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TMI Blog2023 (1) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... OUNTANT MEMBER Assessee by : Shri. Sumeet Khuranna, CA Revenue by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. ORDER Per N V Vasudevan, Vice President This is an appeal by the assessee against the final Order of Assessment 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 (hereinafter called the Act ), in relation to Assessment Year 20161-7. 2. The assessee is a company engaged in providing marketing and sales support services to its Associated Enterprise (AE) M/s. Tarkett SA, France. During the previous year relevant to Assessment Year 2016-17, the assessee provided marketing support services (MSS) to its AE for which it received a sum of Rs.4,98,38,366/-. Since the transaction of providing MSS to the AE was an international transaction, income arising from the said transaction had to be determined having regard to Arm s Length Price (ALP) as laid down in section 92 of the Act. In support of the claim that the amount received from the AE was at arm s length, the assesseee filed a transfer pricing analysis choosing Transaction Net Margin Method (TNMM) as the Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers PLI PLI=OP/OC 12.90% Average Margin of comparableset 18.98% Adjustment Required Yes Average Margin of comparable set M 18.98% Arms Length Price ALP=(1+M)*OC 5,25,23,815 Price Received OR 4,98,38,366 Shortfall being adjustment ALP-OR 26,85,449 5. Aggrieved by the aforesaid addition made by the AO which was incorporated in the draft order of Assessment, the assessee filed objections before the DRP. The DRP gave certain directions which did not result in any relief to the assessee. 6. Aggrieved by the final order of Assessment passed by the AO as per the directions of the DRP, the assessee is in appeal before the Tribunal. The assessee raised the following grounds of appeal: 1. That the order of the National e-Assessment Centre, Delhi / Deputy Commissioner of Income-tax, Circle 7(1)(1), Bangalore (the 'As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is not applicable to the Appellant. 4.5 Not treating the foreign exchange loss as operating item while computation of operating cost mark-up of the Appellant for determining the arm's length price while relying on the judicial precedents. 5. That on the facts and in the circumstances of the case, the learned AO erred in not granting consequential relief in the computation of interest under section 234B of the Act while computing the tax payable. 7. At the time of hearing, learned Counsel for the assessee pressed for adjudication of only ground No.4.4 with regard to not providing working capital adjustment. In this regard, 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., Vs. JCIT IT(TP)A No.1939/Bang2017 order dated 31.10.2018, the Tribunal on a consideration of the very same reasons held as follows: 10. The next grieva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No.2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not compara ..... X X X X Extracts X X X X X X X X Extracts X X X X
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