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2017 (2) TMI 1012 - AT - Income TaxTransfer pricing adjustment - TPO made an adjustment taking in to consideration the OP/OC for AE segment at 23% [26%(-)3%,an allowance for delay in receivables and after sales services and other efforts made under the non-AE business] - Held that:- Fairness demands that the assessee as well as the revenue authorities should avoid arbitrariness, while determining ALP of an IT. Both should use some reasonable data to prove that IT is above board. Adhoc adjustments, in our opinion, goes against the basic concept of TP. In the case under consideration 3% and 8% allowance was given by the TPO and the DRP. But,how they arrived at those figures is not known. The reasons for adopting a certain percentage does not find place in their orders. They have not discussed as to what was the material that gave them the basis for allowing 3% and 8% adjustment on account of ‘delay in receivables and after sales services’ and considering the factors like‘bulk manufacturing orders received from AE.s and geographical locations’. But, both the authorities have not cited the instances where an independent assessee,in similar circumstances,had claimed that adjust -ment on account ‘delay in receivables’ ‘geographical factors’ etc. was approximately 3% or 8%. No judicial forum has adopted the said percentage on account of delay in receivables/ bulk manufacturing/ geographical location. Even if they had some material supporting their stand,same has not been brought on record. Thus, the order passed by them is a non-speaking order and it falls under the category of an order passed without assigning reasons. Such orders cannot be endorsed. A comparable cannot and should not be rejected only on the basis of loss suffered by it for a particular year. A persistent loss making comparable can be excluded. But, in the case under consideration,the comparable had not suffered loss year after year. After admitting that internal TNMM could not have been applied straight away, the DRP should have deliberated upon the issue of determination of ALP in a more rational manner. But,it just adopted the easiest route- an ad hoc allowance. It is a fact that more than 60% of the sales turnover of the assessee is with non- AE.s and the profit ratios of non-AE.s and AE.s cannot be same. Besides, the assessee had entered in to an agreement with its AE for supply of goods and working capital adjustment is required to be made. All these factors would affect the ALP of the transactions. Considering all we are of the opinion that the matter needs further verification and investigation thus we are restoring the matter to the file of the TPO/AO to decide the issue afresh. While determining the ALP, he should consider the data of the companies who are engaged in such activities that are similar or closer to the activities of the assessee and the turnover with the AE.s and Non-AE.s should be of similar volumes. In short,some reasonable comparables should be selected after considering the FAR analysis of such comparable and only then exercise of determining ALP should be completed. Effective ground of appeal is decided in favour of the assessee in part.
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