TMI Blog2023 (3) TMI 706X X X X Extracts X X X X X X X X Extracts X X X X ..... ee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962 - thus we remit the issue to the file of AO/TPO for fresh consideration on similar lines. Depreciation adjustment - DRP not excluding depreciation while computing the operating margin of the Appellant and the comparable companies - HELD THAT:- As decided in assessee own case [ 2022 (5) TMI 34 - ITAT BANGALORE ] we observe that there is no analysis with respect to depreciation policy of the assessee and comparable cases. Therefore, we are of the view that let this matter be reexamined by the TPO / AO afresh. The assessee should demonstrate whether there is any difference in depreciation policy of the assessee and the comparable companies and what is its impact on the computation of arm's length price. If the assessee is able to demonstrate the same, the TPO may allow reasonable depreciation adjustment while determining the ALP for the international transactions. Thus we remit the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP ) have grossly erred in in law and facts of the case by proposing a transfer pricing adjustment of INR 5,67,47,747/-under section 92CA of the Income-tax Act, 1961( the Act ) with respect to the international transactions rendered by the Appellant during AY 13-14. 2. The learned AO/learned TPO/Hon'ble DRP erred in rejecting the Transfer Pricing ( TP ) documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The learned AO/learned TPO / Hon'ble DRP have erred in disregarding the economic analysis performed by the Appellant in the TP documentation in justification of the arm's length nature of the international transactions entered by it with its Associated Enterprises. 4. The learned AO/ learned TPO /Hon'ble DRP erred in considering losses on foreign exchange fluctuation as operating in nature. 5. The learned AO/learned TPO/Hon'ble DRP erred in not allowing adjustment on account of custom duty and surcharges incurred by the Appellant. 6. The learned AO/learned TPO/Hon'ble DRP erred in not allowing purchase price adjustment. 7. The learned AO/learned TPO/Hon'ble DRP e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of transactions with the Associated Enterprise. 3. The Ld. DRP not given certain relief to the assessee. Thus, in final assessment order, TPO made adjustment of Rs.5,67,47,747/-. Against this assessee is in appeal before us by way of above ground. 4. Ground Nos.1, 2 3 are general in nature, which do not require any adjudication. 5. Ground No.4 6 are with regard to not considering the losses on account of foreign exchange fluctuation as operating in nature and ground No.6 is with regard to not allowing purchase price adjustment. The assessee sought adjustment for the purchase price difference between the contracted price and the actual price of delivery due to forex fluctuation. The assessee also sought adjustment for fluctuation for reinstatement of foreign currency as per accounting standards. According to the assessee, TPO has not given any reason for reduction of purchase price adjustment except to state that it makes no sense. According to the Ld. A.R. the purchase of assessee have import component of 75% and there is a peak difference between the purchase price of the assessee and all the comparables. A proper comparability analysis should factor the same. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of localizing its manufacturing process. To meet the quality standards and to overcome technological challenges, the assessee imports raw materials from its AEs. Therefore, it becomes necessary for the assessee to import raw materials from its AEs which is not the case for the comparable companies, thus, putting the assessee in a comparative disadvantage vis-a-vis the comparables. The TPO rejected the adjustment sought for the reason that the decision to import is a conscious decision taken by the assessee and in the absence of any external factors, beyond the control of the Assessee necessitating imports, no adjustment can be made. The TPO also observed that the import duty is a part of the cost of material which is always included at the time of pricing of the product and also that the assessee ought to have considered the customs duty component payable while negotiating the price at which the raw materials are imported. 26. The DRP has upheld the non-grant of customs duty adjustment on the basis that the arithmetic mean of margins under the TNMM method takes care of such difference. 27. The assessee submits that the import of raw materials is not a commercial decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia out of raw materials procured from its AEs. This import duty is not a onetime cost which would affect the company's margin as an extraordinary event. b. Import duty per se does not call for an adjustment. It requires to be seen whether the import is necessitated by certain factors beyond the control of the assessee company. If it is the normal business model of the assessee to import goods, it is not an extraordinary event affecting its margin. c. The higher percentage of import content in the assessee's production is a conscious decision taken by the assessee keeping in mind all commercial considerations including the obvious benefits of better quality which is bound to reflect in higher sales margin. d. Import duty is part of the cost of material which is always taken into account in pricing a product. If the individual elements of cost were to be separately adjusted for differences between the tested party and the comparables, then the profit margin of all the companies would become uniform. e. The assessee company ought to have considered the customs duty component payable while negotiating the price at which the raw materials were imported f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of E-Gain Communication (P) Ltd. (supra) the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect . We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.' Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP.' Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration. 31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar directions. 6.2. In view of the above, we remit the issue to the file of AO/TPO for fresh consideration on similar lines. 