GL & V India Private Limited, Pune V. Deputy Commissioner of Income-tax, Circle - 1(2), Pune

ITA 2252/PUN/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 2692 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 26-04-2021
• Assessment Year: 2013-2014
• Appeal Filed On: 27-09-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: IS DIRECTED AGAINS T PASSED
• Keywords: Business income; Transfer pricing; International transaction; Wholly owned subsidiary; Set aside
• Section: 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, C PUNE VIRTUAL COURT BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NO.2252/PUN/2017 / ASSESSMENT YEAR : 2013-14 GL&V INDIA PRIVATE LIMITED, GL&V HOUSE, PLOT NO.2C, S.NO.162/4A-5A, OFF D.P. ROAD, AUNDH, PUNE 411 007 PAN : AACCG4425A VS. DCIT, CIRCLE-1(2), PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PA SSED BY THE CIT(A)-13, PUNE ON 26-07-2017 IN RELATION TO THE ASS ESSMENT YEAR 2013-14. 2. THE LD. AR PRESSED ONLY GROUND NOS.1.4 AND 1.5 FRO M THE REVISED SET OF GROUNDS. AS SUCH, ALL OTHER GROUNDS STAND DISMISSED AS NOT PRESSED. 3. THE TWO SURVIVING GROUNDS DEAL WITH THE SOLITARY ISSUE OF THE TRANSFER PRICING ADDITION. SUCCINCTLY, THE FACTUAL PANORAMA OF THE CASE IS THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF G L&V ASSESSEE BY SHRI AJIT JAIN AND SHRI SIDDHESH CHAUGULE REVENUE BY SHRI MAHADEVAN A.M. KRISHNAN DATE OF HEARING 22-06-2021 DATE OF PRONOUNCEMENT 24-06-2021 ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 2 INC., CANADA. THE ASSESSEE IS ENGAGED IN THE MANUFACTU RE AND DESIGNING OF EQUIPMENTS USED IN PULP AND PAPER INDUSTRY (AL MOST 90%) AND WATER TREATMENT COVERING MUNICIPAL, POWER AND IND USTRIAL SECTOR (AROUND 10%). IN ADDITION, THE ASSESSEE IS ALSO RE NDERING DESIGNING SERVICES TO ITS ASSOCIATED ENTERPRISES (AES). THE A SSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS IN FORM NO. 3CEB. T HE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THEIR ARMS LENGTH PRICE (ALP). THE TPO ACCEPTE D OTHER INTERNATIONAL TRANSACTIONS AT ALP EXCEPT THE TRANSACTIONS RELATING TO THE MANUFACTURING OPERATIONS, THEREBY COVERING THE TRANSACTIONS OF PURCHASE OF RAW MATERIAL AND SALE OF PROD UCTS. THE ASSESSEE EMPLOYED THE COST PLUS METHOD (CPM) IN ITS TRANSFER PRICING ANALYSIS FOR BENCHMARKING THE MANUFACTURING TRANSAC TIONS. THE TPO REJECTED THE CPM AND DEPLOYED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT/SALES. HE, ACCORDINGLY, WORKED OUT THE ASSESSEES PLI AT 2.35%. OUT OF EIGHT COMPANIES CHOSEN BY THE ASSESSEE AS COMPARABLE, THE TPO REJECTED FOUR. WITH THE REMAINING FOUR COMPANIES, HAVING AVERAGE P LI AT 6.43%, THE TPO