2018 (12) TMI 1764 - AT - Income Tax

TP Adjustment - comparable selection - exclusion on account of RPT filter - HELD THAT - Companies with RPT in excess of 15% need to be excluded from final list. Working capital adjustment - In the present case lower authority had worked out working capital adjustment on hypothetical figure of 1.63% instead of on actual basis. Hence we direct the TPO to grant working capital adjustment on actual basis, subject to availability of the workings made available by the assessee to TPO in earlier round of litigation. Accordingly we direct the AO / TPO to give the working capital adjustment on actual basis if the assessee has given the detailed working to the lower authorities. However, if no such working has been given by the assessee to the lower authorities then in our view the assessee will not be entitled to any such claim. This ground is allowed for statistical purpose.

Summary

Issues:
1. Assessment under section 143(3) r.w.s. 144C(13) of the Act for the assessment year 2011-12.
2. Determination of ALP of international transactions.
3. Exclusion of comparables for ALP determination.
4. Working capital adjustment.

Analysis:

Issue 1: Assessment under section 143(3) r.w.s. 144C(13) of the Act for the assessment year 2011-12
The present appeal was filed against the order passed by the DCIT, Circle - 6(1)(1), Bengaluru, for the assessment year 2011-12. The assessee raised specific grounds of appeal, focusing on certain issues while not pressing others. The history of assessment proceedings and the involvement of the TPO in determining the ALP of international transactions were discussed.

Issue 2: Determination of ALP of international transactions
The TPO was involved in determining the ALP of international transactions undertaken by the assessee. The TPO considered various factors such as the financial results, functions of the assessee, and comparables for software development services. The DRP reviewed the contentions of the assessee and made decisions based on the TP study and objections raised. The discussion also touched upon the RPT filter and the number of comparables required for ALP determination.

Issue 3: Exclusion of comparables for ALP determination
The assessee contested the inclusion of certain comparables for ALP determination, citing precedents and tribunal orders. The Tribunal directed the exclusion of specific comparables based on functional profiles and decisions in similar cases. The grounds for exclusion were discussed, and the Tribunal upheld the exclusion of certain comparables, aligning with previous decisions and maintaining consistency in approach.

Issue 4: Working capital adjustment
The working capital adjustment was a point of contention, with the authorities restricting the adjustment to 1.63% instead of granting the actual adjustment. The Ld. AR relied on various decisions to support the claim for actual working capital adjustment. The Tribunal emphasized the need for actual working capital adjustment to eliminate profit distortion and directed the TPO to grant the adjustment on an actual basis if detailed workings were provided by the assessee. The decision was made based on the TNMM method and the rules governing working capital adjustments.

In conclusion, the appeal was partly allowed, addressing the issues raised by the assessee regarding ALP determination, exclusion of comparables, and working capital adjustment. The Tribunal's decision was based on a thorough analysis of the facts, legal provisions, and precedents to ensure a fair and just outcome in line with the principles of tax law.