TMI Blog2018 (6) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... pray for inclusion of any other new comparables except the 6 comparables which it has already requested for inclusion before the TPO. Working capital adjustment - Held that:- As seen that the TPO has not allowed working capital adjustment to be made to the results of the companies selected by him on account of differences between the working capital requirements of the assessee vis-à-vis these companies. The TPO is directed to allow working capital adjustments to the assessee as per law while carrying out the fresh comparability analysis which has been restored to him Allow the assessee the benefit of proportionate adjustment to the assessee as per law and restrict the adjustment only in respect of international transaction. Calculation of operating margins of the assessee vis-a-vis the comparables selected by the TPO. These grounds are also restored to the file of the TPO for being adjudicated a fresh after duly considering the submissions of the assessee as well as the evidences being filed in support of the same. Disallowance of royalty and disallowance pertaining to provision for bad and doubtful debts - Held that:- This issue is covered in favour of assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nso India s Margin Arm s Length margin 1. Import of raw material, and components spare parts 126,155 TNMM using OP/TC as the PLI 8.00% 5.21% using multiple year data 2. Purchase of finished goods 1,491,874 3. Export of finished goods 7,253,726 4. Payment of royalty 86,491,631 5. Payment of application cost 13,437,657 6. Payment of technical service fee 4,769,617 7. Payment of communication expenses 1,292,598 8. Training expenses 1,577,974 9. Miscellaneous receipts 3,068,780 10. Reimbursement of expenses from group companies 1,996,839 CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AVERAGE 6% 2.3 The TPO however, carried out his own search and arrived at a set of 4 companies which were as under :- S. No. Name of the Company Arm s length margin as per TPO 1. Licas TVS Limited 9.20% 2. Auto Ignition Limited 9.88% 3. India Nippon Electricals Limited 13.63% 4. India Japan Lighting Ltd. 9.94% AVERAGE 10.66% 2.4 Thereafter, based on the search conducted by him, the TPO issued a show cause notice to the assessee. In response, the assessee filed detailed submissions against the adjustment proposed by the TPO and submitted that one of the comparable companies proposed by the TPO, namely India Japan Lighting Ltd., was engaged in the manufacturing of auto lamps which was akin to electrical auto components being manufactured by the assessee. The assessee suggested the inclusion of additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act read with Rule 10D_of the Income-tax Rules, 1962 ( Rules ), by giving arbitrary, vague and unsound reasons that were not backed by any empirical evidence / sound analysis. 3.The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law. in upholding the Ld. TPO's stance of disregarding multiple year/ prior years data as used by the appellant in the TP documentation report and holding that current year (i.e. financial year (FY) 2005-06) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation report. 4.The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law, in upholding the Ld. TPO s stance of rejecting the fresh search for comparable companies carried out by the appellant using data for FY 2005-06 which was submitted to the Ld. TPO by the appellant without prejudice to the fact that the same was not available to it at the time of preparing its TP documentation report. 5.TheLd.DRP and the Ld.AO(followingthedirections of theLd. DRP), erred on facts andin law, in uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. TheLd. DRP and theLd. AO (following the directions of the Ld.DRP), erred on facts and in law, in upholding the Ld. TPO s stance of rejecting the filtration criterion of Plant Machinery/ Gross Fixed Assets (P M/GFA) used by the appellant in its TP documentation report on vague/ ambiguous grounds which were not backed by any sound/ cogent reasoning. 11.The Ld. DRP and the Ld. AO (following the directions of the Ld.DRP), erredon facts and in law, in upholding the Ld. TPO s stance of not appropriately considering the functions, assets and risk profile of the companies used for comparison with the appellant. 12.The Ld. DRP and the Ld. AO (following the directions of theLd.DRP), erredon facts and in law, in upholding the Ld. TPO s stance of arbitrarily disregarding certain comparable companies for ALP determination without giving sound basis/ reasons. 13.The Ld. DRPand the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law, in upholding the Ld. TPO s stance of excluding a company for computation of the ALP of the international related party transactions of the appellant on the ground that it had entered into related party transactions and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly making an absurd adjustment of ₹ 115,226,756 to the value of the appellant s international related party transactions of ₹ 119,510,012, including royalty and technical know-how fee payments, which as a result were reduced to a very insignificant number. 21. TheLd. DRP andthe Ld. AO (following the directions of the Ld. DRP), erred on factsand in law, in disregarding judicial pronouncements in India in undertaking the TP adjustment. 