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2022 (2) TMI 917
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.... assessee filed the return of income u/s 139(1) on 30/9/2016 declaring a total income of Rs. 57,89,890/-. The asst. was selected for scrutiny. The AO issued notice u/s 143(2) of the Act. During the course of asst. proceedings, the matter was referred to the TPO to determine the arms length price (ALP) on the specified domestic transactions undertaken by the assessee with its associated enterprises. The TPO by his order dated 16/10/2019 determined the adjustment u/s 92CA for an amount of Rs. 66,54,892/-. Aggrieved by the adjustments made, assessee filed adjustments before the Dispute Resolution Panel (DRP). The DRP, vide its direction dated 29/3/2021 disposed of the objections of the assessee. Pursuant to the DRP's directions the final assessment order was passed on 23/4/2021. 4. Aggrieved by the final order passed by the AO, the assessee has filed an appeal before us. Though the assessee has raised several grounds in the appeal, the Ld.AR during the course of hearing requested for adjudication of only ground No.6 and prayed for leaving the other grounds open. Hence for the purpose of this appeal we will be considering only the below ground for adjudication 6. The lower ....
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....on. Besides the 'payable' and 'receivable' position stated in the balance sheet may not exactly reflect as to whether it arises from transaction relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible as the differences in working capital requirements itself is based on various assumptions. Besides we also note that the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, we are inclined to uphold the TPO's reasoning and reject the assessee's claim for working capital adjustment" 7. The AO in his final order gave effect to the direction of the DRP and made the final TP adjustment. 8. Aggrieved by the order of the AO, the assessee filed this appeal before us. 9. Before us the Ld.AR re-iterated the submissions made before the AO and DRP. The Ld.AR also submitted ....
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....ed into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in subclause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [o....
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....ents is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: ♦ None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or ♦ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accou....
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....n mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of work....
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.... - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a co....