2017 (5) TMI 1814 - AT - Income Tax

TP Adjustment - method of computation of working capital adjustment in case of M/s ICRA Management Consulting Services Pvt. Ltd., being one of comparables finalized by Ld. TPO - HELD THAT - TPO that while computing working capital adjustment, margin in the case of M/s ICRA Management Consulting Services Pvt. Ltd., has attributed receipts, in the column of average receivables, which disturbed entire calculation. From the financial of M/s ICRA Management Consulting Services Pvt. Ltd., it is observed that there are sufficient trade receivables during the year under consideration. It has been submitted by Ld. Counsel that all these details were before Ld. TPO during assessment proceedings and again during the rectification proceedings under section 154 of the Act. Under such circumstances, and in the interest of natural justice, we are of the considered opinion that these figures needs to be considered while deriving working capital adjustment of M/s. ICRA Management Consulting Services Pvt. Ltd., Accordingly, we set aside this issue to file of Ld. TPO for re-computing working capital adjustment in the light of financial report of M/s. ICRA Management Consulting Services Pvt. Ltd. - In the result this ground raised by assessee stands allowed for statistical purposes. TPO computed net operating margins of two comparable companies, by excluding provision of doubtful debts from operating expenses - To the facts of the present case also the revenue has not disputed the provision of doubtful debts being excessive in the hands of the assessee for the year under consideration. It is also observed that the DRP had directed TPO to have consistent treatment in terms of items includable/excludable in non-operative profit, with assessee as well as with comparables which evidently has not been followed by Ld. TPO. Respectfully following the view taken by this Tribunal in the case of Techbooks International Pvt. Ltd. 2015 (7) TMI 473 - ITAT DELHI we direct Ld. TPO to treat provision of doubtful debts in the case of BVG India Ltd and Cameo Corporate Services Ltd., as operating as well. Accordingly, this ground raised by assessee stands allowed

Summary

Issues:
1. Incorrect adjustments in assessment order under Section 143(3) of the Income-tax Act.
2. Calculation of working capital adjusted operating margin.
3. Inconsistent approach in treatment of expenses.
4. Allegation of furnishing inaccurate particulars of income.
5. Penalty proceedings under section 271 of the Act.
6. Charging interest under sections 244A, 234B, and 234D of the Act.

Issue 1: Incorrect adjustments in assessment order under Section 143(3) of the Income-tax Act.
The appellant challenged the adjustments proposed by the Assistant Commissioner of Income-tax and the Transfer Pricing Officer in the assessment order. The appeal was against the incorrect adjustments and the inconsistent approach followed by the Assessing Officer. The appellant argued that the adjustments made were not in accordance with the directions of the Dispute Resolution Panel. The Tribunal directed the Transfer Pricing Officer to recompute the working capital adjustment for a comparable company as per the directions of the Dispute Resolution Panel.

Issue 2: Calculation of working capital adjusted operating margin.
The main issue for adjudication was the method of computation of working capital adjustment for a comparable company. The appellant contended that the Transfer Pricing Officer had erred in calculating the working capital adjustment by excluding trade receivables. The Tribunal found that the Transfer Pricing Officer had not considered all relevant figures while deriving the working capital adjustment. Consequently, the Tribunal directed the Transfer Pricing Officer to recompute the working capital adjustment based on the correct financial data of the comparable company.

Issue 3: Inconsistent approach in treatment of expenses.
Another issue raised was the inconsistent treatment of certain expenses as operating or non-operating in the case of comparables and the appellant. The Tribunal noted that the Transfer Pricing Officer had excluded provision for doubtful debts from operating expenses for certain comparables. However, after considering the directions of the Dispute Resolution Panel, the Tribunal directed the Transfer Pricing Officer to treat provision for doubtful debts as operating expenses for the comparables. This decision was based on ensuring consistent treatment of expenses for both the appellant and the comparables.

Conclusion:
The Tribunal allowed the appeal of the appellant, setting aside certain adjustments made by the Assessing Officer and directing the Transfer Pricing Officer to recompute the working capital adjustment and treat provision for doubtful debts as operating expenses for the comparables. The Tribunal emphasized the importance of following the correct methodology and ensuring consistency in the treatment of expenses for accurate assessment under the Income-tax Act.