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TMI Blog2023 (4) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO has accepted the overall margin of the trading segment which included the AMP expenses as part of the operating cost. Accordingly, we delete the adjustment made by the TPO. TPO considering incorrect margins - As prayed to direct the Ld. TPO to rectify the above Arithmetical errors in computation of the weighted average of operating margin to operating cost ratio (`OP/OC') margin of the company - HELD THAT:- As considering the submissions, remit the issue back to the TPO to consider the correct margins of the above companies. Working capital adjustment - HELD THAT:- It is a settled position that working capital adjustment need to be given while computing the ALP - We direct the Ld.AO/TPO to compute the working capital adjustment while computing the operating margin of the comparables following the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India P. Ltd. [ 2018 (10) TMI 1796 - ITAT BANGALORE] - SMT. BEENA PILLAI, JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Appellant : Shri Padamchand Khincha, CA For the Respondent : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. ORDER Per Padmavathy S., Accountant Member This appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depicting features of new products, providing information to the public about details of product, its specification etc. The aforesaid advertisement and business promotion activities undertaken by the Assessee are specific to the products sold in India. Given that the selling of the products in India is the function of the Assessee, there are no approvals sought by the Assessee in connection with the incurrence of said expenses which influences the volume of sales of the Assessee. The advertisement contents are decided by the Assessee and the said expenses do not require any approval from its AEs. The aforesaid activities are primarily to promote the business of Assessee and the same is done to influence the volume of sales of the Assessee. 8. The TPO held as under in respect of the above AMP adjustment:- Assessee has not confined itself to distribution of trading goods but has performed additional functions in the form of AMP. Therefore, the Company needs to be adequately compensated for such additional functions. (Page 249 of Appeal Set) RPM analysis carried out by the Assessee in the TP Doc is flawed as AMP is not captured while calculating gross margin. (Page 249 of Appeal Set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Relevant observations from the above decision in this context are as under:- 101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/ segregation, it would as noticed above lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(J)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt made in the sales facilitation services segment and administrative and business support services, the assessee raised grounds No.23 to 31. However, during the course of hearing, the ld. AR submitted that if ground Nos.29 30 which read as under, are adjudicated, the rest of the grounds will not be pressed:- 29. The Ld. TPO has erred in complete disregard to the Hon ble DRP direction by not including the comparable MCI Management India Private Limited. 30. The Ld. TPO has erred in computing the margin for PR Pundit Public Relations Private Limited Marketing Communication Advertising Ltd. 16. The ld AR submitted with regard to MCI Management India Private Limited that the TPO while passing the order giving effect, did not consider the directions given by the DRP. The ld. AR accordingly prayed for remitting the issue back to the TPO for considering the DRP directions properly and recomputed the ALP adjustment in these segments. 17. The ld DR relied on the order of the TPO. 18. We notice that the DRP has given the following directions with regard to the above two comparables. MCI Management India Private Limited: Having considered the submissions. we note that this company was select ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earn a market rate of return on that required capital independent of servicdes that it provides. However, the amount of capital required to support these services varies greatly because the level of inventory, debtor and creditor measured as percentage of total cost varies. It is further submitted that there is an effect on profit from investing in different levels of working capital due to differences reflected in cash collection cycle. The ld. AR therefore prayed that a suitable adjustment for working capital difference between the assessee and the comparables is warranted. The ld AR relied on the following decisions in this regard;- (i) EIT Services (I) P. Ltd. ITA nO.2498/Bang/2019 (ii) Philipps Software Centre P. Ltd. v. ACIT [2018] 26 SOT 226 (iii)Capegemini India P. Ltd. v. ACIT [2013] 27 ITR (Trib) 74 23. We heard the parties and perused the material on record. It is a settled position that working capital adjustment need to be given while computing the ALP and the coordinate Bench has been consistently holding the view in various decisions. 24. We direct the Ld.AO/TPO to compute the working capital adjustment while computing the operating margin of the comparables followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parability of an international transaction [or a 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 parties to the transactions; (d) conditions prevailing in the markets.in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs. of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shal l be comparable to an international transaction [or a specified domestic transaction] if - (i) none of the differences, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest sate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory) 16. Making a working capital adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (vii) 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 ITA No.2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 page 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 1ule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is, not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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