2019 (4) TMI 1427 - AT - Income Tax

Tribunal grants working capital adjustment in Transfer Pricing case, impacting income addition

The Tribunal allowed the assessee's appeal concerning Transfer Pricing Adjustment by directing the TPO to permit working capital adjustment as per DRP's ... TP Adjustment - working capital adjustment - DRP specifically directed TPO to allow the working capital adjustment, which is not followed by the TPO - HELD THAT:- We, therefore, direct the AO/TPO to allow the working capital adjustment while determining the Arm’s Length Price of the relevant international transactions of the assessee with its AE by following these specific directions given by the DRP. Assesese’s appeal is accordingly allowed. Working capital requirements affect the margins and costs because this is an implication which is recovered /recoverable from the customers. Considering Rule 10B(30 and the facts in this case, working capital adjustment should be made provided reliable data is furnished by the assessee to the TPO. The claim for working capital adjustment has consistently been accepted in several decisions of the ITAT. Considering the facts, the TPO is directed to give working capital adjustment using the methodology given in Annexure to Chapter III of OECD guidelines and apply SBI Prime Lending rate (as on 30th June of the relevant financial year) as the interest rate. TP Adjustment in respect of other grounds - as submitted that if TPO allow the working capital adjustment as per the specific directions given by the DRP - difference between the ALP so computed and the price paid by the assessee would be within the permissible limit requiring no addition to be made to on account of TP Adjustment - HELD THAT:- As we have directed the Assessing Officer/TPO to allow such working capital adjustment as per the specific directions given by the DRP, the other grounds raised by the assessee in this appeal relating to the issue of Transfer Pricing Adjustment have become infructuous and even the ld. Counsel for the assessee has accepted this position. Issues:Transfer Pricing Adjustment, Working Capital Adjustment, Validity of Reference under Section 92CA(1), Selection of Comparable Companies, Arm's Length Price Determination, Compliance with DRP Directions, Addition to Total Income, Interest Levied, Penalty Proceedings.Transfer Pricing Adjustment:The appeal was against the addition of Transfer Pricing Adjustment to the total income of the assessee. The Assessing Officer made the addition based on the TPO's determination of Arm's Length Price for international transactions with the Associated Enterprise. The DRP recomputed the adjustment, leading to a revised addition. The assessee challenged the adjustment on various grounds, including the rejection of Transfer Pricing documentation and the methodology used by the TPO. The Tribunal directed the TPO to allow working capital adjustment as per DRP's specific directions, ultimately allowing the assessee's appeal on this ground.Working Capital Adjustment:The issue of working capital adjustment was raised by the assessee before the DRP, who directed the TPO to consider this adjustment while determining the Arm's Length Price. Despite specific directions, the TPO did not follow this instruction while recomputing the Transfer Pricing Adjustment. The Tribunal directed the Assessing Officer/TPO to allow the working capital adjustment as per the DRP's directions, thereby allowing this ground of appeal for the assessee.Validity of Reference under Section 92CA(1):One of the grounds raised by the assessee was the failure to make a valid reference under Section 92CA(1) to the TPO for computing the Arm's Length Price of international transactions. This issue was raised to challenge the basis of the Transfer Pricing Adjustment. However, the Tribunal's decision to allow the working capital adjustment made this ground of appeal irrelevant.Selection of Comparable Companies:The assessee contested the selection of comparable companies by the TPO for technical services and royalty segments. The DRP's directions were not followed by the TPO in this regard. While specific companies were rejected or accepted by the DRP, the Tribunal's decision on working capital adjustment rendered this issue moot.Arm's Length Price Determination:The TPO determined the Arm's Length Price for international transactions, leading to Transfer Pricing Adjustments. The DRP recomputed the adjustments, and the assessee challenged the methodology and calculations. The Tribunal's decision on working capital adjustment impacted the Arm's Length Price determination, making other grounds of appeal irrelevant.Compliance with DRP Directions:The DRP gave specific directions regarding working capital adjustment, which the TPO did not follow while re-computing the Transfer Pricing Adjustment. The Tribunal directed compliance with these directions, emphasizing the importance of following DRP instructions in such cases.Addition to Total Income, Interest Levied, Penalty Proceedings:Various other grounds were raised by the assessee, including challenges to the addition made on account of Transfer Pricing Adjustment, interest levied under sections 234B and 234C, and the initiation of penalty proceedings under section 271(1)(c) of the Act. However, the Tribunal's decision on working capital adjustment impacted the overall outcome, rendering these grounds moot or irrelevant.This detailed analysis of the judgment highlights the key issues, challenges raised by the assessee, and the Tribunal's decisions on each aspect of the case.