TMI Blog2021 (7) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... f Advances to suppliers and Advances from customers, as given by the assessee for the first time before the ld. CIT(A) pertaining to self and the comparables, have not been verified by any authority. These need to be examined and evaluated by observing that only advances to or from customers/suppliers should be included in the computation of working capital of the assessee as well as the qualifying comparables - no advance or outstanding other than relating to purchase or sale of goods should find its place in the computation of working capital. Filter of Manufacturing sales more than 75% of total sales - Exclusion of Fives Cail KCP Ltd. on improper application of one of the accepted filters - The filter under consideration - 'Manufacturing sales not less than 75% of the total sales' - applies at the first level of company selection so that only the companies engaged mainly in manufacturing activity get selected at the entry level. It has no application at the second level of transaction level comparison. If a company has passed the filter and entered the first level, it will have to pass the transaction level comparison also so as to get eligible for inclusion in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions relating to the Manufacturing operations, thereby covering the transactions of purchase of raw material and sale of products. The assessee employed the Cost Plus Method (CPM) in its Transfer pricing analysis for benchmarking the Manufacturing transactions. The TPO rejected the CPM and deployed the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of Operating Profit/Sales. He, accordingly, worked out the assessee's PLI at 2.35%. Out of eight companies chosen by the assessee as comparable, the TPO rejected four. With the remaining four companies, having average PLI at 6.43%, the TPO worked out the transfer pricing adjustment of ₹ 1,03,82,325/-. The Assessing Officer (AO) finalized the assessment u/s. 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961 (hereinafter also called 'the Act') with the transfer pricing addition of the equal amount. The ld. CIT(A) partly allowed the appeal and the assessee has come up before the Tribunal. 4. We have heard both the sides through Virtual Court and gone through the relevant material on record. Though the assessee initially applied the Cost Plus method for benchm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent policies for conducting their business. One assessee may have a policy of allowing less time to trade debtors for payment or may have only cash sales with no debtors, while another may be allowing more time with the ultimate effect of less or more trade debtors. When a company allows more time to the trade debtors for payment, it naturally pushes up the sale price so as to include corresponding interest cost in it. In case of cash sale, the price charged is relatively screwed because of having no element of interest cost in the sale price. Thus in a case of allowing more time to trade debtors for payment, sale price and the resultant profit from sale increases in comparison with a company which allows lesser time to trade debtors for payment. Similar is the position as regards purchases. More the amount of trade creditors means costly purchases followed by lower profit and vice versa. Ergo, relatively high working capital of a company indicates that it allowed more time to trade debtors with the increased sales price and the corresponding swelled profit. In the like manner, it also means that it paid the trade creditors early and made cheap purchases with the resultant more pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e working capital adjustment. Reference to trade receivables and trade payables in the example given in Annexure to Chapter III of the OECD transfer pricing Guidelines, 2010 should be construed as including advances to suppliers and advances from customers. It is only for simplification purpose that the example refers to trade receivables and trade payables to the exclusion of advances to suppliers and advances from customers. We, therefore, amplify the direction of the ld. CIT(A) to the AO/TPO for adopting the method of working capital adjustment as provided in the example given in Chapter III of the OECD Guidelines by also considering Advances to suppliers and Advances from customers, in the same way as Trade receivables and Trade payables. 5.7. The figures of Advances to suppliers and Advances from customers, as given by the assessee for the first time before the ld. CIT(A) pertaining to self and the comparables, have not been verified by any authority. These need to be examined and evaluated by observing that only advances to or from customers/suppliers should be included in the computation of working capital of the assessee as well as the qualifying comparables. In other wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no independent Manufacturing segmental information of this company is available. As against that, the segment of the assessee under consideration is only Manufacturing. We have noted above that the assessee also entered into the international transaction of rendering services. However that transaction was benchmarked separately by the assessee and the TPO did not dispute that it was at ALP. Thus, the only segment of the assessee under consideration is that of Manufacturing de hors Services. In that view of the matter, the companies doing Manufacturing only or having an independent manufacturing segment qualify for comparison. Since the Revenue from sale of services of Fives Cail KCP Ltd. constitutes a substantial portion in the overall kitty, it does not qualify as a good comparable. 6.4. Now we turn to the main plank of the submissions of the ld. AR that since this company's sale from Manufacturing activity at around 83%, passes the filter of Manufacturing sales more than 75% of total sales, the same should be included. There is a basic fallacy in this argument. The comparable selection process in the ALP determination envisages broadly two levels of comparisons: company l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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