Kirloskar Toyota Textile Machinery Private Limited, Bengaluru V. The Deputy Commissioner of Income Tax, Circle-4(1)(1), Bangalore

ITA 271/BANG/2021

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The case involves Kirloskar Toyota Textile Machinery Private Ltd., which appealed against the final assessment order passed by the Assessing Officer under the Income-tax Act, 1961. The primary contention was regarding the transfer pricing adjustments made to the income declared by the company for the assessment year 2016-17. The adjustments were based on the arm's length price (ALP) of international transactions with associated enterprises (AEs). The TPO initially made a significant adjustment, which was later modified but still contested by the assessee. The Tribunal examined various grounds including the rejection of certain comparables, the treatment of duty drawback, and the restriction of adjustments to international transactions only.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124966 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 07-02-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 22-06-2021
• Other Referred Cases: Liberty India vs CIT, Behr India Ltd., Carraro India P. Ltd., Sami Labs. Ltd., CIT Vs. Welspun Zucchi Textiles Ltd., KBACE Technologies Pvt. Ltd vs DCIT, Mobis India Ltd. v. Dy. CIT, ITO v E Value Servc.com, National Thermal Power Co. Ltd. Vs. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 143(3); 92; 92D; 37(1); 192; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.271/Bang/2021 Assessment year : 2016-17 Kirloskar Toyota Textile Machinery Private Ltd., Plot No.10-13, Phase II, Jigani Industrial Area, Anekal Taluk, Bengaluru – 560 105. PAN: AAFCT 3122J Vs. The Assessing Officer, National e-Assessment Centre, Delhi / DCIT Circle 4(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : S/Shri Ajit Tolani, CA & Darpan Kirpalani, Advocate Respondent by : Shri Sunil Kumar Singh, CIT-2(DR)(ITAT), Bengaluru. Date of hearing : 08.02.2023 Date of Pronouncement : 14.02.2023 O R D E R Per Padmavathy S., Accountant Member This appeal is against the final assessment order passed by the Assessing Officer, National e-Assessment centre, Delhi u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 28.4.2021 for the assessment year 2016-17. 2. The assessee is a company engaged in the business of manufacturing textile machinery. The assessee filed the return of IT(TP)A No.271/Bang/2021 Page 2 of 25 income for the AY 2016-17 on 30.11.2016 declaring income of Rs.12,31,66,670. The case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. The case was referred to TPO to determine the ALP in respect of the international transactions the assessee had with its AEs. The TPO made an adjustment of Rs.34,89,00,000 on the basis of which the draft assessment order was passed by the AO. 3. Aggrieved, the assessee raised objections before the DRP. The DRP rejected the grounds raised by the assessee but directed the TPO to adopt the correct figure for TP adjustment. Accordingly, the TP adjustment was modified to Rs.32,04,00,000. The assessee is in appeal against the final order of assessment passed pursuant to the directions of the DRP. 4. The assessee raised the following grounds :- “The grounds mentioned herein below are independent and without prejudice to the other grounds preferred by the Appellant. 1. That on facts and circumstances of the case and in law, the order passed by the Learned AO pursuant to the directions of the Hon'ble Dispute Resolution Panel - 2, Bangalore (Hon'ble Panel' or `Hon'ble DRP'), and the order of the Learned Joint Commissioner of Income tax, Transfer Pricing- Circle 2(1), Bangalore (Teamed TPO') to the extent prejudicial to the Appellant, is bad in law and facts and liable to be quashed. TP related 2. That on the facts and in the circumstances of the case, the Learned AO erred in making a TP adjustment in connection IT(TP)A No.271/Bang/2021 Page 3 of 25 with the Appellant's international transactions by INR 320,400,000. 3. That, on the facts and circumstances of the case, the Learned TPO/ Hon'ble Panel erred in rejecting the TP documentation maintained by the Appellant under Section 92D of the Act. 4. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in law and facts by rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act and the Income-tax Rules, 1962 (`the Rules'), thereby arbitrarily rejecting the economic analysis undertaken by the Appellant and in conducting a fresh economic analysis. 5. That the Learned AO/ Hon'ble DRP erred in upholding the Learned TPO's approach of rejecting the filters applied by the Appellant in the TP documentation and considering a set of similar / modified filters. 6. That the Learned AO/ Hon'ble DRP erred in upholding the Learned TPO's approach of conducting an arbitrary and inconsistent search for selection of comparable companies. 7. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in considering provision no longer required written back and duty drawback as non-operating for computing the operating margin earned by the Appellant, as well as that of the comparable companies. 8. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in selecting following companies which do not pass the test of comparability analysis: • Lakshmi Machine Works Limited • Meera Industries Private Limited • UMW Industries Limited • Lohia Corp Limited 9. