TMI Blog2022 (8) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... be functionally comparable. Further TNMM does not require strict product comparability. Therefore we are of the considered view that that the contention of the assessee that the products of Trion Valves and the industry to which Triton Valves serve are not comparable with assessee is not tenable as the most appropriated method as chosen by the assessee for determination of ALP is TNMM. Comparable selection - Oswal Industries Ltd., for example serves mainly to oil companies and the valves manufactured by this company is different from the valves of the assessee. It is also noted that one of comparables chosen by the assessee in the TP Study, namely KAR mobiles is into Manufacture and Exporters of Engine Valves for Applications in Segments such as Agricultural / Indusrial /Stationary, Automotive - Passenger Cars / Light Commercial Vehicle / Heavy Commercial Vehicles, Battle Tanks, Farm Trackors, High Performance Cars, Locomotives and Marine. If the contention of the assessee is to be accepted then the inclusion of these companies as comparable as by assessee needs to be questioned. We are therefore in agreement with the decision of the TPO and CIT(A) that under TNMM method the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing Adjustments: a) That in the computation of ALP the Hon'ble DRP erred in not directing the Ld. TPO to include the interest paid in arriving at the operating profits of the Comparable entities. b) That the Hon'ble DRP erred in sustaining the order of the Ld. TPO by including Triton Valves without appreciating the fact that the products manufactured by the said company is entirely different from that manufactured by the Appellant. c) That in the Computation of the ALP, the Hon'ble DRP erred in not directing the Ld. TPO to consider the adjustments to the respective Working Capital position of the Appellant and the Comparable Entities. 3. In respect of Corporate Taxation matters: a) That the Hon'ble DRP erred in holding that the tools and spares written off during the year were capital items when in reality they were merely consumable items used in normal manufacturing activity that have limited life due to the stringent quality requirements of the products manufactured by the Appellant. 4. The Appellant prays for leave to add, modify, delete or introduce additional Grounds of Appeal at any time before the Appeal is disposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion of interest paid in arriving at the operating profits of the comparable entities. Hence, this ground is dismissed. 10. In ground No.2(b), the assessee contended inclusion of Triton Valves Ltd., as comparable in the transfer pricing study which we will adjudicate first. 11. Before we undertake comparability analysis, it's sine qua non to understand the FAR of assessee as per the TP document prepared by the assessee. Functions : The assessee has a manufacturing and assembly plant in Whitefield, Bnagalore with the necessary infrastructure. The assessee has a service centre in Delhi and also a marketing department for developing new customers. The Managing Director (MD) of The assessee takes care of the overall management, R D/Product development. The personnel from respective department support the MD to manage the day today functions when it comes to manufacturing, R D, Product development, Marketing, Sales Distribution, after sales services, Finance and administration. Assets Owned : The assessee uses the brand name Walvoil in its product which is an intangible asset belonging to the parent company. The fundamental design and R D work is done at the parent co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re different and hence it is not a comparable industry. However the DRP did not accept the claim of the assessee and confirmed the decision of the TPO. The DRP in the order stated as under:- 'The main argument of the assessee is that the valves, valve cores and accessories manufactured by Triton Valves are used in tyre industry where as the assessee manufactures hydraulic valves which are different. The submission of the has been considered. The TNMM requires establishing comparability at a broad functional level. A strict product comparison is not a necessity. Hence as both the asscssee as well as the comparable Triton Valves are manufacturing valves, both can be considered as functionally comparable under TNMM: Further, it is found that the comparables selected by the assessee, which are accepted by the TPO, also manufacture valves for use in different industries. While KAR Mobile Ltd. manufactures valves for internal combustion engines power generation, stationary and marine engine application, Rane Engine Valve Lid manufactures valves and valve train components, Dynamatic Technologies Ltd manufactures hydraulic gear pumps, control valves, hand pumps and other hydraulic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e also not comparable. 19. Before going into the merits of this case, we will first look into the legal position with regard to the TNMM used for determining the ALP between the AEs. The Transfer Pricing Regulations (i.e. Section 92C of the Act, read with Rule 10B of the Income-tax Rules) as well as the OECD Transfer Pricing Guidelines provide the 5 common transfer pricing methods for evaluating the related party transactions undertaken between entities. Of these TNMM is the most common method that is used for determining the arm s length nature of transactions. It compares the operating/ net margins of companies to analyse if the related party transactions have been undertaken on an arm s length basis. Rule 10B (1) (d) states as under 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- ****** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriated method as chosen by the assessee for determination of ALP is TNMM. 21. Even on merits, the other comparables included and accepted assessee during the TP proceedings are having different products and serves different industries. Oswal Industries Ltd., for example serves mainly to oil companies and the valves manufactured by this company is different from the valves of the assessee. It is also noted that one of comparables chosen by the assessee in the TP Study, namely KAR mobiles is into Manufacture and Exporters of Engine Valves for Applications in Segments such as Agricultural / Indusrial /Stationary, Automotive - Passenger Cars / Light Commercial Vehicle / Heavy Commercial Vehicles, Battle Tanks, Farm Trackors, High Performance Cars, Locomotives and Marine. If the contention of the assessee is to be accepted then the inclusion of these companies as comparable as by assessee needs to be questioned. We are therefore in agreement with the decision of the TPO and CIT(A) that under TNMM method the comparison is done at a broader level and narrow comparison is not applied. In the light of the above, we uphold the order of the AO including the Triton Valves as a compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been provided for the purpose of better comparable. 1) Swiss Re Global Business Solutions India (P) Ltd., Vs. DCIT [2020] 116 taxmann.com 716 (Bangalore Trib.) 2) Maxim India Integrated Circuit Design Pvt. Ltd. Vs. DCIT [IT(TP)A No.1573/Bang/2017 dated 2/11/2020. 3) Nagravision India Pvt. Ltd., Vs. ACIT (TP 1536/Bang/2017 dated 3/7/2020 26. In the case of Nagravision India Pvt. Ltd., (Supra), the Tribunal held that the working capital adjustment should be allowed. For holding so, the Tribunal has followed the decision rendered by another Bench in the case of Huawei Technologies (India) Pvt. Ltd., Vs. DCIT (2019) (101 taxmann.com 313). The decision rendered in the case of Huawei Technologies (India) Pvt Ltd (supra) are extracted below:- 10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT (A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction]if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) This time gap is calculated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee now is in appeal before us contending the addition of Rs.18,12,617/- being treated as capital in nature. The Ld.AR brought our attention to the list of tools which are treated as capital in nature and the same is filed in page 40 of paper book. The Ld AR submitted that the value of the items as given in the list are not material, which proves the fact that these items are smaller tools and consumable used in the operations of the assessee and hence to be treated as revenue in nature. 30. The ld.DR on the other hand submitted that as per the report of the AO, the items have a life beyond 12 months and hence to be treated as capital in nature. The ld.DR also submitted that he Hon ble SC in the case of Sarvana Spinning Mills Pvt. Ltd., (Supra) where the court has held that the tools having independent function and not part of a big machinery should be treated as capital in nature. 31. We have heard the rival submissions and perused the materials on record. On perusal of the list of the tools treated as capital in nature and we find that the value per item in the entire list is not significant. The ratio laid down by the Hon ble SC in Sarvana Spinning Mills Pvt. Ltd., (Supra ..... 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