2022 (2) TMI 917 - AT - Income Tax

TP Adjustment - Not granting adjustment for working capital and risk differential - HELD THAT - In the case of Nagravision India Pvt. Ltd., 2020 (7) TMI 330 - ITAT BANGALORE Tribunal held that the working capital adjustment should be allowed. For holding so, the Tribunal has followed the decision rendered by another Bench in the case of Huawei Technologies (India) Pvt. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE . Thus we hold that the AO is not justified in denying the working capital adjustment to the assessee. We accordingly direct the AO to allow the working capital adjustment.

Summary

Issues Involved:
1. General grounds.
2. Legal grounds relating to Transfer Pricing (TP).
3. TP Adjustments on merits.
4. Interest under Section 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. General Grounds:
The assessee raised a general ground which was not specifically addressed during the hearing. Therefore, it remains open and unadjudicated.

2. Legal Grounds Relating to Transfer Pricing:
The legal grounds pertain to the method used for determining the arm's length price (ALP) for specified domestic transactions. The assessee followed the Comparable Uncontrolled Price (CUP) method, but the Transfer Pricing Officer (TPO) rejected this and used the Transactional Net Margin Method (TNMM). The TPO did not grant adjustments for working capital and risk differential, which the assessee contested.

3. TP Adjustments on Merits:
The core issue was the denial of adjustments for functional and transactional differences and working capital adjustments by the TPO. The TPO's rejection was based on the lack of demonstration by the assessee regarding the impact of differences on price, cost, or profits. The Dispute Resolution Panel (DRP) upheld the TPO's decision, stating that the assessee failed to provide sufficient data to substantiate the need for adjustments.

The Tribunal, however, noted that consistent judicial pronouncements, including cases like Swiss Re Global Business Solutions India (P) Ltd. and Maxim India Integrated Circuit Design Pvt. Ltd., have allowed working capital adjustments for better comparability. The Tribunal emphasized the importance of such adjustments as per Rule 10B and OECD guidelines, which state that adjustments should be made to eliminate material effects of differences on net profit margins. The Tribunal concluded that the AO was not justified in denying the working capital adjustment and directed the AO to allow it.

4. Interest Under Section 234B of the Income-tax Act:
This ground was not specifically argued by the assessee during the hearing and thus remains open for future consideration.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO to grant the working capital adjustment. The other grounds raised by the assessee were left open for future adjudication. The decision was pronounced on 14th February 2022.