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in the computation of TP adjustment by failing to restrict the TP adjustment to the extent of value of international transactions. IT(TP)A No.271/Bang/2021 Page 4 of 25 10. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in not providing the benefit of adjustment for working capital to the Appellant. 11. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in not granting capacity utilization adjustment to the Appellant by not appreciating that proportionate overheads incurred for unutilized capacity cannot be treated as operating expense while computation of operating margin of the Appellant. 12. That the Learned AO in pursuance of the directions issued by the Hon'ble Panel erred in not granting depreciation adjustment to the Appellant ignoring the fact that the depreciation policy differs from company to company and has a significant impact on the computation of margins if an adjustment is not considered to this effect. 13. That the Learned AO has erred in not considering the relief provided by the Hon'ble DRP to the Appellant in the assessment order on account of the following ground: • The Hon'ble Panel has directed the Learned AO/ TPO to consider the weighted average operating margin of UMW Industries Limited as per its annual report. 14. Based on the facts and circumstances of the present case and in law, the order passed by the Learned AO being not in conformity with the mandatory directions issued by the Hon'ble DRP under section 144C(5) of the Act, is bad in law and void. Other than TP 15. That, on the facts and in the circumstances of the case and in law, the Learned AO in pursuance the directions issued by the Hon'ble Panel erred in not allowing deduction under section 37(1) of the Act, on account of Education Cess and Secondary and Higher Education Cess paid by the Appellant on the assessed income along with income-tax and surcharge for the year under appeal. IT(TP)A No.271/Bang/2021 Page 5 of 25 That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.” 5. Ground Nos.1 to 3, 5 & 6 and 14 are general, not warranting any separate adjudication. 6. Ground No.15 with respect to deduction of education cess and secondary & higher education cess is not pressed during the course of assessment. The ld AR also did not press for Ground No.4, 11 and 12 during the course of hearing. 7. The assessee is engaged in the import and manufacture of textile machinery and auto components. For manufacture of textile machinery, the assessee obtains the technology and other know-how from Toyoto Industries Corporation, Japan (TICO) and pays royalty towards the same. The assessee had the following international transactions with its AE:- International Transactions as per 3CEB Particulars Payable Receivable Method used Purchase of raw materials 1307470604 TNMM Sale of finished goods 2426094961TNMM Purchase of spares 415644 TNMM Purchase of fixed assets 721546 TNMM Payment of royalty 48492717TNMM Payment of professional and consultancy charges 59524586 TNMM Communication charges 583184 TNMM Issue of equity shares 2900413700 Other Reimbursement of expenses 952020 8374512CUP Total 1438160301 2434469473 3872629774 IT(TP)A No.271/Bang/2021 Page 6 of 25 8. The segmental financials of the assessee as per P&L account is as under:- Particulars Amount (in Lakhs) Income Revenue from operations 41,704 Less: Excise duty 1,740 Revenue from operations (net) 39,964 Other Income 1,317 Total Revenue 41,281 Expenses Cost of raw materials consumed 31,658 Changes in inventories of finished goods and work in progress (761) Employee benefit expenses 3,558 Finance cost 17 Depreciation and amortization 1,421 Other Expenses 4,167 Total Expenses 40,060 Operating Profit 1,221 OP/OC 3.05% OP/ OR 2.96% 9. The TPO recomputed the segmental financials by treating the duty drawback as non-operating as below:- Particulars Amount (in Rs) Revenue from operations 41,281 Less: Other Income 1,317 Add: Net gain on foreign currency transactions and translation 206 Total Revenue from Operations 40,170 Expenses Total Expenses 40,060 Less: Finance cost 17 Total Operating Expenses 40,043 Operating Profit 127 OP/OC 0.32% OP/OR 0.32% IT(TP)A No.271/Bang/2021 Page 7 of 25 10. The TPO rejected the comparables chosen by the assessee and conducted a fresh search to arrive at the following final set of comparables:- Sl. No Company Name Weighted Average 1 Prashant Texmach Pvt. Ltd 2.74 2 Meera Industries Ltd 4.19 3 Lakshmi Machine Works Ltd 6.41 4 Lohia Corp Ltd 11.43 5 UMW Industries Ltd 20.59 MEAN 9.0 11. Accordingly, the TPO arrived at the TP adjustment as below:- Manufacturing of Textile Machinery Particulars Formula Amount in Rs. Lakhs Arms Length OP/OR A 9.0% Taxpayers operating revenue B 40,170 Arms Length OC C-(100-A)% of B 36,554 OC of taxpayer D 40,043 Differences E=C-D 3489 12. Aggrieved, the assessee raised objections before the DRP. 13. The DRP rejected the various contentions of the assessee and confirmed the TP adjustment with a direction to recompute the assessment as per assessee’s submissions. Aggrieved, the assessee is in appeal before the Tribunal. IT(TP)A No.271/Bang/2021 Page 8 of 25 14. With regard to the grounds raised relating to TP adjustment, we will first consider Ground No.7 contending treatment of duty drawback as non-operative in nature for computing the operating margin of the assessee. During the year under consideration the assessee has received an amount of INR 491 lakhs as duty drawback. The TPO while re- working the operating margin of the assessee excluded the said sum from the operating income. The DRP confirmed the TPO’s decision by relying on the decision of the Supreme Court in the case of Liberty India vs CIT (Civil appeal no.5891 of 2009 dated 31.08.2009). 