ITO Vs M/s H&S Software Development & Knowledge Management Centre Pvt. Ltd. (ITAT Delhi)
In the present case, it appears that the assessee furnished the calculation for adjustment on account of working capital before the ld. DRP who after considering the submissions of the assessee and the guidelines provided by OECD for the computation of working capital adjustment directed the TPO to do needful. As regards to the objection of the TPO that the assessee had not demonstrated that there was a difference in the levels of working capital employed by it vis-à-vis the comparables which affected price and consequently profit, the ld. DRP categorically stated that holding of inventories, trade debtor/ creditors, trade receivable/payable has always an interest cost. Therefore there is definitely a connection in the level of working capital and the price at which one is willing to offer its services/goods. The ld. DRP held that the rejection of the assessee’s claim of working capital adjustment by the TPO was not tenable.
As regards to the observation of the TPO that monthly data of comparables as well as segmental data was not available for making reasonably accurate working adjustment. The ld. DRP directed the TPO that average of opening and closing balance of the inventories and the trade receivable/payable, trade debtors/creditors for the relevant year may be adopted which may broadly give the representative level of working capital over the year. In our opinion, the ld. DRP rightly directed the TPO to compute the working capital adjustment by using the OECD methodology. We do not see any valid ground to interfere with the findings given by the ld. DRP. Accordingly, we do not see any merit in this appeal of the department.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This is an appeal by the department against the order dated 27.11.2014 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
“1. On the facts and in circumstances of the case, the order of Hon ’ble DRP is wrong and against the provisions of law which is liable to be set aside.
2. Whether the observations of Hon ’ble DRP is right in directing the TPO to give working capital adjustment [using OCED methodology given in Annexure to chapter – 3 and applying SBI Prime Lending Rate (as on 30th June of the relevant financial year) as the interest rate] against the TPO order dated 16.01.2014 passed u/s 92CA(3) for A.Y. 2010-11.
3. The appellant craves for the permission to add, alter and submit additional ground in the course of the appellant proceedings before the Hon’ble ITAT.”
3. From the above grounds, it is gathered that only grievance of the department relates to the direction of the ld. DRP to the TPO to give working capital adjustment.
4. Facts related to this issue in brief are that the assessee filed its return of income on 28.09.2010 declaring income at Rs.19,32,894/-. Later on, the case was selected for scrutiny. The assessee filed the Transfer Pricing Report in Form 3CEB. The AO by considering the international transactions of the assessee with associated enterprises (AEs) totaling to Rs.14,71,48,937/-, referred the matter to the Transfer Pricing Officer for determining the arm’s length price of the international transactions as per the provisions of Section 92CA of the Act. The assessee in the TP study selected TNMM as the most appropriate method to benchmark the international transaction and had selected 7 comparables, whose average margin was 13.62% as against the assessee’s margin of 13.81%. Since the assessee’s margin was within the range of ±5%, therefore, it was contended that this transaction was at arm’s length price. The TPO, however, did not agree with the various filters used by the assessee in its TP study and by using certain more filters, he rejected 6 comparables from assessee’s set and selected 11 new comparables. He, thus, selected a set of 12 comparables (1 from assessee’s set and 11 new comparables) whose average margin was 33.14% as against assessee’s margin was 13.81% and proposed the adjustment of Rs.2,40,44,219/-. Subsequently, the AO passed the draft assessment order to assess the assessee at an income of Rs.2,62,86,830/-. Against the draft assessment order, the assessee filed the objections before the ld. DRP who issued certain directions, the TPO thereafter passed the order u/s 92CA of the Act and worked out the adjustment on account of arm’s length price at Rs.2,40,44,219/-.
5. One of the issue agitated by the assessee before the ld. DRP was relating to the denial of adjustment on account of working capital while working out the average margins of the comparable. The gist of the submissions by the assessee before the ld. DRP was as under:
