TaxTMI 
TaxTMI 
2026 (8) TMI 1245
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....essment Year (A.Y.) 2007-08. Since, these are cross appeals filed by the revenue and assessee they are being heard together and disposed of, by this consolidated order. 2. The brief facts of the case are that the assessee being engaged in the business of manufacturing parts and accessories for telecommunication makers. The company was incorporated in 2006 and started its commercial operations in September 2006 and operates only under one segment, of which the TPO made TP additions towards margins earned by the assessee. Further, the TPO has not allowed economic adjustments claimed by the assessee by way of - (i) Capacity Utilization adjustment (ii) Adjustment for Packing materials cost (iii) Working capital adjustment (iv) Adjustment for Pre-commencement expenses (v) Freight cost & training expenses (vi) Inclusion of comparable companies - Arcee Industries Ltd, Synthetic moulders Ltd and Naman Plastic Processor Ltd. (vii) Depreciation on UPS at higher rate 3. The Ld.CIT(A) has partially allowed the appeal of the assessee. Now the assessee has filed an appeal vide - IT(TP)A No.137/Chny/2024 and the Revenue has file....
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....ot be attributed to the international transactions entered by the Appellant. c. The Ld CIT(A)/ TPO has not taken cognizance of the standard cost data submitted by the Appellant during the course of assessment for arriving at the normal profit which the Appellant would have earned but for the initial start-up cost and higher raw material consumption in the initial years of operation. 4. Erroneous rejection of comparable company- Naman Plastic Processor Ltd. The Ld.CIT(A)/ TPO erred in rejecting Naman Plastic Processor Ltd. as a comparable company to that of the Appellant without considering the arguments /evidence put forth by the appellant. 5. Working capital adjustment: a. The Ld.CIT(A) erred in facts and circumstances of the case and in law, by not making an adjustment to the arm's length margin to account for differences in working capital of Appellant as compared to comparable companies considered for the arm's length analysis. b. The Ld.CIT(A) erred in wrongly stating that the Appellant has not brought anything on record to show the working capital differences without taking cognizance of the detailed workings/submissions f....
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.... fixed costs between the Assessee and the comparable companies should be eliminated. Accordingly, the Assessee had claimed that the capacity achieved by the comparable companies, computed based on the available data, was around 64.81% and therefore it has sought for considering under utilisation capacity adjustment. However, the TPO did not grant this adjustment on the reasoning that such data is not available in respect of all the comparable companies. The Ld.CIT(A) upheld the order of the TPO by observing that the capacity details of the comparables were not furnished. The Ld.AR reiterated that it is inappropriate to expect a company to earn profit in the first year of operations itself, having regard to the startup phase of operations, low-capacity utilization, impact of learning curve etc. The losses being an integral part of the startup phase of the operations, it is not appropriate to attribute the losses solely to the international transactions entered by the Assessee. The Assessee during the course of assessment proceedings has also provided the profitability statements of the subsequent years where it has been able to successfully overcome the start-up phase and has starte....
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....acity of the 4 comparable selected by the Assessee was at 64.81%. Therefore, we are of the view that merely because data of capacity of some comparable is not available cannot be a basis to deny the benefit of the adjustment for underutilisation of capacity and the TPO ought to have granted the adjustment basis the data available. In this regard, we also gainfully refer and rely on the jurisdictional Tribunal decision in the case of Valeo India Private Limited vs DCIT [IT(P)A No.77/Chny/2024], wherein it is held as under: "7.4 We have heard the rival parties and perused the material on record. In principle we agree that under TNMM appropriate economic adjustments ought to be made while determining the margins. We gainfully rely on the jurisdictional Tribunal decision in the case of Motonic India Automotive Pvt Ltd v. ACIT [2016] 73 taxmann.com 235 (Chennai - Trib.) and DCIT v. Woosu Automotive India Pvt.Ltd [2023] 155 taxmann.com 287 wherein economic adjustments were allowed. Further, we find that the DRP after having found merit in underutilisation of capacity and other operational issues, rejected the economic adjustment on the premise that the data for some comparable i....
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....argin. 13. We have considered all the submissions made in this regard and we are also conscious of the fact that in the first year of operation the Assessee may not be able to establish necessary facilities for recycling of packing material but that by itself would not qualify the Assessee for claiming an adjustment unless and until it is established that such additional cost incurred was not recoverable from the customer. The Assessee having failed to establish that it was not able to recover the additional packaging cost from its customer, cannot as a matter of right claim such an adjustment. Therefore, we agree with the finding of lower authorities that additional packaging cost should not be eliminated separately for the purpose of margin computation of Assessee. Accordingly, this ground No.2.5 of the assessee is dismissed. 14. The next ground has been raised by the Assessee for elimination of precommencement expenses from the operating cost base while arriving at the operating margins of the Assessee. The TPO, during the proceedings has disallowed the claim of the Assessee in excluding such costs as according to him, the Assessee couldn't substantiate the claim of su....
