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2024 (2) TMI 747 - AT - Income TaxTP Adjustment - selection of comparables - HELD THAT:- Exclude Kitex Garments Limited from the list of comparables as engaged in manufacturing of fabrics and export its fabrics and sells to domestic customers directly whereas the assessee is engaged in the business of processing of garments thereby leading to the conclusion that the operations of Kitex Garments Limited are functionally different from that of the assessee-company. Kewal Kiran Clothing Ltd is also engaged in the business of manufacturing and marketing of apparels and trading of lifestyle accessories and generating power from Wind Mills. Further, Kewal Kiran Clothing Limited is also engaged in branding and advertising activities under its brand name “Killer”. This leads to the conclusion that Kewal Kiran Clothing Limited is engaged in a diversified activities and deriving income from various kinds of operations whereas the assessee is engaged only in one activity ie., processing services. Further, we also find from the annual report Kewal Kiran Clothing Limited has incurred huge processing charges by sub-contracting the work to other entities such as the assessee-company, hence it cannot be considered as a comparable for the computation of ALP of the assessee. Virat Industries Ltd is functionally different from that of the assessee-company and cannot be considered as a comparable for the computation of ALP. Liabilities no longer required written back - whether it has to be treated as operating income or non-operating income while computing the mark-up of the assessee? - HELD THAT:- Since this liability was waived off by BAL, it was written back and considered as income in the impugned AY. Respectfully following the ratio laid down in the case of Pr. CIT vs. Tetra Pak India Ltd [2023 (10) TMI 43 - BOMBAY HIGH COURT], we direct the Ld. AO to include the liabilities written back in the impugned assessment year as operating income. TPO has not considered certain expenses such as provision for doubtful debts, provisions for warranties, provision of doubtful deposits and miscellaneous expenditure written off as operating in nature - submission of the Ld. AR that due to political instability in Visakhapatnam arising out of the agitations due to bifurcation of the separate state of Telangana, the assessee was forced to incur certain expenditure to minimize the impact of the agitations on the work output of the processing unit - Revenue Authorities rejected the contention of the Ld. AR stating that the assessee has not furnished any details of the expenses before the Ld. TPO - HELD THAT:- We direct the assessee to produce the details of expenditure incurred by the assessee which was considered as extraordinary to the TPO / AO. We direct the Ld. AO / TPO to provide one more opportunity to the assessee for submission of the details of expenditure and decide the allowability in accordance with law. Accordingly, this ground raised by the assessee is allowed for statistical purposes. Whether foreign exchange loss is non-operating in nature in the determination of the mark-up on cost of the assessee? - HELD THAT:- TPO has observed that the foreign exchange fluctuations on account of hedging operations cannot be considered as operating item. However, in the instant case we find that the assessee has not engaged in hedging activities and foreign exchange loss is a transactional loss and in our opinion it should be considered as an operating cost for mark-up purposes. Further there is also merit in the argument of the Ld DR wherein the ratio laid in the cases NVH India Auto Parts P Ltd [2023 (11) TMI 935 - ITAT CHENNAI] and Phoenix Comtrade P Ltd [2023 (5) TMI 943 - ITAT MUMBAI] was emphasised. Therefore, we find no infirmity in the order of the Ld. Revenue Authorities and accordingly, this ground raised by the assessee is dismissed. Material difference providing appropriate adjustments in the working capital between the assessee and the comparable companies selected by the Ld. TPO was not considered by the Ld. DRP - DRP has held that the assessee has not demonstrated with any data or information and the impact of difference on the pricing, cost and profits - HELD THAT:- AR has not provided any documents regarding the working capital adjustments. Following the principles of natural justice, in order to provide one more opportunity to the assessee, we hereby direct the Ld. AO / TPO to consider the impact of working capital adjustments of the assessee company and appropriate material differences with that of the comparable companies and decide on this issue accordingly. We also direct the assessee to submit necessary documentation to the Ld. AO / TPO on this issue. Accordingly, this ground raised by the assessee is allowed for statistical purposes. Computation of the notional interest on outstanding receivables - HELD THAT:- We reject the arguments of the Ld. AR that outstanding receivable is not an international transaction. Whether separate adjustment is required to be made in respect of receivables? - We find that from the directions of the Ld. DRP that the assessee has not demonstrated the working capital adjustments before the Ld. Revenue Authorities while determining the ALP under TNM method both for the Tested Party and the comparables. We hereby direct the Ld. AO / TPO to examine and consider the appropriate adjustments arising out of the working capital differences in the computation of the ALP. The assessee is also directed to submit the working relating to working capital adjustments of the assessee company. Following the principle of consistency if the working capital adjustments on the ALP has been already factored in its pricing / profitability vis-à-vis that of its comparables further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding receivables is required, since TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin thereunder would take care of such notional interest cost. Accordingly, this ground raised by the assessee is allowed for statistical purposes.
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