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TMI Blog2018 (4) TMI 1637X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard and hold that the margins of said concern be applied to benchmark international transactions of the assessee with its associated enterprises. However, we direct the Assessing Officer to exclude cost of ₹ 147.33 lakhs while working out the margins of said concern to be applied in order to determine mean margins of comparables. AO shall re-work the margins in line with our directions and compute the mean margins of comparables accordingly and determine the arm's length price of international transactions. Accordingly, the ground of appeal No.3 raised by the assessee is allowed. Non-allowability of working capital adjustment - Held that:- Authorized Representative for the assessee here pointed out that the DRP in para 2.4 had directed the Assessing Officer / TPO to allow working capital adjustment but the Assessing Officer / TPO have failed to follow the directions of DRP. Accordingly, we direct the Assessing Officer / TPO to comply with directions of DRP and allow working capital adjustment in accordance with law and the settled legal position on the issue and work out the adjustment on account of arm's length price. Computation of correct operating margins of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of appeal raised by the assessee is thus, allowed. - ITA No.760/PUN/2015, ITA No.764/PUN/2015 - - - Dated:- 25-4-2018 - MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM For the Appellant : Shri Nikhil Pathak For the Respondent : Shri Rajeev Kumar, CIT ORDER PER SUSHMA CHOWLA, JM: The cross appeals filed by the assessee and Revenue are against order of DCIT, Circle 7, Pune, dated 27.03.2014 relating to assessment year 2010-11 passed under section 143(3) r.w.s. 144C of Income Tax Act 1961 (in short the Act ). 2. The cross appeals filed by the assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The assessee in ITA No.760/PUN/2015 has filed the following abridged grounds of appeal:- 1] The learned A.O. / DRP erred in computing the Arm's Length Price (ALP) of the international transactions of exports to the AE by holding that the assessee company should have earned operating margin of around 11.76% as against 3.98% earned by the assessee company and thereby erred in making an addition of ₹ 4,58,16,961/-. 2] The learned A.O./ DRP erred in holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company as well as comparable company. 6. Briefly, in the facts of the case, the assessee had furnished return of income declaring total income of ₹ 1,36,81,299/-. The case of assessee was selected for scrutiny. Since the assessee had entered into international transactions with its associated enterprises, the Assessing Officer made reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act. The assessee was engaged in the activity of manufacturing and marketing of measuring instruments such as pressure gauges, pressure transmitters, chemical seals, thermometers, temperature transmitters and components and tools for refrigeration and air conditioning systems. The assessee company mainly carried out assembly operations of the components imported from its associated enterprises. Majority of import of components of assessee company were from its parent company WIKA Germany. The TPO observed that the manufacturing activity carried on by the assessee in India related to assembly of components, welding of components, calibration and final adjustment of instruments, filling of liquid in the casing of the instrument, leakage testing by helium leak te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptional year for Aplab Ltd. 7. The second concern which was included by the TPO was Areva T D India Ltd. The TPO noted that the said concern was considered as comparable by the assessee in assessment year 2009-10 and hence, the same was proposed to be included in the year under appeal also. On the other hand, the assessee contended that the said concern had failed the turnover filter criteria, wherein the turnover of the said concern for the year ending 31.12.2009 was ₹ 3724.12 crores, whereas the turnover of assessee was only ₹ 57.55 crores. The assessee contended that Areva T D India Ltd. was very large company in all respects i.e. 64 times bigger than the assessee. Another point which was raised was that the said concern provides global solutions to industrial partners in their end for flawless energy and the main areas of business were selling project items, all types of switchgears and transformers and reactors, etc. The assessee claimed to be engaged in un-related business. However, the TPO rejected the contention of assessee on the ground that turnover perse was not a comparability factor. As regards functional comparability, it was pointed out that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in appeal against the above said adjustment and the Revenue is in appeal against the directions of DRP. 11. Now, we shall take up the appeal filed by the assessee. The first ground of appeal raised by the assessee is general in nature and the same is dismissed. 12. The issue in ground of appeal No.2 raised by the assessee is that only pneumatic segment of Schrader Duncan Ltd. should be considered as comparable company or at best, the said company should have been excluded from the list of comparable entities. The learned Authorized Representative for the assessee pointed out that the issue of TP adjustment on similar grounds arose before the Tribunal in assessee s own case relating to assessment year 2009-10. The Tribunal in cross appeals i.e. ITA No.513/PN/2014 appeal filed by assessee and ITA No.609/PN/2014 i.e. appeal filed by Revenue, vide order dated 29.05.2015 deliberated upon the issue of TP adjustment in the case of assessee on account of its transactions with associated enterprises. The Tribunal vide para 32 onwards decided various facets of transfer pricing adjustment which were raised by the assessee and the Revenue in their respective appeals. The learned Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / exclusion of Schrader Duncan Ltd. and the segmental details to be applied or not, arose before the Tribunal. After considering rival contentions and noting down the activities of the said concern, the Tribunal held vide para 37 that the said concern is to be excluded from final set of comparables while benchmarking international transactions of assessee. The relevant para reads as under:- 37. Now, coming to alternate plea of the assessee i.e. whether the results of both the segments of Shrader Duncan Ltd. were to be considered for determining the arm's length price of international transaction. The objection of the assessee before the authorities below and also before us is whether the only segmental margins of pneumatic division of Shrader Duncan Ltd. are to be applied to benchmark the international transactions of the assessee. The case of the assessee before us was that it was engaged mainly in the manufacturing of measuring instruments, which in turn, were used in various industries, but the same were not pneumatic products. On the other hand, the comparable i.e. Shrader Duncan Ltd. was engaged in two fields i.e. automotive industry and pneumatic industry. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id company i.e. Shrader Duncan Ltd. is functionally dissimilar to the assessee and consequently, the margins shown by the said company cannot be applied in order to benchmark the international transaction of the assessee. For benchmarking the international transaction of the assessee, it is paramount that the comparables which are selected should be functionally similar and in case the same are not functionally same, the said company cannot be picked up as a comparable. Such was the ratio laid down by Special Bench of Chandigarh Tribunal in DCIT Vs. Quark System Pvt. Ltd. (2010) 132 TTJ Chd (SB) (1). Another aspect of the issue is that where the assessee himself had picked up certain companies in its list of comparables, can the same be excluded from the final list of comparables. Similar issue arose before Special Bench of Chandigarh Tribunal in DCIT Vs. Quark System Pvt. Ltd. (supra), wherein it was held that the taxpayer cannot be estopped from pointing out a mistake in the assessment though such mistake was a result of evidence adduced by the taxpayer. Following the same parity of reasoning, we hold that the said company Shrader Duncan Ltd. is to be excluded from the final list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any was in designing, manufacturing and installing complete range of high and medium voltage products and also secondary distribution equipment for the electricity transmission and distribution networks. On the other hand, the assessee was engaged in the activity of manufacturing and marketing of measuring instruments. The assessee was engaged in the assembly operations of components imported from its AEs and the activity involved assembly of components, building of components, calibrations and final adjustment of instruments, etc. The comparisons of the business carried on by the assessee and that carried on by Areva T D India Ltd. reflects that the same are not comparables. Where the business of the selected company is not comparable with that of the tested company, then the same cannot be picked up as a comparable, as the results shown by such company cannot be matched with the results of tested company, to work out whether the international transaction carried on by the tested party is at arm's length price. The assessee had applied turnover filter of ₹ 600 crores and all the companies whose turnover was more than ₹ 600 crores were excluded. The margins of Are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores due to general recession in the market. The learned Authorized Representative for the assessee pointed out that the Delhi Bench of Tribunal in Honda Motorcycle Scooters India (P.) Ltd. (2015) 56 taxmann.com 237 (Delhi Trib.) had held that no adjustment to operating margins is to be allowed because of strike of employees. The learned Authorized Representative for the assessee further referred to the observations of DRP at page 38 of Appeal Memo, wherein it was observed that 8 days strike do not make any impact on the operations. The learned Authorized Representative for the assessee stressed that the strike related expenses can be excluded while working out the margins of said concern. 21. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below. 22. We have heard the rival contentions and perused the record. The issue vide ground of appeal No.3 is against rejection of Aplab Ltd. on the ground of extraordinary event by the TPO, which has been confirmed by the DRP. The assessee had selected Aplab Ltd. as functionally comparable and there is no dispute to the fact that the said concern was functionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer / TPO to allow working capital adjustment but the Assessing Officer / TPO have failed to follow the directions of DRP. Accordingly, we direct the Assessing Officer / TPO to comply with directions of DRP and allow working capital adjustment in accordance with law and the settled legal position on the issue and work out the adjustment on account of arm's length price. We also find that similar issue of non-allowance of adjustment on account of working capital adjustment arose in assessment year 2009-10 and the Tribunal vide para 40 directed the Assessing Officer to re-compute the working capital adjustment in the hands of assessee. Accordingly, the ground of appeal No.4 raised by the assessee is allowed. 26. Now, coming to the issue raised vide ground of appeal No.5 i.e. computation of correct operating margins of assessee. 27. The learned Authorized Representative for the assessee in this regard pointed out that commission income was earned from associated enterprises by using the employees and in earlier year also, the said commission income was part of operating revenue, hence there was no reason to deviate and exclude the said commission income from PLI. The plea o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that all the facts in this regard were available on record and in view of the dictate of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. Vs. CIT (1998) 229 ITR 383 (SC), the said adjustment on account of foreign exchange be allowed in the hands of assessee. The learned Authorized Representative for the assessee relied on the decision of Pune Bench of Tribunal in Approva Systems (P.) Ltd. Vs. CIT (2015) 54 taxmann.com 81 (Pune Trib). 32. We find that the additional ground of appeal raised by the assessee is purely legal in nature and the same is admitted for adjudication. The assessee is aggrieved by non-allowance of adjustment on account of foreign exchange gain. The issue stands settled by various decisions of Tribunal that foreign exchange fluctuation cannot be excluded from computation of operating margins of assessee company. 33. Similar is the proposition laid down by the Pune Bench of Tribunal in Approva Systems (P.) Ltd. Vs. CIT (supra), which in turn, relied on series of decisions of different Benches of Tribunal as mentioned in para 22 of the said order. Following the same parity of reasoning, we direct the Assessing Officer to consider the fore ..... X X X X Extracts X X X X X X X X Extracts X X X X
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