TMI Blog2023 (6) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... o bring in comparable companies for the purpose of broad comparison. Therefore, the working capital adjustment as claimed by the Assessee should be allowed. We remit the issue of TP adjustment made back to TPO for a denovo consideration with a direction to keep in mind the above decisions of the coordinate bench with regard to application of turnover filter and working capital adjustment for determination of ALP, taking into account the details submitted by the assessee after allowing an opportunity of hearing to the assessee. Inclusion of non-AE transactions for the purpose of ALP - contention of the revenue is that the terms of transaction between the assessee and the other person is influenced by the AE and accordingly the transactions with local vendors is a deemed international transaction - HELD THAT:- DRP has upheld that decision of the TPO without analysing the provisions under which the transaction is deemed as international transaction and without calling for any relevant documents in this regard. As further notice that the DRP has stated that no segregation of accounts for AEs and Non-AEs was available and segment-based information pertaining to AE and Non-AE s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TP adjustment was enhanced to Rs.6,63,31,365. Aggrieved by the order of assessment, the assessee is in appeal before the Tribunal. 3. The assessee raised the following grounds:- 1. The impugned order is opposed to law and facts of the case insofar as it is prejudicial to the interest of the Appellant. 2. The order of the Ld. AO and the order of the Ld. DRP under whose directions the impugned assessment order is passed is invalid and bad in law for including Non Associated Enterprise (AE) transactions for the purpose of making upward adjustments to ALP. 3. The order of the Ld.AO and the order of the Ld. DRP under whose directions the impugned assessment order is passed is invalid and bad in law for including the under mentioned companies as comparables for the following reasons: a. Elecon Engineering Co Limited as the same is functionally dissimilar, fails to meet the turnover criteria and had an extraordinary year due to merger; b. GKN Driveline (India) Limited since the same fails to meet the turnover criteria; c. Z F Windpower Coimbatore Private Limited as the same is functionally dissimilar, fails to meet the turnover criteria and operates i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amt (Paid) Amt (Recd) Method Purchase of raw material and components 25,32,49,585 TNMM Purchase of Fixed Assets 21,987 TNMM Trade Payable 20,50,35,309 TNMM Royalty Expense 1,60,93,000 CUP Royalty payable 1,60,93,000 CUP Reimbursement of expenses 95,441 Other Sale of Finished goods - manufacturing activity 52,62,82,000 TNMM Sale of Services - manufacturing activity 50,000 TNMM Trade Receivables - manufacturing activity 21,38,19,375 TNMM Purchase of raw material and component ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 9.35% 6. The TPO rejected the filters applied by the assessee and proceeded to apply fresh filters to choose the following final set of comparables :- Manufacturing Segment Sl.no Company Name OP/OC OP/OR 1 Talbros Engineering Ltd. 6.15 5.80 2 R AC L Geartech Ltd. 10.06 9.14 3 Lumax Mannoh Allied Technologies Ltd. 10.27 9.31 4 Elecon Engineering Co. Ltd. 11.83 10.58 5 G K N Driveline (India) Ltd. 14.38 12.57 6 Z F Wind Power Coimbatore Pvt. Ltd. 20.37 16.93 7 Sona B L W Precision Forgings Ltd. 22.83 18.59 8 Orbit Bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plying the turnover filter did not apply the upper turnover filter of Rs.200 crores. 11. The ld DR submitted that the DRP while considering the objections raised by the assessee has applied the turnover filter of 10 times and therefore supported the order of the DRP. The ld AR as a rebuttal brought to our attention that even companies with more than 10 times turnover have been included and therefore prayed for remitting the issue with a direction to apply upper turnover filter. With regard to working capital adjustment, the ld AR submitted that the coordinate bench of the Tribunal has been consistently holding that the working capital adjustment need to be considered for the purpose of determination of ALP and accordingly prayed for a direction in this regard also. 12. We heard the parties and perused the material on record. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account the differences, if any, between the international transaction [or the specified domestic 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; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the 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 a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 13. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given s by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables 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. (vi) 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. (vii) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and nontrade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost 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 page 173 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a separate adjudication. 17. Ground No.2 is with regard Inclusion of non-AE transactions for the purpose of ALP. In this regard it is submitted that the assessee sold a substantial portion of its product to only one company namely Ajax Fiori India Private Limited which is a resident in India. During the year under consideration the assessee had purchases not only from its Associate Enterprises but also from a number of resident suppliers who have no connection whatsoever with the assessee in terms of control and ownership. However, in the form 3CEB filed for AY 2017-18, the transactions with Ajax Fiori and a large number of suppliers from whom the assessee had purchased raw materials in the ordinary course of business have been treated as Deemed international transaction by the accountant firm. The same has been retained by the Ld. TPO in his order u/s 92CA of the Act. He has proceeded to make adjustments on the basis of OP/OC as well as OP/OR. The ld AR submitted that if at all any adjustment to the Arm s Length Price has to be made, it should be limited to only the international transactions with respect to purchases from AE and not with respect to purchase and sales with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany and therefore a Resident under the Income tax Act. Thus, section 92B(1) is not attracted in respect of the transactions with this entity. The ld AR Comer group (i.e. the AE of the Assessee) and Ajax Fiori in respect of sale made by Comer India and that the terms and conditions of the sale of finished goods to Ajax Fiori is determined between Comer India and Ajax Fiori. The purchases from local resident vendors are on Principal to Principal basis with the vendors and the AE has no role to play in the Terms and Conditions of manufacture. The ld AR accordingly submitted that none of the conditions in 92B(2) are fulfilled and the mere fact that there is only one customer cannot lead to a presumption that the terms are decided by the parent company or any of the AEs. The ld AR further submitted that the TPO has fully relied upon the report of the accountant furnished in form 3CEB and he has not conducted any inquiries of his own on the said deemed international transactions. The ld AR relied on the decision of the Honourable Supreme Court in the case of PFirm [1965] 56 ITR 67 (SC) to contend that there is no estoppel against the assessee from contesting the deemed international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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