2019 (6) TMI 144 - AT - Income Tax

TP Adjustment - working capital adjustment - Credit period ratio of 85 days of comparables the credit period ratio of the assessee is 1118 days - HELD THAT - In principle we agree with the contention of the learned Authorised Representative that adjustment on account of working capital has to be made while computing the margin of the comparables. The Tribunal Kolkata Bench in Dong Fang Electric India Pvt. Ltd. 2019 (4) TMI 1427 - ITAT KOLKATA has laid down certain parameters for working capital adjustment. It is the contention of AR that a working of margins of the comparables after providing for working capital adjustment following the parameters laid down in case of Dong Fang Electric India Pvt. Ltd. (supra) has been placed on record vide paper book Page no. 81. In view of the aforesaid we direct the Assessing Officer/Transfer Pricing Officer to verify the computation of working capital adjustment made by the assessee and compute the margin of the comparables and determine the arm s length price of the international transaction. Accordingly this ground is allowed. Inclusion of unutilized MODVAT credit to the value of the closing stock/opening stock u/s 145A - HELD THAT - Tribunal in assessee s own case 2018 (4) TMI 35 - ITAT MUMBAI while deciding identical issue in the order referred to above has upheld the decision of learned Commissioner (Appeals) in directing the Assessing Officer to include the unutilized MODVAT credit to the value of closing stock and allow consequential effect to the opening stock.

Summary

Issues:
1. Working capital adjustment in transfer pricing study report.
2. Exclusion of comparables selected by the Transfer Pricing Officer.
3. Inclusion of unutilized MODVAT credit in closing stock.

Working Capital Adjustment:
The appeal and cross objection arose from an order pertaining to the assessment year 2012-13. The assessee, engaged in manufacturing clutches, had international transactions with its Associated Enterprise. The Transfer Pricing Officer rejected the assessee's benchmark and made adjustments resulting in a ?2.33 crore addition. The learned Commissioner (Appeals) granted partial relief but disallowed the claim of working capital adjustment. The assessee argued that the adjustment should be allowed as per transfer pricing provisions, citing various decisions. The Tribunal agreed, stating that working capital adjustment impacts pricing and profitability, and Rule 10B(e)(iii) provides for such adjustments. The Tribunal directed the Assessing Officer to verify the computation of working capital adjustment and determine the arm's length price of the international transaction.

Exclusion of Comparables:
The Revenue challenged the exclusion of three comparables by the Transfer Pricing Officer. However, the learned Authorised Representative, on behalf of the assessee, did not contest these grounds. Consequently, the Tribunal allowed grounds 1, 2, and 3 raised by the Revenue without delving into the issues further.

Inclusion of Unutilized MODVAT Credit:
The Revenue contested the direction to include unutilized MODVAT credit in the closing stock, following a decision in the assessee's own case for the assessment year 2011-12. The Tribunal found that a previous decision had upheld a similar direction by the learned Commissioner (Appeals). Therefore, the Tribunal dismissed the Revenue's ground, aligning with the previous decision.

In conclusion, the Tribunal partly allowed the Revenue's appeal and the assessee's cross objection, addressing the issues of working capital adjustment, exclusion of comparables, and inclusion of unutilized MODVAT credit in a comprehensive and legally sound manner.