22.TheLd. DRP and the Ld. AO (following the directionsof the Ld.DRP), Erred on factsandin law, in not issuing a speaking order / Directions and in disposing off the appellant s detailed submissions and objections against the TP adjustment in a cryptic manner, without discussing/ appreciating/ understanding the merits of the case. 23.TheLd. DRP and the Ld AO (following the directionsof the Ld.DRP), erredon factsand in law, in disallowing a sum of ₹ 576,661 (being 25% of royalty payment after Ld. TPO;s adjustment) representing turnover based running royalty by observing the same as capital in nature. 24. The Ld. DRP and the Ld. AO (follwoign the directions of the Ld. DRP), erred on facts and in law, in disregard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the same industry. It was further argued that as long as the comparable companies chosen are also engaged in similar manufacturing activities for auto electrical components like the assessee, the results could reasonably be expected to be indicative of the actual margins prevalent in the industry. The Ld. AR submitted that these companies operated within the broader auto component industry and are affected by similar economic factors. The Ld. AR submitted that even within the broad auto component industry, these companies were engaged in the electrical component vertical and thus could be considered comparable to the Assessee. It was further submitted that if the strict product comparability criteria was to be applied, even the comparable companies identified by the TPO will be found to be not engaged in the exact product profile. The Ld. AR also referred to the Safe Harbour Rules notified by the Government of India and submitted that the safe harbour rules have classified the auto component industry in two broad buckets of core and noncore component. It was submitted that even as per these rules, the products manufactured by the Assessee and the auto lamp companies would fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical fees paid, payment of IT cost and training fees paid) and that the addition, if any, has to be restricted to the international transactions of the Company and by no stretch of imagination, could the same be extended to the domestic transactions with Non AEs by the Assessee. The Ld. AR furnished a chart providing details in this regard which is as per the table below: Particulars Reference Amount (in INR) Total cost of the Appellant (OC) (A) 3,893,484,000 Operating Profit of the Appellant (OP) (B) 309,163,000 OM (OP/OC) (C=B/A) 7.94% Operating Profit as per TPO @ 10.90% (D=A*10.90%) 424,519,539 Difference (E-D-B) 115,226,756 Value of International Transactions F 109,187,506 Proportionate adjustment (G=E*F/A) 3,231,379 3.5 The Ld. AR furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectification. 5. We have heard the rival submissions and have also perused the material available on record. First, we take up the issue of comparables. It is seen that the assessee had initially selected 5 companies as comparables and, thereafter, on being required by the TPO to submit current year data, carried out a fresh search and identified 8 additional comparables companies with an average OP/TC of 6%. However, the TPO rejected all the comparables selected by the assessee and based on a fresh search selected 4 comparables within average OP/TC margin of 10.66%. However, the assessee objected to the selection of the comparables and this resulted in the TPO dropping one of the comparables introduced by him i.e. India Japan Lighting Ltd. and arrived at average OP/TC margin of 10.90%. Although, the assessee had suggested that 6 more comparables having FAR similar to India Japan Lighting Ltd. be considered, the TPO did not accept the assessee s contention and excluded India Japan Lighting Ltd. also from the final list of comparables. It is the submission of the assessee that the assessee had not requested exclusion of this comparable but had requested inclusion of 6 more compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble Delhi High Court in the case of CIT vs. Keihin Panalfa Ltd. in ITA no. 11 12/ 2015. It is settled law that transfer pricing adjustment has to be made only in proportion to the international transaction of the assessee and the addition cannot be extended to domestic transactions with non-AEs of the assessee. The assessee has submitted a chart wherein the relief in terms of proportionate adjustment has been worked out at ₹ 32,31,379/-. Respectfully, following the judgment of the Jurisdictional High Court in the case of Keihin Panalfa Ltd. (supra), we direct the TPO to allow the assessee the benefit of proportionate adjustment to the assessee as per law and restrict the adjustment only in respect of international transaction. Thus, these grounds are also allowed for statistical purposes. 5.3 The assessee has also agitated the calculation of operating margins of the assessee vis-a-vis the comparables selected by the TPO. These grounds are also restored to the file of the TPO for being adjudicated a fresh after duly considering the submissions of the assessee as well as the evidences being filed in support of the same. 5.4 The other two issues being challenged by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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