Red Hat India Private Limited Vs ACIT (ITAT Mumbai)
Working Capital Adjustment Mandatory — ITAT Deletes ₹4.23 Cr TP Addition in Red Hat India Case
The Mumbai Bench of the Income Tax Appellate Tribunal allowed the assessee’s appeal and deleted the sole surviving transfer pricing adjustment of ₹4.23 crore, holding that denial of working capital adjustment was contrary to binding directions issued by the Tribunal in the first round of proceedings.
The case arose in the second round of litigation pursuant to earlier ITAT directions requiring the Transfer Pricing Officer to grant working capital and proportionate adjustments. Despite clear and categorical directions, the TPO again refused working capital adjustment on impractical grounds such as non-availability of daily balances and differences in cost of capital. The Tribunal strongly disapproved this approach, reiterating that once entitlement to working capital adjustment is settled, the lower authorities are bound to implement it in letter and spirit.
On merits, after granting working capital adjustment, the Tribunal noted that the assessee’s margin (1.40%) fell well within the arm’s length range, as against the working-capital-adjusted mean margin of comparables (1.626%) and the tolerance band under section 92C(2). Consequently, the entire TP adjustment relating to royalty and service fees (subscription segment) was held to be unsustainable and deleted.
With the deletion of the TP adjustment, other grounds relating to limitation, validity of assessment, selection of comparables, and digital signature were rendered academic. Grounds relating to TDS credit, MAT credit, foreign tax credit, self-assessment tax, and interest under section 244A were restored to the Assessing Officer for verification and grant as per law.
Accordingly, the assessee’s appeal was allowed, providing significant relief in a second-round transfer pricing dispute
FULL TEXT OF THE ORDER OF ITAT MUMBAI
