M/s.Tokai Rika Minda India Pvt. Ltd., Bangalore V. Deputy Commissioner of Income Tax, Bangalore

ITA 2327/BANG/2016

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4891 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 28-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Set aside
• Section: 92C; 143(3); 92; 133(6); 10B; 195; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri George George K, JM & Ms.Padmavathy S, AM IT(TP)A No.2327/Bang/2016 : Asst.Year 2012-2013 M/s.Tokai Rika Minda India Private Limited Plot No.365, Sompura 1 st Stage KIADB Industrial Area Dobbaspet, Nelamangala Taluk Bangalore Rural Dist – 562 111. PAN : AADCT0271C. v. The Deputy Commissioner of Income-tax, Circle 7(1)(1) Bangalore. (Appellant) (Respondent) Appellant by : Sri.K.R.Vasudevan, Advocate Respondent by : Sri.Pradeep Kumar, CIT-DR Date of Hearing : 22.03.2022 Date of Pronouncement : 08.04.2022 O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against final assessment order passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. 2. Though the assessee has raised multifarious grounds in its memorandum of appeal, during the hearing, the learned AR confined his submissions to the following issues:- (i) Violation of principles of natural justice (Grounds 1.1 to 1.7) (ii) Search process and selection of comparables (Ground 1.7 to 3) (iii) Adjustment towards Forex fluctuations (Grounds 4 to 5.1) (iv) Exclusion of depreciation from operating cost (Ground 6) IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 2 (v) Adjustment towards capacity utilisation (Grounds 7) (vi) Adjustment towards working capital adjustment (Grounds 8) (vii) Restricting adjustment towards AE transactions (Ground 9) [This addition was unilaterally added by the DRP] 3. Brief facts of the case are as follows: The assessee is a subsidiary of the Tokai Rika Company Ltd, based in Japan. The assessee is mainly engaged in manufacturing key sets and locks to automotive industry. The assessee has manufacturing facility. The assessee in its TP study, has adopted TNMM as the most appropriate method. The assessee has arrived at set of 2 comparable companies with an average OPM of 2.80% viz-a-viz that of 23.11 % of the assessee. The assessee made various adjustments to arrive at the OPM. Thus, in the TP study, it was concluded that international transactions are at arm's length. 4. The TPO rejected the comparables set taken by the assessee. The TPO conducted a fresh TP analysis and selected a set of 6 comparable companies and arrived at OPM of comparables at 4.37%. After rejecting the adjustments made by the assessee, the TPO arrived at OPM of the assessee at - 10.82%. The TPO therefore proposed a TP adjustment of Rs. 4,69,48,996. 5. Aggrieved by the above TP adjustment, the assessee filed objections before the DRP. The DRP rejected the objections of the assessee. In fact the DRP enhanced the TP adjustment to IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 3 Rs. 12,96,10,400 by directing the TPO to recompute the TP adjustment without giving the benefit of proportionate adjustment on account of local purchases. Pursuant to the DRP’s directions, the final assessment order was passed. 6. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. The assessee has filed a paper book enclosing therein the TP study, the financials etc. The learned AR has filed a brief written submission. The contentions raised are summarized as follows:-  The assessee has submitted that the TPO has done fresh TP analysis but did not furnish the search process and the accept/reject matrix, while selecting fresh set of comparables. The assessee has also .submitted that the DRP has not considered the detailed submissions made by the assessee on various issues.  The assessee submitted that the TPO has erred in applying filter of import purchase to total purchase of 25%. The assessee is also seeking inclusion of Dynamatic technologies and Jay Ushin limited.  The Assessee has submitted that due to adverse foreign exchange fluctuations, import cost of raw materials have increased considerably. The Assessee has therefore claimed economic adjustment towards Forex fluctuations.  The assessee has submitted that if the rates of depreciation are different between the tested party and the comparable companies, an adjustment has to be made for the same in the comparability analysis. In this regard, the assessee has relied on the decision of the Tribunal in the case of Out source Partners Ltd IT(TP)A No.2171IBang/2019 (order dated 24.11.2021).  The Assessee's another grievance is non-granting of the adjustment with regard to underutilisation of the capacity. The assessee has submitted that the year under consideration is first full year of operation and it had idle capacity to the extent of 19.10% during the year. The TPO has not allowed IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 4 capacity utilisation adjustment on the ground that adjustment has to be computed on the tested party and not on the comparables. The Assessee relied on the decision in the case of Pact Closure Systems India Ltd IT(TP)A No 6801Bang/2017 (Bangalore) (order dated 14.09.2021).  The assessee submitted that the working capital adjustment should be granted and placed reliance on the Bangalore Tribunal decision in the case of Huawei Technologies India Private Limited reported in 101 taxmann.com 313.  The Assessee has also argued that the TP adjustment should be restricted only to the international transactions. The Assessee submitted that the DRP has erred in computing the transfer pricing adjustment for the total operating costs. The ld. Counsel for the Assessee submitted that the 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. The Assessee relied on the decision in the case of IKA India P Ltd 101 taxmann.com 276. 