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TMI Blog2016 (6) TMI 590X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies viz., Varroc Engineering, Hi Tech Arai, Varroc Engineering, Asco India Ltd., Perfect Circle India Ltd., Rane Engine Valve Ltd., Auto Gallon Industries Ltd., on the other. Under such circumstances, we deem it befitting to set aside the impugned order and remit the matter to the file of TPO/AO for considering the comparability or otherwise of Kusalava International Ltd. and other seven companies afresh, after allowing a reasonable opportunity of being heard to the assessee. Apart from the inclusion of the Kusalava International Ltd., the ld. AR also pressed for the inclusion M/s Design Auto System in the list of comparables. It was fairly admitted that this company was not chosen by the assessee as comparable either before the TPO or before the DRP. Referring to the Annual report of this company, it was argued that the same was functionally similar. The ld. DR opposed the inclusion of this company in the list of comparables. As in an earlier para, we have restored for fresh consideration of Kusalava International Ltd. and seven other companies to the TPO after allowing due opportunity to the assessee. While carrying out this exercise, the TPO is also directed to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting total income of the assessee from international transactions having regard to the arm's length price, there is no scope for computing income from non-international transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of 'total sales', also inclusive of sales made to non-AEs, we vacate the impugned order on this issue and restore the matter to the file of the TPO/AO for recalculating the amount of addition of transfer pricing adjustment by taking into consideration the international transactions only to the exclusion of transactions with non-AEs. Assessee appeal is allowed for statistical purposes. - ITA No. 5881/Del/2012 - - - Dated:- 11-5-2016 - SHRI R. S. SYAL, AM AND SHRI KULDIP SINGH, JM For the Petitioner : Himanshu S. Sinha, Advocate For the Respondent : Dr. B.R.R. Kumar, Sr. DR ORDER PER R.S. SYAL, AM This appeal by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) on 28.9.2012 under section 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chosen by him. By applying the average operating profit margin at 8.82% of three comparable companies, the TPO proposed transfer pricing adjustment amounting to ₹ 2,74,69,498/-. The AO included this amount in his draft order, which was assailed by the assessee before the Dispute Resolution Panel (DRP). No relief was allowed by the Panel. Ultimately, the AO made an addition of ₹ 2.74 crore on account of transfer pricing adjustment. The assessee is aggrieved against this addition. This addition has been challenged on three major counts, namely, comparables, non-granting of working capital adjustment and making transfer pricing addition on entity level figures. We will deal with these three major issues in seriatim. I. COMPARABLES 3. The ld. AR assailed the non-inclusion of Kusalava International Ltd. in the final set of comparables. Before espousing the comparability or otherwise of this company, we deem it appropriate to consider the functional profile of the assessee company. A copy of Transfer pricing study report is available on pages 81 onwards of the paper book. Page 83 gives brief profile of the assessee as a company engaged in the business of manufacturing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n product lines manufactured by Kusalava International Ltd. and the assessee. 5. We find that there is not much discussion in the order of the TPO about the functional profile of Kusalava International Ltd. The TPO simply excluded this company from the list of comparables by observing that it has entered into a phase of losses. In the immediately next para on the same page No.15, the TPO has remarkably observed as under:- In the like manner as the assessee has proposed above fresh comparables I also propose some new comparable in equal numbers from my search from having similar line of product. After inclusion of the fresh comparables of the assessee as well as of the dept the position of the margin shoots to 10.80 detailed as under :- India Nippon Electricals Ltd. 120.23 9.74 8.88 Lucas TVS 958.29 8.34 7.70 Auto Ignition Ltd. 132.89 10.97 9.88 Varroc Engineering 629.22 13.90 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... just, fair and equitable to also consider the other seven companies selected by the TPO from the angle of comparability. A line of distinction needs to be drawn between the cases in which the TPO ignores some companies on the basis of some logical reasons after referring to them as comparable in his order and the cases in which the TPO does not refer to any new company as comparable. Whereas in the first set of cases, there is full justification for directing the consideration of such companies as comparable on parity, of course, after due opportunity to the assessee, in the second set of cases, there can be no rationale in requiring the TPO to once again initiate a fresh process of search for finding out new companies in the circumstances as are prevailing before us. Extantly, we are covered under the first situation in which the TPO referred to seven new companies as comparable in his order but ignored them on the touchstone of parity in not considering any new company as comparable including those proposed by the assessee. Once, the assessee has assailed the non-inclusion of its company, namely, Kusalava International, which it is also lawfully entitled to and we accept such co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed because the assessee failed to demonstrate that the difference in the working capital deployed was making a difference in the margin earned by the assessee and comparables. On the contrary, the ld. AR has drawn our attention towards the details furnished by the assessee for claiming working capital adjustment. It is vivid that the working capital adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back the dues to its suppliers, which reduces the interest cost and increases profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade receivables, as the case may be, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. We, therefore, agree in principle with the grant of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the average adjusted operating profit margin of comparable cases. Such adjusted profit margin of the comparables constitutes benchmark margin, which is then compared with the operating profit margin from the assessee's international transactions with its AE. It is not permissible to make transfer pricing adjustment, by applying the average operating profit margin of the comparables on the assessee's universal transactions entered into with both the AEs and non-AEs. As the entire exercise under Chapter-X is confined to computing total income of the assessee from international transactions having regard to the arm's length price, there is no scope for computing income from non-international transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of 'total sales', also inclusive of sales made to non-AEs, we vacate the impugned order on this issue and restore the matter to the file of the TPO/AO for recalculating the amount of addition of transfer pricing adjustment by taking into consideration the international transactions only to the exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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