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TMI Blog2023 (2) TMI 1237X X X X Extracts X X X X X X X X Extracts X X X X ..... wire. We also notice from the annual report (pg. 1493 of paper book) that one of the major suppliers for the company is Bharat Dynamics which is a Govt. of India Enterprise, which is a manufacturing base for guided weapon systems. Therefore we see merit in the submission of the ld AR that the company supplies the guided wire for defence activities and therefore not comparable with the assessee who supplies machinery to textile industry. TPO and the DRP have considered the profile of the company as manufacturer of other machinery for textiles, apparel and other industries whereas as per the annual return, the extract of which is reproduced above, the company is engaged in the manufacture of guidance wire and miniature control cable. In view of the discussion, we hold that the functional profile of UMW Industries Ltd. is different from that of the assessee and therefore not comparable. The AO/TPO is directed to exclude the company from list of comparables. Lohia Corporation Ltd. - assessee contended before the TPO and the DRP that the company incurs significant expenditure towards R D which is more than 3% on an average for the previous 3 years and assessee on the other hand i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000. The assessee is in appeal against the final order of assessment passed pursuant to the directions of the DRP. 4. The assessee raised the following grounds :- The grounds mentioned herein below are independent and without prejudice to the other grounds preferred by the Appellant. 1. That on facts and circumstances of the case and in law, the order passed by the Learned AO pursuant to the directions of the Hon'ble Dispute Resolution Panel - 2, Bangalore (Hon'ble Panel' or `Hon'ble DRP'), and the order of the Learned Joint Commissioner of Income tax, Transfer Pricing- Circle 2(1), Bangalore (Teamed TPO') to the extent prejudicial to the Appellant, is bad in law and facts and liable to be quashed. TP related 2. That on the facts and in the circumstances of the case, the Learned AO erred in making a TP adjustment in connection with the Appellant's international transactions by INR 320,400,000. 3. That, on the facts and circumstances of the case, the Learned TPO/ Hon'ble Panel erred in rejecting the TP documentation maintained by the Appellant under Section 92D of the Act. 4. That the Learned AO in pursuance of the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered to this effect. 13. That the Learned AO has erred in not considering the relief provided by the Hon'ble DRP to the Appellant in the assessment order on account of the following ground: The Hon'ble Panel has directed the Learned AO/ TPO to consider the weighted average operating margin of UMW Industries Limited as per its annual report. 14. Based on the facts and circumstances of the present case and in law, the order passed by the Learned AO being not in conformity with the mandatory directions issued by the Hon'ble DRP under section 144C(5) of the Act, is bad in law and void. Other than TP 15. That, on the facts and in the circumstances of the case and in law, the Learned AO in pursuance the directions issued by the Hon'ble Panel erred in not allowing deduction under section 37(1) of the Act, on account of Education Cess and Secondary and Higher Education Cess paid by the Appellant on the assessed income along with income-tax and surcharge for the year under appeal. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39,964 Other Income 1,317 Total Revenue 41,281 Expenses Cost of raw materials consumed 31,658 Changes in inventories of finished goods and work in progress (761) Employee benefit expenses 3,558 Finance cost 17 Depreciation and amortization 1,421 Other Expenses 4,167 Total Expenses 40,060 Operating Profit 1,221 OP/OC 3.05% OP/ OR 2.96% 9. The TPO recomputed the segmental financials by treating the duty drawback as non-operating as below:- Particulars Amount (in Rs) Revenue from operations 41,281 Less: Other Income 1,317 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-operative in nature for computing the operating margin of the assessee. During the year under consideration the assessee has received an amount of INR 491 lakhs as duty drawback. The TPO while reworking the operating margin of the assessee excluded the said sum from the operating income. The DRP confirmed the TPO s decision by relying on the decision of the Supreme Court in the case of Liberty India vs CIT (Civil appeal no.5891 of 2009 dated 31.08.2009). 15. In this regard, the ld. AR submitted that the Duty Draw Back (DDB) is a benefit arising out of the business operation of the assessee and therefore should be considered as part of operating income. The ld. AR in this regard relied on the decision of Pune Bench of the Tribunal in the case of Behr India Ltd. (ITA No.645/PN/2013) and also Carraro India P. Ltd. in ITA No.1629/PN/2013. The ld. AR also placed reliance on the decision of the coordinate Bench in Sami Labs. Ltd. in IT(TP)a No.186/Bang/2016. 16. We have heard the rival submissions. The duty drawback is provided to the manufacturer and exporter for the purpose of compensating in the duty component which is already been included in the cost of raw material and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the coordinate bench we hold that the duty draw back should be considered as part of operating income. We remit the issue back to the TPO to verify that export incentive is in respect of turnover of the present year as per the ratio laid down in the above judgement. Needless to say that the assessee be given an opportunity of being heard. It is ordered accordingly. 18. In ground No.8, the assessee contended the inclusion of certain comparables out of which Lakshmi Machine Works Ltd. and Mira Industries P. Ltd. were not pressed during the course of hearing by the ld. AR. UMW Industries Ltd. 19. The ld. AR submitted that the principal activities of the company as per the annual return is that the company is engaged in manufacture of guidance wire and miniature control cable. The ld. AR drew our attention to the Profit loss account of the assessee wherein the revenue from operations is mainly from sale of guidance wire. The ld. AR therefore submitted that the company is functionally not comparable with the assessee which is engaged in the manufacture of textile machinery. The ld. AR submitted that UMW Ltd. is engaged in manufacture of guidance wire used in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o applies innovation and new technology in its business and it obtained technologies from its AE for wich it pays royalty. The objections of the tax payer is rejected in the backdrop of rejection of R D expenses/sales of 3% and payment of royalty by the taxpayer. 24. The ld AR submitted that the company carries its own R D and carries on a full-fledged manufacturing activity based on its own research. The ld AR also submitted that the company has significant intangibles in the nature of copyrights, patents and other operating intangibles which is the result of the R D activities undertaken by it. The ld AR further submitted that the assessee does not conduct any R D activity on its own and relies on the technical know-how of its AE to manufacture the products. Therefore it is submitted that the company is not a suitable comparable. The ld AR also submitted that applying the R D filter is widely accepted by various judicial pronouncements and in this regard relied on the following decision Name of the assessee Appellate Authority Reference BMCSoftware India Pvt Ltd ITAT - Pune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of IKA India Pvt. Ltd. (supra) has considered the issue of restricting the TP adjustment to only the international transactions and held that 54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm's length. This presumption of the CIT(Appeals) is without any basis. He has not demons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method, in the following manner, namely :- (a)**** (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 transaction 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 into such transactions, which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations (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 DECO 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 effect the condition being examined in the methodology (e.g price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid DECO guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding that the following factors have to he 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, (ij) the selection of the appropriate interest rare (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 the profit margins 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 comparables was the only reliable basis of determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 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 debtors of 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 rates of interest applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In view of the above, we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee. 31. Respectfully following the above decision of the Co-ordinate Bench we hold that the working capital adjustment is to be allowed as per actuals, after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/ AO are accordingly directed. 32. The assessee has also raised an additional ground which reads as under:- 16. The Learned Assessing Officer/Learned Transfer Pricing Officer erred in rejecting the transfer pricing documentation maintained by the Appellant, in compliance with Section 92D of the Income-tax Act, 1961 read with relevant Income-tax Rules, 1962, thereby rejecting the comparable companies selected by in the transfer pricing documentation. The Appellant prays for the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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