Income Tax Appellate Tribunal - Bangalore
Comer Industries India Private ... vs Assessment Unit Income Tax Department, ... on 27 February, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND
Ms. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No.848/Bang/2022
Assessment year : 2017-18
Comer Industries India Private Limited, Vs. The Assessment Unit,
16-A, Bommasandra Industrial Area, Income Tax Department/
Attibele Hobli, Anekal Taluk, Deputy Commissioner of
Bangalore - 560 099. Income Tax,
PAN: AAGCC 1941H Circle 2(1)(1),
Bengaluru.
APPELLANT RESPONDENT
Appellant by : Shri Balasubramanyam, CA
Respondent by : Ms.Neera Malhotra, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 21.02.2023
Date of Pronouncement : 27.02.2023
ORDER
Per Padmavathy S., Accountant Member
This appeal is against the final order of assessment passed by AO, Assessment Unit, Income Tax Department dated 20.7.2022 for the AY 2017-18. The assessee is a company incorporated under the Companies Act, 2013 and is the wholly owned subsidiary of Komal Industries SpA. The company is engaged in the manufacture of rigid and steering drive axles. The assessee imports raw materials/components required for the purpose of manufacturing these IT(TP)A No.848/Bang/2022 Page 2 of 23 axles from Komal SpA. The assessee also purchases certain raw materials and components from local vendors in India and the terms of such purchases are determined under the overall supervision of Komal SpA.
2. The assessee filed the return of income for the AY 2017-18 which was processed by CPC u/s. 143(1)(a) vide order dated 2.8.2018 determining an income of Rs.42,89,810. The case was selected for scrutiny on the TP risk parameters i.e., deemed international transactions by persons other than AE in pursuance of a prior agreement and accordingly a reference was made to the TOPO for computation of ALP in relation to the international transactions. The TPO made an adjustment of Rs.3,33,45,649 and the AO passed draft assessment order incorporating the TP adjustment. Aggrieved, the assessee raised its objections before the DRP whereby the TP adjustment was enhanced to Rs.6,63,31,365. Aggrieved by the order of assessment, the assessee is in appeal before the Tribunal.
3. The assessee raised the following grounds:-
1. The impugned order is opposed to law and facts of the case insofar as it is prejudicial to the interest of the Appellant.
2. The order of the Ld. AO and the order of the Ld. DRP under whose directions the impugned assessment order is passed is invalid and bad in law for including Non Associated Enterprise (AE) transactions for the purpose of making upward adjustments to ALP.
3. The order of the Ld.AO and the order of the Ld. DRP under whose directions the impugned assessment order is passed is IT(TP)A No.848/Bang/2022 Page 3 of 23 invalid and bad in law for including the under mentioned companies as comparables for the following reasons:
a. Elecon Engineering Co Limited as the same is functionally dissimilar, fails to meet the turnover criteria and had an extraordinary year due to merger;
b. GKN Driveline (India) Limited since the same fails to meet the turnover criteria;
c. Z F Windpower Coimbatore Private Limited as the same is functionally dissimilar, fails to meet the turnover criteria and operates in a significantly different market in view of its substantial export business;
d. Orbit Bearings India P Limited as it is functionally dissimilar and operates in a significantly different market in view of its substantial export business.
4. The Ld AO and the Ld DRP erred in excluding Sharada Precision Private Limited as a comparable entity for impermissible reasons and in doing so he failed to appreciate that irrespective of the TPO's rejection of the appellant's Transfer pricing study, the appellant is entitled to ask for inclusion of any other comparable at any time during the proceedings so long as the said company is functionally comparable and satisfies the search criteria applied for selecting the other comparables
5. The Ld DRP erred in not adjudicating on the claim of the Appellant for the inclusion of the companies detailed hereunder and in doing so failed to consider that the said companies are functionally comparable and satisfy all the search criteria applied for selecting the other comparables. The companies whose inclusion are not adjudicated are as below:
i. Gajra Gears P Limited ii. Genau Extrusions Limited iii. Hindustan Hardy Limited iv. Jaya Hind Industries Limited v. JMT Auto Limited IT(TP)A No.848/Bang/2022 Page 4 of 23 vi. Mahindra Gears and Transmissions P Ltd vii. Mantri Metallics P Limited viii. Premium Transmissions Limited ix. Ranvik Auto Components P Limited x. Roop Automotive Limited xi. Shanthi Gears Limited xii. Shivam Autotech Limited xiii. ZF Steering Gear (India) Limited
6. The Ld AO erred in excluding Bharat Gears as a comparable by holding that the same is a company having persistent loss without appreciating the fact that the company has made profits in the 3 year period considered and does not satisfy the criteria to be classified as a persistent loss making company.
