2019 (8) TMI 1862 - AT - Income Tax

TP Adjustment - non-granting of working capital adjustment - HELD THAT - As relying on Emptoris Technologies India (P.) Ltd 2015 (10) TMI 738 - ITAT PUNE DRP/TPO/AO should be directed to grant working capital adjustments in the hands of the comparable to bring the same to the level of the assessee and the same is required while benchmarking the international transactions entered into by the assessee. The finding of the CIT(A) is not correct when he stated that the figures are based on presumptions - Decided in favour of assessee. Manner of quantification of adjustments - restricting to the value of international transactions only and not to the all transactions at the entity level - HELD THAT - As decided in M/s. Hyundai Construction Equipment India Pvt. Ltd case 2019 (4) TMI 1286 - ITAT PUNE as relying on the Jurisdictional High Court judgement in the case of CIT vs. Firestone International (P.) Ltd 2015 (6) TMI 1123 - BOMBAY HIGH COURT asserted that the TP adjustments are to computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The principle of relevant here proportionality is and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs ie controlled cost. Also we direct the AO to restrict the adjustments, if any only to the international transaction with AE - Decided against revenue.

Summary

Issues Involved:
1. Reference to the Transfer Pricing Officer (TPO) without specific hearing.
2. Non-granting of working capital adjustment.
3. Restricting adjustment to the value of international transactions only.

Detailed Analysis:

1. Reference to the Transfer Pricing Officer (TPO) without specific hearing:
The assessee raised an objection that the Assessing Officer (AO) erred in making a reference under section 92CA(1) to the TPO without reaching any opinion about situations specified in section 92C(3) of the ITA, 1961. The assessee argued that a specific hearing should have been granted before making such a reference. However, this ground was not pressed by the assessee during the proceedings and was dismissed as not pressed.

2. Non-granting of working capital adjustment:
The assessee contended that the TPO and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in not granting appropriate working capital adjustment while arriving at the average Operating Profit/Operating Income (OP/OI) margins of the external comparables. The CIT(A) had refused the assessee’s request on the grounds of presumptions in figures of the comparables. The Tribunal found that the issue of granting working capital adjustments was settled in favor of the assessee in the case of DCIT vs. Emptoris Technologies India (P.) Ltd. [2015] 61 taxmann.com 439 (Pune – Trib.), where it was held that working capital adjustments should be made in the hands of comparables to bring them to the level of the assessee. Consequently, the Tribunal directed the TPO/Assessing Officer to grant working capital adjustments, allowing the assessee’s ground on this issue.

3. Restricting adjustment to the value of international transactions only:
The Revenue raised an issue regarding the CIT(A)’s decision to restrict the adjustment only to the value of international transactions carried out by the assessee with its associated enterprises (AEs), rather than applying it at the entity level. The Tribunal referred to the settled legal position that adjustments should be restricted to the international transactions with AEs and not extended to the entire turnover of the entity. This principle was supported by the Jurisdictional High Court judgment in the case of CIT vs. Firestone International (P.) Ltd., 378 ITR 558, and the subsequent approval by the Hon’ble Supreme Court. The Tribunal also cited similar decisions from other cases, reinforcing that TP adjustments should be limited to transactions with AEs. As a result, the Tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal on this ground.

Conclusion:
The Tribunal partly allowed the assessee’s appeal by directing the TPO/Assessing Officer to grant working capital adjustments and dismissed the Revenue’s appeal, affirming that adjustments should be restricted to the value of international transactions with AEs. The final order pronounced on August 19, 2019, concluded with the assessee’s appeal being partly allowed and the Revenue’s appeal being dismissed.