2014 (6) TMI 279 - AT - Income Tax

Transfer pricing - determination of ALP - Rejection of working capital adjustment Held that - Assessee has claimed before the TPO regarding working capital adjustment, but the TPO denied on the ground that assessee failed to provide the details - AO has disregarded the submissions of the assessee - The DRP also considered the working capital adjustment only with respect to the comparables submitted by the assessee - It did not analyse the same with respect to the data of the assessee company thus, the matter is required to be remitted back to the TPO to the issue of working capital adjustment as claimed by the assessee Decided in favour of Assessee. Selection of comparables - ACI Infocom Ltd. not considered as comparable Held that - The TPO and DRP are correct in observing that the net worth of the company is eroding the data of the past years of the assessee consistently making losses certainly point out the abnormal working conditions and hence, this company cannot be taken as cogent comparable - assessee has sold its plant and machinery and substantial land and buildings also indicate that assessee is not operating any normal circumstances - assessee has claimed that manufacturing division was sold off, but the trading division continues to function - no segmental data has been provided for consideration thus, there is no infirmity in the order Decided against assessee. Determination of arm s length adjustment - International transaction from AEs - Enhancement of returned income Opportunity of being heard Held that - TPO has rejected 8 out of the 10 comparables submitted by the assessee - The TPO has mentioned in show cause notice his observations on the lack of comparability of 8 comparables - assessee s submissions and objections in this regard has not been brought in TPO s order - TPO has only mentioned that he has considered the assessee s objections and submissions and thereafter TPO has again reproduced his original observations mentioned in the show cause notice - The DRP against assessee s objections has laconically upheld the order of the TPO - assessee has claimed that Priya Ltd. and Savex Computer Ltd. which has been rejected the year were earlier approved by the DRP in earlier years thus, the matter is required to be remitted back to the TPO for examination of comparability of the comparables rejected earlier Decided in favour of Assessee.

Summary

Issues Involved:
1. Denial of working capital adjustment.
2. Rejection of ACI Infocom Ltd. as a comparable company.
3. Determination of arm's length adjustment for the appellant's international transactions.
4. Jurisdictional error in referring the matter to the TPO without recording reasons.

Issue-wise Detailed Analysis:

1. Denial of Working Capital Adjustment:
The first grievance of the assessee was the denial of working capital adjustment. The assessee argued that the Transfer Pricing Officer (TPO) refused the adjustment on the grounds of insufficient details, despite the submission of the required data as per OECD-approved methods. The Dispute Resolution Panel (DRP) also rejected the claim, citing irrelevant and extraneous factors. The Tribunal noted that the TPO and DRP failed to consider the assessee's provided data and directed the TPO to re-examine the issue, ensuring that the working capital adjustment is considered with respect to the assessee's data.

2. Rejection of ACI Infocom Ltd. as a Comparable Company:
The assessee contested the rejection of ACI Infocom Ltd. as a comparable company. The TPO had dismissed ACI Infocom Ltd. due to its consistent losses over several years and eroding net worth, indicating abnormal business conditions. The DRP upheld this decision. The Tribunal supported the authorities' view, stating that ACI Infocom Ltd.'s financial instability and lack of segmental data rendered it unsuitable as a comparable.

3. Determination of Arm's Length Adjustment:
For the assessment year 2009-10, the assessee challenged the TPO's determination of the arm's length price (ALP) by rejecting most of the comparables submitted by the assessee. The TPO accepted only two comparables, resulting in a significant TP adjustment. The assessee argued that the TPO's selection was biased towards high-margin companies and that the DRP did not provide a detailed rationale for its decision. The Tribunal found merit in the assessee's claim that the DRP did not adequately consider the assessee's objections and directed the TPO to re-examine the comparability analysis, ensuring a speaking order and proper opportunity for the assessee to be heard.

4. Jurisdictional Error in Referring the Matter to the TPO:
The assessee claimed a jurisdictional error, arguing that the Assessing Officer (AO) did not record reasons for referring the matter to the TPO, as required under section 92CA(1) of the Act. The Tribunal dismissed this ground, noting that the issue was already settled against the assessee by the decision in Aztec Software 249 ITR (AT) 32.

Conclusion:
Both appeals by the assessee were partly allowed for statistical purposes, with directions for the TPO to reconsider the working capital adjustment and the comparability analysis, ensuring detailed and reasoned orders, and providing the assessee with adequate opportunities to present their case.