7. Ground No.7 which reads as follows:- The learned AO/learned TPO/Hon'ble DRP erred in ignoring the fact that different companies adopt different rates for various asset categories while computing depreciation and the data. pertaining to the same is not available in the public domain. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment while determining the ALP for the international transactions. 7.2. In view of the above order, we remit the issue to the AO/TPO for fresh consideration. 8. Ground Nos.8, 9 10 are with regard to the capacity utilization adjustment. After hearing both the parties, similar issue came before this Tribunal in assessee s own case cited (supra) wherein it was held as under:- 12. On the issue of capacity adjustment, we find that the settled law is that adjustment on account of capacity utilization has to be granted. In this regard, the Tribunal in the case of IKA India has held as follows:- 22. We have heard the submissions of the assessee and the ld. DR on the issue raised by the assessee in ground No.7. We shall first see the statutory provisions relevant to the issue. Rule 10B(1)(e) of the Rules states that adjustments should be made to account for: ...the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market 23. Rule 10B(2) of the Rules provides compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties. Further, Para 2.74 of the OECD Guidelines while laying down the comparability criteria to be adopted while applying the transaction net margin method states as follows: ..... Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied) 25. US transfer pricing Regulations on this aspect is as follows:- In addition, the US transfer pricing regulations, u/s 482 of the Internal Revenue Code (hereinafter referred to as 'the US regulations') also support the above. Regulation 1.482-1(d)(2) of the US regulation states as follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. (iii) In the case of Biesse Manufacturing Company Limited (IT(TP) A Nos. 97 493/Bang/2015) for AY 2010-11, the Tribunal held as follows: 10.4.1. We have heard the rival contentions and perused and carefully considered the submissions made and material on record; including the judicial pronouncements cited. The issue for consideration is whether adjustment for under-utilization of capacity is allowable in the case on hand and if so, the manner of computation thereof and the quantum of adjustment 10.4.5 In the above cited case of the Mumbai Tribunal i.e. Petro Araldite P. Ltd. (supra), the Tribunal has upheld the principle that adjustment for capacity under-utilization can be grante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is comparable to the price charges under an uncontrolled transaction of similar nature. The regulations don t restrict or provide that the adjustments cannot be made on the results of the tested party. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per subclause (i) of rule 10B(1)(e) of the Rules itself. The absence of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. The above view has also been upheld in the following decisions:- Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) Demang Cranes Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 30. As far as data of comparable companies on capacity utilization being not available in public domain is concerned, it is practically not possible to obtain data on capacity utilization of comparable companies and consequently compute adjustment on the comparable companies, the operating cost of the tested party is adjusted for capacity utilization adjustment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for information on capacity utilization of the comparable companies such as Installed Capacity, Actual Production in Units, Break-up of Fixed Cost and Variable Cost; Segmental/ product wise information, if any. 34. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Ground No.7 is decided accordingly. 13. Accordingly, we set aside the issue to the files of the AO / TPO directing to follow the directions given in the case of IKA India (P.) Ltd. v. ACIT (supra). 8.1. Respectfully following the above order of the Tribunal, we remit the issue to the file of AO/TPO on similar direction. 9. Ground No.11 is with regard working capital adjustment. 9.1 After hearing both the parties, we of the opinion that similar issue came for consideration before this Tribunal in assessee s own case, wherein the Tribunal held as under:- 14. The next grievance of the assessee is not granting of working capital adjustment. We have considered the rival submissions and perused the material on record, includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which 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 mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and /or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases andlor 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tested party and the com parables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [20 13 J 38 taxmann.com 231/[2014 J 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able todemonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 1 OB(1 )( e) (iii) 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 margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment is to be proposed, the same should be restricted only to the international transactions entered into during the year. It is a settled principle that adjustment is to be restricted to the international transactions alone. Therefore, your petitioner submits that the additional ground No.14 be admitted. 11.1. The Ld. AR. pleaded to admit the additional ground on the reason that inadvertently assessee has not raised this ground on earlier occasion and all the facts are already on record which does not require any investigation of fresh facts and prayed that additional ground may be admitted. 11.2 After hearing both the parties, we are of the opinion that all the facts are already on record and there is no necessity of investigation of fresh facts otherwise on record. Accordingly, these additional grounds are admitted by placing the reliance on the judgement in the case of NTPC Vs. CIT reported in 229 ITR 383. After admitting the additional grounds, we are of the opinion that this issue squarely covered by the earlier order of the Tribunal in assessee s own case cited (supra), wherein it was held as under: 16. On the issue of TP adjustment to be restricted t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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