WORKED OUT THE TRANSFER PRICING ADJUSTMENT O F RS.1,03,82,325/-. THE ASSESSING OFFICER (AO) FINALIZED THE ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 3 ASSESSMENT U/S.143(3) R.W.S. 144C(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) WITH THE TRANSFER PRICING A DDITION OF THE EQUAL AMOUNT. THE LD. CIT(A) PARTLY ALLOWED THE APP EAL AND THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL. 4. WE HAVE HEARD BOTH THE SIDES THROUGH VIRTUAL COURT AND G ONE THROUGH THE RELEVANT MATERIAL ON RECORD. THOUGH THE ASSE SSEE INITIALLY APPLIED THE COST PLUS METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS UNDER THE MANUFACTURING ACTIVITY, BUT IT IS NOT AGGRIEVED BY ITS SUBSTITUTION BY THE TPO WITH THE TNMM AS TH E MOST APPROPRIATE METHOD. TO BE MORE SPECIFIC, THE GRIEVA NCE OF THE ASSESSEE IS ONLY TWO-FOLD, NAMELY IMPROPER WORKING CAPITAL ADJUSTMENT AND WRONGFUL EXCLUSION OF FIVES CAIL KCP LTD. ON IMPROPER APPLICATION OF ONE OF THE ACCEPTED FILTERS. A. WORKING CAPITAL ADJUSTMENT : 5.1. THE ASSESSEE DID NOT CLAIM ANY WORKING CAPITAL AD JUSTMENT IN ITS TRANSFER PRICING STUDY REPORT. NO SUCH CLAIM WAS MADE BEFORE THE TPO AS WELL. IT WAS FOR THE FIRST TIME THAT THE ASSESSEE LODGED SUCH A CLAIM BEFORE THE LD. CIT(A) BY FURNISHING CALCULATION S OF ITS WORKING CAPITAL AND THAT OF THE COMPARABLE COMPANIES. IN SUC H CALCULATION, THE ASSESSEE INCLUDED TWO ITEMS, WHICH ARE SUBJECT MATTER OF DISPUTE, VIZ., ADVANCES TO SUPPLIERS AND ADVANCES FROM ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 4 CUSTOMERS. THE LD. CIT(A) RESTORED THE MATTER TO THE AO D IRECTING HIM: TO ADOPT THE METHOD OF WORKING CAPITAL ADJUSTMENT AS PROVIDED IN THE EXAMPLE PROVIDED IN THE ANNEXURE TO CHAPTE R III OF THE OECD TRANSFER PRICING GUIDELINES, 2010 . THE CASE OF THE ASSESSEE IS THAT IN THE HYPOTHETICAL EXAMPLE OF WORKING CAPITAL CALCULATION GIVEN IN THE OECD GUIDELINES, THE ITEMS OF ADVANCES TO SUPPLIERS AND ADVANCES FROM CUSTOMERS DO NOT FIND ANY PLA CE, WHICH SHOULD BE INCLUDED. 5.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THRO UGH THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE AS TO THE PER SE GRANTING OF WORKING CAPITAL ADJUSTMENT. THE CONTROVERSY REV OLVES AROUND ONLY ITS COMPUTATION, AND THAT TOO, QUA THE TWO ITEMS OF ADVANCES TO SUPPLIERS AND ADVANCES FROM CUSTOMERS. 5.3. THE EXAMPLE IN THE ANNEXURE TO CHAPTER III OF THE OECD TRANSFER PRICING GUIDELINES, 2010 CONTEMPLATES ADDING UP TRAD E RECEIVABLES AND INVENTORIES AND THEN REDUCING TRADE PAYAB LES SO AS TO CONSTITUTE NUMERATOR WITH THE DENOMINATOR OF SALES. IT DOES NOT EX FACIE IMBIBE ADVANCES TO SUPPLIERS AND ADVANCES FROM CUSTOMERS . 