7. The learned Departmental Representative has filed a brief submission supporting the orders of the TPO and the DRP. 8. We have heard the rival submissions and perused the material on record. The assessee has submitted that the TPO has done fresh / TP analysis but did not furnish the search process and the accept/reject matrix, while selecting fresh set of comparables. The assessee has also submitted that the DRP has not considered the detailed submissions made by the assessee on various issues. We observe that the TPO has given the search process in para 4.1.1 of Order u/s 92CA. However, the assessee is objecting to search process and key words used. This issue is not addressed by the TPO or DRP. On the issue of comparable selection, we observe that the DRP has not properly analyse the submissions of the Assessee. The DRP has made general observation that TNMM IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 5 requires broadly similar comparables and exactly similar companies are not required. This is not proper reason and TPO/DRP are duty bound to specifically analyse the comparables submitted by the Assessee and the Assessee's objection to the comparable selected by the TPO. The Assessee is also duty bound to file the annual reports and make specific submissions with respect to the comparables. These aspects are not analysed in proper perspective. In these given facts and circumstances of the case, we deem it fit and proper that the issue with regard to determination of ALP should be remanded to the AO/TPO for determination a fresh in the light of observations made by us in this order. The AO/TPO shall afford assessee opportunity of being heard. Accordingly, the order of the AO is set aside and issue is remanded to the AO/TPO. 9. On issue of foreign exchange fluctuations adjustment, we observe that the TPO and the DRP have not properly analysed the submissions of the Assessee. There is no analysis whether there was any adverse foreign exchange fluctuations during the relevant assessment year, which is abnormal in nature and what is its effect on the operating margin of the Assessee and the comparables. These aspects needs to be analysed. In the given facts and circumstances of the case, we are of the view that it would be just and appropriate to set aside the impugned Order on this issue and remand the issue to the TPO. 10. On the issue of depreciation adjustment, the assessee has submitted that if the rates of depreciation are different IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 6 between the tested party and the comparable companies, an adjustment has to be made for the same in the comparability analysis. In this regard, the assessee has relied on the decision of the Tribunal in the case of Outsource Partners Ltd IT(TP)A No.2171IBang/2019, wherein it is observed as follows:- “4.4 From the above order of the Tribunal, it is clear if there is difference in depreciation in the case of assessee and the comparable cases, reasonable depreciation adjustment is to be made to determine the arm's length of the international transaction. On perusal of the TPO's order and the DRP's order, confirming the same, it is clear that the directions of the Tribunal in its earlier order has not been given effect to. The TPO has admitted that depreciation cost of the comparable companies is lesser than the assessee (since deprecation policy followed by comparable companies is as per Companies Act, whereas the assessee was showing higher rate of depreciation based on some agreement (see page 5 of the TPO's order). Hence, suitable depreciation adjustment ought to have been made by AO / TPO. Therefore, this issue is restored to the files of the AO / TPO. The AO/ TPO is directed to allow depreciation adjustment if they notice the rate of depreciation are different in the case of the assessee and the comparable cases. Therefore, ground 4 is allowed for statistical purposes.” 11. However, we observe that there is no analysis with respect to depreciation policy of the assessee and comparable cases. Therefore, we are of the view that let this matter be re- examined by the TPO / AO afresh. The assessee should demonstrate whether there is any difference in depreciation policy of the assessee and the comparable companies and what is its impact on the computation of arm's length price. If the assessee is able to demonstrate the same, the TPO may allow reasonable depreciation adjustment while determining the ALP for the international transactions. IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 7 12. On the issue of capacity adjustment, we find that the settled law is that adjustment on account of capacity utilization has to be granted. In this regard, the Tribunal in the case of IKA India has held as follows:- 22. We have heard the submissions of the assessee and the ld. DR on the issue raised by the assessee in ground No.7. We shall first see the statutory provisions relevant to the issue. Rule 10B(1)(e) of the Rules states that adjustments should be made to account for: "...the differences, if any, between the international 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" 23. Rule 10B(2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. One such factor is 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. 22. Rule 10B(3) of the Rules provide that: "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 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." 23. As per Section 92C of the Act, ALP is required to be computed using any of the given six methods and in the manner as is prescribed in Rule 10B of the Rules. Rule 10B in turn states that the most appropriate method would be one which inter alia provides the most reliable measure of ALP, and one of the important factors to be taken into account herein is the ability to make reliable and accurate adjustments. 