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2021 (3) TMI 1055 - AT - Income TaxRectification u/s 254 - coordinate bench has failed to consider the financial statement of the associated enterprises - HELD THAT - The coordinate bench considered the financial statements of the associated enterprise, which were placed by the assessee to show that the financial condition of the associated enterprise was not good and therefore the associated enterprise was not paying price of the services of the assessee. In the transfer pricing analysis we were supposed to look at the operating margin of the assessee and in analyzing the comparable prices, the financial condition of the associated enterprise was not at all required to be considered. Further the associated enterprise as we have already held in the order that has taken away the whole money from the associated enterprise, which was lying as reserve and surplus in the hands of the assessee. We do not now hesitate to state that the associated enterprise has withdrawn the full results are available with the assessee in the form of outstanding advances which are really in the form of dividend payment to the associated enterprise from India. Therefore, in our view it is immaterial whether the associated enterprise is making a losses or it is making of profit for working out the operating margin of the assessee. Coordinate bench has inadvertently overlooked that assessee is providing ITeS services to its associated enterprise and amounts outstanding was only in respect of the services provided and that it had not made any loan or had made any advances to its associated enterprise and the sum outstanding was only in respect of services provided and nothing else - We failed to understand why the distinction is required to be made from sale of goods or sale of services. According to us fact that it is for services or goods. According to us, assessee has made advances to the AE for more than usual credit period. In fact, it is an advance of the full reserve and surplus available with the assessee to its associated enterprise. It is immaterial whether the assessee has obtained any loan or has not taken any loan. Therefore, this contention is rejected. In paragraph number (iii) the note states that the coordinate bench did not record that such an amount had the character of making advances is interest free loan which has been the the material statement for not granting any working capital adjustment. The working capital adjustment is required to be given difference in the working capital employed by the different comparables compared to the assessee. In the case of the assessee we have already held that outstanding of associated enterprise was a device employed by the assessee in connivance with its associated enterprise to withdraw the full reserve and surplus available in India which otherwise could not have been withdrawn without paying dividend distribution tax but has been withdrawn by the making a device of keeping the outstanding receivable from associated enterprise to the extent of reserve and surplus available with the assessee.Therefore, this contention also deserves to be rejected. Demonstration by the assessee before the learned assessing officer for granting of any working capital adjustment - We do not find any error in the order of the coordinate bench as it has considered all the aspects of the working capital adjustment requested by the assessee. In fact, when the assessee could not show that the amount outstanding from its associated enterprises is towards outstanding service business or is a methodology to allow the associated enterprise enjoyment of four reserve and surplus available in India. We have held that assessee has allowed the associated enterprise to enjoy the reserve and surplus available with an Indian entity without paying dividend distribution tax thus there is no working capital adjustment required to be made in the comparability analysis. Thus the contention raised by the assessee deserves to be rejected The coordinate bench has followed the order in the case of the assessee for earlier years noted in para 16. That decision has been followed by the coordinate bench in assessee s own case. The coordinate bench in further para 2 stated that the peculiar facts of the case noted by the coordinate bench in para No. 17 to 20 are so startling that decision relied upon by the ld AR does not apply to the facts of the present case. Thus, all the decisions placed before the coordinate bench were considered and in view of the peculiar facts of the case of the assessee were held to be distinguishable. Vide para number D, it has been stated that sum of the grounds have not been considered. All these grounds are related to the working capital adjustment. Thus, all the grounds of the appeal were also on the same issue of adjustment on account of outstanding receivables. All these grounds were considered and decided against the assessee as the main issue has already been decided against the assessee for the reason that the outstanding receivable from its associated enterprise does not deserve to be considered for granting any working capital adjustment to the assessee. No error in the order of the coordinate bench in following the decision of coordinate bench in assessee s own case. That binds us and has been followed.
Issues Involved:
1. Rectification of errors in the order of the coordinate bench. 2. Admission and rejection of additional grounds of appeal. 3. Consideration of working capital adjustment and its impact. 4. Consideration of financial condition of the associated enterprise. 5. Nature of outstanding receivables and their classification. 6. Non-adjudication of specific grounds of appeal. Detailed Analysis: 1. Rectification of Errors in the Order: The assessee filed a miscellaneous application to rectify inadvertent errors in the order of the coordinate bench passed for Assessment Year 2012-13. The application was made under the provisions of section 254(2) of the Act, which allows for rectification of mistakes apparent from the record. 2. Admission and Rejection of Additional Grounds of Appeal: The assessee raised additional grounds of appeal numbered as ground no. 5.1 and ground no. 7. The Tribunal admitted ground no. 5.1, recognizing it as a legal ground, but ultimately rejected it on merits. The Tribunal held that the total shareholders' funds available with the associated enterprise as an interest-free trade receivable indicated that the outstanding receivable was not a transaction of sale of goods/services to the assessee. 3. Consideration of Working Capital Adjustment: The assessee argued that the working capital adjustment should be considered as it takes into account the impact of outstanding receivables on profitability. The Tribunal rejected this argument, stating that the assessee did not demonstrate any request for working capital adjustment before the Transfer Pricing Officer (TPO) or the Dispute Resolution Panel (DRP). The Tribunal also noted that the assessee did not claim any working capital adjustment in its transfer pricing study report. 4. Consideration of Financial Condition of the Associated Enterprise: The Tribunal considered the financial statements of the associated enterprise, which showed accumulated losses and a genuine cash crunch. However, it concluded that the financial condition of the associated enterprise was immaterial for working out the operating margin of the assessee. The Tribunal emphasized that the outstanding receivables were a device to allow the associated enterprise to enjoy the reserve and surplus available in India without paying dividend distribution tax. 5. Nature of Outstanding Receivables and Their Classification: The Tribunal rejected the assessee's contention that the outstanding receivables were solely in respect of services provided. It held that the receivables were, in effect, advances to the associated enterprise and not merely trade receivables. The Tribunal found that the receivables allowed the associated enterprise to enjoy the reserve and surplus available with the assessee, thus not warranting any working capital adjustment. 6. Non-Adjudication of Specific Grounds of Appeal: The assessee contended that certain grounds of appeal were not adjudicated by the Tribunal. The Tribunal clarified that all grounds related to the issue of working capital adjustment and the impact of outstanding receivables were considered and decided against the assessee. The Tribunal found no error in following the decision of the coordinate bench in the assessee's own case for earlier years. Conclusion: The Tribunal dismissed the miscellaneous application filed by the assessee, finding no mistake apparent in the order. The Tribunal upheld its earlier decision, emphasizing that the peculiar facts of the case distinguished it from other cited decisions and did not warrant any working capital adjustment. The order was pronounced in the open court on 23/03/2021.
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