2016 (9) TMI 1283 - AT - Income Tax

Non adjustment on account of difference in working capital position vis- -vis the comparable companies - Held that - The capital employed on the assessee including working capital is one of the relevant factors for the purpose of determining the arm s length price. Therefore the capital employed by the assessee including the working capital and that of comparable companies needs to be taken into consideration. Without comparing the working capital employed by the comparable companies and that of the assessee this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment. On picking up of comparables or selection of comparable companies Transfer Pricing Officer considered the claim of the assessee and excluded M/s Mobil Telecommunications Ltd. and included M/s Aanchal Computers Ltd. The Dispute Resolution Panel simply rejected the objection of the assessee without any further discussion in the order. Thus this Tribunal is of the considered opinion that the DRP being the fact finding authority with regard to international transaction is expected to dispose each and every aspect with regard to functional similarity capital employed by the assessee etc. for the purpose of determining the arm s length price. Since the DRP has not discussed anything on material facts this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly the orders of the authorities below are set aside and the issue with regard to selection of comparables working capital adjustment and objections raised by the assessee with regard to comparables selected by the TPO are remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter once again to the Transfer Pricing Officer. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Transfer pricing adjustment for working capital difference
Selection of comparables by Transfer Pricing Officer and Dispute Resolution Panel

Analysis:
The appeal concerns the order of the Assessing Officer dated 26.12.2015 following directions from the Dispute Resolution Panel. The appellant pressed grounds No.5, 6 & 7, specifically addressing working capital adjustment and selection of comparables. The appellant argued that the Dispute Resolution Panel did not make adjustments for working capital differences between the appellant and comparable companies, emphasizing the need for proper adjustments. The appellant highlighted that the DRP acknowledged the detailed arguments and supporting documents provided by the appellant but did not consider them due to lack of verifiable supporting material. The appellant stressed that working capital comparison is crucial in determining arm's length price.

Regarding the selection of comparables, the appellant contended that the TPO included companies not functionally comparable to the appellant and urged for a reconsideration. The DRP's dismissal without proper discussion was challenged by the appellant. The Departmental Representative countered by stating that the appellant failed to provide verifiable source material for working capital verification, justifying the DRP's decision. The DRP's confirmation was supported by the fact that the TPO considered the materials filed by the appellant.

The Tribunal acknowledged both sides' arguments and reviewed the records. It recognized the significance of working capital in determining profit and the necessity of comparing capital employed by the appellant and comparable companies. The Tribunal emphasized that without comparing working capital, transfer pricing adjustments cannot be made. Additionally, the Tribunal noted the appellant's objections to the selection of comparables and the TPO's actions. It highlighted the DRP's responsibility as a fact-finding authority to address all aspects related to determining arm's length price, emphasizing the need for detailed discussions. Consequently, the Tribunal set aside the lower authorities' orders and remitted the issues of comparables selection, working capital adjustment, and objections back to the Assessing Officer for reconsideration. The TPO was instructed to re-examine the matter considering the appellant's objections and decide accordingly. The DRP was directed to provide a speaking order addressing all aspects raised by the appellant. The decision allowed the appeal for statistical purposes, with the matter remitted back to the Assessing Officer.