Arm Embedded Technologies Pvt. Ltd Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that 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 comparable in terms of Rule 10B(3) of the Rules. Matter remanded to re-compute the working capital adjustment.
Facts-
The assessee mainly contend that AO has erred in upholding the learned TPO’s approach of determining the arm’s length price for the provision of software development MOW (‘SWD’) services and provision of marketing and sales support services (MSS’) segments of the Appellant by rejecting the value of international transaction of provision of SWD and provision of MSS, as recorded in the books of account. as the arm’s length price.
The assessee also contended the rejection of TP documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence.
Conclusion-
Held 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.
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 comparable in terms of Rule 10B(3) of the Rules.
Held that in view of the above, we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal is filed by the assessee against order dated 07/04/2021 by the National e-Assessment Centre, Delhi for A.Y. 2016-17 on following grounds of appeal:
“The grounds mentioned herein by the Appellant are without prejudice to one another.
1. That the order of the Deputy Commissioner of Income-tax, National e-Assessment Centre, Delhi / Deputy Commissioner of Income-tax, Circle 1(1)(1), Bengaluru (learned AO’) dated 07 April 2021, passed under Section 143(3) read with section 144C(13) of the Act, pursuant to the directions of the learned Dispute Resolution Panel (‘learned Panel’) to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
2. That on the facts and in the circumstances of the case, the learned Panel and the learned AO erred in upholding the learned TPO’s approach of determining the arm’s length price for the provision of software development MOW (‘SWD’) services and provision of marketing and sales support services (MSS’) segments of the Appellant by: 2.1 Rejecting the value of international transaction of provision of SWD and provision of MSS, as recorded in the books of account. as the arm’s length price.
2.2 Rejecting the TP documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence.
2.3 Applying the provisions of Rule 10B(5) read with Rule 10CA(2) and Rule 10CA(4) of the Income-tax Rules, 1962 (‘the Rules’) while undertaking the fresh benchmarking analysis.
2.4 Rejecting the Company’s contentions against that the use of information under section 133(6) of the Act, which tantamounts to choosing secret comparable companies whose information were not available in public domain while undertaking the TP study for the respective financial year and without prejudice. not sharing the responses received under section 133(6) with the Appellant.
2.5 Conducting a fresh comparability analysis by rejecting certain filters applied by the Appellant in the TP documentation as below:
