Federal Mogul Automotive Products (India) Ltd., Gurgaon V. DCIT, New Delhi

ITA 5881/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7967 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 10-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 22-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR B R R KUMAR
• Assessee Lawyers: HIMANSHU S SINHA
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.5881/DEL/2012 ASSESSMENT YEAR : 2008-09 FEDERAL MOGUL AUTOMOTIVE PRODUCTS (INDIA) LTD., 10 TH FLOOR, TOWER-B, PARAS TWIN TOWERS, SECTOR 54, GOLF COURSE ROAD, GURGAON. PAN: AAACF4128M VS. DCIT, CIRCLE-11(1), CR BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU S. SINHA, ADVOCATE DEPARTMENT BY : DR. B.R.R. KUMAR, SR. DR DATE OF HEARING : 10.05.2016 DATE OF PRONOUNCEMENT : 11.05.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 28.9 .2012 UNDER SECTION ITA NO.5881/DEL/2012 2 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT , 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMEN T YEAR 2008-09. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.2,74,69,498/-. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF FEDERAL MOGUL PTY. LTD., AUSTRA LIA, WHEREAS FEDERAL MOGUL CORPORATION, USA IS A PARENT COMPANY OF THE G ROUP. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G SPARK PLUGS AND ALSO IN MARKETING AND DISTRIBUTION OPERATIONS OF A WIDE RANGE OF OTHER FEDERAL MOGUL PRODUCTS INCLUDING WIPER BLADES, GLO W PLUGS, IGNITION COILS, ENGINE PARTS, OIL SEALS AND ANTIFRICTION BEA RINGS. THE ASSESSEE FILED ITS RETURN DECLARING NIL INCOME. SUCH RETURN WAS A CCOMPANIED BY AUDIT REPORT IN FORM NO. 3CEB DIVULGING NINE INTERNATIONA L TRANSACTIONS INCLUDING PURCHASE OF RAW MATERIAL COMPONENTS, PURC HASE OF TRADING MATERIAL, SALE OF FINISHED GOODS, SALE OF SEMI FINI SHED GOODS AND COMMISSION RECEIVED. THE ASSESSEE USED TRANSACTIONA L NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH T HE PROFIT LEVEL ITA NO.5881/DEL/2012 3 INDICATOR (PLI) OF OPERATING PROFIT/SALES. IT COMP UTED ITS OPERATING PROFIT MARGIN TO SALES AT 3.34%. FIVE COMPANIES WER E CHOSEN AS COMPARABLES WITH AN AVERAGE PROFIT RATE OF 1.77%. THAT IS HOW, THE ASSESSEE DECLARED THAT ALL OF ITS INTERNATIONAL TRA NSACTIONS WERE AT ARMS LENGTH PRICE (ALP) UNDER THE TNMM ON ENTITY LEVEL. THE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS REPORTED BY THE A SSESSEE. THE TPO DID NOT DISPUTE THE APPLICATION OF THE TNMM AS THE MOST APPROPRIATE METHOD WITH THE PLI OF OP/SALES. HE, HOWEVER, MADE ALTERNATIONS IN THE COMPARABLES SELECTED BY THE ASSESSEE. FINALLY A SET OF THREE COMPANIES, NAMELY, AUTO IGNITION LTD., INDIA-NIPPON ELECTRICAL S LTD. AND LUCAS TVS LTD. WAS TAKEN AS COMPARABLE WITH AN AVERAGE OP /SALES AT 8.82%. DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, TH E ASSESSEE SUBMITTED THAT ONE COMPANY, NAMELY, KUSALAVA INTERNATIONAL LT D., WAS ALSO COMPARABLE AND HENCE BE INCLUDED IN THE TALLY OF CO MPARABLES. THE TPO REFUSED TO INCLUDE THIS COMPANY IN THE LIST OF COM PARABLES ON THE PREMISE THAT THERE WERE SEVEN OTHER COMPARABLE COMP ANIES, APART FROM THOSE SELECTED BY THE ASSESSEE, AND HE WAS NOT GOIN G TO CONSIDER ANY ITA NO.5881/DEL/2012 4 FRESH COMPANY AS COMPARABLE, EITHER GIVEN BY THE AS SESSEE OR CHOSEN BY HIM. BY APPLYING THE AVERAGE OPERATING PROFIT MARGI N AT 8.82% OF THREE COMPARABLE COMPANIES, THE TPO PROPOSED TRANSFER PRI CING ADJUSTMENT AMOUNTING TO RS.2,74,69,498/-. THE AO INCLUDED THI S AMOUNT IN HIS DRAFT ORDER, WHICH WAS ASSAILED BY THE ASSESSEE BEF ORE THE DISPUTE RESOLUTION PANEL (DRP). NO RELIEF WAS ALLOWED BY TH E PANEL. ULTIMATELY, THE AO MADE AN ADDITION OF RS.2.74 CROR E ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THE ASSESSEE IS AGGRI EVED AGAINST THIS ADDITION. THIS ADDITION HAS BEEN CHALLENGED ON THRE E MAJOR COUNTS, NAMELY, COMPARABLES, NON-GRANTING OF WORKING CAPIT AL ADJUSTMENT AND MAKING TRANSFER PRICING ADDITION ON ENTITY LEVEL FI GURES. WE WILL DEAL WITH THESE THREE MAJOR ISSUES IN SERIATIM. I. COMPARABLES 3. THE LD. AR ASSAILED THE NON-INCLUSION OF KUSALA VA INTERNATIONAL LTD. IN THE FINAL SET OF COMPARABLES. BEFORE ESPOUSING T HE COMPARABILITY OR OTHERWISE OF THIS COMPANY, WE DEEM IT APPROPRIATE T O CONSIDER THE FUNCTIONAL PROFILE OF THE ASSESSEE COMPANY. A COPY OF TRANSFER PRICING ITA NO.5881/DEL/2012 5 STUDY REPORT IS AVAILABLE ON PAGES 81 ONWARDS OF TH E PAPER BOOK. PAGE 83 GIVES BRIEF PROFILE OF THE ASSESSEE AS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING SPARK PLUGS WITH MARKETIN G AND DISTRIBUTION OPERATIONS FOR A WIDE RANGE OF OTHER FEDERAL MOGUL PRODUCTS INCLUDING WIPER BLADES, GLOW PLUGS, IGNITION COILS, ETC. ON A FURTHER ANALYSIS OF THE TP STUDY REPORT, IT TRANSPIRES THAT THE ASSESSEE IS NOT ONLY ENGAGED IN MANUFACTURE OF SPARK PLUGS AND OTHER AUTO COMPONENT S, BUT, IS ALSO ENGAGED IN TRADING BUSINESS APART FROM EARNING COMM ISSION FROM SALE OF FEDERAL MOGUL PRODUCTS IN THE CAPACITY OF AN AGENT. A COPY OF THE ASSESSEES PROFIT & LOSS ACCOUNT IS AVAILABLE ON PA GE 221 OF THE PAPER BOOK, WHICH SHOWS TOTAL SALES OF GOODS AT RS.54.28 CRORE WITH SALE OF FINISHED GOODS AT RS.49.70 CRORE AND SALE OF TRADED GOODS AT RS.4.58 CRORE. APART FROM THAT, THE ASSESSEE EARNED COMMIS SION AMOUNTING TO RS.60.42 LAC ON SALE OF PRODUCTS ON BEHALF OF ITS A E. ON A SPECIFIC QUERY ABOUT ANY AGREEMENT UNDER WHICH THE ASSESSEE UNDERT OOK TO DO MANUFACTURING, TRADING AND COMMISSION BUSINESS WITH ITS AE, THE LD. AR SUBMITTED THAT NO SUCH FORMAL AGREEMENT WAS ENTERED INTO. THIS HAS NOT BEEN CONTROVERTED BY THE LD. DR WITH ANY COGENT MAT ERIAL. AS SUCH, WE ITA NO.5881/DEL/2012 6 PROCEED TO DETERMINE THE COMPARABILITY OF THE COMPA NY CHALLENGED BY THE LD. AR ON THE PREMISE THAT THE ASSESSEE IS ENGA GED IN MANUFACTURING AND TRADING OF SPARK PLUGS, WIPER BLADES, IGNITION COILS AND ENGINE PARTS, ETC. IN ADDITION TO INDENTING BUSINESS. 4. WE HAVE NOTED ABOVE THAT THE TPO REFUSED TO CONS IDER THE COMPARABILITY OR OTHERWISE OF KUSALAVA INTERNATIONA L LTD. ON THE REASON THAT HE ESCHEWED TO CONSIDER NEW COMPANIES, DESPITE THERE BEING SEVEN OTHER COMPARABLE COMPANIES FOUND BY HIM ON SEARCH. HE, HOWEVER, MADE A PASSING REFERENCE ON PAGE 15 OF HIS ORDER TH AT KUSALAVA INTERNATIONAL LTD. ENTERED INTO A PHASE OF LOSSES W HICH WAS DIFFERENT FROM THE ASSESSEES ECONOMIC HEALTH. THE LD. AR SU BMITTED THAT THIS COMPANY IS ENGAGED IN THE SALE OF CYLINDER LINERS U SED IN ENGINES OF COMMERCIAL VEHICLES WHICH WAS SIMILAR TO THE ASSESS EE ALSO MANUFACTURING SPARK PLUGS, ETC., USED IN THE ENGINE OF COMMERCIAL VEHICLES. THIS WAS OPPOSED BY THE LD. DR BY CONTEN DING THAT THE MANUFACTURING OF ANY COMPONENT USED IN COMMERCIAL V EHICLES DOES NOT PER SE MAKES ITS MANUFACTURER AS COMPARABLE TO THE MANUFA CTURER OF ITA NO.5881/DEL/2012 7 SOME OTHER PART OF COMMERCIAL VEHICLE, AS THE TWO M AY BE MATERIALLY DIFFERENT IN TERMS OF VALUE, CHARACTERISTICS AND CO MPLEXITY. HE ALSO TRIED TO DISTINGUISH BETWEEN PRODUCT LINES MANUFACTURED B Y KUSALAVA INTERNATIONAL LTD. AND THE ASSESSEE. 5. WE FIND THAT THERE IS NOT MUCH DISCUSSION IN THE ORDER OF THE TPO ABOUT THE FUNCTIONAL PROFILE OF KUSALAVA INTERNATIO NAL LTD. THE TPO SIMPLY EXCLUDED THIS COMPANY FROM THE LIST OF COMPA RABLES BY OBSERVING THAT IT HAS ENTERED INTO A PHASE OF LOSSES. IN THE IMMEDIATELY NEXT PARA ON THE SAME PAGE NO.15, THE TPO HAS REMARKABLY OBSE RVED AS UNDER:- IN THE LIKE MANNER AS THE ASSESSEE HAS PROPOSED AB OVE FRESH COMPARABLES I ALSO PROPOSE SOME NEW COMPARABLE IN E QUAL NUMBERS FROM MY SEARCH FROM HAVING SIMILAR LINE OF PRODUCT. AFTER INCLUSION OF THE FRESH COMPARABLES OF THE ASSESSEE AS WELL AS OF THE DEPT THE POSITION OF THE MARGIN SHOOTS TO 10.80 DETAILED AS UNDER :- INDIA NIPPON ELECTRICALS LTD. 120.23 9.74 8.88 LUCAS TVS 958.29 8.34 7.70 AUTO IGNITION LTD. 132.89 10.97 9.88 VARROC ENGINEERING 629.22 13.90 12.21 HI TECH ARAI 151.44 21.46 17.67 VARROC ENGINEERING 629.22 13.90 12.21 ASCO INDIA LTD. 53.56 69.29 40.93 PERFECT CIRCLE INDIA LTD. 76.97 2.32 2.27 RANE ENGINE VALVE LTD. 198.41 4.54 4.34 AUTO GALLON INDUSTRIES LTD. 9.02 4.19 4.02 KUSALAVA INTERNATIONAL 83.26 -1.32 -1.33 MEAN 10.80 ITA NO.5881/DEL/2012 8 SINCE, NEW COMPARABLES PROPOSED BY THE ASSESSEE ARE REJECTED, I AM ALSO NOT GOING TO USE FRESH COMPARABLES PROPOSED BY ME. 6. A CAREFUL PERUSAL OF THE ABOVE RECORDING BY THE TPO DIVULGES THAT APART FROM THREE COMPANIES FINALLY SELECTED AS COMP ARABLES OUT OF THE ASSESSEES ORIGINAL LIST OF FIVE COMPARABLES, THE T PO NEITHER CONSIDERED KUSALAVA INTERNATIONAL LTD., AS PROPOSED BY THE ASS ESSEE, AS COMPARABLE NOR THE OTHER SEVEN COMPANIES INCLUDED IN THE ABOVE TABLE SELECTED BY HIM AS COMPARABLE ON FRESH SEARCH. THIS STAND WAS T AKEN BY THE TPO FOR NOT CONSIDERING ANY FRESH COMPARABLES PROPOSED EITH ER BY THE ASSESSEE OR SEARCHED BY HIM. ONCE WE ACCEPT THE CONTENTION ADVANCED ON BEHALF OF THE ASSESSEE AND PROCEED TO CONSIDER KUSALAVA IN TERNATIONAL LTD. AS COMPARABLE, WHICH WAS PUT FORTH BY THE ASSESSEE DUR ING THE COURSE OF THE PROCEEDINGS BEFORE THE TPO, IT IS, BUT NATURAL THAT WE SHOULD ALSO CONSIDER THE OTHER SEVEN COMPANIES SELECTED BY THE TPO AS COMPARABLE IN THE FRESH SEARCH WHICH WERE EXCLUDED BECAUSE HE WAS NOT ENTERTAINING ANY FRESH COMPARABLES. IF WE ACCEPT THE OBJECTION OF THE LD. AR FOR CONSIDERING ONLY KUSALAVA INTERNATIONAL LTD. AS COM PARABLE AND IGNORING THOSE SEVEN SELECTED BY THE TPO AND INCORPORATED IN HIS ORDER, IT WOULD ITA NO.5881/DEL/2012 9 DISTORT THE OVERALL COMPARABILITY AND AMOUNT TO BLO WING HOT AND COLD IN THE SAME BREATH. OBVIOUSLY, THIS CANNOT BE PERMITT ED. ONCE WE ARE PROPOSING TO CONSIDER THE COMPARABILITY OR OTHERWIS E OF KUSALAVA INTERNATIONAL, IT IS JUST, FAIR AND EQUITABLE TO A LSO CONSIDER THE OTHER SEVEN COMPANIES SELECTED BY THE TPO FROM THE ANGLE OF COMPARABILITY. A LINE OF DISTINCTION NEEDS TO BE DRAWN BETWEEN THE CASES IN WHICH THE TPO IGNORES SOME COMPANIES ON THE BASIS OF SOME LO GICAL REASONS AFTER REFERRING TO THEM AS COMPARABLE IN HIS ORDER AND TH E CASES IN WHICH THE TPO DOES NOT REFER TO ANY NEW COMPANY AS COMPARABLE . WHEREAS IN THE FIRST SET OF CASES, THERE IS FULL JUSTIFICATION FOR DIRECTING THE CONSIDERATION OF SUCH COMPANIES AS COMPARABLE ON PARITY, OF COURS E, AFTER DUE OPPORTUNITY TO THE ASSESSEE, IN THE SECOND SET OF C ASES, THERE CAN BE NO RATIONALE IN REQUIRING THE TPO TO ONCE AGAIN INITIA TE A FRESH PROCESS OF SEARCH FOR FINDING OUT NEW COMPANIES IN THE CIRCUMS TANCES AS ARE PREVAILING BEFORE US. EXTANTLY, WE ARE COVERED UND ER THE FIRST SITUATION IN WHICH THE TPO REFERRED TO SEVEN NEW COMPANIES AS COMPARABLE IN HIS ORDER BUT IGNORED THEM ON THE TOUCHSTONE OF PARITY IN NOT CONSIDERING ANY NEW COMPANY AS COMPARABLE INCLUDING THOSE PROPO SED BY THE ITA NO.5881/DEL/2012 10 ASSESSEE. ONCE, THE ASSESSEE HAS ASSAILED THE NON- INCLUSION OF ITS COMPANY, NAMELY, KUSALAVA INTERNATIONAL, WHICH IT I S ALSO LAWFULLY ENTITLED TO AND WE ACCEPT SUCH CONTENTION, THEN SIM ULTANEOUSLY THE OTHER SEVEN COMPANIES ORIGINALLY SELECTED BY THE TPO SHOU LD ALSO BE TAKEN UP FOR CONSIDERATION. WE HOLD ACCORDINGLY. IN OUR OPIN ION, CONSIDERING THE COMPARABILITY OF THESE SEVEN COMPANIES DOES NOT AM OUNT TO MAKING OUT A NEW CASE BY THE AO/TPO BECAUSE THESE SEVEN COMPAN IES WERE SPECIFICALLY TAKEN NOTE OF BY THE TPO AS COMPARABLE IN HIS ORDER. 7. TURNING TO THE MERITS OF COMPARABILITY, WE FIN D THAT THERE IS NOT MUCH DISCUSSION IN THE TPOS ORDER ABOUT THE FUNCTI ONAL PROFILE OF KUSALAVA INTERNATIONAL LTD., ON ONE HAND AND OTHER SEVEN COMPANIES VIZ., VARROC ENGINEERING, HI TECH ARAI, VARROC ENGI NEERING, ASCO INDIA LTD., PERFECT CIRCLE INDIA LTD., RANE ENGINE VALVE LTD., AUTO GALLON INDUSTRIES LTD., ON THE OTHER. UNDER SUCH CIRCUMST ANCES, WE DEEM IT BEFITTING TO SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FOR CONSIDERING THE COMPARABILITY OR OTHE RWISE OF KUSALAVA ITA NO.5881/DEL/2012 11 INTERNATIONAL LTD. AND OTHER SEVEN COMPANIES AFRESH , AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 8. APART FROM THE INCLUSION OF THE KUSALAVA INTERNA TIONAL LTD., THE LD. AR ALSO PRESSED FOR THE INCLUSION M/S DESIGN AUTO S YSTEM IN THE LIST OF COMPARABLES. IT WAS FAIRLY ADMITTED THAT THIS COMP ANY WAS NOT CHOSEN BY THE ASSESSEE AS COMPARABLE EITHER BEFORE THE TPO OR BEFORE THE DRP. REFERRING TO THE ANNUAL REPORT OF THIS COMPANY, IT WAS ARGUED THAT THE SAME WAS FUNCTIONALLY SIMILAR. THE LD. DR OPPOSED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. 9. IN AN EARLIER PARA, WE HAVE RESTORED FOR FRESH C ONSIDERATION OF KUSALAVA INTERNATIONAL LTD. AND SEVEN OTHER COMPANI ES TO THE TPO AFTER ALLOWING DUE OPPORTUNITY TO THE ASSESSEE. WHILE CA RRYING OUT THIS EXERCISE, THE TPO IS ALSO DIRECTED TO CONSIDER THE COMPARABILITY OR OTHERWISE OF DESIGN AUTO SYSTEMS AND THEN DEAL WITH IT ACCORDINGLY. II. WORKING CAPITAL ADJUSTMENT 10. THE NEXT ISSUE RAISED BY THE LD. AR IS ABOUT NO T GRANTING OF WORKING CAPITAL ADJUSTMENT. THE ASSESSEE REQUESTED FOR ALLOWING ITA NO.5881/DEL/2012 12 WORKING CAPITAL ADJUSTMENT WHICH WAS REFUSED BY THE TPO. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP AS WELL. NOW T HE SAME IS CHALLENGED BEFORE US. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. WE ARE NOT INCLINED TO ACCEPT THE VIEW CANVASSED BY THE AUTHORITIES THAT THE WORKING CAPITAL ADJUSTMENT CANNOT BE ALLOWED BECAUSE THE ASSESSEE FAILED TO DEMONSTRATE THAT THE DIFFERENCE IN THE WORKING CAPITAL DEPLOYED WAS MAKING A DIFFERENCE IN THE MARGIN EARNED BY THE ASSESSEE AND COMPARABLES. ON THE CONTRARY, T HE LD. AR HAS DRAWN OUR ATTENTION TOWARDS THE DETAILS FURNISHED BY THE ASSESSEE FOR CLAIMING WORKING CAPITAL ADJUSTMENT. IT IS VIVID THAT THE WO RKING CAPITAL ADJUSTMENT IS RESTRICTED TO INVENTORY, TRADE RECEIV ABLES AND TRADE PAYABLES. IF A COMPANY CARRIES HIGH TRADE RECEIVAB LES, IT WOULD MEAN THAT IT IS ALLOWING ITS CUSTOMERS RELATIVELY LONGER PERIOD TO PAY THEIR DUES, WHICH WILL RESULT INTO HIGHER INTEREST COST AND THE RESULTANT LOW NET PROFIT. SIMILARLY, BY CARRYING HIGH TRADE PAYABLES, A COMPA NY BENEFITS FROM A RELATIVELY LONGER PERIOD AVAILABLE TO IT FOR PAYING BACK THE DUES TO ITS ITA NO.5881/DEL/2012 13 SUPPLIERS, WHICH REDUCES THE INTEREST COST AND INC REASES PROFITS. IN ORDER TO NEUTRALIZE THE DIFFERENCES ON ACCOUNT OF CARRYIN G HIGH OR LOW INVENTORY, TRADE PAYABLES AND TRADE RECEIVABLES, AS THE CASE MAY BE, IT BECOMES EMINENT TO ALLOW WORKING CAPITAL ADJUSTMENT SO AS TO BRING THE CASE OF THE ASSESSEE AT PAR WITH THE OTHER FUNCTION ALLY COMPARABLE ENTITIES. WE, THEREFORE, AGREE IN PRINCIPLE WITH T HE GRANT OF WORKING CAPITAL ADJUSTMENT. 12. THE VIEW TAKEN BY THE DISPUTE RESOLUTION PAN EL FOR NOT ALLOWING SUCH AN ADJUSTMENT THAT THE ASSESSEE DID NOT FURNIS H NECESSARY DETAILS IS NOT TENABLE SINCE THE ASSESSEE DID FURNISH THE NECE SSARY DETAILS, WHICH HAVE BEEN ADVERTED TO DURING THE COURSE OF PROCEEDI NGS BEFORE US. HOWEVER, SINCE SUCH DETAILS QUA THE GRANT OF SUCH AN ADJUSTMENT HAVE NOT BEEN EXAMINED BECAUSE OF REFUSAL TO GRANT SUCH ADJUSTMENT AT THE THRESHOLD, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE FIT AND PROPER TO SET ASIDE THE IMPUGNED ORDER ON THIS ISSU E AND SEND THE MATTER BACK TO THE FILE OF THE AO/TPO FOR COMPUTING AND AL LOWING WORKING CAPITAL ADJUSTMENT, IF ANY, AVAILABLE TO THE ASSESS EE IN THE LIGHT OF OUR ITA NO.5881/DEL/2012 14 ABOVE DISCUSSION. ONCE IT IS HELD THAT SUCH AN ADJ USTMENT IS ALLOWABLE QUA ALL THE COMPARABLES, THEN IT SHOULD BE CARRIED OUT WHETHER IT FAVOURS OR DISFAVORS THE ASSESSEE. IT GOES WITHOUT SAYING T HAT THE ASSESSEE WILL BE ALLOWED AN OPPORTUNITY OF HEARING IN SUCH FRESH DET ERMINATION OF THE WORKING CAPITAL ADJUSTMENT, IF ANY. III. T.P. ADJUSTMENT ONLY FOR INTERNATIONAL TRANSACTIONS. 13. THE NEXT CHALLENGE OF THE LD. AR WAS AGAINST THE COMPUTATION OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF TRANSACTI ON WITH ASSOCIATED ENTERPRISES (AES) AND NON-AES. COMPUTATION OF THE ARMS LENGTH PRICE BY THE TPO ON THE LAST PAGE OF HIS ORDER DIVULGES T HAT HE TOOK OPERATING PROFIT AMOUNTING TO RS.4,42,38,699 AT A MARGIN OF 8.82%. THIS HAS BEEN CALCULATED BY THE TPO ON ENTITY LEVEL FIGURES OF TH E ASSESSEE, INCLUDING THOSE CONCERNING UNRELATED TRANSACTIONS. BY APPLY ING THE ARITHMETIC MEAN OF THE COMPARABLES AT 8.82%, THE TPO PROPOSED A TRANSFER PRICING ADJUSTMENT OF RS.2,74,69,498/-. THE LD. AR CONTEND ED THAT NO TRANSFER PRICING ADJUSTMENT IS POSSIBLE IN RESPECT OF TRANSA