24. The OECD Guidelines on this aspect is as follows:- Para 1.35 of the OECD Guidelines states as follows: "Where there are differences between the situations being compared that could materially affect the comparison, comparability adjustments must be IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 8 made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 of the OECD Guidelines states as follows: ".... material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties." Further, Para 2.74 of the OECD Guidelines while laying down the comparability criteria to be adopted while applying the transaction net margin method states as follows: "..... Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied) 25. US transfer pricing Regulations on this aspect is as follows:- In addition, the US transfer pricing regulations, u/s 482 of the Internal Revenue Code (hereinafter referred to as 'the US regulations') also support the above. Regulation 1.482-1(d)(2) of the US regulation states as follows: "In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. For purposes of this section, a material difference is one that would materially affect the measure of an arm's length result under the method being applied." 26. The Indian transfer pricing regulations, OECD Guidelines and the US transfer pricing regulations call for an adjustment to be made in case of material differences in the transactions or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin. While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 9 adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. In the following decisions it has been held that adjustment to the profit margins have to be made on account of underutilization of capacity: (i) In the case of M/s. Mando India Steering Systems Private Limited vs Assistant Commissioner of Income Tax, [I.T.A. No. 2092/Mds 12012], the Tribunal upheld the contention of the taxpayer for making a suitable adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: "10. .......... We are of the considered view that underutilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production." (ii) In the ruling of DCIT Vs Panasonic AVC Networks India Co Ltd (I.T.A. No.: 4620/De1/2011), it was held that:- "5. ..... Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment." (iii) In the case of Biesse Manufacturing Company Limited (IT(TP) A Nos. 97 & 493/Bang/2015) for AY 2010-11, the Tribunal held as follows: "10.4.1. We have heard the rival contentions and perused and carefully considered the submissions made and material on record; including the judicial pronouncements cited. The issue for consideration is whether adjustment for under-utilisation of capacity is allowable in the case on hand and if so, the manner of computation thereof and the quantum of adjustment...... .................. 10.4.5 In the above cited case of the Mumbai Tribunal i.e. Petro Araldite P. Ltd. (supra), the Tribunal has upheld the principle that adjustment for capacity underutilisation can be granted .............. Following the decision of the ITAT, Mumbai in the case of Petro Araldite P. Ltd. (supra), we hold that any adjustment for capacity underutilisation can be granted....." (iv) In the recent case of GE Intelligent Platform Private Limited (IT(TP)A No. 148/Bang/2015 and 164/Bang/2015) for AY 2010-11 was held as follows: "8 .......... now the law is quite settled to the extent that once there is unutilized capacity or men power, such underutilization impacts margin and therefore, the adjustment should be made while computing the IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 10 ALP ............... If the underutilization is more than average underutilization of the industry then necessary adjustment is required to be made to the margin of computing ALP......" 27. Moreover, the above argument of the assessee for grant of capacity utilization adjustment is also supported by the following decision of Bangalore ITAT in the case of Genisys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010). Relevant extract of the decision is under:- "15.2 We agree with this contention of the counsel for the assessee. All the comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. The AO shall consider this fact also while determining the ALP and make the TP adjustments. With these directions, the appeal of the assessee is disposed of.” 28. The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). 29. In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making “reasonably accurate adjustments” for eliminating any material differences between the two transactions being compared. The purpose or intent of the comparability analysis is to examine as to whether or not, the values stated for the international transactions are at ALP i.e., whether the price charges is comparable to the price charges under an uncontrolled transaction of similar nature. The regulations don’t restrict or provide that the adjustments cannot be made on the results of the tested party. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per subclause (i) of rule 10B(1)(e) of the Rules itself. The absence of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. The above view has also been upheld in the following decisions:- • Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) • Demang Cranes & Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 30. As far as data of comparable companies on capacity utilization being not available in public domain is concerned, it is practically not possible to obtain data on capacity utilization of comparable companies and consequently compute adjustment on the comparable companies, the operating cost of the tested party is adjusted for capacity utilization adjustment. IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 11 31. The assessee has under-utilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) of the Act. The relevant extracts of the section are as under:- "(6) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act :" 32. In this regard, we find that the Mumbai ITAT in case of M/s Kiara Jewellery P.Ltd. (I.T.A.No.8109/Mum/2011), has directed the AO/ TPO to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The relevant extract of the aforesaid decision is as under:- "11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of assessee company to the file of AO/TPO for deciding the same afresh keeping in view the said guidelines. If the exact details of capacity utilization of the comparable companies are not available in the public domain, the AO/TPO is directed to obtain the same directly from the concerned parties and to decide this issue afresh after giving assessee an opportunity of being heard." (Emphasis Supplied) 33. Accordingly, we direct the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as — • Installed Capacity, • Actual Production in Units, • Break-up of Fixed Cost and Variable Cost; • Segmental/ product wise information, if any. 34. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 12 the adjustment for capacity under-utilized. Ground No.7 is decided accordingly.” 13. Accordingly, we set aside the issue to the files of the AO / TPO directing to follow the directions given in the case of IKA India (P.) Ltd. v. ACIT (supra). 14. The next grievance of the assessee is not granting of working capital adjustment. We have considered the rival submissions and perused the material on record, including the judicial pronouncements cited. We find that the assessee has filed the computation of working capital adjustment before the DRP, but the DRP has not considered the same. We also find that the Co-ordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Limited 101 taxmann.com 313 has discussed all the reasons on the issue and held that working capital shall be allowed; holding as under at paras 10 to 18 thereof:- “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 (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 IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 13 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) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or 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 IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 14 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(l)(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 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 Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 15 "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 andlor 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 rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or 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." IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 16 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 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 com parables was the only reliable basis of 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. (iii) 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. (iv) 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 Ltd. v. Dy. CIT [20 13 J 38 taxmann.com 231/[2014 J 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 17 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 v. E Value Serve.com [2016J 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 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 IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 18 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 pages 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 Rule 1 OB(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 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. Respectfully following the above decision of the Co- ordinate Bench in the case of Huawei Technologies India (P) IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 19 Ltd. (supra), we also hold that the working capital adjustment is to be allowed as per actual on the final set of comparables. The TPO / AO are accordingly directed. 16. On the issue of TP adjustment to be restricted to AE transactions, we find that the Assessee has rightly contended that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. The ITAT in the case of Continental Automotive Components India Private Limited IT(TP)A No713/Bang/2017 has held as follows: “53. We have considered the rival submissions. This issue was considered by the Hon'ble Supreme Court in the case of CITv. Hindustan Unilever Ltd., 99 taxman.com 134 (SC) wherein it was held that while determining the ALP of international transactions, benchmarking has to be done only on Associated Enterprises transactions and not for the entire turnover. In view of this, we-find force in the argument of the ld. AR that the TP adjustment should be restricted only to international transactions pertaining to purchase of raw materials from AEs and other related transactions only. With these observations, we allow this ground of the assessee.” 17. In view of the transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. 18. Therefore, we set aside the orders of the TPO and DRP and direct the TPO to redetermine the TP adjustment afresh. The TPO while determining the TP adjustment shall comply with our directions mentioned supra. It is ordered accordingly. IT(TP)A No.2327/Bang/2016. M/s.Tokai Rika Minda India Private Limited. 20 19. In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced on this 08 th day of April, 2022. Sd/- (Padmavathy S) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 08 th April, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-IV, Bangalore. 4. The Director of Income-tax (Intl.Taxation) Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore