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TMI Blog2018 (6) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... esent its case by the TPO. We, however, also direct that the assessee will not be at liberty to pray for inclusion of any other new comparables except the 6 comparables which it has already requested for inclusion before the TPO. Working capital adjustment - Held that:- As seen that the TPO has not allowed working capital adjustment to be made to the results of the companies selected by him on account of differences between the working capital requirements of the assessee vis-à-vis these companies. The TPO is directed to allow working capital adjustments to the assessee as per law while carrying out the fresh comparability analysis which has been restored to him Allow the assessee the benefit of proportionate adjustment to the assessee as per law and restrict the adjustment only in respect of international transaction. Calculation of operating margins of the assessee vis-a-vis the comparables selected by the TPO. These grounds are also restored to the file of the TPO for being adjudicated a fresh after duly considering the submissions of the assessee as well as the evidences being filed in support of the same. Disallowance of royalty and disallowance pertaining to provision for bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts spare parts 126,155 TNMM using OP/TC as the PLI 8.00% 5.21% using multiple year data 2. Purchase of finished goods 1,491,874 3. Export of finished goods 7,253,726 4. Payment of royalty 86,491,631 5. Payment of application cost 13,437,657 6. Payment of technical service fee 4,769,617 7. Payment of communication expenses 1,292,598 8. Training expenses 1,577,974 9. Miscellaneous receipts 3,068,780 10. Reimbursement of expenses from group companies 1,996,839 CUP NA NA 2.1 Reference was made to the Transfer Pricing Officer (TPO) and during the course of Transfer Pricing proceedings the TPO directed the assessee to submit current year data, i.e. pertaining to financial year 2005-06, for the comparable companies considered in the transfer pricing study. The assessee submitted before the TPO that in case the information available at the time of assessment proceedings is to be used, then instead of merely updating the financial results of the comparable companies, a fresh search ought to be conducted so that the additional companies for which data for financial year 2005-06 was available at the time of assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a further disallowance of ₹ 22,34,415/- in respect of provision for bad and doubtful debts. The draft assessment order was passed proposing to assess the total income of the assessee at ₹ 401,536,300/- as against the returned income of ₹ 368,761,248/-. 2.6 Aggrieved, the assessee approached the Ld. DRP and raised its objections before it. However, the Ld. DRP upheld the order of the TPO/AO with regard to the transfer pricing adjustment as well as the disallowance pertaining to royalty and provision for bad and doubtful debts. 2.7 Now, the assessee has approached the ITAT and has challenged the final assessment order passed subsequent to the directions of the Ld. DRP by raising the following grounds of appeal :- "1.The Learned Dispute Resolution Panel ("Ld. DRP") and the Learned Assistant Commissioner of Income-tax ("Ld. AO") (following the directions of the Ld. DRP), erred on facts and in law, in enhancing the income of the appellant by ₹ 115,226,756, on account of the Transfer Pricing ('TP') adjustment u/s 92CA(3) of the Income Tax Act, 1961 ('Act') made by the Learned Deputy Commissioner of Income-tax, Transfer Pricing Officer - l(4) ("Ld. TPO"), b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh search for companies himself and not sharing the detailed step by step search strategy followed to arrive at the final set of 3 companies in the TP order on the basis of which the ALP was determined. 7.TheLd.DRP and the Ld.AO(following the directions of the Ld.DRP), erred on facts andin law, in upholding the Ld. TPO's stance of resorting to arbitrary rejection of low-profit/ loss making companies, based on erroneous and inconsistent reasons, and selecting only high-profit making companies, thus deriving a narrow/ incorrect/ unrepresentative industry set for benchmarking the operating profit margin earned by the appellant, and demonstrating an intention to arrive at a pre-formulated opinion and make an addition to the returned income of the appellant, without complete and adequate application of mind. 8. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law, in upholding the Ld. TPO's stance of applying (for the purpose of benchmarking/ economic analysis) a much narrower/ incorrect/ unrepresentative economic activity criteria of 'auto electrical components' as against a much broader/ representative economic activity criteria of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made to the results of the companies selected by the Ld. TPO on account of differences between the working capital requirements of the appellant vis-a-vis these companies. 16.The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law,4n not allowing a comparability adjustment to be made on account of differences in levels of indigenization between the appellant and the companies selected by the Ld. TPO. 17. The Ld. DRPand the Ld. AO (following the directions of the Ld.DRP),erred on facts and in law, in upholding the Ld. TPO's stance of considering incorrect OP/ TC margin number of the appellant in the TP order. 