CTIONS WITH NON-AES. ITA NO.5881/DEL/2012 15 14. IT IS UNCONTROVERTED, AS IS ALSO APPARENT F ROM THE TPOS ORDER, THAT THE TRANSFER PRICING ADJUSTMENT HAS BEEN MADE BY CO NSIDERING THE TOTAL SALES EFFECTED BY THE ASSESSEE IN RESPECT OF TRANSA CTIONS WITH THE ASSOCIATED ENTERPRISES (AE) AND NON-AES. AN ADDITI ON TOWARDS TRANSFER PRICING ADJUSTMENT IS MADE BY COMPARING THE ASSESSE ES PROFIT RATE FROM THE INTERNATIONAL TRANSACTION WITH THAT OF COMPARAB LE UNCONTROLLED TRANSACTIONS. UNDER THE TNMM, THE PROCESS IS SIMPLE IN INITIALLY FINDING OUT THE OPERATING PROFIT MARGIN OF THE ASSESSEE AND THEN THE AVERAGE ADJUSTED OPERATING PROFIT MARGIN OF COMPARABLE CASE S. SUCH ADJUSTED PROFIT MARGIN OF THE COMPARABLES CONSTITUTES BENCHM ARK MARGIN, WHICH IS THEN COMPARED WITH THE OPERATING PROFIT MARGIN F ROM THE ASSESSEES INTERNATIONAL TRANSACTIONS WITH ITS AE. IT IS NOT PERMISSIBLE TO MAKE TRANSFER PRICING ADJUSTMENT, BY APPLYING THE AVERAG E OPERATING PROFIT MARGIN OF THE COMPARABLES ON THE ASSESSEES UNIVERS AL TRANSACTIONS ENTERED INTO WITH BOTH THE AES AND NON-AES. AS THE ENTIRE EXERCISE UNDER CHAPTER-X IS CONFINED TO COMPUTING TOTAL INCO ME OF THE ASSESSEE FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARMS LENGTH PRICE, THERE IS NO SCOPE FOR COMPUTING INCOME FROM NON-INT ERNATIONAL ITA NO.5881/DEL/2012 16 TRANSACTIONS HAVING REGARD TO THE ALP. AS THE TPO HAS COMPUTED THE TRANSFER PRICING ADJUSTMENT QUA ALL THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH REFERENCE TO THE BASE OF TOTAL SALES , ALSO INCLUSIVE OF SALES MADE TO NON-AES, WE VACATE THE IMPUGNED ORDE R ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE TPO/AO FOR RE CALCULATING THE AMOUNT OF ADDITION OF TRANSFER PRICING ADJUSTMENT BY TAKIN G INTO CONSIDERATION THE INTERNATIONAL TRANSACTIONS ONLY TO THE EXCLUSIO N OF TRANSACTIONS WITH NON-AES. THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD. OUR THIS VIEW IS FORTIFIED BY A RECENT JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. KEIHIN PANALFA LTD. (2016) 381 ITR 407 (DEL) . SIMILAR VIEW HAS BEEN TAKEN IN CIT VS. THYSSEN KRUPP INDUSTRIES INDIA P. LTD. (2016) 381 ITR 413 (BOM) . 15. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON T HE ISSUE OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT AND RE MIT THE MATTER TO THE FILE OF AO/TPO FOR FRESH DETERMINATION OF THE ALP O F THE INTERNATIONAL TRANSACTION IN CONSONANCE WITH OUR ABOVE OBSERVATIO NS/DIRECTIONS, AFTER ALLOWING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE . ITA NO.5881/DEL/2012 17 16. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 11.05.201 5. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 11 TH MAY, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.