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2021 (3) TMI 1262 - AT - Income TaxTP Adjustment - International transactions of the assessee with its associated enterprises - assessee has restricted his arguments in respect of entity level adjustments made by the Ld. TPO - HELD THAT - Admittedly it is a well settled principle of law by the decision of Hon ble Supreme Court in the case of CIT vs. M/s. Firestone International Pvt. Ltd. 2016 (1) TMI 1408 - SC ORDER affirmed to the findings of Hon ble Bombay High Court where the Hon ble High Court held that TP adjustments cannot be made beyond the transactions of the assessee with its associated enterprises. ITAT Chennai in the case of Prodapt Solutions Pvt. Ltd. 2019 (3) TMI 1919 - ITAT CHENNAI has considered an identical issue and held that transfer pricing adjustment has to be made only in respect of transactions of the assessee being a tested party with associated enterprises after comparing the transactions made by similarly placed company in uncontrolled transactions with non associated enterprises. Thus adjustment can be made only in respect of transactions of the assessee with its associated enterprises but not to a third party transactions at entity level - TPO as well as DRP has erred in making TP adjustment at entity level - we direct the Ld. TPO to restrict TP adjustment in respect of international transactions of the assessee with its associated enterprises. Working capital adjustment - HELD THAT - TPO needs to compute working capital adjustment having regard to the margins of the comparables after considering the working capital levels. But fact remains that the details with regard to working capital adjustment of comparables is not placed before us. Therefore we are of the considered view that the matter needs to go back to the file of Ld. TPO to re-consider the working capital adjustment in light of the findings of the Tribunal in assessee s own case for AY 2011-12 2021 (3) TMI 585 - ITAT CHENNAI .
Issues:
1. Transfer pricing adjustments made at entity level. 2. Working capital adjustment in transfer pricing analysis. 3. Disallowance of employees' contribution to PF and ESI. Transfer Pricing Adjustments at Entity Level: The appeal was against the final assessment order passed by the Assessing Officer under the Income Tax Act, 1961. The assessee challenged the adjustments made by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP) in relation to project segment, engineering segment, and royalty payment. The issue revolved around whether entity level adjustments can be made beyond transactions with associated enterprises. The Tribunal referred to judicial precedents, including decisions of the Supreme Court and High Courts, to conclude that transfer pricing adjustments should be limited to transactions with associated enterprises. The Tribunal directed the TPO to restrict adjustments to international transactions with associated enterprises, dismissing the need for entity level adjustments. Working Capital Adjustment: The assessee argued for working capital adjustments based on a previous ITAT decision in a similar case. The Tribunal agreed that working capital adjustments are necessary in computing profit level indicators, but noted the lack of details regarding comparables' working capital levels. Consequently, the matter was remanded to the TPO for reconsideration of working capital adjustments in line with the Tribunal's previous decision for the assessment year 2011-12. Disallowance of Employees' Contribution to PF and ESI: The grounds related to disallowance of employees' contribution to Provident Fund (PF) and Employee State Insurance (ESI) were not pressed by the assessee and were dismissed as such. The Tribunal did not delve into these issues due to the lack of arguments presented. In conclusion, the Tribunal partially allowed the appeal, directing the TPO to restrict transfer pricing adjustments to transactions with associated enterprises and remanding the working capital adjustment issue for further consideration. The grounds regarding disallowance of employees' contribution to PF and ESI were dismissed. The judgment was pronounced on 31st March 2021 in Chennai.
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