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TMI Blog2023 (3) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... al trial services for its Associated Enterprises (AE). 2.2. During the year under consideration, the assessee has earned a margin of 13.89% on cost (excluding pass through costs). The international transactions undertaken by the assessee were benchmarked using the Transactional Net Margin Method (`TNMM.) and adopting the Profit Level Indicator (PLI) of Operating Profit / Total Cost (OP/TC). 2.3. The assessee conducted a detailed search for comparable companies and arrived at a set of 5 companies whose arithmetic mean margin was computed as 9.81%. Since the assessee had earned a higher margin i.e., 13.89% than the comparable companies, the international transactions were determined to be at Arm's length. 2.4. During the assessment proceedings, the Ld. Transfer Pricing Officer (TPO) has considered the pass-through cost as a part of the assessee's cost-base and thereby recomputed the margin (operating profit/operating costs) of the assessee at 9.42% (refer Pg. no. 33 of TPO Order). 2.5. Further, the Ld. TPO also rejected the assessee's benchmarking analysis and conducted a fresh search for comparable companies. After considering the various submissions made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable, only if the RPT transaction fits within the relevant criteria of 25% as applied by the Ld.TPO. 6. Syngene International Ltd. 6.1 The Ld.AR submitted that, this comparable is engaged in providing contract research and manufacturing services. He submitted that this comparable has dedicated R&D centres, discovery services and development and manufacturing services. Development and manufacturing services includes manufacturing of molecules for clinical supplies and commercialization. 6.2 The Ld.AR referred to the annual report placed at pages 666 and 667 of the paper book wherein all the above details have been referred to. Further, he submitted that in the notes to the financial statement at page 743, this company also renders services in the stream of discovery chemistry and biology services, toxicology, pharmaceutical development, process development / manufacture of advanced intermediates, active pharmaceutical ingredients and bio-therapeutics. We therefore direct the Ld.TPO to exclude this company from the list. Accordingly, Ground no. 4 raised by assessee stands allowed partly. 7. Ground no. 5 is raised by assessee seeking working capital adjustment. It is submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely ;- (a) to (b)** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: ♦ None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or ♦ Reasonably accurate adjustments can be made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 23. The aforesaid decision clearly lays down the proposition that working capital adjustment is to be given effect to while determining ALP while adopting TNMM method. Respectfully following the said decision, we allow this issue in favour of the assessee." Respectfully following the above, we direct the Ld.AO/TPO to compute the Working Capital Adjustment on actuals. The assessee has also sought risk adjustment in this ground which may be considered by the Ld.TPO only if the assessee is able to establish the difference in risk undertaken by assessee with the comparables that remains for computing the margin. Accordingly, this ground raised by assessee stands allowed. 8. Ground no. 6 is in respect of treating the recovery of passthrough cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction." 9. Considering the fact that there is no change in facts and the nature of pass-through costs being identical, respectfully following the above view taken by this Tribunal, in assessee's own case for A.Y. 2013-14, we hold that the recovery of expenses is a separate international transaction that needs to be determined and the Ld.TPO has rightly computed the markup of such transaction. Accordingly, this ground raised by assessee stands dismissed. Except for the above grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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