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TMI Blog2021 (7) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ated Enterprises (AEs). The assessee reported certain international transactions in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining their Arm's Length Price (ALP). The TPO accepted other international transactions at ALP except the transactions relating to the Manufacturing operations, thereby covering the transactions of purchase of raw material and sale of products. The assessee employed the Cost Plus Method (CPM) in its Transfer pricing analysis for benchmarking the Manufacturing transactions. The TPO rejected the CPM and deployed the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of Operating Profit/Sales. He, accordingly, worked out the assessee's PLI at 2.35%. Out of eight companies chosen by the assessee as comparable, the TPO rejected four. With the remaining four companies, having average PLI at 6.43%, the TPO worked out the transfer pricing adjustment of Rs. 1,03,82,325/-. The Assessing Officer (AO) finalized the assessment u/s. 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961 (hereinafter also called 'the Act') with the transfer pricing addition of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionale behind allowing working capital adjustment. Under the TNMM, operating profit margin (in percentage terms) of an assessee is compared with that of the comparables so as to ascertain if the assessee's international transaction is at ALP. Assessees adopt different policies for conducting their business. One assessee may have a policy of allowing less time to trade debtors for payment or may have only cash sales with no debtors, while another may be allowing more time with the ultimate effect of less or more trade debtors. When a company allows more time to the trade debtors for payment, it naturally pushes up the sale price so as to include corresponding interest cost in it. In case of cash sale, the price charged is relatively screwed because of having no element of interest cost in the sale price. Thus in a case of allowing more time to trade debtors for payment, sale price and the resultant profit from sale increases in comparison with a company which allows lesser time to trade debtors for payment. Similar is the position as regards purchases. More the amount of trade creditors means costly purchases followed by lower profit and vice versa. Ergo, relatively high workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit margin is concerned. Thus, advances to suppliers and advances from customers are integral part of working capital adjustment in the same way in which there are trade receivables and trade creditors. Such advances, ergo, cannot be excluded in computing the working capital adjustment. Reference to trade receivables and trade payables in the example given in Annexure to Chapter III of the OECD transfer pricing Guidelines, 2010 should be construed as including advances to suppliers and advances from customers. It is only for simplification purpose that the example refers to trade receivables and trade payables to the exclusion of advances to suppliers and advances from customers. We, therefore, amplify the direction of the ld. CIT(A) to the AO/TPO for adopting the method of working capital adjustment as provided in the example given in Chapter III of the OECD Guidelines by also considering Advances to suppliers and Advances from customers, in the same way as Trade receivables and Trade payables. 5.7. The figures of Advances to suppliers and Advances from customers, as given by the assessee for the first time before the ld. CIT(A) pertaining to self and the comparables, hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s palpable that the overall PLI of this company at (-) 41.54% imbibes the effect not only of its manufacturing activity but also that of rendering services, which is not minuscule. On a pertinent query, the ld. AR fairly conceded that no independent Manufacturing segmental information of this company is available. As against that, the segment of the assessee under consideration is only Manufacturing. We have noted above that the assessee also entered into the international transaction of rendering services. However that transaction was benchmarked separately by the assessee and the TPO did not dispute that it was at ALP. Thus, the only segment of the assessee under consideration is that of Manufacturing de hors Services. In that view of the matter, the companies doing Manufacturing only or having an independent manufacturing segment qualify for comparison. Since the Revenue from sale of services of Fives Cail KCP Ltd. constitutes a substantial portion in the overall kitty, it does not qualify as a good comparable. 6.4. Now we turn to the main plank of the submissions of the ld. AR that since this company's sale from Manufacturing activity at around 83%, passes the filter of Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only if it is either exclusively in Manufacturing or if it is not so exclusively in manufacturing (having 75% or more as manufacturing), but its segmental information of the Manufacturing is separately available. 6.6. Adverting to the facts of the extant case, we find that Fives Cail KCP Ltd. passes the filter of Manufacturing sales not less than 75% of the total sales and ex consequenti the company level test is through, but it fails the transaction level test inasmuch as it is albeit largely a manufacturing company but also has service income of 17% of its total revenue and admittedly no segmental information for the Manufacturing activity is available. So, this company having manufacturing activity at 83% cannot be considered as comparable to the international transaction under consideration of 100% Manufacturing activity. We, therefore accord our imprimatur to the exclusion of this company from the list of comparable. 7. To sum up, we set aside the impugned order and send the matter back to the AO/TPO for redetermining the ALP in conformity with directions given hereinabove. Needless to say, the assessee will be allowed reasonable opportunity of being heard. 8. In the result ..... 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