TaxTMI 
TaxTMI 
TaxTMI 
2021 (8) TMI 1362
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....regards the above ground, the only contention of the learned AR is that out of the final list of comparables selected by the TPO (refer page 6 of the TPO's order), the margin of one of the comparable companies, namely, Priya International Limited is erroneous. It was submitted by the learned AR that this fact was noticed by the DRP in assessee's own case for assessment year 2012-2013, wherein the DRP directed the A.O. to take the margin of only electronic segment. 3.1. The learned Departmental Representative did not raise any specific objection to the submission of the learned AR in his written submission dated 28.01.2021. 3.2. We have heard rival submissions and perused the material on record. The DRP in its directions dated 28.12.2016 for assessment year 2012-2013 in assessee's own case had directed the A.O. to rectify the margin of Priya International Limited by adopting only electronics segment. The relevant directions of the DRP for assessment year 2012-2013 in assessee's own case, reads as follow:- "M/s. Priya International Limited: It is noticed from the Annual Report that, out of the sales of Rs. 9.05 crores, the sale of software is only Rs. 2.66 crore....
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....e Limited v. DCIT (supra) had held that as per section 92 of the I.T. Act, the transfer pricing adjustment has to be made with reference to the international transactions the assessee had undertaken with its AEs. The relevant finding of the Co-ordinate Bench of the Tribunal reads as follow:- "55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm's length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm's length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for tr....
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....Calcutta High Court in the case of Orient General Industries Ltd. v. CIT [1994] 209 ITR 409 (Cal.)]. 5.2. Aggrieved, the assessee has filed this appeal before the Tribunal. The learned AR reiterated the submissions made before the Income Tax Authorities. The learned AR has also relied on the order of the Mumbai Bench of the Tribunal in the case of Chander K. Raichandani v. ACIT in ITA No. 799/Mum/2012 (order dated 08.02.2013). 5.3. The learned DR relied on the finding of the AO and the CIT(A). 5.4. We have heard rival submissions and perused the material on record. The assessee had claimed as deduction in the Profit and Loss Account, interest expenditure on account of delayed payment of statutory dues amounting to Rs. 15,16,748. Whether the statutory payment are routed through the Profit and Loss account or not is immaterial for deciding the issue whether interest paid for the belated payment of statutory dues is compensatory or not (if the same is compensatory, the interest expenditure is allowable deduction u/s. 37 of the I.T. Act). The Mumbai Bench of the Tribunal in the case of Chander K. Raichandani v. ACIT (supra) had clearly held that the simple interest paid for belated ....
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....he arm's length price. The observations of the TPO in not granting working capital adjustment reads as follow:- "The taxpayer's Net margin on sales in the AE segment as shown on page 3 is at a margin of 1.31%. Further, no adjustments like working capital and other adjustments can be given unless reasonably accurate adjustment can be made. The purpose of making an adjustment is to increase the comparability and not the profitability. Further, in the absence of accurate details of debtors and creditors of the taxpayer as well as the Uncontrolled Comparables, no working capital adjustment is given." 7.1. The DRP affirmed the view taken by the AO/TPO. 7.2. Aggrieved, the assessee has filed this appeal before the ITAT. The learned AR by referring to page 105 of the paper book, submitted that the details of working capital adjustment were on record before the AO/TPO and the DRP. It was submitted that the rejection of claim of working capital adjustment is against the Rules and judicial pronouncements. The learned AR relied on the ITAT Bangalore Bench orders in the case of M/s. Goldman Sachs Services Pvt. Ltd. V. JCIT in ITA No. 2355/Bang/2019 (order dated 15.06.2020) and Yaho....
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....able 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 shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsib....
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....ably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 17. 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 suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefiting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefi....
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.... 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 therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 20. The TPO also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No. 2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore,....
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....ding 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 TPO/DRP is also not sustainable. 21. In the light of the above discussion, we are of the view that the revenue authorities were not justified in denying adjustment on account of working capital adjustment. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 186 to 200 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the TPO/DRP that differences in working capital requirements of the international transaction and the uncon....
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....nto account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the TPO/DRP that differences in working capital requirements of the international transactions and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by the Revenue Authorities working capital adjustment cannot be allowed to the profit margin, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the I.T. Rules. 7.4.2. As mentioned above, the assessee in the present case has given all the details required for working capital adjustment. Therefore, the Revenue Authorities were not justified in denying the claim of the assessee for deduction. Hence, the AO/TPO is directed to allow the working capital adjustment in the light of the material placed on record, after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly. 7.5.....