7. The Ld AO erred in not considering the adjustments to the respective Working Capital position of the Assessee and the Comparable Entities in the computation of the ALP.
8. The Operating Margin of Comparables computed by the Ld. AO is erroneous inasmuch as he has not considered the correct financial information of comparable entities.
4. During the year under consideration, the assessee has entered into the following international transactions.
Particulars Amt (Paid) Amt (Recd) Method
Purchase of raw material 25,32,49,585 TNMM
and components
Purchase of Fixed Assets 21,987 TNMM
Trade Payable 20,50,35,309 TNMM
Royalty Expense 1,60,93,000 CUP
Royalty payable 1,60,93,000 CUP
Reimbursement of expenses 95,441 Other
Sale of Finished goods - 52,62,82,000 TNMM
manufacturing activity
IT(TP)A No.848/Bang/2022
Page 5 of 23
Sale of Services - 50,000 TNMM
manufacturing activity
Trade Receivables - 21,38,19,375 TNMM
manufacturing activity
Purchase of raw material 23,14,13,396 TNMM
and components-
Manufacturing activity
Trade payables - 7,37,88,575 TNMM
manufacturing activity
Total 79,57,90,293 74,01,51,375 153,59,41,668
5. The assessee in the TP study has submitted the following financials determining the margins of the assessee. The assessee has chosen TNMM as the most appropriate method. Operating profit/operating revenue is the profit level indicator. In the TP study, the assessee has chosen 7 comparables as listed below and has applied weighted average of 3 years margins of the comparables for the purpose of benchmarking:-
Sr Name of the company Year wise operating profits/operating No. revenue (%) 2017 2016 2015 Weighted average 1 Sharda Precision Pvt. Ltd. NA -5.17% 7.52% 1.03% 2 Bharat Gears 2.14% 3.98% 2.24% 3.09% 3 GKN Driveline (India) Limited NA 6.98% 1.77% 4.12% 4 Talbros Engineering Ltd. 8.04% 5.82% 7.06% 6.41% 5 Lumax Mannch Allied 13/68 9.35% NA 9.35% Technologies Ltd. % IT(TP)A No.848/Bang/2022 Page 6 of 23 6 RACL Geartech Ltd 9.30% 9.58% 11.10% 10.31% 7 Adroit Industries (India) Ltd. NA 20.89 23.50% 22.19% 35TH Percentile 3 4.12% Median 4 6.41% 65th Percentile 5 9.35%
6. The TPO rejected the filters applied by the assessee and proceeded to apply fresh filters to choose the following final set of comparables :-
Manufacturing Segment Sl.no Company Name OP/OC OP/OR 1 Talbros Engineering Ltd. 6.15 5.80 2 R AC L Geartech Ltd. 10.06 9.14 3 Lumax Mannoh Allied Technologies Ltd. 10.27 9.31 4 Elecon Engineering Co. Ltd. 11.83 10.58 5 G K N Driveline (India) Ltd. 14.38 12.57 6 Z F Wind Power Coimbatore Pvt. Ltd. 20.37 16.93 7 Sona B L W Precision Forgings Ltd. 22.83 18.59 8 Orbit Bearings India Pvt. Ltd. 29.95 23.05 9 Adroit Industries (India) Ltd. 31 32 23.85 35th percentile 11.83 10.58 Median 14.38 12.57 65th percentile 20.37 16.93
7. The TPO accordingly determined the TP adjustment as per below working:-
IT(TP)A No.848/Bang/2022 Page 7 of 23 Sl. Amount Particulars No. (in million) 1 Operating Revenue 54,16,37,364 2 Operating Cost 50,68,99,197 3 Operating Profit (Col.1-2) 3,47,38,167 4 OP/OR (CoI.3/1) 6.41% 5 OP/OC (Co1.3/2) 6.85% 6 Arm's Length OP/OR (Median of 12.57% Comparables margin) 7 Arm's Length OP (Co1.1*6) 6,80,83,816 8 Arm's Length Cost (Col. 1-7) 47,35,53,548 9 Adjustments (Co1.2-8) 3,33,45,649
8. The issues contended by the assessee through various grounds is summarised below -
(i) Ground no.1 - General
(ii) Ground no.2 - Inclusion of non-AE transactions for the
purpose of ALP
(iii) Ground no.3 to 6 - Inclusions and exclusions based on
Turnover filter, functional similarity /dissimilarity, persistent loss filter
(iv) Ground no.7 - Working capital adjustment
(v) Ground no.8 - Considering incorrect margin of comparables
9. Ground 1 being general does not warrant specific adjudication. During the course of hearing the ld AR presented arguments with regard to turnover filter and working capital adjustment. The ld AR IT(TP)A No.848/Bang/2022 Page 8 of 23 further submitted that if the issue of inclusions and exclusions are adjudicated and remitted back based on these two contentions then the rest of the grounds in this regard would become academic.