5.4. IN ORDER TO APPRECIATE THE INCLUSION OR OTHERWISE OF ADVANCES TO/FROM SUPPLIERS/CUSTOMERS, WE FIRST NEED TO UNDERSTAND THE RATIONALE BEHIND ALLOWING WORKING CAPITAL ADJUSTMENT. UNDER THE ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 5 TNMM, OPERATING PROFIT MARGIN (IN PERCENTAGE TERMS) OF AN ASSESSEE IS COMPARED WITH THAT OF THE COMPARABLES SO AS TO ASCERTAIN IF THE ASSESSEES INTERNATIONAL TRANSACTION IS AT ALP. ASSESSE ES ADOPT DIFFERENT POLICIES FOR CONDUCTING THEIR BUSINESS. ON E ASSESSEE MAY HAVE A POLICY OF ALLOWING LESS TIME TO TRADE DEBTORS FOR PAYMENT OR MAY HAVE ONLY CASH SALES WITH NO DEBTORS, WHILE ANOTHER MAY BE ALLOWING MORE TIME WITH THE ULTIMATE EFFECT OF LESS OR M ORE TRADE DEBTORS. WHEN A COMPANY ALLOWS MORE TIME TO THE TRAD E DEBTORS FOR PAYMENT, IT NATURALLY PUSHES UP THE SALE PRICE S O AS TO INCLUDE CORRESPONDING INTEREST COST IN IT. IN CASE OF CASH S ALE, THE PRICE CHARGED IS RELATIVELY SCREWED BECAUSE OF HAVING NO E LEMENT OF INTEREST COST IN THE SALE PRICE. THUS IN A CASE OF ALLOWING MOR E TIME TO TRADE DEBTORS FOR PAYMENT, SALE PRICE AND THE RESULTANT P ROFIT FROM SALE INCREASES IN COMPARISON WITH A COMPANY WHICH ALLOWS LES SER TIME TO TRADE DEBTORS FOR PAYMENT. SIMILAR IS THE POSITION AS R EGARDS PURCHASES. MORE THE AMOUNT OF TRADE CREDITORS MEANS COSTL Y PURCHASES FOLLOWED BY LOWER PROFIT AND VICE VERSA. ERGO, RELATIVELY HIGH WORKING CAPITAL OF A COMPANY INDICATES THAT IT ALLOWED MOR E TIME TO TRADE DEBTORS WITH THE INCREASED SALES PRICE AND THE CORRESPONDING SWELLED PROFIT. IN THE LIKE MANNER, IT ALSO ME ANS THAT IT PAID THE TRADE CREDITORS EARLY AND MADE CHEAP PURCHASES WITH THE ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 6 RESULTANT MORE PROFIT. IF FOR BENCHMARKING, WE COMPARE NA KED AND UNADJUSTED PROFIT OF A COMPARABLE COMPANY WITH THE ASSESSEE - IN THE FACE OF A DIFFERENCE IN WORKING CAPITALS OF THE TWO - IT WOULD SHOW SKEWED RESULTS AND TARNISH THE COMPARABILITY. 5.5. RULE 10B(3) OF THE INCOME-TAX RULES, 1962 PROVID ES THAT: `AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF .(II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. . IN ORDER TO BRING THE COMPANIES WITH HIGH OR LOW WORKING CAPITALS AT THE SAME LEVEL PLAYING FIELD, IT BECOMES ESSENTIAL THAT A COMPANY WITH HIGHER WORKING CAPITAL SHOULD FACE REDUCTION IN ITS PROFIT CORRESPONDINGLY SO AS TO BECOME ELIGIBLE FOR COMPARISON W ITH THE ASSESSEE COMPANY AND VICE VERSA . IT IS FOR SUCH HIGH OR LOW WORKING CAPITALS EMPLOYED BY AN ASSESSEE AND COMPARABLES THAT NEE D FOR ADJUSTING THE PROFIT MARGIN ARISES, WHICH IS CARRIED THROUGH T HE WORKING CAPITAL ADJUSTMENT. 5.6. ORDINARILY, WORKING CAPITAL IS COMPUTED BY ADDING THE AMOUNT OF INVENTORIES AND TRADE RECEIVABLES AND THEN REDU CED BY THE AMOUNT OF TRADE RECEIVABLES. REVERTING TO THE FACTS OF THE IN STANT CASE, IT IS SEEN THAT THE APPARENT EFFECT OF THE DIRECTION GIVEN BY THE LD. CIT(A) IS TO CONSIDER ONLY TRADE RECEIVABLES AND TRADE ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 7 PAYABLES, IN ADDITION TO INVENTORY AND NOT ADVANCES TO SUPP LIERS OR ADVANCES FROM CUSTOMERS THAT HAVE BEEN CONTESTED BEFORE THE TRIBUNAL. HIGHER AMOUNT OF ADVANCES TO SUPPLIERS INDICATES THAT AN ASSESSEE-BUYER MADE MORE ADVANCE PAYMENTS AND MADE C HEAP PURCHASES. THERE IS NO QUALITATIVE DIFFERENCE BETWEEN A SITU ATION OF HIGHER AMOUNT OF ADVANCES TO SUPPLIERS AND A SITUATION OF LO WER AMOUNT OF TRADE PAYABLES INSOFAR AS ITS IMPACT ON THE PROF IT MARGIN IS CONCERNED. BOTH THE SITUATIONS AFFECT THE PROFITABILITY AND THE WORKING CAPITAL IN THE SAME MANNER. IN THE LIKE SCENARIO, HIGH ER AMOUNT OF ADVANCES FROM CUSTOMERS DECIPHERS THAT AN ASSE SSEE- SELLER MADE CHEAP SALES. AGAIN, THERE IS NO QUALITATIVE DIFFERE NCE BETWEEN THE HIGHER AMOUNT OF ADVANCES FROM CUSTOMERS AND LOWER AMOUNT OF TRADE RECEIVABLES INSOFAR AS ITS IMPACT ON THE PRO FIT MARGIN IS CONCERNED. THUS, ADVANCES TO SUPPLIERS AND ADV ANCES FROM CUSTOMERS ARE INTEGRAL PART OF WORKING CAPITAL ADJUSTMEN T IN THE SAME WAY IN WHICH THERE ARE TRADE RECEIVABLES AND TRADE CREDITORS. SUCH ADVANCES, ERGO, CANNOT BE EXCLUDED IN C OMPUTING THE WORKING CAPITAL ADJUSTMENT. REFERENCE TO TRADE RECEIVAB LES AND TRADE PAYABLES IN THE EXAMPLE GIVEN IN ANNEXURE TO CHAPTER I II OF THE OECD TRANSFER PRICING GUIDELINES, 2010 SHOULD BE CONSTR UED AS INCLUDING ADVANCES TO SUPPLIERS AND ADVANCES FROM CUSTOMER S. IT IS ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 8 ONLY FOR SIMPLIFICATION PURPOSE THAT THE EXAMPLE REFERS TO TRAD E RECEIVABLES AND TRADE PAYABLES TO THE EXCLUSION OF ADVANCES TO SUPPLIERS AND ADVANCES FROM CUSTOMERS. WE, THEREFORE, AMPLIFY THE DIRECTION OF THE LD. CIT(A) TO THE AO/TPO FOR ADOPTING THE METH OD OF WORKING CAPITAL ADJUSTMENT AS PROVIDED IN THE EXAMPLE GIVE N IN CHAPTER III OF THE OECD GUIDELINES BY ALSO CONSIDERING ADVA NCES TO SUPPLIERS AND ADVANCES FROM CUSTOMERS, IN THE SAME WAY AS TRADE RECEIVABLES AND TRADE PAYABLES. 5.7. THE FIGURES OF ADVANCES TO SUPPLIERS AND ADVAN CES FROM CUSTOMERS, AS GIVEN BY THE ASSESSEE FOR THE FIRST TIME BEF ORE THE LD. CIT(A) PERTAINING TO SELF AND THE COMPARABLES, HAVE NOT BE EN VERIFIED BY ANY AUTHORITY. THESE NEED TO BE EXAMINED AND EVALUATED BY OBSERVING THAT ONLY ADVANCES TO OR FROM CUSTOMERS/SUPP LIERS SHOULD BE INCLUDED IN THE COMPUTATION OF WORKING CAPITAL OF THE ASSESSEE AS WELL AS THE QUALIFYING COMPARABLES. IN OTHER WORDS, NO ADVANCE OR OUTSTANDING OTHER THAN RELATING TO PURCHASE OR SA LE OF GOODS SHOULD FIND ITS PLACE IN THE COMPUTATION OF WORKING CAPITA L. WE ORDER ACCORDINGLY. B. FILTER OF MANUFACTURING SALES MORE THAN 75% OF TOTAL SALES - FIVES CAIL KCP LTD. ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 9 6.1. THE ASSESSEE USED ONE OF THE FILTERS, NAMELY, ` COMPANIES HAVING MANUFACTURING SALES COMPRISE < 75% OF THEIR TOTAL SALES WERE EXCLUDED AND ACCORDINGLY INCLUDED FIVES CAIL KCP LTD. IN THE LIS T OF COMPARABLES WITH PLI AT (-) 41.54% . THE TPO REJE CTED THIS COMPANY ON ACCOUNT OF EXCEPTIONALLY LOW PROFIT (LOSS). WH EN THE MATTER CAME UP BEFORE THE LD. CIT(A), HE REVERSED THE RE ASONING OF THE TPO BY HOLDING THAT LOSS MAKING COMPANIES PER SE CANNOT BE EXCLUDED. HE, HOWEVER, NOTED THAT THE REVENUE FROM SALE OF SERVICES OF THIS COMPANY STOOD AT RS.8.31 CRORE AS AGAINS T REVENUE FROM SALE OF PRODUCTS AT RS.38.58 CRORE. IN THE ABSENC E OF ANY SEGMENTAL INFORMATION AVAILABLE IN THE FINANCIAL STATEMENTS, THE LD. CIT(A) HELD THAT THIS COMPANY CANNOT BE COMPARED WITH THE ASSESSEE COMPANY THAT IS ENGAGED ONLY IN MANUFACTURING UND ER THE SEGMENT UNDER CONSIDERATION. THE ASSESSEE IS AGGRIEVED BY THE EXCLUSION OF THIS COMPANY. 6.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ORIGINAL REASON ADDUCED BY THE TPO FOR THE REJECTION OF THIS COMPANY, BEING EXCEPTIONA LLY LOW PROFIT (LOSS), HAS BEEN OVERTURNED BY THE LD. CIT(A), WHICH NEED NOT BE DELVED INTO. THE RAISON D`ETRE WHICH NEEDS TO BE GONE INTO IS THE ARGUMENT OF THE LD. AR ABOUT THIS COMPANY PASSING ALL THE FILTERS ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 10 INCLUDING HAVING MANUFACTURING SALES NOT LESS THAN 75% OF ITS TO TAL SALES. IT WAS STATED THAT PERCENTAGE OF MANUFACTURING SALES TO TOTAL REVENUE OF THIS COMPANY IS ABOUT 83% AND HENCE IT QUALIFIES FOR THE INCLUSION. 6.3. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THIS COM PANY, WHOSE COPY IS AVAILABLE IN THE PAPER BOOK. PAGE 394 IS ITS P ROFIT AND LOSS ACCOUNT WHICH GIVES FIGURES OF REVENUE FROM SALE OF PRODUCTS AT RS.38.58 CRORE; REVENUE FROM SALE OF SERVIC ES AT RS.8.31 CRORE (ABOUT 17%); AND OTHER OPERATING REVENUE A T RS 0.39 CRORE. THUS IT IS PALPABLE THAT THE OVERALL PLI OF THIS COMPA NY AT (-) 41.54% IMBIBES THE EFFECT NOT ONLY OF ITS MANUFACTURING ACTIVITY BUT ALSO THAT OF RENDERING SERVICES, WHICH IS NOT MINUSCULE. ON A PERTINENT QUERY, THE LD. AR FAIRLY CONCEDED THAT NO INDEPEN DENT MANUFACTURING SEGMENTAL INFORMATION OF THIS COMPANY IS AVAILABLE . AS AGAINST THAT, THE SEGMENT OF THE