2015 (11) TMI 1895 - AT - Income Tax

TP Adjustment - working capital adjustment - as per Revenue was that no such working capital adjustment was claimed before the TPO and CIT(A) allowed the same without any verification - HELD THAT - As order was passed by the TPO proposing an adjustment which was adopted by the AO while passing the order u/s 143(3) r.w.s.144C(4) - case of the assessee was that since the assessee was providing services to its associate enterprises then it was working on lower prices for its services. On the other hand if services were provided wherein the customers pays on later date then the working capital adjustment is to be allowed to a company which is providing the services on cash basis. We find that similar issue of allowing working capital adjustment to the assessee has been held in favour of the assessee by series of decision on various in DCIT Vs. Emptoris Technologies India Pvt. Ltd. 2015 (10) TMI 738 - ITAT PUNE - CIT(A) on the other hand had placed reliance on the decision in Vedaris Technologies Pvt. Ltd. 2010 (3) TMI 898 - ITAT DELHI and the OECD Guidelines. We find merit in the order of CIT(A) in directing the AO to grant working capital adjustment to the assessee on the basis of average credit/debit period for the year and commercial rate of interest. We find no merit in the grounds of appeal raised by the Revenue and the same are dismissed.

Summary

Issues:
- Working capital adjustment in transfer pricing determination

Analysis:
1. The appeal filed by the Revenue challenges the order of CIT(A) allowing working capital adjustment in the transfer pricing assessment for the assessment year 2008-09 under the Income-tax Act, 1961.

2. The Revenue contends that the working capital adjustment was erroneously allowed by CIT(A) without demonstrating that pricing of products and services for comparables or the assessee was based on working capital. The Revenue argues that the comparables were identified diligently, and no adjustment was warranted as all relevant factors influencing prices were considered.

3. The Revenue further argues that the Profit Level Indicator used for comparison excluded the impact of credit policy on interest costs, making working capital adjustment unnecessary. Additionally, the Revenue points out that OECD guidelines do not support automatic or routine application of such adjustments.

4. Despite the absence of the assessee during the proceedings, the Revenue raises concerns about the lack of claim for working capital adjustment before the TPO and CIT(A). However, the record shows that the TPO proposed a significant adjustment, which was upheld by the Assessing Officer.

5. The CIT(A) justified the working capital adjustment by emphasizing the impact of differences in working capital levels on pricing and profit margins. Citing judicial precedents and OECD views, the CIT(A) directed the Assessing Officer to grant the adjustment based on credit/debit periods and commercial interest rates.

6. The Tribunal found merit in the CIT(A)'s decision, citing previous rulings favoring working capital adjustments for transfer pricing assessments. Notably, decisions from various Tribunal Benches, including Pune and Delhi, supported the necessity of such adjustments for accurate profit margin calculations.

7. Ultimately, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s directive to grant working capital adjustment to the assessee based on relevant financial parameters. The decision aligned with established legal principles and previous rulings on similar transfer pricing issues.

In conclusion, the Tribunal's detailed analysis and reliance on legal precedents and OECD guidelines supported the allowance of working capital adjustment in the transfer pricing assessment, leading to the dismissal of the Revenue's appeal.