2023 (1) TMI 1074 - AT - Income Tax

TP Adjustment - Comparable Selection - working capital adjustment - DRP directed for exclusion of 2 out of 9 comparable companies selected by the ld. TPO and upheld the action of the ld. TPO denying working capital adjustment to the assessee - HELD THAT - It is not in dispute that the claim of working capital adjustment together with its detailed workings were indeed made and submitted by the assessee before the ld. TPO and also before the ld. DRP. This is evident representing submissions made before the TPO and pages representing submissions made before the ld. DRP. The assessee also stated that working capital adjustment had indeed been granted to the assessee either by the ld. TPO or by the ld. DRP, in the earlier years commencing from A.Y. 2011-12 onwards, as the case may be. AR before us drew our attention to the relevant pages of the paper book where working capital adjustment has been granted to the assessee in the past commencing from A.Yrs.2011-12 to 2017-18. In fact, we also find that on the final set of comparables chosen by the DRP, the assessee had given the working capital adjustments for the said comparable companies which has been ignored by the lower authorities. Hence, we deem it fit to restore the issue to the file of the ld. TPO with a direction to grant working capital adjustment to the assessee after examining the workings given by the assessee thereon. The computation of ALP should be done accordingly. Hence, the ground No.7.9 raised by the assessee is allowed for statistical purposes.

Summary

Issues involved:
Transfer pricing adjustment - Working capital adjustment for arm's length price determination

Analysis:

Issue 1: Transfer pricing adjustment - Working capital adjustment for arm's length price determination

The appeal was filed against the final assessment order passed by the Assessing Officer under the Income Tax Act, following directions from the Dispute Resolution Panel. The main contention raised by the assessee was related to the working capital adjustment for determining the arm's length price. The company in question had amalgamated with another entity and had engaged in international transactions for software development and technology consulting services. The Transfer Pricing Study Report (TPSR) indicated that the company had considered working capital adjustments for comparable companies, with detailed workings provided. Despite the company's operating margin being higher than the comparables, the Taxation Officer made an adjustment to the arm's length price without granting the working capital adjustment. The Dispute Resolution Panel upheld this decision. However, it was noted that in previous years, working capital adjustments had been granted to the assessee. Upon review, the tribunal deemed it appropriate to restore the issue to the Taxation Officer for granting the working capital adjustment after examining the workings provided by the assessee. The ground raised by the assessee on this issue was allowed for statistical purposes.

Issue 1.1: Impact on other grounds

In light of the decision made regarding the working capital adjustment, the adjudication of other grounds raised by the assessee was considered academic in nature and left open without any opinion given. The appeal of the assessee was allowed for statistical purposes.

This judgment highlights the importance of considering working capital adjustments in transfer pricing assessments and the need for consistency in applying such adjustments based on past practices and detailed workings provided by the taxpayer.