10. The ld AR submitted that the turnover of the assessee is Rs.52 crores and the TPO while applying the turnover filter did not apply the upper turnover filter of Rs.200 crores.
11. The ld DR submitted that the DRP while considering the objections raised by the assessee has applied the turnover filter of 10 times and therefore supported the order of the DRP. The ld AR as a rebuttal brought to our attention that even companies with more than 10 times turnover have been included and therefore prayed for remitting the issue with a direction to apply upper turnover filter. With regard to working capital adjustment, the ld AR submitted that the coordinate bench of the Tribunal has been consistently holding that the working capital adjustment need to be considered for the purpose of determination of ALP and accordingly prayed for a direction in this regard also.
12. We heard the parties and perused the material on record. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:-
IT(TP)A No.848/Bang/2022 Page 9 of 23 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court.
We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.
17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the IT(TP)A No.848/Bang/2022 Page 10 of 23 ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).
13. In view of the aforesaid decision, we hold that companies whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.
14. With regard to working capital adjustment we notice that the coordinate Bench of this Tribunal in case of Huawei Technologies India P. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein, it was held as under:
IT(TP)A No.848/Bang/2022 Page 11 of 23 "10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows:
Determination of arm's length price under section 92C . 10B. (1) For the purposes of sub-section (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 (d).............
(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 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 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)......
IT(TP)A No.848/Bang/2022 Page 12 of 23 (2) For the purposes of sub-rule (1), the comparability 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 shall be comparable to an international transaction [or a specified domestic transaction] if -
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to 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.
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 IT(TP)A No.848/Bang/2022 Page 13 of 23 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 eliminate the effect of any such differences. These are called "comparability adjustments.
13. In Paragraph 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 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 IT(TP)A No.848/Bang/2022 Page 14 of 23 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 adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that:
• A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) • This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers -- (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 s 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 IT(TP)A No.848/Bang/2022 Page 15 of 23 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.
(vi) 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.
(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. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that 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 Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has held that insisting on daily balances IT(TP)A No.848/Bang/2022 Page 16 of 23 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 Anal is 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 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 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 IT(TP)A No.848/Bang/2022 Page 17 of 23 treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:
"(3) An uncontrolled transaction shall be comparable to an international transaction if--
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
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."
15. We accordingly remit the issue of TP adjustment made back to TPO for a denovo consideration with a direction to keep in mind the above decisions of the coordinate bench with regard to application of turnover filter and working capital adjustment for determination of ALP, taking into account the details submitted by the assessee after allowing an opportunity of hearing to the assessee. It is ordered accordingly.
16. In view of the above decision with regard to TP adjustment, ground no.8 has become academic not warranting a separate adjudication.
17. Ground No.2 is with regard Inclusion of non-AE transactions for the purpose of ALP. In this regard it is submitted that the assessee sold IT(TP)A No.848/Bang/2022 Page 18 of 23 a substantial portion of its product to only one company namely Ajax Fiori India Private Limited which is a resident in India. During the year under consideration the assessee had purchases not only from its Associate Enterprises but also from a number of resident suppliers who have no connection whatsoever with the assessee in terms of control and ownership. However, in the form 3CEB filed for AY 2017-18, the transactions with Ajax Fiori and a large number of suppliers from whom the assessee had purchased raw materials in the ordinary course of business have been treated as Deemed international transaction by the accountant firm. The same has been retained by the Ld. TPO in his order u/s 92CA of the Act. He has proceeded to make adjustments on the basis of OP/OC as well as OP/OR. The ld AR submitted that if at all any adjustment to the Arm's Length Price has to be made, it should be limited to only the international transactions with respect to purchases from AE and not with respect to purchase and sales with resident non related parties.
18. The ld AR drew our attention to the provisions of section 92B which reads as follows -
"Meaning of international transaction. 92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the IT(TP)A No.848/Bang/2022 Page 19 of 23 allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-
section (1), be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not. ..."
