2017 (4) TMI 1552 - AT - Income Tax

Adjustment for differences in working capital levels - HELD THAT - There is a positive working capital as seen from the balance sheet submitted by the assessee. Accordingly, we remit the issue to the file of AO to grant suitable working capital adjustments after making proper TP study. Hence, this ground is allowed for statistical purposes . Recovery of advances written off as an operating item in computing the operating profits for benchmarking transactions - HELD THAT - As relying on LOGICA PRIVATE LTD. 2015 (3) TMI 401 - ITAT BANGALORE we remit the issue to the file of AO for the purpose of excluding recovery of advance written off from operating profit and to compare ALP. Hence, this ground raised by the assessee is allowed. Disallowing an adjustment in respect of the extraordinary foreign exchange loss suffered by the appellant as against the comparable companies - HELD THAT - As per MOTONIC INDIA AUTOMOTIVE PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-IV (3) , CHENNAI 2016 (8) TMI 1423 - ITAT CHENNAI this issue is remitted to the file of AO for considering the same afresh in the light of above Order of Tribunal. Applying the comparability criterion inconsistently for different companies and erred in considering companies as comparable, even when they fail the comparability criterion - HELD THAT - We find force in the argument of ld.D.R that the sales details are not made available to TPO. Hence, the TPO considered it as compared to the assessee s case. In the case of M/s.Nitin Fire Protection Industries Ltd., the major income is included from project related activity. It cannot be compared to the assessee s case. Accordingly, we direct the AO to exclude the M/s.Nitin Fire Protection Industries Ltd. from the comparables and decide accordingly.

Summary

Issues:
1. Assessment order challenged under various grounds.
2. Non-granting of adjustment for differences in working capital levels.
3. Failure to consider recovery of advances written off in operating profits.
4. Rejection of certain companies as comparable for Transfer Pricing benchmarking.
5. Inconsistent application of comparability criterion for different companies.
6. Denial of adjustment for extraordinary foreign exchange loss.
7. Tax demand raised without adjusting carry-forward eligible for set-off.

Issue 1 - Assessment Order Challenge:
The appellant challenged the assessment order on various grounds, including violation of natural justice, lack of merit, and jurisdiction. Specific objections were raised against the Transfer Pricing Officer's (TPO) methodologies and adjustments. The Dispute Resolution Panel (DRP) was also criticized for rejecting working capital adjustments and recovery of advances written off. The appellant sought adjustments for differences in working capital levels and operating profits, as well as inclusion of certain companies as comparable for benchmarking.

Issue 2 - Working Capital Adjustment:
The appellant's request for working capital adjustment was initially rejected by the DRP due to lack of submission to the TPO. However, upon review, the Tribunal found a positive working capital based on submitted balance sheets. The issue was remitted to the Assessing Officer (AO) for proper consideration and adjustment after a thorough Transfer Pricing study.

Issue 3 - Recovery of Advances in Operating Profits:
The Tribunal referenced a similar case where the exclusion of recovery of advances written off from operating profits was deemed erroneous. Following this precedent, the issue was remitted to the AO for appropriate adjustments in computing operating profits and determining the Arm's Length Price (ALP).

Issue 4 - Comparable Companies Rejection:
The appellant contested the rejection of certain companies as comparable for benchmarking purposes. The Tribunal agreed that inconsistent application of comparability criteria was evident. Specifically, the Tribunal directed the exclusion of a company primarily engaged in project-related activities from the comparables list, emphasizing the need for accurate comparability analysis.

Issue 5 - Foreign Exchange Loss Adjustment:
The appellant's claim for an adjustment due to an extraordinary foreign exchange loss was supported by a precedent where exchange rate fluctuations were considered in determining the ALP. Following this decision, the issue was remitted to the AO for a fresh assessment considering exchange rate adjustments.

Issue 6 - Tax Demand Adjustment:
The appellant raised concerns about a tax demand without adjusting the carry-forward eligible for set-off. However, this issue was not discussed in detail in the judgment.

In conclusion, the Tribunal partially allowed the appeal for statistical purposes, remitting several issues back to the AO for proper consideration and adjustments in line with legal precedents and Transfer Pricing regulations.