2024 (7) TMI 1054 - AT - Income Tax

TP Adjustment - Transaction of purchase of goods from Associated Enterprises ( AE ) - MAM - Comparable selection - HELD THAT - The primary business of the assessee during the year under consideration is to sell and distribute fiber glass products which are manufactured by its overseas AEs. Assessee adopted both the buy-sell model as well as sales commission model depending on how the customers are acquired and maintained. In the buy-sell model, assessee imports products from its overseas AEs and resells the same to the customers in India and in the sales commission model, assessee s overseas AEs sell the products to the third party customers in India directly and the assessee charges sales commission to the overseas AEs based on a certain percent of the product value of the direct sales made by the overseas AEs. The business profile as mentioned in the TP study report, it can be safely concluded that the assessee is not doing any value addition and the products imported from AEs are sold in the market, therefore, consider the FAR analysis, Resale Price Method (RPM), is to be considered as a Most Appropriate Method (MAM) as adopted by the TPO. During the course of scrutiny assessment proceedings, the TPO showcaused the assessee to explain as to why Transactional Net Margin Method (TNMM), should not be rejected and RPM applied as MAM. Assessee in its reply, strongly rejected the RPM as the MAM contending absence of reliable data with respect to degree of comparability and absence of reliance date relating to gross margins earned by the comparable companies. The objections raised by the assessee were dismissed by the TPO. Comparables selected by the assessee - TPO rejected ECMAS Resins Private Limited (ECMAS) as the said company was engaged in manufacturing and sale of unsaturated polyester resins and trading component of its income is 40.06% only. Before us, the assessee had strongly contended that due to paucity of the comparables available, a trading filter range of 30%-40% should be considered as an appropriate threshold for selecting comparable companies. We are inclined to accept this contention of the assessee for the simple reason that ECMAS is a manufacturer and while carrying out its activities, it is also doing trading activities but which is very less as compared to the manufacturing activity and its trading results is completely dominated by its manufacturing activities. Therefore, rejection of ECMAS is upheld. TPO has included Arrow Technical Textile Private Limited (ATTPL) as a good comparable. The business description of this entity as extracted from its website shows that it is a dynamically upstart company offering world-class Structural Strengthening Materials, Carbon Fibers, Basalt Fibers Products, High Strength Fiberglass, Fiberglass Product Insulation Cloth, High Silica Fibers, Filter Cloth, Non Woven Fabric and many more. Its core purpose is to provide innovative solutions in advanced industrial fiber and fabric to Indian Industry and SAARC Nations with a sustainable ecological environment commitment. This company has a wide range of product mix which primarily deals in textile fiber and carbon fiber and fabrics and this company is offering composite fibers such as High Silica, Carbon Fiber, Basalt Fiber, Aramid, EMI (electromagnetic induction) and ESD (electromagnetic sensitive devices). The principle business activity of the company is trading in textile products. This is entirely different from the products sole by the assessee. The assessee deals in basic glass fiber products like assemble rovings, direct rovings, chopped strands, shopper strand mat. Thus, the products offered by ATTPL are quite different from fiber glass products in terms of its uses and industrial application. Because of the product dissimilarity, we are of the considered view that ATTPL is not a good comparable and direct the TPO to exclude the same from the final list of comparables. TPO has dismissed the claim of working capital adjustments on the ground that the assessee has failed to explain as to how by not treating the working capital adjustment would materially affect the amount of gross profit margin in the open market. We are of the considered view that there is some force in the contention of the TPO but at the same time, improvement in the results, in the comparability study after giving working capital adjustment cannot be ruled out. The assessee is directed to demonstrate how the working capital adjustment would make the difference in the comparability and the TPO is directed to examine the working capital adjustment furnished by the assessee and decide this claim after offering reasonable and adequate opportunity of being heard to the assessee. To sum up, exclusion of ECMAS stands and ATTPL is directed to be excluded. With this, the TPO is directed to re-compute the Arm s Length Price adjustment, if any, after giving effect to the working capital adjustments. Assessee has also claimed for the application of external Comparable Uncontrolled Price (CUP) method as the MAM. We are of the considered view that application of any method as MAM for the determination of ALP margin depends upon the functional profile of the tested party and on the facts of the case in hand, in the light of the functional profile of the assessee RPM is the MAM. With the above directions, appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Dispute regarding addition on account of variation in Arm's Length Price (ALP) of purchase of goods from Associated Enterprises (AE).
2. Dispute over the rejection of Transaction Net Margin Method (TNMM) and adoption of Resale Price Method (RPM) for ALP determination.
3. Challenge against rejection of economic analysis and identification of new comparables.
4. Disagreement on the selection of comparable companies like ECMAS Resins Private Limited and Arrow Technical Textiles Private Limited.
5. Dispute regarding working capital adjustments and direct expenses consideration for computation of gross margins.
6. Alternative contention for the application of Comparable Uncontrolled Price (CUP) method.

Analysis:

Issue 1: Addition on Account of ALP Variation
The assessee contested the addition of Rs. 8,83,76,149 on the grounds of ALP variation. The Tribunal considered the nature of the assessee's business of selling and distributing fiber glass products and concluded that the Resale Price Method (RPM) was appropriate due to the lack of value addition by the assessee. The Tribunal upheld the addition based on the FAR analysis.

Issue 2: TNMM Rejection and RPM Adoption
The rejection of TNMM and adoption of RPM as the Most Appropriate Method (MAM) for ALP determination were challenged by the assessee. The Tribunal noted the objections raised by the assessee regarding the reliability of data and comparability of gross margins but upheld the TPO's decision to apply RPM as MAM.

Issue 3: Selection of Comparables
The rejection of ECMAS Resins Private Limited as a comparable company was upheld by the Tribunal due to its dominant manufacturing activities. However, the inclusion of Arrow Technical Textiles Private Limited was disputed based on product dissimilarity with the assessee's offerings. The Tribunal directed the exclusion of ATTPL from the list of comparables.

Issue 4: Working Capital Adjustments
The Tribunal acknowledged the importance of working capital adjustments for comparability study but required the assessee to demonstrate the impact on gross profit margins. The TPO was directed to re-examine the working capital adjustments and their effect on the ALP determination.

Issue 5: Application of CUP Method
The assessee's contention for the application of Comparable Uncontrolled Price (CUP) method was considered, but the Tribunal determined that RPM was the MAM based on the functional profile of the tested party. The Tribunal partially allowed the appeal, directing the TPO to re-compute the ALP adjustment after considering the working capital adjustments.

In conclusion, the Tribunal addressed various issues raised by the assessee related to ALP determination, selection of comparables, working capital adjustments, and the application of different pricing methods. The judgment provided detailed analysis and directions, partially allowing the appeal while upholding certain decisions regarding the transfer pricing adjustments.