TaxTMI 
TaxTMI 
2022 (2) TMI 917
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal 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 authorities have erred in: (i) Not granting adjustment functional and transactiona....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 that the coordinate bench in the case of Toyota Kirloskar Motors Pvt. Ltd., (ITA No.2016/Bang/2018) vide order date....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evant 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 [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns 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 accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te (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 working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecause 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 commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the work....