ITAT allows working capital adjustment despite negative 9.71% following Software AG precedent and OECD guidelines

ITAT Chennai allowed assessee's appeal for working capital adjustment despite negative working capital percentage of -9.71%, following Software AG precedent and OECD guidelines. The Tribunal remanded the matter regarding Akshay Software Technologies' comparability for TPO verification of functional similarity. For R Systems International, ITAT directed TPO to include it as comparable after making suitable adjustments for different fiscal year-ends (December vs March). The appeal was partly allowed for statistical purposes.

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Issues Involved:
1. Working Capital Adjustment
2. Rejection of Comparables by Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP)

Summary:

1. Working Capital Adjustment:
The assessee, Atmel R&D India Private Limited, contested the TPO's rejection of working capital adjustment, arguing that the TPO erred by not allowing economic adjustments for differences in working capital employed by the assessee and its comparables. The TPO dismissed the claim, stating that the adjustment was only relevant if the assessee's working capital was negative, which was not the case. The DRP upheld this decision. However, the Tribunal found merit in the assessee's argument, noting that the working capital percentage on operating cost was negative (-9.71%) and directed the TPO to allow the working capital adjustment, referencing the decision in Software AG (India) Pvt. Ltd.

2. Rejection of Comparables by TPO and DRP:
- Akshay Software Technologies Limited: The TPO rejected this company as a comparable, citing its predominant engagement in onsite development, whereas the assessee was engaged in offshore development. The DRP upheld this rejection. The Tribunal remitted the issue back to the TPO for verification of functional comparability, referencing the decision in Qualcomm India Pvt. Ltd.
- R Systems International Limited: The TPO and DRP rejected this company due to its different financial year ending (31st December, 2012) compared to the assessee's financial year ending (31st March, 2013). The Tribunal directed the TPO to consider this company as comparable after making suitable adjustments in line with Rule 10B(3) of the Income Tax Rules, emphasizing that the difference in fiscal year endings does not materially affect comparability.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the TPO to reconsider the working capital adjustment and the inclusion of Akshay Software Technologies Limited and R Systems International Limited as comparables after appropriate adjustments.

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