2023 (1) TMI 116 - AT - Income Tax

TP Adjustment - Computation of the working capital adjustment - HELD THAT - We find that the reasons given by the DRP and the TPO for not providing working capital adjustment has been that because of the inputs in determining the working capital adjustments being variables, it is not possible to reasonably give accurate adjustments. On identical reasons, working capital adjustments was denied to the assessee in the case of Huawai Technologies India Pvt. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE In the present case, the assesse has given the computation of the working capital adjustment and the same is given an Annexure to this order. Similar computation has been given for AY 2014-15, 2015- 16 and the same are given in the assessee s Paper Book. We are of the view that in the light of the decision referred to above, the assesse is entitled to working capital adjustment. The TPO is accordingly directed to allow the same as per law.

Issues Involved:
1. Validity of the assessment order.
2. Scope of assessment extension.
3. Transfer pricing adjustment.
4. Comparability analysis and selection of comparables.
5. Working capital adjustment.
6. Foreign exchange loss treatment.
7. Computation of interest under section 234B.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order dated 25.03.2021, passed by the ACIT, Circle – 7(1)(1), Bengaluru, under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, claiming it to be bad in law and liable to be quashed. The order was contested on the grounds that it was prejudicial to the appellant.

2. Scope of Assessment Extension:
The assessee argued that the scope of assessment was erroneously extended from limited scrutiny for ascertaining the correct disclosure of the 'value' of international transactions to the determination of 'arm's length price' of international transactions without requisite approval from PCIT / CIT.

3. Transfer Pricing Adjustment:
The assessee, engaged in providing marketing and sales support services to its Associated Enterprise (AE) in France, received Rs.4,98,38,366/- for these services. The transaction was an international one, requiring determination of income based on Arm’s Length Price (ALP) as per section 92 of the Act. The assessee used the Transaction Net Margin Method (TNMM) with OP/TC as the profit level indicator, showing an OP/TC of 14.95% compared to comparables with profit margins between 4.48% and 8.22%. The TPO, however, rejected the assessee's transfer pricing study and chose four different comparables, leading to an average margin of 18.98%, resulting in a shortfall adjustment of Rs.26,85,449/-.

4. Comparability Analysis and Selection of Comparables:
The TPO's approach of determining the ALP included:
- Conducting a fresh comparability analysis by rejecting certain filters applied by the assessee and applying additional/modified filters.
- Including Axience Solutions Private Limited, despite it being functionally different from the assessee.
- Excluding functionally comparable companies such as Cheers Interactive India Private Limited, Empire Industries Limited (Trading & Indenting segment), Showhouse Event Management Private Limited, MCI Management India Private Limited, Competent Automobiles Co. Limited (Services & Spares segment), and MIG Media Neurons Limited.

5. Working Capital Adjustment:
The primary issue pressed by the assessee was the denial of working capital adjustment. The DRP and TPO denied this adjustment, citing the variability of inputs and the impossibility of accurate adjustments. However, the Tribunal, referencing the case of Huawai Technologies India Pvt. Ltd., ruled that the assessee is entitled to working capital adjustment. The Tribunal emphasized that the net profit margin in comparable uncontrolled transactions should be adjusted to account for differences that could materially affect the net profit margin in the open market. The Tribunal directed the TPO to allow the working capital adjustment as per law.

6. Foreign Exchange Loss Treatment:
The assessee contended that the foreign exchange loss should be treated as an operating item while computing the operating cost mark-up for determining the ALP. The Tribunal did not specifically address this issue in the provided text.

7. Computation of Interest under Section 234B:
The assessee argued that the AO erred in not granting consequential relief in the computation of interest under section 234B of the Act while computing the tax payable. The Tribunal did not specifically address this issue in the provided text.

Conclusion:
The Tribunal partly allowed the appeal, primarily directing the TPO to allow the working capital adjustment as per law, based on the detailed analysis and precedent cases. The other grounds of appeal were not specifically adjudicated upon in the provided text. The judgment emphasizes the importance of accurate comparability analysis and the necessity of reasonable adjustments to ensure fair determination of ALP in international transactions.

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