TMI Blog2023 (4) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, we delete the adjustment made by the TPO. TPO considering incorrect margins - As prayed to direct the Ld. TPO to rectify the above Arithmetical errors in computation of the weighted average of operating margin to operating cost ratio (`OP/OC') margin of the company - HELD THAT:- As considering the submissions, remit the issue back to the TPO to consider the correct margins of the above companies. Working capital adjustment - HELD THAT:- It is a settled position that working capital adjustment need to be given while computing the ALP - We direct the Ld.AO/TPO to compute the working capital adjustment while computing the operating margin of the comparables following the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India P. Ltd. [ 2018 (10) TMI 1796 - ITAT BANGALORE] - IT(TP)A No.885/Bang/2022 - - - Dated:- 13-3-2023 - SMT. BEENA PILLAI, JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Appellant : Shri Padamchand Khincha, CA For the Respondent : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. ORDER Per Padmavathy S., Accountant Member This appeal is against the order of DCIT, Circle 4( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture in connection with campaigning, depicting features of new products, providing information to the public about details of product, its specification etc. The aforesaid advertisement and business promotion activities undertaken by the Assessee are specific to the products sold in India. Given that the selling of the products in India is the function of the Assessee, there are no approvals sought by the Assessee in connection with the incurrence of said expenses which influences the volume of sales of the Assessee. The advertisement contents are decided by the Assessee and the said expenses do not require any approval from its AEs. The aforesaid activities are primarily to promote the business of Assessee and the same is done to influence the volume of sales of the Assessee. 8. The TPO held as under in respect of the above AMP adjustment:- Assessee has not confined itself to distribution of trading goods but has performed additional functions in the form of AMP. Therefore, the Company needs to be adequately compensated for such additional functions. (Page 249 of Appeal Set) RPM analysis carried out by the Assessee in the TP Doc is flawed as AMP is not captured w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses. The Hon ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Relevant observations from the above decision in this context are as under:- 101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/ segregation, it would as noticed above lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(J)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee through various grounds have become academic and accordingly left open. 15. With respect to the adjustment made in the sales facilitation services segment and administrative and business support services, the assessee raised grounds No.23 to 31. However, during the course of hearing, the ld. AR submitted that if ground Nos.29 30 which read as under, are adjudicated, the rest of the grounds will not be pressed:- 29. The Ld. TPO has erred in complete disregard to the Hon ble DRP direction by not including the comparable MCI Management India Private Limited. 30. The Ld. TPO has erred in computing the margin for PR Pundit Public Relations Private Limited Marketing Communication Advertising Ltd. 16. The ld AR submitted with regard to MCI Management India Private Limited that the TPO while passing the order giving effect, did not consider the directions given by the DRP. The ld. AR accordingly prayed for remitting the issue back to the TPO for considering the DRP directions properly and recomputed the ALP adjustment in these segments. 17. The ld DR relied on the order of the TPO. 18. We notice that the DRP has given the following directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,372,771,849 1,910,568,479 1,573,375,365 Operating profit (A-B) 312,507,616 194,878,049 146,187,353 Margin on cost 9.27% 10.20% 9.29% Weighted Average Margin -Unadjusted on cost 9.53% 20. Accordingly, it was prayed to direct the Ld. TPO to rectify the above Arithmetical errors in computation of the weighted average of operating margin to operating cost ratio (`OP/OC') margin of the company. 21. We, after considering the submissions, remit the issue back to the TPO to consider the correct margins of the above companies. 22. Ground No.31 is with regard to working capital adjustment. In this regard, the ld. AR submitted that the investment in working capital requires capital and operating assets and an uncontrolled entity is expected to earn a market rate of return on that required capital independent of servicdes that it provides. However, the amount of capital required to support these services varies greatly because the level of inventory, debtor a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f) ...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment. 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. 3. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (vi) Disclose in the balance sheet does not contain break up of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ways 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 non-trade 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 working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of workin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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