TaxTMI 
TaxTMI 
2023 (1) TMI 116
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....om the said transaction had to be determined having regard to Arm's Length Price (ALP) as laid down in section 92 of the Act. In support of the claim that the amount received from the AE was at arm's length, the assesseee filed a transfer pricing analysis choosing Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining ALP. The assessee also chose profit level indicator as OP/TC. The assessee's OP/TC was 14.95% and this was compared with the comparables chosen by the assessee whose profit margins was in the range of 4.48 to 8.22%. The assessee claimed that the international transaction has been carried at ALP. In determining the ALP, the assessee also claimed working capital adjustment which was not granted by the TPO. 3. The TPO to whom the AO referred the question of determination of ALP under section 92CA of the Act, rejected the transfer pricing study of the assessee and he chose the following 4 comparable companies: S.No. Company Name Financial Year wise OP/OC (%) 2015-16 2014-15 2013-14 Average 1 Focus Suites Solutions & Services Ltd. 21.04 4.12 12.58 2 Ugam Solutions Pvt. Ltd 5.75 ....
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.... (b) determination of 'arm's length price' of international transactions without seeking requisite approval from PCIT / CIT. 3. That on the facts and in the circumstances of the case, the learned AO and the Deputy Commissioner of Income-tax (Transfer Pricing) - 2(1)(2), Bangalore (the 'learned Transfer Pricing Officer' or the 'learned TPO') erred in making an adjustment to the transfer price of the Appellant and learned DRP erred in upholding the same.. 4. That on the facts and in the circumstances of the case, the Learned Panel and the learned AO erred in upholding the learned TPO's approach of determining the arm's length price for the provision of marketing support services ('MSS') of the Appellant by: 4.1 Conducting a fresh comparability analysis by rejecting certain filters applied by Appellant in the TP documentation and applying additional / modified filters. 4.2 Including the company Axience Solutions Private Limited even though this company is functionally different (i.e., engaged in consulting and other diversified activities) from the Appellant (engaged in ground level work): 4.3 Exc....
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....to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d) .... (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered 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 sub-clause (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 materi....
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....onal transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 10. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments 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 • Reasonabl....
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....ries to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in 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. Th....
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....e truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-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 opeing 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 excact 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....