18. The Ld. DRPand the Ld. AO (following the directions of the Ld.DRP),erred on facts and in law, in upholding the Ld. TPO's stance of making various statements/ averments merely based on conjectures/ surmises and unsound presumptions, which were not in accordance with the facts of the case, thereby making a high pitched assessment. 19. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law, in upholding the Ld. TPO's stance of making an adjustment to the international related par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AO erred on facts and in law, in making a disallowance of ₹ 2,234,415 being provision for bad and doubtful debts, when the same has been reduced from Loans and Advances under the assets side of the balance sheet and is thus in the nature of actual write off in view of the decision of the Apex Court in the case of Vijaya Bank vs CIT. 3. The Ld. AR submitted that the TPO had adopted an inappropriate benchmarking approach. It was submitted that in the show-cause notice, the TPO had proposed to consider 4 companies engaged in the sale of electrical auto components such as head lamps, starter motor, alternator, switches, ignition units, etc. for ALP determination and in response, the assessee had argued that TNMM is more tolerant to product differences if forming part of the same industry and thus proposed following additional comparable companies which are engaged in the manufacturing of auto lamps similar to the India Japan Lighting Ltd. These companies were as under: • Autolite (India) Ltd., • Fiem Industries Ltd., • Halonix Ltd., • Jagan Lamps Ltd., • Lumax Industries Ltd.; and • S L Lumax Ltd. 3.1 It was submitted that the TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paro Maruti Limited • Ghatge Patil Industries Limited • Shriram Foundry Limited • Sona Koyo Steering Systems Limited • X L O India Limited • Wheels India Limited • P H C Manufacturing Pvt. Ltd. 3.3 Coming to the next issue in dispute, it was submitted that the TPO did not allow a working capital adjustment to be made to the results of the companies selected by him on account of differences between the working capital requirements of the appellant vis-a- vis these companies. It was submitted that the rationale for seeking working capital adjustment was explained to the TPO in great detail by the assessee and in doing so reliance had been placed by the assessee on various guidelines (OECD Draft Notes on Comparability released on May 10, 2006 (OECD Draft Notes) and judicial rulings which clearly emphasized the importance of appropriate comparability adjustments including working capital adjustment for determining the ALP but the same was disregarded. 3.4 Coming to the issue of disallowing proportionate adjustment in respect of international transactions, it was submitted by the Ld. AR that by arriving at an arm's length OP/TC margin of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's own case for earlier assessment year. A copy of the said judgment was placed before us. 3.7 With respect to the grounds pertaining to disallowance of provision for bad and doubtful debts, it was submitted that the assessee had filed additional objections before the Ld. DRP but the Ld. DRP had not passed speaking directions on the objections. 4. In response, the Ld. Sr. Departmental Representative placed heavily reliance on the order of the TPO as well as the directions of the Ld. DRP. It was vehemently argued by the Ld. Sr. DR that the TPO had selected the comparables after conducting a proper search process and had excluded the comparables after considering the FAR of the comparables. It was further submitted that there was no need for any variation in the order of the TPO which had subsequently been upheld by the Ld. DRP. The Ld. Sr. DR also vehemently argued that the working capital adjustment as claimed by the assessee had been rightly rejected and further there was no requirement for proportionate adjustment in the case of only international transaction as claimed by the assessee. The Ld. Sr. DR also submitted that there was no need for rectifying the operating margin of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dences and submissions of the assessee in this regard. The assessee shall be given due opportunity to present its case by the TPO. We, however, also direct that the assessee will not be at liberty to pray for inclusion of any other new comparables except the 6 comparables which it has already requested for inclusion before the TPO. We also further direct that the assessee shall also not be at liberty to pray for exclusion of any other comparable except those comparables whose exclusion it has already prayed before the TPO/Ld. DRP. Thus, these grounds are allowed for statistical purposes. 5.1 Coming to the issue of working capital adjustment, it is seen that the TPO has not allowed working capital adjustment to be made to the results of the companies selected by him on account of differences between the working capital requirements of the assessee vis-à-vis these companies. The TPO is directed to allow working capital adjustments to the assessee as per law while carrying out the fresh comparability analysis which has been restored to him. Thus, these grounds also stand allowed for statistical purposes. 5.2 The next ground for agitation by the assessee is regarding proportio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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