Working Capital Adjustment Upheld; Assessing Officer to Verify Calculations in 45 Days, Dismissing Both Parties' Appeals.

The Tribunal upheld the CIT(A)'s decision to allow a working capital adjustment, directing the Assessing Officer to verify calculations and complete the exercise within 45 days. As a result, the appeals by both the Revenue and the assessee were dismissed. Other issues raised by the assessee, such as the rejection of comparables, administrative expenses, risk adjustment, and tax considerations, were not specifically addressed due to the resolution of the working capital adjustment.

---

---

Issues Involved:
1. Working Capital Adjustment
2. Rejection of Comparables
3. Adjustment of Administrative Expenses
4. Operating Margins and Non-Operating Expenses
5. Risk Adjustment
6. Tax Cost and Profit After Tax Consideration
7. Eligibility for Tax Holiday and Manipulation of International Transactions

Detailed Analysis:

1. Working Capital Adjustment:
The primary issue raised by the Revenue was the CIT(A)'s allowance of working capital adjustment without considering the correct practice of taking the average of opening and closing balances. The CIT(A) noted that the assessee, a wholly owned subsidiary of its parent AE company, worked only for the said company at a cost plus 10% margin, and thus, had minimal working capital requirements compared to other comparables. The CIT(A) directed the Assessing Officer to verify the calculation and allow working capital adjustment as per records, which would bring the margins within the acceptable range of +/- 5%. The Tribunal upheld the CIT(A)'s decision, directing the Assessing Officer to complete the exercise within 45 days.

2. Rejection of Comparables:
The assessee contended that the CIT(A) erred in confirming the rejection of certain companies considered as comparable due to functional differences and being loss-making. The CIT(A) followed the decision of the Special Bench of ITAT - Chandigarh Bench in DCIT v. Quark Systems (P) Ltd, which held that merely because a comparable is making a loss, it cannot be excluded. The Tribunal did not specifically adjudicate this issue due to the resolution of the working capital adjustment.

3. Adjustment of Administrative Expenses:
The assessee argued that the CIT(A) erred in not allowing adjustments for basic administrative expenses incurred to maintain corporate identity and support staff, which were not part of "Service Provider costs" as per the inter-company services agreement. The Tribunal did not specifically address this issue due to the resolution of the working capital adjustment.

4. Operating Margins and Non-Operating Expenses:
The assessee contended that the CIT(A) did not appreciate that the operating margins as per the inter-company services agreement were 10%, and non-operating expenses such as loss on sale of assets and donations should be added back while calculating operating margins. The Tribunal did not specifically address this issue due to the resolution of the working capital adjustment.

5. Risk Adjustment:
The assessee argued that the CIT(A) erred in not granting any adjustment towards the lower risk borne by the assessee compared to the comparables. The Tribunal noted that the TPO did not allow the risk adjustment due to lack of supporting evidence. The Tribunal did not specifically address this issue due to the resolution of the working capital adjustment.

6. Tax Cost and Profit After Tax Consideration:
The assessee contended that for benchmarking purposes, profit after tax should have been considered, and tax cost should be part of operating costs as the assessee was eligible for deduction u/s. 10A. The Tribunal did not specifically address this issue due to the resolution of the working capital adjustment.

7. Eligibility for Tax Holiday and Manipulation of International Transactions:
The assessee argued that it was eligible for a tax holiday u/s. 10A and had no reason to manipulate the value of its international transactions, as there was no benefit in shifting profits outside India. The Tribunal did not specifically address this issue due to the resolution of the working capital adjustment.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to allow working capital adjustment, directing the Assessing Officer to complete the exercise within 45 days. Consequently, the appeals of both the Revenue and the assessee were dismissed. The Tribunal did not specifically address other issues raised by the assessee due to the resolution of the working capital adjustment.

---