2018 (8) TMI 1133 - AT - Income Tax

Transfer pricing - working capital adjustment - Rule 10B(1)(e)(iii) - The assessee carried out the working capital adjustment at 5.39% but the TPO did not accept the same by observing that the exact details of the debtors, inventories and the creditors is not available and that according to the OECD guidelines of 2010, working capital benefit cannot be given automatically, but can be given only in a situation, where there is a greater chance of increasing the comparability levels of the assessee - Held that - The DRP has merely confirmed the order of the TPO without discussing as to why the assessee s contentions cannot be accepted. Therefore, we deem it fit and proper to set aside the issue to the file of the DRP for reconsideration of the issue in accordance with Rules and precedents on the issue. Selection of comparable - Non-allocation of unallocated research and development expenses while computing the segmental profit of Suven Life Sciences Ltd. - Held that - assessee is into simple drug testing, whereas Suven Life Science is undertaking not only drug discovery, but is also involved in development of new drugs. Therefore, these activities are clearly functionally distinguishable. - these differences cannot be overlooked nor can there be adjustment made for these differences. Therefore, we direct the AO to exclude this company from the list of comparables. Decided partly in favor of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Grant of Working Capital Adjustment
3. Filters
4. Comparables
5. Incorrect Computation of Margin of Appellant
6. Use of Multiple Year Data
7. Risk Profile for Captive Service Provider
8. Computation of Interest Liability under Sections 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessee challenged the assessment order passed under section 143(3) read with section 144C and section 92CA(3) of the Income Tax Act, 1961. The primary contention was against the determination of the Arm's Length Price (ALP) and the resultant transfer pricing adjustment of ?1,02,32,356. The assessee claimed that the economic analysis undertaken was in accordance with the Act and the Income-tax Rules, 1962, which was rejected by the DRP/AO.

2. Grant of Working Capital Adjustment:
The assessee argued for a working capital adjustment based on Rule 10B(1)(e)(iii) of the Rules, citing differences in debtors and creditors materially affecting net profit margins. The TPO denied the adjustment due to lack of exact details and non-uniformity in receivables and payables among comparable companies. The DRP confirmed the TPO's decision. The Tribunal found that the DRP did not consider the assessee's detailed submissions and remanded the issue back to the DRP for reconsideration and a speaking order.

3. Filters:
The assessee contested the application of diminishing revenue/persistent losses filter by the TPO. The Tribunal upheld the AO's decision, stating that only functionally comparable companies should be adopted for ALP determination and companies with persistent losses or diminishing revenue cannot be considered comparables.

4. Comparables:
- Suven Life Sciences Ltd: The assessee argued against its inclusion as a comparable due to functional dissimilarity. The Tribunal agreed, noting that Suven Life Sciences was involved in complex R&D and drug discovery activities, unlike the assessee's simple drug testing services. The Tribunal directed the AO to exclude Suven Life Sciences from the list of comparables.
- Incorrect Margins: The assessee claimed incorrect margins were adopted for TCG Lifesciences Ltd, Manipal Acunova Ltd, and Choksi Laboratories Ltd. The Tribunal remanded the matter to the TPO to analyze the impact of provisions for bad and doubtful debts on margins and make suitable adjustments.

5. Incorrect Computation of Margin of Appellant:
The assessee contended that the forex loss should not be considered as an operating loss. The Tribunal noted that while the issue was generally decided against the assessee, the loss arising subsequent to the date of invoice should not be considered as operating loss. The issue was remanded to the AO for verification.

6. Use of Multiple Year Data:
The Tribunal did not specifically address this issue as it was not pressed by the assessee during the hearing.

7. Risk Profile for Captive Service Provider:
The Tribunal did not specifically address this issue as it was not pressed by the assessee during the hearing.

8. Computation of Interest Liability under Sections 234B and 234C:
The Tribunal did not specifically address this issue as it was not pressed by the assessee during the hearing.

Conclusion:
The appeal was partly allowed. The Tribunal remanded certain issues back to the DRP and TPO for reconsideration and directed the exclusion of Suven Life Sciences from the list of comparables. The order emphasized the need for detailed consideration and appropriate adjustments in determining the ALP and related computations.