TMI Blog2019 (12) TMI 1641X X X X Extracts X X X X X X X X Extracts X X X X ..... relying on various decisions to the proposition that the comparables have to be excluded on account of carrying out research and development activities and considering the fact that the comparable company has very low export sales as compared to that of the assessee, we hold that ZF Steering Gear (India) Ltd., cannot be considered as a comparable. Negative working capital adjustment for the differences between the working capital of comparable companies vis- -vis the assessee - As in the instant case, majority of sales i.e., 94% of the total sales made by the assessee is to its related parties, therefore, the assessee, in our opinion, is running its business with no working capital risk. Therefore we are of the considered opinion that the TPO/DRP were not justified in making negative working capital adjustment. Therefore, the additional ground raised by the assessee is allowed. - ITA No. 1928/Del/2017 - - - Dated:- 11-12-2019 - SHRI R.K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER For the Appellant : Shri Vishal Kalra, Advocate For the Respondent : Ms Nidhi Sharma, Sr. DR ORDER PER R.K. PANDA, AM: This appeal filed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing, without appreciating the facts, economic adjustment on account of a sales downturn made by the Appellant to factor for the different geographic markets of operation vis-a-vis companies selected for arm's length price determination; 3.4 selecting current year (i.e. financial year 2011-12) data for comparability; 4 That on the facts and circumstances of the case and in law the Ld. AO/ Ld. TPO erred in not examining the validity of initiation of penalty proceedings u/s 271 (1) (c) of the Act. 5 That on the facts and circumstances of the case and in law, the Ld. AO erred in charging and computing interest under section 234B, 234C and 234D of the Act. That the appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal as they may be advised. That, the above grounds are independent and without prejudice to each other. 4. The assessee has also raised two additional grounds. However, at the time of hearing, the ld counsel did not press the additional ground No.1 for which the ld. DR has no objection. Therefore, we are not concerned with the same. So far as the additional ground No.2 is con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10. The assessee had identified the following five comparable companies:- S.No. Name of the Company Return on cost (basis 3 years weighted average as per TP documentation) Return on cost (Single year updated margins) refer pages 195-196 of paper book 1. Bharat Gears Ltd. 7.62% 6.98% 2. Hindustan Hardy Spicer Ltd. 1.01% 5.10% 3. Raunaq Automotive Components Ltd. 8.66% 7.35% 4. Talbros Engineering Ltd. 5.72% 8.67% 5. Rane (Madras) Ltd. 6.54% 6.84% Arithmetic Mean 5.91% 6.99% 11. The TPO accepted the claim of the assessee for capacity utilization adjustment and worked out the average margin of the comparable companies at 0.8%. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture of automobile steering and suspension parts. He submitted that the assessee is not engaged in the business hydraulic pumps and seat belt division as that of Rane TRW Steering Systems Ltd. 14. Referring to Rule 10TA of the IT Rules, 1962, the ld. counsel for the assessee drew the attention of the Bench to clause (b) of the said Rule and drew the attention of the Bench to the definition of Core auto components which means (i) Engine and engine parts, including piston and piston rings, engine valves and parts cooling systems and parts and power train components (ii) Transmission and steering parts, including gears, wheels, steering systems, axles and clutches; (iii) Suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs. 15. He accordingly submitted that the business of the assessee comes within the ambit of manufacturing core auto components which has been given a separate treatment by the legislature as compared to manufacture of non-core components as in the auto industry the business of manufacture and sale of these two segments is very different. 16. Further, the segmental data are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate criteria for exclusion of a comparable:- (i) Omniglobe Information Technologies (India) Pvt. Ltd vs Addl. CIT [ITA No. 6980/Del/2017]; (ii) Cypress Semiconductor Technology India (P.) Ltd. vs DCIT [IT(TP) A No. 1002/Bang/2011; and (iii) 24/7 Customer.com (P.) Ltd. vs DCIT [ITA No. 227/Bang/2010] 19. He accordingly submitted that Rane TRW Steering Systems Ltd., should be excluded from the list of comparables since it owns substantial intangibles, has carried out R D activities and has low export sales as compared to total sales. 20. The ld. DR, on the other hand, heavily relied on the order of the A.O./TPO/DRP. 21. We have considered the rival arguments made by both the sides and perused the record. We find the TPO, in the order passed u/s 92CA(3) added Rane TRW Steering Systems Ltd., as a comparable. From the orders passed u/s 92CA(3) for the assessment year 2010-11 and 2011-12, we find the TPO has accepted the TP analysis filed by the assessee and has not considered Rane TRW Steering Systems Ltd., as a comparable. Further, we find from the various details furnished by the ld. counsel that this company is not functionally comparable since Rane TRW Steer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of which is unknown and cannot be determined. Further, the export sale of ZF Steering Gear (India) Ltd., is 0.5% of the total sales as against export sale of 98.90% to the total sales in the case of the assessee. He submitted that ZF Steering Gear (India) Ltd., is engaged in research and development activities in their product/process development during the year whereas the assessee has not incurred any such expenditure during the year. Relying on the decisions cited while arguing exclusion of Rane TRW Steering Systems Ltd., he submitted that all these decisions are also applicable to the present comparable. He accordingly submitted that ZF Steering Gear (India) Ltd., should be excluded from the list of comparables. 23. The ld. DR, on the other hand, heavily relied on the order of the A.O./TPO/DRP. 24. We have heard the rival arguments made by both the sides, perused the orders of the A.O./TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the TPO added ZF Steering Gear (India) Ltd., as a comparable while determining the ALP of the international transaction although the assessee has not consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing capital adjustment of cost of the assessee). He accordingly computed the TP adjustment. The ld. DRP dismissed the ground raised by the assessee objecting the working capital adjustment in the light of the assertion of the Assessing Officer that the said claim was already allowed to the assessee at the time of TP proceedings. 27. The ld. counsel for the assessee submitted that the TPO, in his order, has wrongly stated that the assessee asked for such working capital adjustment. He submitted that working capital adjustment was never sought by the assessee and was also not required in the case of the assessee. He submitted that the relevant market factors such as difference in inventories, debtors and creditors play a major role while setting up price mechanism for transactions in independent scenario. The said factors have already been considered by the assessee during the price setting process for transactions between the assessee and its AEs. He submitted that the TPO, after arriving at the arithmetic mean of all comparables at 0.80%, worked out the negative working capital adjustment thereby making ALP at 3.28%. He submitted that the working capital adjustment is made for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t more than 94% of the sales made by the assessee are to the related parties and, therefore, the assessee is running its business with no working capital risk whereas the comparables companies who primarily cater to the domestic market are having working capital risk. Under such circumstances, if at all any working capital adjustment has to be made, then, it has to be a positive adjustment and there cannot be any negative working capital adjustment. We find the Delhi Bench of the Tribunal in the case of Inductis India Pvt. Ltd. (supra) has held that in case the assessee render ITES Services to the AE, there was no need for making any negative working capital adjustment when the assessee did not carry any working capital risk. The Bangalore Bench of the Tribunal in the case of Lam Research India (Private) Limited (supra) has held that negative working capital adjustment cannot be carried out where the assessee was a captive service provider. The Hyderabad Bench of the Tribunal in the case of Adaptec (India) Private Limited (supra) has held that there is no need for making any negative working capital adjustment when the assessee does not bear any working capital risk. The Bangalore ..... X X X X Extracts X X X X X X X X Extracts X X X X
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