Tribunal directs inclusion of advances in working capital adjustment calculation, remands for redetermination

The Tribunal directed the AO/TPO to include "Advances to suppliers" and "Advances from customers" in the working capital adjustment calculation. Fives Cail KCP Ltd. was excluded as a comparable company due to the lack of segmental information, failing the transaction level test. The Tribunal remanded the matter back to the AO/TPO for redetermining the Arm's Length Price (ALP) in accordance with the directions provided, partly allowing the appeal for statistical purposes.

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Issues Involved:
1. Working Capital Adjustment
2. Filter of Manufacturing Sales More Than 75% of Total Sales - Inclusion of Fives Cail KCP Ltd.

Issue-wise Detailed Analysis:

1. Working Capital Adjustment:

The assessee did not initially claim any working capital adjustment in its Transfer Pricing study report or before the Transfer Pricing Officer (TPO). The claim was first made before the Commissioner of Income Tax (Appeals) [CIT(A)], who directed the Assessing Officer (AO) to adopt the method of working capital adjustment as per the OECD Transfer Pricing Guidelines, 2010. The dispute centered on whether "Advances to suppliers" and "Advances from customers" should be included in the working capital adjustment.

The Tribunal noted that the OECD guidelines' example for working capital calculation does not explicitly include these advances. However, it reasoned that advances to suppliers and advances from customers impact profitability similarly to trade receivables and payables, thus should be included in the working capital adjustment. The Tribunal directed the AO/TPO to include these advances while computing the working capital adjustment, ensuring only advances related to the purchase or sale of goods are considered.

2. Filter of Manufacturing Sales More Than 75% of Total Sales - Inclusion of Fives Cail KCP Ltd.:

The assessee included Fives Cail KCP Ltd. as a comparable company, asserting it met the filter of having manufacturing sales comprising more than 75% of total sales. The TPO excluded this company due to its exceptionally low profit (loss), a reasoning overturned by the CIT(A). However, the CIT(A) excluded the company due to the lack of segmental information, as it also had significant revenue from services (17%).

The Tribunal upheld the CIT(A)'s exclusion of Fives Cail KCP Ltd. The Tribunal explained that the comparable selection process involves two levels: company level and transaction level. Even if a company passes the company level filter (manufacturing sales more than 75%), it must also pass the transaction level comparison. Since Fives Cail KCP Ltd. did not have separate segmental information for its manufacturing activity, it failed the transaction level test. Therefore, it could not be considered comparable to the assessee's 100% manufacturing activity.

Conclusion:

The Tribunal set aside the impugned order and remanded the matter back to the AO/TPO for redetermining the Arm's Length Price (ALP) in accordance with the directions provided. The appeal was partly allowed for statistical purposes, ensuring the assessee would be given a reasonable opportunity to be heard.

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