15. In this regard, the ld. AR submitted that the Duty Draw Back (DDB) is a benefit arising out of the business operation of the assessee and therefore should be considered as part of operating income. The ld. AR in this regard relied on the decision of Pune Bench of the Tribunal in the case of Behr India Ltd. (ITA No.645/PN/2013) and also Carraro India P. Ltd. in ITA No.1629/PN/2013. The ld. AR also placed reliance on the decision of the coordinate Bench in Sami Labs. Ltd. in IT(TP)a No.186/Bang/2016. 16. We have heard the rival submissions. The duty drawback is provided to the manufacturer and exporter for the purpose of compensating in the duty component which is already been included in the cost of raw material and the duty drawback received against the duty paid in our view is part of the operating profit of the assessee. We also notice that the coordinate bench of the Tribunal in the case of Sami Labs. Ltd (supra) has considered a similar issue and held that IT(TP)A No.271/Bang/2021 Page 9 of 25 We have considered the rival submissions. On this aspect, there is no dispute that export incentive has to be included or excluded from the operating profit of both i.e. tested party and comparables. As per the earlier order of DRP in assessee’s own case, it was held that the same should be excluded from the tested party as well as the comparables and on the same line in the present year also, the issue was decided on that line. Now we have the benefit of later judgment of Hon’ble Bombay High Court rendered in the case of CIT Vs. Welspun Zucchi Textiles Ltd. (supra) which is dated 06.01.2017. In this judgment, it was held that DEPB benefit is operating revenue includable in arriving at operating profit in TP analysis. Hence by respectfully following this judgment of Hon’ble Bombay High Court, we hold that the export incentives should be included in the operating profit of the assessee as well as the comparables. But it should be ensured that such export incentive is in respect of turnover of the present year only because if the export incentive is relatable to the turnover of an earlier year then the same cannot be included in the present year profit for TP analysis because in that situation, the profit will remain included in the numerator, but the corresponding turnover will not remain included in the denominator and this will give absurd result. Hence we direct the AO/TPO to decide the issue afresh in the light of this judgment of Hon’ble Bombay High Court and in the light of above discussion. The same effect should be given for working out the operating profit percentage of the assessee i.e. the tested party and the comparables both and if it is found that the effect cannot be given in the case of the comparable for want of required data then it should not be included in the profit of the tested party i.e. assessee also. Necessary order as per law should be passed by AO/TPO in the light of above discussion after providing reasonable opportunity of being heard to assessee. Ground no. 4 is allowed for statistical purposes 17. Assessee’s case the facts are identical and therefore respectfully the above decision of the coordinate bench we hold that the duty draw back should be considered as part of operating income. We remit the issue back to the TPO to verify that export incentive is in respect of IT(TP)A No.271/Bang/2021 Page 10 of 25 turnover of the present year as per the ratio laid down in the above judgement. Needless to say that the assessee be given an opportunity of being heard. It is ordered accordingly. 18. In ground No.8, the assessee contended the inclusion of certain comparables out of which Lakshmi Machine Works Ltd. and Mira Industries P. Ltd. were not pressed during the course of hearing by the ld. AR. UMW Industries Ltd. 19. The ld. AR submitted that the principal activities of the company as per the annual return is that the company is engaged in manufacture of guidance wire and miniature control cable. The ld. AR drew our attention to the Profit & loss account of the assessee wherein the revenue from operations is mainly from sale of guidance wire. The ld. AR therefore submitted that the company is functionally not comparable with the assessee which is engaged in the manufacture of textile machinery. The ld. AR submitted that UMW Ltd. is engaged in manufacture of guidance wire used in the defence activities unlike assessee which caters to the textile industry. The ld. AR also submitted that the TPO and the DRP have unanimously considered the profile of the company as manufacture of other machinery for textile apparels and leather products which is factually not correct. 20. The ld. DR relied on the order of the DRP. IT(TP)A No.271/Bang/2021 Page 11 of 25 21. We heard the rival submissions and perused the material on record. We notice that as per the annual return as extracted below, the principal business activity of the company is manufacturing of guidance wire. 22. Also we notice that the major part of the revenue derived by the company is from sale of guidance wire. We also notice from the annual report (pg. 1493 of paper book) that one of the major suppliers for the company is Bharat Dynamics which is a Govt. of India Enterprise, which is a manufacturing base for guided weapon systems. Therefore we see merit in the submission of the ld AR that the company supplies the guided wire for defence activities and therefore not comparable with the assessee who supplies machinery to textile industry. We also notice that the TPO and the DRP have considered the profile of the company as manufacturer of other machinery for textiles, apparel and other industries (page 11 to DRP order), whereas as per the annual return, the extract of which is reproduced above, the IT(TP)A No.271/Bang/2021 Page 12 of 25 company is engaged in the manufacture of guidance wire and miniature control cable. In view of the discussion, we hold that the functional profile of UMW Industries Ltd. is different from that of the assessee and therefore not comparable. The AO/TPO is directed to exclude the company from list of comparables. In view of this, Ground No.13 has become infructuous. Lohia Corporation Ltd. 23. The assessee contended before the TPO and the DRP that the company incurs significant expenditure towards R&D which is more than 3% on an average for the previous 3 years. The assessee on the other hand is a licensed manufacturer and relies on the technical know- how of which AE to manufacture the product. The TPO/DRP did not accept the contention of the assessee and held that – “The comparability is functionally similar to the taxpayer. Almost all manufacturing companies need to innovate and improvise the products they manufacture. Even product improvements and testing are categorised as R&D. Further the assessee also applies innovation and new technology in its business and it obtained technologies from its AE for wich it pays royalty. The objections of the tax payer is rejected in the backdrop of rejection of R&D expenses/sales of 3% and payment of royalty by the taxpayer.” 24. The ld AR submitted that the company carries its own R&D and carries on a full-fledged manufacturing activity based on its own research. The ld AR also submitted that the company has significant intangibles in the nature of copyrights, patents and other operating intangibles which is the result of the R&D activities undertaken by it. The ld AR further submitted that the assessee does not conduct any IT(TP)A No.271/Bang/2021 Page 13 of 25 R&D activity on its own and relies on the technical know-how of its AE to manufacture the products. Therefore it is submitted that the company is not a suitable comparable. The ld AR also submitted that applying the R&D filter is widely accepted by various judicial pronouncements and in this regard relied on the following decision – Name of the assessee Appellate Authority Reference BMCSoftware India Pvt Ltd ITAT - Pune ITA No.1425/Pun/2010 Bindview India Pvt Ltd ITAT - Pune ITA No.1501/Pun/2011 Telcordia Technologies India Pvt Ltd ITAT - Mumbai ITA No.7821/Mum/2011 Agnity India Technologies Pvt Ltd High Court – Delhi ITA 1204/2011 Toyota Tsusho India Private Ltd ITAT - Bangalore IT(TP)A No.3372/Bang/2018 25. The ld. DR submitted that R&D filter of 3% is not a standard filter applied and a comparable cannot be rejected on this ground. The ld. DR further submitted that it is only the average for the last 3 years towards R&D expenses is more than 3% of which FY 2015-16 and 2013-14 are less than 3%. Therefore, the filter applied based on average for last 3 years is not correct. The ld. DR further submitted that though the assessee is not directly involved in R&D, the assessee is using the R&D of its AE for which the assessee is paying royatly. Therefore the assesses is indirectly incurring expenditure towards R&D and accordingly the company cannot be rejected on the ground that the assessee is not directly incurring any R&D expenditure. The ld. DR also submitted that under TNMM, there should be a comparison at IT(TP)A No.271/Bang/2021 Page 14 of 25 an overall level for functionality and not at individual product level. The ld. DR therefore prayed for inclusion of the company. 26. We heard the rival submissions and perused the material on record. We notice from the above judicial pronouncements relied on by the assessee that application of R&D filter with a threshold limit of 3% is a settled position now. We also notice that the Bangalore Bench of the Tribunal in the case of KBACE Technologies Pvt. Ltd vs DCIT (ITA No.3189/Bang/2018 dated 29.1.2020) has also taken a similar view. In view of this we direct the TPO to exclude Lohia Corporation Ltd from the list of comparables. 27. Through ground No.9, the assessee contended that the TP adjustment should restricted to the value of only international transactions. In this regard, the ld. AR relied on the decision of the coordinate Bench of the Tribunal in the case of IKA India Pvt. Ltd. in IT(TP)A No.2192/Bang/2017. 28. We heard the rival submissions and perused the material on record. We notice that the coordinate Bench in the case of IKA India Pvt. Ltd. (supra) has considered the issue of restricting the TP adjustment to only the international transactions and held that – “54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE IT(TP)A No.271/Bang/2021 Page 15 of 25 transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm's length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm's length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 56. In view of the above 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.” 