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2021 (3) TMI 69 - AT - Income TaxTP Adjustment - re-computation of ALP by combining both Import of material and Export of Finished goods and applying TNMM and thereby upward adjustment - In respect of the import of materials and export of Finished goods TPO applied TNMM as the MAM for both the aforesaid transactions on combined basis and recomputed the ALP by considering 5.15% as Arm's Length Margin and made addition of INR 3.42 crores to the returned losses - HELD THAT - As decided in own case 2020 (10) TMI 933 - ITAT DELHI it is not the case that assessee has resold the same goods with only minor modifications to justify the adoption of RPM as the most appropriate method. In the present case the assessee has assembled the goods partly purchased from its associated enterprise and partly developed by its own vendor. Therefore, the decision relied upon by the learned authorised representative MSS INDIA (P) LIMITED. 2009 (5) TMI 600 - ITAT PUNE-A does not help the case of the assessee. In view of the above facts we do not find any infirmity in the order of the learned assessing officer/transfer pricing officer as well as the direction of the learned dispute resolution panel in rejecting the resale price method adopted by the assessee and adopting transactional net margin method as the most appropriate method. - Decided against assessee. Working capital adjustment - Addition while applying TNMM on account of difference in working capital of the comparable companies and that of the assessee - HELD THAT - There is no denial of the fact that in the earlier assessment years, namely, assessment years 2011-12 and 2012-13 TPO allowed the working capital adjustment since the facts and circumstances involved in this year are similar to the facts and circumstances for the earlier assessment years, there is no justification for not allowing the same for this particular year. Having regard to this anomalous situation, we are of the considered opinion that the working capital adjustment should have been allowed for this year also. We therefore while answering ground No. 2 in favour of the assessee, direct the learned Assessing Officer/Ld. TPO to allow working capital adjustment to the assessee for this assessment year also. Recomputation of the arm's-length price by applying the entity level margins of tested party - ignoring segmental margins in respect of marketing support services and also by selecting six new companies why rejecting two companies selected by the assessee for such comparison - There is no dispute that the assessee has maintained segmental records in relation to the Management Support Services. It is not decipherable from the orders of the authorities below that these segmental records are rejected for any explicit reasons. Ld. TPO adopted the entity level margins of the assessee as well as the comparables. There is no denial as to the submissions of the ld. AR that the segment of Management Support Services is different from other activities performed by the comparables. In Technimount ICB Pvt. Ltd. 2013 (9) TMI 595 - ITAT MUMBAI as held that as per the provisions contained in Chapter-X vide provisions 92-94, international transactions are to be taken into consideration for determination of Arm's Length Price and for such purpose wherever it is practicable and available, the segmental results have to be considered and not to the profit at entity level. In view of the undisputed availability of the segmental results in the case of the assessee as well as the comparable companies, in respect of Management support services, we are of the considered opinion that the ld. TPO should have taken them into consideration. For this purpose, we set aside the issue to the file of ld. Assessing Officer/TPO for comparison of the segmental results and not the margin at entity level. Rejection of two entities, namely, Best Mulyankan Consultants Ltd. and Indus Technical Financial Consultants Ltd. from the list of comparables holding those to be functionally dissimilar - It is seen from the record that the assessee has not produced the material to capture functional profile of these two companies with reference to the agreements for provision of services and the material produced before us in the shape of relevant extracts of annual report is insufficient to reach a definite conclusion on this aspect. When we have to compare the functional profile in the teeth of the objection taken by the ld. TPO, to retain these two entities in the list of comparables, matter requires deeper analysis. No such material is forthcoming. Hence, we hold that the assessee failed to substantiate their claim that Best Mulyankan Consultants Ltd. and Indus Technical Financial consultants Ltd. are good comparables to the assessee. Companies functionally dissimilar with that of assessee need to be deselected from final list. Non-comparable of certain companies in view of their huge and disproportionate turnover more than 200 times to that of the assessee when compared to the entities like assessee.
Issues Involved:
1. Re-computation of ALP by combining Import of Material and Export of Finished Goods. 2. Denial of Working Capital Adjustment. 3. Re-computation of ALP by applying entity level margins instead of segmental margins. 4. Selection and rejection of comparable companies for ALP determination. Issue-wise Detailed Analysis: 1. Re-computation of ALP by combining Import of Material and Export of Finished Goods: The first issue pertains to the re-computation of the Arms Length Price (ALP) by combining both Import of Material and Export of Finished Goods and applying the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) applied TNMM as the Most Appropriate Method (MAM) for both transactions on a combined basis, leading to an upward adjustment of ?34,193,860. The Dispute Resolution Panel (DRP) upheld this adjustment, and the Assessing Officer (AO) passed the final order accordingly. Upon a petition under Rule 13 for rectification of computational errors, the TPO recomputed the margin at 1.82%, restricting the addition to ?2.44 crores. The Tribunal noted that the issue had been previously adjudicated in the assessee's favor for the assessment year 2012-13 and saw no change in facts or circumstances to warrant a different view, thereby dismissing ground No. 1. 2. Denial of Working Capital Adjustment: The second issue involved the denial of working capital adjustment by the TPO while applying TNMM. The assessee argued that significant differences in working capital employed by the company and comparable companies justified the adjustment, which had been allowed in previous years (AY 2011-12 and 2012-13). The Tribunal found no justification for not allowing the adjustment for the current year, given the similarity in facts and circumstances. Therefore, it directed the AO/TPO to allow the working capital adjustment for the assessment year 2013-14. 3. Re-computation of ALP by Applying Entity Level Margins Instead of Segmental Margins: The third issue concerned the re-computation of ALP by applying entity level margins instead of segmental margins for "marketing support services." The TPO rejected two comparables selected by the assessee and added six new ones, recomputing the ALP at a margin of 12.73% on an entity level. The Tribunal noted that the assessee maintained proper segmental records for marketing support services, which were not explicitly rejected by the authorities. Citing precedents, the Tribunal held that segmental results should be considered for benchmarking and set aside the issue to the AO/TPO for comparison of segmental results. 4. Selection and Rejection of Comparable Companies for ALP Determination: The fourth issue involved the selection and rejection of comparable companies. The assessee challenged the rejection of two entities (Best Mulyankan Consultants Ltd. and Indus Technical & Financial Consultants Ltd.) and the inclusion of six others (Apitco Ltd., Cameo Corporate Services Ltd., Concept Communications Ltd., Just Dial Limited, Killick Agencies, and Marketing Consultants & Agencies Ltd.). The Tribunal found that the assessee failed to substantiate the comparability of Best Mulyankan Consultants Ltd. and Indus Technical & Financial Consultants Ltd. with sufficient material. However, it directed the exclusion of Apitco Ltd., Cameo Corporate Services Ltd., and Killick Agencies based on functional dissimilarity and previous judicial decisions. Additionally, it directed the exclusion of Cameo Corporate Services Ltd., Concept Communications Ltd., Just Dial Limited, and Marketing Consultants & Agencies Ltd. due to their disproportionate turnover compared to the assessee, following the precedent set by the Bombay High Court in Pentair. Conclusion: The appeal was allowed in part, with specific directions for re-computation and exclusion of certain comparables, ensuring a more accurate benchmarking of the assessee's international transactions. The Tribunal's order emphasized consistency with previous rulings and the necessity of considering segmental results and appropriate comparables for ALP determination.
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