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....ncement expenses are not found in the Financials of the comparable and it is one of the reasons why the Assessee is seeking exclusion of these expenses to make it comparable with mature comparable companies. In one hand the TPO does not dispute that the comparable companies are all well established companies but on the other hand the TPO denies the benefit of this adjustment on the ground that Assessee has not established that comparable companies have not incurred similar expenditure. It is a definite fact that established companies would not incur pre-commencement expenditure, therefore it is only logical that when Assessee has incurred such expenditure in the first year of operation the same ought to excluded while comparing the Assessee's margin with well established comparable companies. That apart, we also note that the purpose of the TP analysis is to find out whether the Assessee has shifted profits outside India by arranging its international transaction with AE's but in the instant case we find that the pre-commencement expenditure has got nothing to do with international transaction undertaken by the Assessee, hence it is not appropriate to consider such expense as an op....
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....ifference in working capital levels cannot be accurately measured as data with regard to working capital employed by assessee and comparable companies is not available on a daily basis. Subsequently, the Assessee submitted before the Ld.CIT(A), that the working capital adjustment was carried out based on reliable and accurate workings prepared basis information available in public domain. The Ld.CIT(A) after considering the submission made by assessee, observed that, the assessee had considered only debtors, creditors and inventory values while computing the adjustment and held that various other factors were also required to be considered. The Ld.CIT(A) stated that the opening and closing balances do not show the movements in their accounts during the year. The ld.CIT(A) further stated that the disclosure of the figures of debtors and creditors which are important for computing the working capital adjustment does not provide the breakup of trade and non-trade nature of such balances. Since, the assessee has failed to provide such data pertaining to the assessee as well as the comparable companies, the claim for working capital adjustment was rejected. 21. The Ld.AR submitted th....
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....king capital adjustment. Therefore, the unreasonable contention of the lower authorities cannot be sustained. The ld.CIT(A) has relied on Jurisdictional Tribunal decision in the case of NVH India Auto Parts P. Ltd wherein working capital adjustment was denied. However, the said order has been later modified by this Tribunal vide order in MA No.170/Chny/2023 dated 19.01.2024, wherein the Tribunal has remanded back the issue of working capital adjustment to the file of the TPO to verify and allow the adjustment based on the workings & details furnished by the Assessee. Hence, the ld.CIT(A)'s reliance on the main appeal order which is subsequently modified cannot be sustained. This Tribunal in plethora of decisions has held that working capital adjustment is allowable on the basis of working in accordance with ICAI guidelines. We rely on the jurisdictional Tribunal decision in the case of Hyundai Wia Ltd (supra) wherein it is held under: "16. The next issue before us is the ground on working capital adjustment. The Ld. AR submitted that this ground was raised as an additional ground before the dispute resolution panel (DRP). The DRP having admitted the grounds has not allowed....
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.... the assessee was not able to demonstrate the impact of working capital adjustment. The Ld. AR objected to the argument of the Ld. DR and pointed out that complete working capital adjustment working has been given by the assessee and a copy of the same is at pages 212 to 260 of the Assessee's paper book. 18. We perused the material on record and find that the working is available and furnished before the lower authority. Therefore, we direct the TPO to consider the working capital adjustment as provided in paper book page nos. 212-260 and grant adjustment while arriving at the arm's length price. This ground is allowed." 24. Therefore, respectfully following the judicial precedents relied upon by the assessee, we direct the TPO to grant working capital adjustment on the final set of comparable companies by allowing the assessee's corresponding ground of appeal No.2.10. 25. Further, the Additional Ground of Appeal raised by the assessee - benefit of +/- 5% variation from the arithmetic mean of comparable companies should be allowed. 26. The Ld.AR brought to our attention that under the erstwhile proviso to section 92C(2), the law provided a tolerance band of +/-5% ....
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....ered in the comparability analysis. iii. Whether on the facts and circumstances of the case, the Ld. CIT(A) is correct in directing the Ld TPO to include the company M/s. Arcee Industries Ltd and ignoring the fact that the PBIT of this company is negative. This indicated that the company has incurred loss in 2 years out of 3 years and considered as a comparable. iv. The Ld. CIT(A) has erred in deleting the disallowance of depreciation on UPS by relying on the decision of the Hon'ble Madras High Court in the case of CIT vs Cactus Imaging India Pvt. Ltd, where the dispute relates to depreciation on printer. v. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld CIT(A) may be set aside and that order of the Assessing Officer be restored. Exclusion of comparable company - Arcee Industries Limited 30. Ground No.(ii) relates to the exclusion of Arcee Industries Limited as a comparable company. The TPO had rejected the company Arcee Industries Ltd as a comparable on the basis of persistent loss filter. In the remand report it was stated by the TPO that the said company has incurred PBIT of (-) 0.05 ....