29. Respectfully following the above decision of the coordinate Bench, we hold that the TP adjustment should be restricted only to AE related transaction and direct the TPO/AO to compute the TP adjustment accordingly. 30. Through Ground No.10, the assessee is contending the issue of TPO not providing the benefit of adjustment for working capital to the assessee. In this regard, the ld. AR relied on the decision of the coordinate Bench in the case of Huawei where it was held as under:- IT(TP)A No.271/Bang/2021 Page 16 of 25 “We have heard the submissions of both sides on this issue based on the records placed before us. We note that, this issue has been considered by this coordinate bench of this Tribunal in the 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 – “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 insofar 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)**** (e) transactional net margin method, by which – (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base: (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the IT(TP)A No.271/Bang/2021 Page 17 of 25 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 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- IT(TP)A No.271/Bang/2021 Page 18 of 25 (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 DECO 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 DECO on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially effect the condition being examined in the methodology (e.g price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. IT(TP)A No.271/Bang/2021 Page 19 of 25 13. In Paragraphs 13 to 16 of the aforesaid DECO guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive 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 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 com parables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: IT(TP)A No.271/Bang/2021 Page 20 of 25 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 in 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 he kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ij) the selection of the appropriate interest rare (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining 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 or different segments and therefore proper comparison cannot be made. IT(TP)A No.271/Bang/2021 Page 21 of 25 (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 [2013]38 taxmann.com 231/[2014] 61 SOT 40. 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 v E Value Servc.com [2016] 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 IT(TP)A No.271/Bang/2021 Page 22 of 25 has also observed that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rates of interest 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 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 108(l)(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 IT(TP)A No.271/Bang/2021 Page 23 of 25 comparable in terms of Rule 108(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. In view of the above, we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee.” 31. Respectfully following the above decision of the Co-ordinate Bench we hold that the working capital adjustment is to be allowed as per actuals, after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/ AO are accordingly directed. 32. The assessee has also raised an additional ground which reads as under:- IT(TP)A No.271/Bang/2021 Page 24 of 25 “16. The Learned Assessing Officer/Learned Transfer Pricing Officer erred in rejecting the transfer pricing documentation maintained by the Appellant, in compliance with Section 92D of the Income-tax Act, 1961 read with relevant Income-tax Rules, 1962, thereby rejecting the comparable companies selected by in the transfer pricing documentation. The Appellant prays for the inclusion of below mentioned comparable companies selected in its transfer pricing documentation, which clear all the filters applied by the Learned Transfer Pricing Officer: a. GSL Textile India Pvt. Ltd. b. Texfab Engineers Private Limited.” 33. During the course of hearing, out of the above inclusion sought, the ld. AR pressed for the inclusion of only GSL Textiles and did not press Texfab Engineers P. Ltd. It was submitted that GSL Textiles clears all the filters and is to be included. This additional ground was not taken in the original ground and does not require fresh investigation into facts. Accordingly, he prayed for admission of additional ground. 34. After hearing both the parties, following the Hon’ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional ground is admitted for adjudication. 35. The ld AR submitted that GSL Textiles was a comparable selected in the TP documentation of the assessee which is rejected by the TPO. In the final list of comparables the TPO has not included the company. The ld. AR therefore prayed that the issue may be remitted IT(TP)A No.271/Bang/2021 Page 25 of 25 back to the TPO for fresh consideration. Accordingly, we remit the issue back to the TPO to consider the inclusion of GSL Textiles afresh and decide based on merits. It is ordered accordingly. 36. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 14 th day of February, 2023. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 14 th February, 2023. / Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.