ITAT Sends Back Case After TPO Ignored Rectification Claim in Segmental Financials

Rockwell Automation Private Limited Vs ACIT (ITAT Delhi)

In this case involving , the assessee challenged the assessment order passed under Section 143(3) read with Section 144C(13) of the Income-tax Act for AY 2017-18. The appeal was restored by the ITAT through a miscellaneous application only for adjudication of Ground Nos. 5, 6, and 7 relating to transfer pricing adjustments, corrected segmental financials, and working capital/risk adjustments.

With respect to Ground No. 5, the assessee argued that during assessment proceedings it had submitted updated and corrected margins for certain comparable companies. However, the Transfer Pricing Officer (TPO) rejected the corrected computations and retained the margins proposed earlier, stating that the computations had been rechecked under Rule 10TA of the Income Tax Rules, 1962. The assessee also contended that objections regarding the corrected margins were specifically raised before the Dispute Resolution Panel (DRP), but no specific directions were issued.

Regarding Ground No. 6, the assessee submitted that an inadvertent error had occurred in the segmental accounts. An international transaction with Associated Enterprises amounting to Rs. 79,91,176 relating to erection, commissioning, and services connected with the assembly/manufacturing segment had mistakenly been included in the Engineering Design Services segment. A rectification application was filed before the TPO seeking correction of the mistake. The assessee also raised a specific objection before the DRP requesting consideration of the corrected segmental financials. The DRP directed the TPO to verify the claim and, if found correct pursuant to rectification proceedings under Section 154, exclude the transaction from the Engineering Design Services segment. However, the TPO did not consider the rectification application.

On Ground No. 7, the assessee submitted that it had claimed working capital adjustment in its transfer pricing report and furnished working capital-adjusted margins during the proceedings. The assessee also relied upon various judicial precedents supporting grant of such adjustments. The TPO rejected the claim on the basis that working capital adjustment could not be granted merely due to differences in inventories, receivables, or payables unless the international transactions themselves affected such differences. The TPO further held that since comparability analysis was carried out at the operating profit level excluding interest components, no justification existed for granting working capital adjustment. The assessee challenged this rejection before the DRP. The DRP directed the TPO/AO to follow the approach adopted in preceding assessment years concerning segment-level adjustments, working capital adjustment, and risk adjustment. The assessee pointed out that working capital adjustment had been allowed in AY 2013-14 subject to verification and had also been allowed in AY 2020-21. However, for AY 2017-18, the TPO/AO considered unadjusted margins.

During the hearing before the Tribunal, the assessee requested that all three issues be remanded to the AO/TPO for verification and reconsideration. The Departmental Representative did not object to the matter being remanded.

The ITAT observed that the rectification application relating to corrected segmental financials had not been considered despite the DRP’s directions. Finding merit in the assessee’s submissions, the Tribunal remitted Ground No. 6 back to the AO/TPO for consideration of the rectification application after granting an opportunity of hearing to the assessee.

The Tribunal further held that Grounds No. 5 and 7 also required restoration to the AO/TPO for verification and fresh decision. Accordingly, all the grounds were restored to the file of the AO/TPO. The appeal of the assessee was allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal is filed by the assessee against the assessment order dated 30.06.2022 passed by the ACIT, Circle 19 (1), Delhi u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 (for short ‘the Act”) for Assessment Year 2017-18 pursuant to the directions of the Dispute Resolution Panel passed u/s 144C(5) of the Act.

2. In the misc. application filed by the assessee, the ITAT vide order dated 02.05.2025 recalled the order of the Tribunal dated 12.07.2023 only for adjudicating Ground Nos.5, 6 & 7. Ground Nos.5, 6 & 7 are reproduced below :-

“5. On the facts and in law, the Ld. AO/Ld. TPO erred in incorrectly computing the net cost-plus margins of the comparable companies selected by the ld. TPO and not sharing back-up calculations with the Appellant.

6. On facts and in law, the Ld. AO/Ld. TPO erred in not considering the corrected segmental financials submitted by the appellant after rectifying the mistake apparent from record.

7. On facts and in law, the Ld. AO/Ld. TPO erred in not allowing working capital adjustment and risk adjustment under rule 10B(1)(e) of the Rules for determination of the ALP to account for differences in working capital employed by the appellant and risk profile of the appellant vis-à-vis the comparable companies.”

3. With regard to ground no.5, ld. AR submitted that during the assessment proceedings, the assessee provided updated/corrected margins of certain comparable companies and referred to page no. 83 and 236 of ITAT factual paper book. He submitted that however, the TPO has rejected the corrected margins and retained the margins as proposed in the SCN, merely stating that the margin computations were re-checked and finalised in accordance with Rule 10TA of the Income Tax Rules, 1962. Further he submitted that the assessee’s allocation of certain non-operating expenses to the manufacturing segment was rejected on the ground that such allocation was made on an ad hoc basis without any cogent basis or proper justification. He further submitted that being aggrieved by the TP Order, the assessee filed its objections before the ld. DRP, which included a ground of objection i.e. Ground no. 3.4 and referred page no. 44 of merit appeal for granting corrected margins of certain companies. He submitted that however, the ld. DRP did not provide any specific direction on the same. He brought to our attention summary of unadjusted margins of certain comparable companies computed by the assessee and the Ld. TPO/ AO as below :-

4. With regard to ground no.6, ld. AR submitted that the assessee noticed an inadvertent error made in the segment accounts of the assessee wherein an international transaction with AE amounting to Rs.79,91,176/- in the nature of erection, commissioning and services pertaining to Assembly/ Manufacturing Segment was included in the Engineering Design Services Segment. He further submitted that accordingly, a rectification application for correction of the same was filed with the TPO. Further, while filing objections, the assessee raised a specific ground seeking consideration of the corrected segmental financials, being Ground No.2 and referred page no. 136 of the merit appeal. He further submitted that during the proceedings before the Hon’ble DRP, the assessee had been filed a rectification application under Section 154 of the Act before the Ld. TPO. He submitted that the ld. DRP, taking note of the submission, directed the Ld. TPO to verify the claim and, if found to be correct pursuant to the rectification order under Section 154 of the Act, to exclude the said transaction from the Engineering Design Services segment while passing the final assessment order and referred page no.43 of the merit appeal, however, no reply was provided by the Ld. TPO to the assessee.

5. With regard to ground no.7, ld. AR submitted that in the TP Report, Rockwell India had expressly retained the right to claim a working capital adjustment and referred page no. 454 of the merit appeal. He submitted that during the course of assessment proceedings, the assessee furnished working capital-adjusted margins and referred pages 84 and 236 of the ITAT factual paper book and also submitted various judicial precedents supporting the grant of working capital adjustment. The judicial precedents relied upon are as under :-

• M/s Sony India (P) Limited (supra)
• Mentor Graphics (Noida) Pvt. Ltd
• M/s Sony India Private Limited 157 Taxman 125
• Philips Software Centre (P) Ltd. vs A CIT
• Nokia India Pvt Ltd – ITA No. 551/Del/201l, AY 2006-07, ITAT Delhi
• Demag Cranes & Components (India) Private Limited -ITA No.120/PN2011
• TNT India Private Limited – ITA No. 1442(BNG)/108

6. He submitted that however, the Ld. TPO rejected the claim for working capital adjustment on the ground that such an adjustment cannot be granted merely due to differences in the levels of inventories, trade receivables, or trade payables. He submitted that according to the Ld. TPO, in the transfer pricing context, working capital adjustments are permissible only where the international transactions themselves have a bearing on such differences. Further, it was held that since comparability analysis is carried out at the operating profit level and interest components are excluded from the margin computation, there remains no justification for granting a working capital adjustment. He submitted that accordingly, the claim for working capital adjustment was rejected and referred pages 72-73 of the merit appeal. He submitted that aggrieved by the aforesaid rejection, the assessee, while filing objections before the ld. DRP, raised a specific ground seeking grant of working capital adjustment, being Ground No. 3.6 and referred page no. 136 of the merit appeal. He further submitted that the ld. DRP, directed the Ld. TPO/AO to follow the approach adopted by the ld. DRP in the preceding assessment years with respect to segment-level adjustments, including proportionate adjustment, working capital adjustment, and risk adjustment which would continue to apply for the present assessment year. Since the factual and legal position remained unchanged, the ld. DRP concluded that no fresh claims for such adjustments were admissible and referred page no. 45 of the merit appeal. He further submitted that it is pertinent to note that in the earlier assessment year i.e. AY 2013-14, the issue of working capital adjustment was raised by the assessee and was allowed by the ld. DRP, subject to verification of the relevant data available with the Ld. TPO and referred page 10 of the ld. DRP’s directions for A Y 2013-14). The assessee further highlighted that in a subsequent assessment year i.e., A Y 2020-21, the ld. DRP allowed the working capital adjustment. However, in the subject year i.e. AY 2017-18, the Ld. TPO/ AO has disregarded the aforesaid direction of the ld. DRP in A Y 2013-14 (wherein working capital was granted subject to verification) and considered the unadjusted margins of comparable companies and referred page nos. 10 to 12 of merit appeal.

7. In view of his submissions, he pleaded that all the three issues may be sent back to the TPO/Assessing Officer for verification and decide accordingly.

8. On the other hand, ld. DR of the Revenue submitted that he has no objection to remit this issue back to the file of AO/TPO to verify and allow the same as per law.

9. Considered the rival submissions and material placed on record. With regard to ground no.6, we observed that assessee has inadvertently included the international transaction with Associated Enterprises (AE) in the nature of erection, commissioning and services pertaining to assemblies/manufacturing segment was included in engineering, it is not services segment. The assessee filed rectification application for the abovesaid correction before TPO. It was submitted that assessee raised a specific ground seeking consideration of the corrected segmental financials. However, the rectification application was not considered by the TPO. The ld. DRP took note of the same and directed the TPO to verify the claim. Inspite of that, TPO has not considered the same. It was prayed that the issue may be remitted back to the AO/TPO to consider the above rectification application and do the needful as per law. Since there is a merit in the submissions of the assessee, we are inclined to remit this issue back to the file of AO/TPO to consider the rectification application and do the needful as per law after giving an opportunity of being heard to the assessee.

10. Further, after going through the submissions of the ld. AR as aforesaid, in our considered opinion and in the interest of justice, grounds no.5 & 7 are required to be restored back to the file of Assessing Officer/ TPO to verify and decide accordingly. Hence, we ordered accordingly.

11. Accordingly, all the grounds are restored back to the file of Assessing Officer/TPO.

12. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on this 13^TH day of May, 2026.