ASSESSEE UNDER CONSIDE RATION IS ONLY MANUFACTURING. WE HAVE NOTED ABOVE THAT THE ASSESSE E ALSO ENTERED INTO THE INTERNATIONAL TRANSACTION OF RENDERING SERVICES. HOWEVER THAT TRANSACTION WAS BENCHMARKED SEPARATELY BY TH E ASSESSEE AND THE TPO DID NOT DISPUTE THAT IT WAS AT ALP. THU S, THE ONLY SEGMENT OF THE ASSESSEE UNDER CONSIDERATION IS THAT OF MANUFACTURING DE HORS SERVICES. IN THAT VIEW OF THE MATTER, THE ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 11 COMPANIES DOING MANUFACTURING ONLY OR HAVING AN INDEPENDEN T MANUFACTURING SEGMENT QUALIFY FOR COMPARISON. SINCE THE REV ENUE FROM SALE OF SERVICES OF FIVES CAIL KCP LTD. CONSTITUTES A SUBSTANTIAL PORTION IN THE OVERALL KITTY, IT DOES NOT QUALIFY AS A GOOD COMPARABLE. 6.4. NOW WE TURN TO THE MAIN PLANK OF THE SUBMISSIONS OF TH E LD. AR THAT SINCE THIS COMPANYS SALE FROM MANUFACTURING ACTIVITY A T AROUND 83%, PASSES THE FILTER OF MANUFACTURING SALES MORE THAN 75% OF TOTAL SALES, THE SAME SHOULD BE INCLUDED. THERE IS A BASIC FALLACY IN THIS ARGUMENT. THE COMPARABLE SELECTION PROCESS IN THE ALP DETERMINATION ENVISAGES BROADLY TWO LEVELS OF COMPARISONS: COMPANY LEVEL AND TRANSACTION LEVEL. IN ORDER TO QUALIFY FOR INCLUSION IN THE LIST OF COMPARABLES, A COMPANY MUST FIRST PAS S THE COMPANY LEVEL COMPARISON AND THEN TRANSACTION LEVEL. THE BRO AD NATURE OF ACTIVITY UNDER WHICH THE TRANSACTION OF AN ASSESSEE - COMPANY UNDER CONSIDERATION FOR BENCHMARKING, FALLS, FACILITA TES IN SELECTING COMPARABLES AT THE COMPANY LEVEL. SUCH NATURE OF A CTIVITY SETS UP THE PARAMETERS OF PREDOMINANT SIMILARITY OF THE CO MPANIES TO BE SELECTED AT THE FIRST LEVEL. THEN COMES THE TRANSACTION LEVEL COMPARISON, WHICH REQUIRES SELECTING SUCH COMPANIES, OUT OF THOSE QUALIFYING FROM THE COMPANY LEVEL COMPARISON, WHICH ARE E NGAGED ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 12 IN THE TRANSACTIONS SIMILAR TO THE TRANSACTION UNDER CONSIDERATIO N. IF A COMPANY SELECTED AT THE FIRST LEVEL IS ENGAGED SOLELY IN THE TRANSACTIONS AKIN TO THE INTERNATIONAL TRANSACTION UNDER CONSIDERA TION FOR BENCHMARKING, THEN THAT QUALIFIES FOR INCLUSION. IF ON THE OTHER HAND, A COMPANY CHOSEN FROM THE COMPANY LEVEL COMPARISO N, HAS MULTIPLE TRANSACTIONS AND ONE OF THEM IS SIMILAR TO THE INTERNATIO NAL TRANSACTION UNDER CONSIDERATION, THEN SUCH A COMPANY WILL CALL FOR INCLUSION ONLY IF ITS RESULTS FROM THE COMPARABLE TRANSACTION AR E SEPARATELY AVAILABLE, NAMELY, THE SEGMENTAL INFORMATION OF THE CONCERNED TRANSACTION OR SEGMENT IS IDENTIFIABLE AND AVAILABLE. IT IS ONLY ON PASSING THE SECOND LEVEL OF COMPARISON AT THE TRANS ACTION LEVEL, THAT SUCH EITHER A FULLY COMPARABLE COMPANY OR ITS SE PARATELY IDENTIFIABLE COMPARABLE TRANSACTION/SEGMENT WILL PASS THE TEST OF FINAL INCLUSION. 