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TMI Blog2022 (2) TMI 917X X X X Extracts X X X X X X X X Extracts X X X X ..... assed u/s. 143(3) r.w.s.144C(13) of the Income-tax Act 1961 (the Act) for the assessment year 2016-17. 2. The assessee raised several grounds before us. i. Ground No.1 is general. ii. Ground Nos. 2 and 3 are legal grounds relating to Transfer Pricing. iii. Ground Nos. 4 to 7 related to TP Adjustments on merits. iv. Ground No.8 is interest u/s 234B of the Act. 3. The brief facts of the case are that the assessee is an HUF engaged in jewellary business. For the asst. year 2016-17, the assessee filed the return of income u/s 139(1) on 30/9/2016 declaring a total income of ₹ 57,89,890/-. The asst. was selected for scrutiny. The AO issued notice u/s 143(2) of the Act. During the course of asst. proceedings, the matter was referred to the TPO to determine the arms length price (ALP) on the specified domestic transactions undertaken by the assessee with its associated enterprises. The TPO by his order dated 16/10/2019 determined the adjustment u/s 92CA for an amount of ₹ 66,54,892/-. Aggrieved by the adjustments made, assessee filed adjustments before the Dispute Resolution Panel (DRP). The DRP, vide its direction dated 29/3/2021 disposed of the objections of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position as at the end of the financial year and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the find and capital position of the company its marketing strategies, its market share etc. all of which cannot be captures in the year receivable or payable position. Besides the payable and receivable position stated in the balance sheet may not exactly reflect as to whether it arises from transaction relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible as the differences in working capital requirements itself is based on various assumptions. Besides we also note that the assessee had failed to dem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely ;- (a) to (b)** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in subclause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomers - (less) the period granted to pay debts to suppliers. 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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