19. The ld AR accordingly submitted that a plain reading of the sub- section (1) shows that only transactions between two associated enterprises at least one of whom is a non-resident can be treated as international transactions and that the Associated enterprises have been defined under section 92A of the Act to include entities where control or substantial interest is held by another entity.
20. The ld AR submitted that Ajax Fiori is a private limited company incorporated in India, jointly held by AJAX Engineering, India and Fiori S.p.A, Italy and these entities are not connected to the Comer group which controls the assessee company. Therefore, Ajax Fiori is not an associated enterprise to the assessee according to any of the clauses of 92A(2). Further, the entity is an Indian company and therefore a Resident under the Income tax Act. Thus, section 92B(1) is not attracted in respect of the transactions with this entity. The ld AR further submitted that there have been no agreements between the IT(TP)A No.848/Bang/2022 Page 20 of 23 Comer group (i.e. the AE of the Assessee) and Ajax Fiori in respect of sale made by Comer India and that the terms and conditions of the sale of finished goods to Ajax Fiori is determined between Comer India and Ajax Fiori. The purchases from local resident vendors are on Principal to Principal basis with the vendors and the AE has no role to play in the Terms and Conditions of manufacture. The ld AR accordingly submitted that none of the conditions in 92B(2) are fulfilled and the mere fact that there is only one customer cannot lead to a presumption that the terms are decided by the parent company or any of the AEs. The ld AR further submitted that the TPO has fully relied upon the report of the accountant furnished in form 3CEB and he has not conducted any inquiries of his own on the said deemed international transactions. The ld AR relied on the decision of the Honourable Supreme Court in the case of PFirm [1965] 56 ITR 67 (SC) to contend that there is no estoppel against the assessee from contesting the deemed international transaction specified in clause 20 of auditor's certificate (Form -3CEB).
21. The ld DR relied on the order of the lower authorities.
22. We heard the parties and perused the material on record. From the plain reading of subsection (2) to section 92B as extracted above which is invoked in assessee's case here it is clear that the circumstances where transactions with any entity other than an associated enterprise may be included within the ambit of section 92B are:
IT(TP)A No.848/Bang/2022 Page 21 of 23 a. If there exists a prior agreement between an Associated enterprise and such Other entity (resident/non-resident) regarding the assessee, OR b. The terms of the transaction between the assessee and the Other entity (resident/non-resident) is determined in substance by the Associated enterprise and the Other entity, without the assessee having any control over the terms.
23. The contention of the revenue is that the terms of transaction between the assessee and the other person is influenced by the AE and accordingly the transactions with local vendors is a deemed international transaction. The TPO has in the order u/s.92CA has stated that the transaction of purchase of raw material and components from local vendors in India and the terms of such purchases are determined under the overall supervision of Comer SpA. However we notice that this finding of the TPO is not supported by any evidences in terms of whether the terms of purchases from the local vendor is influenced by the AE and nothing has been brought on record by the revenue in this regard. The ld AR submitted that there is no such condition exists between AE and the assessee and the onus is on the revenue to prove the contrary since the assessee cannot asked to prove a negative fact. We also see merit in the submission of the ld AR that the report of the auditor cannot be the sole basis on which the impugned adjustment is made and that there is no estoppels against contesting the deemed international transaction as reported in form 3CE. We notice that the DRP has upheld that decision of the TPO without analysing the provisions under which the transaction is deemed as international transaction and without calling for any relevant documents in this IT(TP)A No.848/Bang/2022 Page 22 of 23 regard. It is further notice that the DRP has stated that no segregation of accounts for AEs and Non-AEs was available and segment-based information pertaining to AE and Non-AE sales and purchases was to be provided. As submitted by the ld AR we see no merit in this contention since the raw materials procured from AEs and non-AEs have been consumed in making sale of finished goods to only one customer who is not an AE u/s 92 and accordingly the question of providing a break-up of revenue and cost pertaining to AEs and Non- AEs segments does not arise. In view of this discussion and considering the materials presented for our perusal we hold that the transactions with the local vendors the terms of which are not influenced by Comer SpA cannot be treated as deemed international transaction and accordingly cannot be included for the purpose of ALP adjustment. The TPO is directed accordingly to consider only the transaction with AE for the purpose of determination ALP in accordance with the directions given in this order.
24. In result the appeal of the assessee is partly allowed.
Pronounced in the open court on this 27th day of February, 2023.
Sd/- Sd/-
( GEORGE GEORGE K. ) ( PADMAVATHY S. )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore,
Dated, the 27th February, 2023.
/Desai S Murthy /
IT(TP)A No.848/Bang/2022
Page 23 of 23
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar
ITAT, Bangalore.