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2016 (6) TMI 590 - ITAT DELHI

2016 (6) TMI 590 - ITAT DELHI - TMI - Addition on account of transfer pricing adjustment - selection of comparable - Held that:- We are covered under the first situation in which the TPO referred to seven new companies as comparable in his order but ignored them on the touchstone of parity in not considering any new company as comparable including those proposed by the assessee. Once, the assessee has assailed the non-inclusion of its company, namely, Kusalava International, which it is also law .....

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iscussion in the TPO's order about the functional profile of Kusalava International Ltd., on one hand and other seven companies viz., Varroc Engineering, Hi Tech Arai, Varroc Engineering, Asco India Ltd., Perfect Circle India Ltd., Rane Engine Valve Ltd., Auto Gallon Industries Ltd., on the other. Under such circumstances, we deem it befitting to set aside the impugned order and remit the matter to the file of TPO/AO for considering the comparability or otherwise of Kusalava International Ltd. a .....

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he ld. DR opposed the inclusion of this company in the list of comparables. As in an earlier para, we have restored for fresh consideration of Kusalava International Ltd. and seven other companies to the TPO after allowing due opportunity to the assessee. While carrying out this exercise, the TPO is also directed to consider the comparability or otherwise of Design Auto Systems and then deal with it accordingly.

Non granting of working capital adjustment - Held that:- If a company car .....

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ayables and trade receivables, as the case may be, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment. The view taken by the Dispute Resolution Panel for not allowing such an adjustment that the assessee did not furnish necessary details is not tenable since the assessee did furnish the necessary details, which have bee .....

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g adjustment in respect of transaction with Associated Enterprises (AEs) and non-AEs - Held that:- Under the TNMM, the process is simple in initially finding out the operating profit margin of the assessee and then the average adjusted operating profit margin of comparable cases. Such adjusted profit margin of the comparables constitutes benchmark margin, which is then compared with the operating profit margin from the assessee's international transactions with its AE. It is not permissible to m .....

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ustment qua all the transactions carried out by the assessee with reference to the base of 'total sales', also inclusive of sales made to non-AEs, we vacate the impugned order on this issue and restore the matter to the file of the TPO/AO for recalculating the amount of addition of transfer pricing adjustment by taking into consideration the international transactions only to the exclusion of transactions with non-AEs.

Assessee appeal is allowed for statistical purposes. - ITA No. 588 .....

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raised in this appeal is against the addition on account of transfer pricing adjustment amounting to ₹ 2,74,69,498/-. Briefly stated, the facts of the case are that the assessee is a wholly owned subsidiary of Federal Mogul Pty. Ltd., Australia, whereas Federal Mogul Corporation, USA is a parent company of the group. The assessee is engaged in the business of manufacturing spark plugs and also in marketing and distribution operations of a wide range of other Federal Mogul products includi .....

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e Profit level indicator (PLI) of Operating Profit/Sales. It computed its Operating profit margin to sales at 3.34%. Five companies were chosen as comparables with an average profit rate of 1.77%. That is how, the assessee declared that all of its international transactions were at arm's length price (ALP) under the TNMM on entity level. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the ALP of the international transactions reported by the assessee. The TPO di .....

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e be included in the tally of comparables. The TPO refused to include this company in the list of comparables on the premise that there were seven other comparable companies, apart from those selected by the assessee, and he was not going to consider any fresh company as comparable, either given by the assessee or chosen by him. By applying the average operating profit margin at 8.82% of three comparable companies, the TPO proposed transfer pricing adjustment amounting to ₹ 2,74,69,498/-. .....

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ll deal with these three major issues in seriatim. I. COMPARABLES 3. The ld. AR assailed the non-inclusion of Kusalava International Ltd. in the final set of comparables. Before espousing the comparability or otherwise of this company, we deem it appropriate to consider the functional profile of the assessee company. A copy of Transfer pricing study report is available on pages 81 onwards of the paper book. Page 83 gives brief profile of the assessee as a company engaged in the business of manuf .....

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p; Loss Account is available on page 221 of the paper book, which shows total sales of goods at ₹ 54.28 crore with sale of finished goods at ₹ 49.70 crore and sale of traded goods at ₹ 4.58 crore. Apart from that, the assessee earned commission amounting to ₹ 60.42 lac on sale of products on behalf of its AE. On a specific query about any agreement under which the assessee undertook to do manufacturing, trading and commission business with its AE, the ld. AR submitted tha .....

