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TMI Blog2022 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... determination of ALP should be remanded to the AO/TPO for determination a fresh in the light of observations made by us in this order. The AO/TPO shall afford assessee opportunity of being heard. Accordingly, the order of the AO is set aside and issue is remanded to the AO/TPO. Foreign exchange fluctuations adjustment - HELD THAT:- We observe that the TPO and the DRP have not properly analysed the submissions of the Assessee. There is no analysis whether there was any adverse foreign exchange fluctuations during the relevant assessment year, which is abnormal in nature and what is its effect on the operating margin of the Assessee and the comparables. These aspects needs to be analysed. In the given facts and circumstances of the case, we are of the view that it would be just and appropriate to set aside the impugned Order on this issue and remand the issue to the TPO. Not granting of working capital adjustment - HELD THAT:- We have considered the rival submissions and perused the material on record, including the judicial pronouncements cited. We find that the assessee has filed the computation of working capital adjustment before the DRP, but the DRP has not considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e OPM. Thus, in the TP study, it was concluded that international transactions are at arm's length. 4. The TPO rejected the comparables set taken by the assessee. The TPO conducted a fresh TP analysis and selected a set of 6 comparable companies and arrived at OPM of comparables at 4.37%. After rejecting the adjustments made by the assessee, the TPO arrived at OPM of the assessee at -10.82%. The TPO therefore proposed a TP adjustment of Rs. 4,69,48,996. 5. Aggrieved by the above TP adjustment, the assessee filed objections before the DRP. The DRP rejected the objections of the assessee. In fact the DRP enhanced the TP adjustment to Rs. 12,96,10,400 by directing the TPO to recompute the TP adjustment without giving the benefit of proportionate adjustment on account of local purchases. Pursuant to the DRP's directions, the final assessment order was passed. 6. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. The assessee has filed a paper book enclosing therein the TP study, the financials etc. The learned AR has filed a brief written submission. The contentions raised are summarized as follows:- The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in the case of IKA India P. Ltd. 101 taxmann.com 276. 7. The learned Departmental Representative has filed a brief submission supporting the orders of the TPO and the DRP. 8. We have heard the rival submissions and perused the material on record. The assessee has submitted that the TPO has done fresh/TP analysis but did not furnish the search process and the accept/reject matrix, while selecting fresh set of comparables. The assessee has also submitted that the DRP has not considered the detailed submissions made by the assessee on various issues. We observe that the TPO has given the search process in para 4.1.1 of Order u/s. 92CA. However, the assessee is objecting to search process and key words used. This issue is not addressed by the TPO or DRP. On the issue of comparable selection, we observe that the DRP has not properly analyse the submissions of the Assessee. The DRP has made general observation that TNMM requires broadly similar comparables and exactly similar companies are not required. This is not proper reason and TPO/DRP are duty bound to specifically analyse the comparables submitted by the Assessee and the Assessee's objection to the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment ought to have been made by AO/TPO. Therefore, this issue is restored to the files of the AO/TPO. The AO/TPO is directed to allow depreciation adjustment if they notice the rate of depreciation are different in the case of the assessee and the comparable cases. Therefore, ground 4 is allowed for statistical purposes. 11. However, we observe that there is no analysis with respect to depreciation policy of the assessee and comparable cases. Therefore, we are of the view that let this matter be re-examined by the TPO/AO afresh. The assessee should demonstrate whether there is any difference in depreciation policy of the assessee and the comparable companies and what is its impact on the computation of arm's length price. If the assessee is able to demonstrate the same, the TPO may allow reasonable depreciation adjustment while determining the ALP for the international transactions. 12. On the issue of capacity adjustment, we find that the settled law is that adjustment on account of capacity utilization has to be granted. In this regard, the Tribunal in the case of IKA India has held as follows:- 22. We have heard the submissions of the assessee and the Ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions Para 1.36 of the OECD Guidelines states as follows: .... material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties. Further, Para 2.74 of the OECD Guidelines while laying down the comparability criteria to be adopted while applying the transaction net margin method states as follows: ..... Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant extract is reproduced as below: 10. .......... We are of the considered view that underutilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. (ii) In the ruling of DCIT Vs. Panasonic AVC Networks India Co Ltd. (I.T.A. No.: 4620/Del/2011), it was held that:- 5. ..... Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. (iii) In the case of Biesse Manufacturing Company Limited (IT(TP) A Nos. 97 493/Bang/2015) for AY 2010-11, the Tribunal held as follows: 10.4.1. We have heard the rival contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). 29. In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making reasonably accurate adjustments for eliminating any material differences between the two transactions being compared. The purpose or intent of the comparability analysis is to examine as to whether or not, the values stated for the international transactions are at ALP i.e., whether the price charges is comparable to the price charges under an uncontrolled transaction of similar nature. The regulations don't restrict or provide that the adjustments cannot be made on the results of the tested party. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per subclause (i) of rule 10B(1)(e) of the Rules itself. The absence of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e this issue relating to adjustment on account of capacity utilization in the case of assessee company to the file of AO/TPO for deciding the same afresh keeping in view the said guidelines. If the exact details of capacity utilization of the comparable companies are not available in the public domain, the AO/TPO is directed to obtain the same directly from the concerned parties and to decide this issue afresh after giving assessee an opportunity of being heard. (Emphasis Supplied) 33. Accordingly, we direct the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as-- Installed Capacity, Actual Production in Units, Break-up of Fixed Cost and Variable Cost; Segmental/product wise information, if any. 34. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Ground No. 7 is decided accordingly. 13. Accordingly, we set aside the issue to the files of the AO/TPO directing to follow the directions given in the case of IKA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect of any such differences. These are called comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the com parables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013 J 38 taxmann.com 231/[2014 J 61 SOT 40. That decision was based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 1 OB(1)(e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the difference ..... X X X X Extracts X X X X X X X X Extracts X X X X
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