filter applied based on average for last 3 years is not correct. The ld. DR further submitted that though the assessee is not directly involved in R&D, the assessee is using the R&D of its AE for which the assessee is paying royatly. Therefore the assesses is indirectly incurring expenditure towards R&D and accordingly the company cannot be rejected on the ground that the assessee is not directly incurring any R&D expenditure. The ld. DR also submitted that under TNMM, there should be a comparison at an overall level for functionality and not at individual product level. The ld. DR therefore prayed for inclusion of the company. 26. We heard the rival submissions and perused the material on record. We notice from the above judicial pronouncements relied on by the assessee that application of R&D filter with a threshold limit of 3% is a settled position now. We also notice that the Bangalore Bench of the Tribunal in the case of KBACE Technologies Pvt. Ltd vs DCIT (ITA No.3189/Bang/2018 dated 29.1.2020) has also taken a similar view. In view of this we direct the TPO to exclude Lohia Corporation Ltd fro....
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....d that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee." 29. Respectfully following the above decision of the coordinate Bench, we hold that the TP adjustment should be restricted only to AE related transaction and direct the TPO/AO to compute the TP adjustment accordingly. 30. Through Ground No.10, the assessee is contending the issue of TPO not providing the benefit of adjustment for working capital to the assessee. In this regard, the ld. AR relied on the decision of the coordinate Bench in the case of Huawei where it was held as under:- "We have heard the submissions of both sides on this issue based on the records placed before us. We note that, this issue has been considered by this coordinate bench of this Tribunal in the 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....
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....sets 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 capital in 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 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 ma....
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....lude 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 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 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 com parables, with an assumption that the difference should be reflected in profits. The....
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.... (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 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 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 ....
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....at 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 108(l)(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 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 108(3) of the Rules, which provides as follows: "(3) An uncontrolled transact....