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2023 (1) TMI 117 - AT - Income TaxTP Adjustment - Exclusion of abnormal raw material consumption - assessee made an adjustment of 18% towards abnormal raw material consumption during the AY 2007-08 as it is the first full year of operation of the company - TPO while considering the issue during the remand proceedings did not allow the adjustment for the purpose of computation of ALP - HELD THAT - We notice that the raw material consumption is not reducing in a linear manner as claimed by the assessee warranting an adjustment for the purpose of ALP. Further, this adjustment is done by the assessee during the remand proceeding as a new adjustment to the ALP and from the order u/s.92CA passed by the TPO it is not coming out clearly whether this adjustment is examined in detail during the remand proceedings by the TPO. One of the reasons quoted by the DRP for rejection of this adjustment is that the assessee has not submitted the annual reports of the subsequent years to substantiate the raw material consumption details. The raw material consumption is unique to each business and depends on many factors including internal and external factors like location, environment, etc. and needs to be examined factually based on evidences and supporting. In view of the above discussion we remit this issue back to TPO/AO to examine the issue afresh and pass a speaking order after giving a reasonable opportunity of being heard to the assessee. The assessee is directed to submit all the relevant details and evidences as may be called for in this regard and cooperate with the proceedings. It is ordered accordingly. This ground is allowed in favour of the assessee for statistical purposes. Exclusion of certain comparables - Exclusion of Mazda Ltd. - The overview of business of Mazda Ltd. shows that it a manufacturing and engineering company mainly into space and energy saving ejector vaccum systems. The product catalogue of the company includes vaccum systems, condenser, heater vaccum pump, hotshot pump, etc. One of the products manufactured is the value and the company in its annual report has given the financials of the valve product separately. We notice that the TPO has for the purpose of comparability considered the revenue and cost attributable to value products only. The level of comparability under TNMM is at a broad level of product comparability and high level functional comparability -we hold that Mazda Ltd. cannot be excluded and the orders of the lower authorities are upheld. Exclusion of Yuken India Ltd - Yuken India Ltd. is having a broad level of product comparability and high level of functional comparability and rightly included in the list of comparables by the revenue authorities. This issue is decided against the assessee. Inclusion of M/s. Leader Valves - Leader Valves Ltd. should be included as a comparable, considering the broader product comparability and high level of functional comparability. As regards the objection of the revenue authorities that this issue was not originally raised in the first round of proceedings, we agree with the contention of the ld. AR that the entire issue of comparability of the companies was set aside to the TPO and it was open for the assessee to seek inclusion of this company based on a fresh TP study. We hold this issue in favour of the assessee. Exclusion of working capital adjustment while computing the ALP - HELD THAT - As relying on assessee own case 2022 (8) TMI 118 - ITAT BANGALORE we direct the AO to allow the working capital adjustment to the assessee. This ground of the assessee is allowed. Adjustment to the interest on External Commercial Borrowings (ECB) - assessee has taken ECB from its AE at an interest rate of LIBOR 1.5% - HELD THAT - We see merit in the argument of the ld AR that the assessee s borrowing is for one year period as per the terms of the loan agreement (pg. 98 of PB) and therefore LIBOR 150 basis points is justified to be at arm s length. In view of this we hold that the interest charged by the assessee at LIBOR 150 basis points which is within the range as per the RBI s Master Circular, is within the arm s length. The adjustment made on this count is hereby deleted. This ground is held in favour of the assessee.
Issues Involved:
1. Exclusion of abnormal raw material consumption. 2. Exclusion of certain comparables. 3. Inclusion of certain comparables. 4. Adjustment to the interest on External Commercial Borrowings (ECB). 5. Exclusion of working capital adjustment while computing the ALP. Detailed Analysis: Exclusion of Abnormal Raw Material Consumption: The assessee claimed an 18% adjustment for abnormal raw material consumption during the AY 2007-08, arguing it was the first full year of operation with trial productions causing wastage. The TPO and DRP rejected this claim, stating it was not raised in the first round and lacked substantiation by subsequent years' financials. The Tribunal remanded the issue back to the TPO/AO for fresh examination, directing the assessee to provide relevant details and evidences. Exclusion of Certain Comparables: The TPO included Mazda Ltd. and Yuken India Ltd. as comparables, which the assessee contested. The DRP upheld the inclusion of these companies, noting that under TNMM, broad product range comparability suffices. The Tribunal agreed with the DRP, citing high-level functional comparability and broad product comparability, thus rejecting the exclusion of Mazda Ltd. and Yuken India Ltd. Inclusion of Certain Comparables: The assessee proposed including Leader Valves Ltd. during remand proceedings. The TPO and DRP rejected this, stating it was not raised initially and lacked evidence of passing the applied filters. The Tribunal, however, included Leader Valves Ltd., considering broad product comparability and high-level functional comparability, and noting the entire issue of comparability was set aside to the TPO in the first round. Adjustment to the Interest on External Commercial Borrowings (ECB): The TPO adjusted the interest rate on ECB from LIBOR + 1.5% to 4.92%, using the CUP method. The Tribunal, referencing the RBI Master Circular, held that the interest rate charged by the assessee was within arm's length as it conformed to the RBI guidelines (LIBOR + 150 basis points). The adjustment was thus deleted. Exclusion of Working Capital Adjustment While Computing the ALP: The Tribunal directed the AO to allow the working capital adjustment, following its previous decision in the assessee's own case for AY 2013-14. It emphasized that working capital adjustments improve the reliability of comparables and should be allowed as per Rule 10B(1)(e)(iii) of the Income-tax Rules. Conclusion: The Tribunal partly allowed the appeal, directing the TPO to recalculate the ALP as per the directions contained in the order. The issues of exclusion of abnormal raw material consumption and inclusion of Leader Valves Ltd. were remanded for fresh examination, while the adjustments for working capital and ECB interest were decided in favor of the assessee.
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