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2016 (7) TMI 1281 - AT - Income TaxTransfer pricing adjustment - working capital adjustment by TPO - Held that:- Since the TPO has not complied with the directions given by the DRP therefore, we set aside this issue to the record of the TPO/A.O. for giving the proper working capital adjustment without any restriction as held by the co-ordinate bench of this Tribunal in the case of Citrix R & D India Pvt. Ltd. [2016 (2) TMI 1050 - ITAT BANGALORE] wherein it was held that the TPO cannot restrict the working capital adjustment artificially from the actual computation. Non-allowance of capacity utilisation adjustment - Held that:- he assessee has bench marked its international transactions in manufacturing segment by considering the composite transaction of sale as well as royalty paid to the AE. The TPO has separated the royalty from manufacturing transaction segment and treated the ALP at Nil. We have already set aside the issue of ALP of royalty to the record of the TPO/A.O. As regards the issue raised in the manufacturing segment for non-grant of working capital adjustment abnormal expenditure and non-allowance of capacity utilisation, we find that it is the first year of the assessee’s manufacturing activity then the issue of capacity utilisation adjustment is required to be examined by considering the level of capacity utilisation of the assessee as well as the comparable. Accordingly, we set aside this matter of TP Adjustment in manufacturing segment to the record of the TPO to consider the adjustment on account of capacity under-utilisation as well as excluding the abnormal expenditure. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue afresh. Comparability selection - Held that:- As assessee is into international transactions in software development services the companies functionally dissimilar with that of assessee need to deleted from final list of comparability. Considering the Arm’s Length Price (‘ALP’) of Royalty at Nil - Held that:- As the assessee has produced the relevant evidence including the license agreement under which the Royalty has been paid to AE therefore, in the facts and circumstances of the case, we set aside this issue to the record of the TPO / TPO to re-examine the issue as per the provisions of transfer pricing and in the light of the evidence produced by the assessee as well as the T.P. order passed under Section 92CA for the Assessment Year 2012-13. Incorrect computation of operating margin of the assessee and proportionate T.P. Adjustment - Held that:- We find merit in the contention of the assessee that if sub-lease income is excluded from the operating profit then corresponding lease expenditure shall also be excluded from the operating cost while computing the operating margin of the assessee. Accordingly, we set aside this issue to the record of the A.O./TPO to compute the operating margin of the assessee after excluding the corresponding lease expenditure from the operating cost. The TPO is also directed to confine the adjustment to the value of international transactions only.
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