6.5. THE FILTER UNDER CONSIDERATION - `MANUFACTURING SALES NOT LESS THAN 75% OF THE TOTAL SALES - APPLIES AT THE FIRST LEVEL OF CO MPANY SELECTION SO THAT ONLY THE COMPANIES ENGAGED MAINLY IN MANUFACTURING ACTIVITY GET SELECTED AT THE ENTRY LEVEL. IT HAS N O APPLICATION AT THE SECOND LEVEL OF TRANSACTION LEVEL COMPARISON. IF A COMPANY HAS PASSED THE FILTER AND ENTERED THE FIRST LEVEL, IT W ILL HAVE TO PASS THE TRANSACTION LEVEL COMPARISON ALSO SO AS TO GET ELIGIB LE FOR ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 13 INCLUSION IN THE FINAL LIST OF COMPARABLES. IN ORDER TO BECOME COMPARABLE TO AN INTERNATIONAL TRANSACTION OF MANUFACTURING, A COMPANY WILL GET INCLUDED ONLY IF IT IS EITHER EXCLUSIVELY IN MANUFACTURING OR IF IT IS NOT SO EXCLUSIVELY IN MANUFACTURING (HAVING 75% OR MORE AS MANUFACTURING), BUT ITS SEGMENTAL INFORMATION OF THE MANUFACTURING IS SEPARATELY AVAILABLE. 6.6. ADVERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THAT FIVES CAIL KCP LTD. PASSES THE FILTER OF MANUFACTURING SALES NOT LESS THAN 75% OF THE TOTAL SALES AND EX CONSEQUENTI THE COMPANY LEVEL TEST IS THROUGH, BUT IT FAILS THE TRANSACTION LEVEL TEST INASMUCH AS IT IS A LBEIT LARGELY A MANUFACTURING COMPANY BUT ALSO HAS SERVICE INCOME OF 17% OF ITS TOTAL REVENUE AND ADMITTEDLY NO SEGMENTAL INFORMATIO N FOR THE MANUFACTURING ACTIVITY IS AVAILABLE. SO, THIS COMPANY HAVING MANUFACTURING ACTIVITY AT 83% CANNOT BE CONSIDERED AS COMPARABLE TO THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION OF 100% MANUFACTURING ACTIVITY. WE, THEREFORE ACCORD OUR IMP RIMATUR TO THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLE. 7. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER AND S END THE MATTER BACK TO THE AO/TPO FOR REDETERMINING THE ALP IN CONFORMITY WITH DIRECTIONS GIVEN HEREINABOVE. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED REASONABLE OPPORTUNITY OF BEING HEA RD. ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 14 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL P URPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH JUNE, 2021. SD/- SD/- ( S.S. VISWANETHRA RAVI ) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 24 TH JUNE, 2021 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. 6. THE PCIT-5, PUNE DR, ITAT, C BENCH, PUNE / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE ITA NO.2252/PUN/2017 GL&V INDIA PRIVATE LIMITED 15 DATE 1. DRAFT DICTATED ON 22-06-2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 24-06-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *