Tribunal grants appeal, stresses fair assessment of working capital adjustment claim in ITES segment

The Tribunal allowed the appeal for statistical purposes, emphasizing the need for a fair consideration of the working capital adjustment claim by the authorities. The matter was remitted back to the AO/TPO for a detailed examination of the working capital adjustment claim in the ITES segment for the assessment year 2006-07. The Tribunal directed the authorities to reconsider and grant the working capital adjustment if found applicable, highlighting the importance of thorough assessment before dismissing such claims.

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Issues:
Transfer pricing adjustment in ITES segment
Grant of working capital adjustment

Analysis:
1. Transfer pricing adjustment in ITES segment:
The appeal was against the AO's order under sections 143(3), 144C, and 254 of the Income-tax Act, 1961 for the assessment year 2006-07. Initially, TP adjustments were made for Software development and IT enabled services (ITES) segments. However, in the present proceedings, the dispute was limited to the ITES segment. The assessee applied the Transactional Net Margin Method (TNMM) with the Profit level indicator (PLI) of OP to OC. The TPO selected four comparable cases, calculating their profits' arithmetic mean at 19.22%. Due to errors in the comparables' profit rates, the TPO rectified the mean to 18.71%. The AO then passed the impugned order based on this. The assessee contended that working capital adjustment was not granted, which was legally due. The TPO and DRP rejected this claim without proper examination. The authorities failed to consider the claim on its merits, leading to the appeal.

2. Grant of working capital adjustment:
The contention regarding the working capital adjustment was pivotal in this case. The TPO and DRP dismissed the claim without a detailed examination, asserting it was only applicable to the manufacturing or trading sector. However, the Tribunal in a previous case had ruled that such claims cannot be rejected without a thorough assessment. The Tribunal remitted the matter back to the AO/TPO for a detailed examination of the working capital adjustment claim. The assessee highlighted that the TPO had allowed working capital adjustment in the two subsequent assessment years. Consequently, the Tribunal set aside the impugned order and directed the AO/TPO to reconsider the working capital adjustment claim on its merits and grant it if found applicable.

In conclusion, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a fair consideration of the working capital adjustment claim by the authorities.

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