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on the reason that he eschewed to consider new companies, despite there being seven other comparable companies found by him on search. He, however, made a passing reference on page 15 of his order that Kusalava International Ltd. entered into a phase of losses which was different from the assessee's economic health. The ld. AR submitted that this company is engaged in the sale of cylinder liners used in engines of commercial vehicles which was similar to the assessee also manufacturing spar .....

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that there is not much discussion in the order of the TPO about the functional profile of Kusalava International Ltd. The TPO simply excluded this company from the list of comparables by observing that it has entered into a phase of losses. In the immediately next para on the same page No.15, the TPO has remarkably observed as under:- "In the like manner as the assessee has proposed above fresh comparables I also propose some new comparable in equal numbers from my search from having simila .....

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o Gallon Industries Ltd. 9.02 4.19 4.02 KUSALAVA International 83.26 -1.32 -1.33 Mean 10.80 Since, new comparables proposed by the assessee are rejected, I am also not going to use fresh comparables proposed by me." 6. A careful perusal of the above recording by the TPO divulges that apart from three companies finally selected as comparables out of the assessee's original list of five comparables, the TPO neither considered Kusalava International Ltd., as proposed by the assessee, as co .....

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consider the other seven companies selected by the TPO as comparable in the fresh search which were excluded because he was not entertaining any fresh comparables. If we accept the objection of the ld. AR for considering only Kusalava International Ltd. as comparable and ignoring those seven selected by the TPO and incorporated in his order, it would distort the overall comparability and amount to blowing hot and cold in the same breath. Obviously, this cannot be permitted. Once we are proposing .....

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here is full justification for directing the consideration of such companies as comparable on parity, of course, after due opportunity to the assessee, in the second set of cases, there can be no rationale in requiring the TPO to once again initiate a fresh process of search for finding out new companies in the circumstances as are prevailing before us. Extantly, we are covered under the first situation in which the TPO referred to seven new companies as comparable in his order but ignored them .....

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es not amount to making out a new case by the AO/TPO because these seven companies were specifically taken note of by the TPO as comparable in his order. 7. Turning to the merits of comparability, we find that there is not much discussion in the TPO's order about the functional profile of Kusalava International Ltd., on one hand and other seven companies viz., Varroc Engineering, Hi Tech Arai, Varroc Engineering, Asco India Ltd., Perfect Circle India Ltd., Rane Engine Valve Ltd., Auto Gallon .....

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s fairly admitted that this company was not chosen by the assessee as comparable either before the TPO or before the DRP. Referring to the Annual report of this company, it was argued that the same was functionally similar. The ld. DR opposed the inclusion of this company in the list of comparables. 9. In an earlier para, we have restored for fresh consideration of Kusalava International Ltd. and seven other companies to the TPO after allowing due opportunity to the assessee. While carrying out .....

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erused the relevant material on record. We are not inclined to accept the view canvassed by the authorities that the working capital adjustment cannot be allowed because the assessee failed to demonstrate that the difference in the working capital deployed was making a difference in the margin earned by the assessee and comparables. On the contrary, the ld. AR has drawn our attention towards the details furnished by the assessee for claiming working capital adjustment. It is vivid that the worki .....

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es profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade receivables, as the case may be, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment. 12. The view taken by the Dispute Resolution Panel for not allowing such an adjustment that the assessee did not f .....

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ing working capital adjustment, if any, available to the assessee in the light of our above discussion. Once it is held that such an adjustment is allowable qua all the comparables, then it should be carried out whether it favours or disfavors the assessee. It goes without saying that the assessee will be allowed an opportunity of hearing in such fresh determination of the working capital adjustment, if any. III. T.P. ADJUSTMENT ONLY FOR INTERNATIONAL TRANSACTIONS. 13. The next challenge of the .....

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82%, the TPO proposed a transfer pricing adjustment of ₹ 2,74,69,498/-. The ld. AR contended that no transfer pricing adjustment is possible in respect of transactions with non-AEs. 14. It is uncontroverted, as is also apparent from the TPO's order, that the transfer pricing adjustment has been made by considering the total sales effected by the assessee in respect of transactions with the associated enterprises (AE) and non-AEs. An addition towards transfer pricing adjustment is made .....

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