2012 (11) TMI 174 - AT - Income Tax

Tribunal upholds income adjustment in transfer pricing case, excludes company from comparables, remits working capital for reassessment.

The Tribunal upheld the Assessing Officer's order to enhance the assessee's income by Rs. 1,04,37,360 due to adjustments in the arm's length price of ... Computation of arm's length price – ALP - working capital adjustment – selection of comparable - Held that:- Price charged by the assessee varies by more than 5% from the Arm's Length Price - adjustment is to be made to the income of the assessee, being the difference between the arm's length price and the price charged by the assessee from it's A.Es for export services - assessee has given the relevant details but these details have neither been looked into by the learned TPO nor by the Dispute Resolution Panel - TPO has not asked any further details after this letter otherwise assessee could have submitted any other details if required – matter remitted it to the Assessing Officer for a limited purpose i.e. learned Assessing Officer shall investigate the issue about granting working capital adjustment to the assessee - appeal of the assessee is partly allowed. Issues Involved:1. Addition to total income by recomputing arm's length price of international transactions.2. Selection of comparables and exclusion of VJIL Consulting Ltd.3. Claim for working capital adjustment.Issue-wise Detailed Analysis:1. Addition to Total Income by Recomputation of Arm's Length Price:The assessee filed its return declaring taxable income of Rs. 33,92,504. The Assessing Officer (AO) scrutinized the return and observed international transactions with associated enterprises (AEs), leading to a reference to the Transfer Pricing Officer (TPO). The TPO analyzed the transactions and determined an adjustment of Rs. 1,04,37,360 to the arm's length price (ALP) under section 92 of the Income-tax Act, 1961. The AO framed a draft assessment order based on the TPO's findings, which was subsequently confirmed by the Dispute Resolution Panel (DRP). The DRP upheld the TPO's adjustments, leading to the enhancement of the assessee's income by Rs. 1,04,37,360.2. Selection of Comparables and Exclusion of VJIL Consulting Ltd.:The assessee selected seven comparables in its Transfer Pricing (TP) study report, claiming an average margin of 9.19%. The TPO excluded VJIL Consulting Ltd. from the list of comparables, citing reasons such as functional dissimilarity, persistent losses, and untraceable statutory and accounting records. The TPO's analysis showed that VJIL Consulting was primarily engaged in software development, unlike the assessee's digital mapping services. The TPO also noted significant management disputes and financial irregularities in VJIL Consulting, leading to its exclusion. The Tribunal upheld the TPO's decision to exclude VJIL Consulting Ltd. based on these cumulative factors.3. Claim for Working Capital Adjustment:The assessee claimed a working capital adjustment, which the TPO rejected, arguing that the assessee did not provide sufficient empirical data to justify the adjustment. The TPO's detailed analysis emphasized that the Indian transfer pricing provisions allow only reasonably accurate adjustments, and the assessee failed to exhibit different working capital intensities between itself and the comparables. The Tribunal noted that the assessee had submitted relevant details in a letter dated March 4, 2009, which were not considered by the TPO or the DRP. Consequently, the Tribunal set aside the order on this issue and remitted it to the AO for re-adjudication, instructing the AO to investigate the working capital adjustment claim and decide in accordance with the law after providing the assessee with a fair hearing.Conclusion:The Tribunal upheld the AO's order on all issues except the working capital adjustment, which was remitted for re-adjudication. The appeal was partly allowed, directing the AO to reassess the working capital adjustment claim with due consideration of the evidence provided by the assessee.