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TMI Blog2018 (4) TMI 1835X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Arm's Length Price u/s 92CA of the Act. Rejection of Comparable by Ld. TPO: 3. The Ld. TPO/Hon'ble DRP and consequently Ld. AO have grossly erred in law and on facts and circumstances of the appellant's case in rejecting Continental Valves as a comparable on account of failing low turnover filter of Rs. 5 Crore applied by the Ld. TPO (i.e. Rs. 3.71 Crore) as against the appellant's filter of Rs. 1 Crore which is against the tenet of comparability under Rule 1OB(2) of the Income Tax Rules, 1962 ('the Rules') and in spite of it being accepted by the Hon'ble DRP in AY 2012-13. Selection of New Comparables by Ld TPO: 4. The Ld. TPO/Hon'ble DRP and consequently Ld. AO have grossly erred in law and on facts and circumstances of the appellant's case in selecting new comparables which have high turnover and different functional profiles than the appellant and do not satisfy the provisions of Rule 10B(2) and their selection is therefore bad in law and on facts. Cherry picking of comparables: 5. Without prejudice to Ground No. 4, the Ld. TPO/Hon'ble DRP and consequently Ld. AO have grossly erred in law and on facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Arm's Length Operating Cost with the Total expenses of Rs. 20,56,35,378 instead of Operating Cost of the appellant of Rs. 20,48,90,405/-. 10. The Ld. TPO/Hon'ble DRP and consequently Ld. AO have grossly erred in law and on facts and circumstances of the appellant's case in calculating transfer pricing adjustment by considering Total Revenue of Rs. 20,82,34,754/- instead of Operating Revenue of Rs. 207,765,823/-. The Ld. TPO/Hon'ble DRP and consequently Ld. AO have grossly erred in law and on facts and circumstances of the appellant's case in not limiting the transfer pricing adjustments in the proportion of the value of International Transactions forming part of cost base as it bears to the total Operating Cost of the appellant. Others: 12. That the interest charged u/s 234B and 234C of the Act is wholly illegal and untenable grounds and is prayed not to be upheld. 13. That the penalty proceedings initiated u/s Sec 271(1)(c) are on wholly illegal and untenable grounds since there was no concealment of any income nor submission of inaccurate particulars of income, nor any default according to law by the appellant. That each ground of appeal is independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded to final list, having average margin at 10.53% as under: Sl. No. Company Name OP/OI 1. Roto Pumps 14.48 2. Bemco Hydraulic 9.49 3. Yuken India Ltd. 4.58 4. W P I L Ltd. 13.24 5. Dynamatic Technologies Ltd. 10.87 Avg. 10.53% 2.5. On the basis of the above comparables finalised by Ld.TPO, adjustment proposed was calculated as under: Operational income Rs. 208,234,754 Arm's length price 10.53 Arm's length price at a margin of 89.47% Rs. 186,307,634 Operational cost Rs. 207,549,444 Proposed adjustment u/s 92CA Rs. 21,241,810 3. Aggrieved by adjustments so proposed by Ld. TPO, assessee raised objections before DRP as under: * considering erroneous operational cost of assessee as computed in the show cause notice; * erroneously rejecting 2 comparables namely Hawa Engineers Ltd., and Continental Valves Ltd from the list of comparables; * objection against cherry picking of companies as comparables; * computation of incorrect PLI's by using OP/net sales in the case of Continental Valves Ltd; * ignoring the voluntary transfer pricing adjustment offered by assessee and the value of international transaction. 3.1. DRP, though upheld adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. Further on the functional comparability of assessee with this comparable, it is observed that this company is engaged in manufacture of control valves with a wide range of models, sizes, materials and pressure classes and has also developed specialpurpose valves to meet requirements of its esteemed customers. On verification of profit and loss account of this comparable it is observed that purchase of raw materials constitute materials consumed in production process and not for trading process which establishes this comparable to be engaged in carrying out manufacturing activity only. Further from TPO order passed by Ld.TPO placed at page 258 for assessment year 2011-12, as well as DRP for assessment year 2012-13 it is observed that this comparable has been accepted during these assessment years by observing as under: "Continental valves Ltd was accepted as a suitable comparable in assessment year 2011-12 by the TPO. The TPO has not specified any change in circumstances on the basis of which this comparables should be rejected as a suitable comparable in the year under consideration. Further companies for performing similar functions that is manufacturing valves has been acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT DR submitted that this company is engaged in manufacturing of vertical pumps, horizontal pumps, grey iron, castings and sluice valves. He submitted that in the Transfer Pricing report submitted by assessee only one page regarding financial statement of this company has been placed. He referred to page 176 wherein, Notes Forming Part of the Financial statement is placed in respect of this comparable. He suggested that this company may be considered as it is also involved in manufacturing activity. 6.3. We have perused the submissions advanced by both the sides in the light of the records placed before us. 6.4. On perusal of financial extracts placed in paper book at page 176, we do agree with what has been stated by Ld. CIT DR. It is not possible to gather what has been submitted by Ld.AR in respect of this comparable in so far as the financial/segmental information is concerned. Ld.TPO in his order categorised this company to be engaged in manufacturing activity. Merely because this company is having a huge turnover and is submitted to be having its own R& D wing, cannot make it functionally dissimilar, more so when TNMM is used as the most appropriate method. This was wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similarity of this company with that of assessee. Assessee is directed to provide entire company profile along with its full financials to Ld. TPO for the year under consideration. Ld. TPO shall then verify and compare the functional similarity of manufacturing segment undertaken by this comparable with that of assessee to consider/reject this company for the purposes of determining ALP of international transaction. 6.10. Ld.AR placed reliance upon decision of Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd., reported in [2013] 36 taxmann.com 289, to substantiate his contention regarding the comparability based upon turnover being a relevant factor. He emphasised that turnover filter depends upon broad base of skilled employees who gives better output as well as a better position to bargain price to attract customers, as compared to small company which do not have such benefits which in turn affects turnover due to low profit margin. 6.11. We have perused the decision relied upon by Ld.AR. It is observed that Ld.AR did not dispute functional dissimilarity between the assessee with WIPL Ltd., & Dynamatic Technologies that have been argued for exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 124/-. 7.3. Ld. CIT DR submitted that admittedly Ld.A.O. has not followed directions of DRP and accordingly this ground can be setaside to Ld. AO for reworking of PLI, as per the directions of DRP. 7.4. We have perused the submissions advanced by both the sides in the light of the records placed before us. 7.5. It is observed that Ld. AO has failed to follow directions of DRP and has computed incorrect PLI of comparables. This is evident from order passed by Ld. TPO under section 154 of the Act, which is placed at pages 288-289 of paper book. We also direct Ld. TPO to provide the computation of PLI in respect of the comparables to assessee in the interest of principle of natural justice. 7.6. Accordingly this ground raised by assessee stands allowed for statistical purposes. 8. Ground No. 9-10 These grounds have been raised by assessee against incorrect calculation of operating cost and operating revenue of assessee. 8.1. Ld.AR submitted that Ld. TPO has inadvertently considered figure of total expenses of Rs. 20,56,35,378/-instead of actual operating cost being Rs. 20,48,90,405/-. He referred to page No. 287 and 296 of paper book, in order to demonstrate the mistake. Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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