2014 (1) TMI 180 - AT - Income Tax

Working capital adjustment - Held that - The TPO in the first rectification order adopted a positive figure of Trade receivables as against Nil is the original order and stuck to it in the second rectification order, the assessee is harping on the contention that the amount of Trade receivables is Nil and the same should be adopted - TPO has kept the calculation of such a positive figure close to his heart and has not revealed its working despite repeated requests by the assessee - The issue was set aside for fresh adjudication.

Summary

Issues:
1. Calculation of working capital adjustment by the Transfer Pricing Officer (TPO) in the original order and subsequent rectification orders.

Analysis:
The appeal was against the order passed by the Assessing Officer following the direction by the Dispute Resolution Panel (DRP) for the Assessment Year 2008-09. The primary issue raised was regarding the calculation of the working capital adjustment by the TPO in the original order and two subsequent rectification orders. The assessee, an Indian Branch of a US Corporation, engaged in providing services and had entered into international transactions with its Associated Enterprises (AEs). The TPO initially set the figure of 'Trade receivables' at Nil for working capital adjustment. Subsequent rectification orders altered this figure, leading to a dispute. The assessee contended that the TPO erred in not considering the correct figure of 'Trade receivables' while calculating the adjustment.

The Tribunal noted that the TPO had initially calculated the working capital adjustment based on the available material, setting 'Trade receivables' at Nil. However, subsequent rectification orders changed this figure significantly, impacting the comparables' mean margin and the assessee's profit rate. The Tribunal observed discrepancies in the TPO's approach, particularly in converting the 'Nil' figure of 'Trade receivables' to a positive figure without clear justification. The Tribunal examined the balance sheet and relevant schedules, noting the absence of 'Trade receivables' as a current asset. The dispute primarily revolved around the interpretation of 'Trade receivables,' with the assessee contending that the amount in question was a loan to a sister concern, not a trade receivable. The Tribunal found merit in the assessee's argument and decided to set aside the TPO's order on this issue.

Considering the arguments presented and the discrepancies in the TPO's calculations, the Tribunal concluded that justice would be served by remitting the matter back to the Assessing Officer/ TPO for a correct computation of the working capital adjustment. The Tribunal directed the authorities to clarify how the 'Trade receivables' figure was computed positively in the rectification orders and to recompute the adjustment after addressing any objections from the assessee. The Tribunal partially allowed the appeal for statistical purposes, focusing on the specific issue of working capital adjustment. The decision aimed to ensure a fair and accurate assessment of the adjustment, emphasizing transparency and proper justification in the calculation process.

In conclusion, the Tribunal's detailed analysis highlighted the importance of accurate calculations and proper justification in transfer pricing adjustments. By addressing the discrepancies in the TPO's approach and remitting the matter for a correct computation, the Tribunal aimed to uphold fairness and transparency in the assessment process, ultimately serving the interests of justice and ensuring a balanced resolution of the dispute.