2023 (4) TMI 517 - AT - Income Tax

Tribunal allows Covid-19 delay, emphasizes accurate financial adjustments under Transfer Pricing regulations.

The Tribunal condoned the delay in filing the appeal due to the Covid-19 pandemic and proceeded to adjudicate the matter. Regarding financial adjustments, ... TP Adjustment - financial adjustments undertaken to eliminate material differences in respect of capacity utilization adjustment and working capital adjustment - As contended that comparables were operating at a much higher capacity per year than what the assessee operated at, during its first year of operation - HELD THAT:- We agree with the contention of assessee to permit making adjustment in respect of capacity utilization and working capital levels vis-à-vis the comparables based on the methodology adopted by it. Since the grounds taken by the assessee on the selection of comparables by the Ld. TPO is not pressed upon in the instant appeal and the categorical finding of the Ld. CIT(A) on the same holding the selection of comparables by TPO as undisturbed, we find it proper to direct the Ld. TPO/AO to consider the claim of adjustment in respect of capacity utilization and working capital levels so as to allow adjustment to the profit margin on comparables selected by him (TPO/AO), after affording the assessee reasonable opportunity of being heard. In a situation where the data about comparable companies is not available for the purpose of allowing adjustments towards capacity utilization and working capital levels, the only way to get the data in a current case would be by Ld. TPO collecting the same from the comparable companies so selected by him by exercising his powers u/s 133(6) of the Act. We direct the Ld. TPO to exercise powers u/s. 133(6) of the Act to call for information on capacity utilization and working capital levels of the selected comparable companies in those cases whose data is not available in public domain. After obtaining the information, the assessee be given an opportunity to put up its case by sharing details so obtained and accordingly grant the adjustment for capacity utilization and working capital levels. We thus, remit the matter back to the file of Ld. TPO/AO in terms of our above directions and thus the appeal of the assessee is partly allowed for statistical purposes. Issues Involved:1. Condonation of delay in filing the appeal.2. Financial adjustments for capacity utilization.3. Financial adjustments for working capital levels.Detailed Analysis:1. Condonation of Delay in Filing the Appeal:The appeal was filed by the assessee with a delay of 30 days, citing the Covid-19 pandemic as the reason. The Tribunal noted that the Supreme Court had excluded the period from 15.03.2020 to 28.02.2022 for the purpose of limitation due to the pandemic. Thus, the Tribunal condoned the delay and proceeded to adjudicate the matter.2. Financial Adjustments for Capacity Utilization:The assessee, engaged in the distribution and assembly of industrial products, was in its first year of operation for the assembly unit during the assessment year 2009-10 and reported low capacity utilization. The assessee argued that its capacity utilization was only 22%, whereas the comparables operated at an average of 71%. The Transfer Pricing Officer (TPO) and the Commissioner of Income Tax (Appeals) [CIT(A)] did not accept the assessee's adjustments for capacity utilization.The Tribunal noted that capacity utilization impacts profits due to under-absorption of fixed costs, especially under the Transactional Net Margin Method (TNMM). The TPO's use of the Fixed Assets Turnover Ratio (FATR) was deemed inappropriate for measuring capacity utilization. The Tribunal emphasized that reliable and accurate adjustments are necessary for comparability analysis as per Rule 10B(3) of the Income Tax Rules, 1963.3. Financial Adjustments for Working Capital Levels:The assessee claimed adjustments for working capital differences, arguing that it operated with lower levels of accounts receivables and inventory, and higher levels of accounts payables compared to the comparables. This impacted its profits due to the financing cost of the working capital structure. The TPO did not perform the working capital adjustment on the comparables without providing any reason.The Tribunal highlighted that working capital levels affect prices and profits, and adjustments are necessary for comparability analysis. It referred to Rule 10B(3)(ii), which allows adjustments to eliminate material effects of differences.Tribunal's Decision:The Tribunal directed the TPO/AO to allow adjustments for capacity utilization and working capital levels based on the methodology adopted by the assessee. The TPO/AO was instructed to collect data from comparable companies using powers under section 133(6) of the Income Tax Act if the data was not available in the public domain. The matter was remitted back to the TPO/AO for fresh adjudication, allowing the appeal of the assessee for statistical purposes.