2018 (1) TMI 289 - AT - Income Tax

Working capital adjustment - assessee in the TP study selected TNMM as the most appropriate method to benchmark the international transaction - Held that - In the present case, it appears that the assessee furnished the calculation for adjustment on account of working capital before the ld. DRP who after considering the submissions of the assessee and the guidelines provided by OECD for the computation of working capital adjustment directed the TPO to do needful. As regards to the objection of the TPO that the assessee had not demonstrated that there was a difference in the levels of working capital employed by it vis- -vis the comparables which affected price and consequently profit, DRP categorically stated that holding of inventories, trade debtor/ creditors, trade receivable/payable has always an interest cost. Therefore there is definitely a connection in the level of working capital and the price at which one is willing to offer its services/goods. The ld. DRP held that the rejection of the assessee s claim of working capital adjustment by the TPO was not tenable. As regards to the observation of the TPO that monthly data of comparables as well as segmental data was not available for making reasonably accurate working adjustment. The ld. DRP directed the TPO that average of opening and closing balance of the inventories and the trade receivable/payable, trade debtors/creditors for the relevant year may be adopted which may broadly give the representative level of working capital over the year. In our opinion, the ld. DRP rightly directed the TPO to compute the working capital adjustment by using the OECD methodology. We do not see any valid ground to interfere with the findings given by the ld. DRP. Accordingly, we do not see any merit in this appeal of the department. - Decided in favour of assessee

Summary

Issues:
- Appeal by department against order dated 27.11.2014 passed by AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961.
- Grievance related to direction of ld. DRP to TPO to give working capital adjustment.

Analysis:
1. The department's appeal challenged the direction of the ld. DRP to the TPO to provide working capital adjustment. The case involved the assessee filing its return of income, which was later scrutinized due to international transactions with associated enterprises. The TP study selected TNMM as the method, using 7 comparables, with the TPO rejecting 6 and selecting 11 new comparables. The TPO proposed an adjustment of &8377; 2,40,44,219, leading to a draft assessment order of &8377; 2,62,86,830. The ld. DRP directed the TPO to make a working capital adjustment, citing Indian transfer pricing regulations and OECD guidelines.

2. The ld. DRP's direction was based on the principle that working capital requirements affect margins, prices, costs, and profits, as it is an implicit cost recoverable from customers. The TPO's objection regarding the difference in working capital levels between the assessee and comparables was dismissed, emphasizing the impact of working capital on pricing. The TPO's concern about data availability for accurate adjustments was addressed by the ld. DRP, suggesting the use of average balances for inventories and receivables/payables.

3. The department contended that the assessee failed to provide relevant data to the TPO and argued against the working capital adjustment. However, the Tribunal upheld the ld. DRP's decision, stating that the working capital adjustment was justified based on the submissions made and OECD guidelines. The Tribunal found no merit in the department's appeal, affirming the direction for working capital adjustment and dismissing the appeal.

In conclusion, the Tribunal's decision upheld the direction for working capital adjustment by the ld. DRP, emphasizing the impact of working capital on pricing and profits, and the adherence to OECD guidelines for accurate adjustments. The department's appeal was dismissed, affirming the necessity of working capital adjustment in transfer pricing assessments.