Home Case Index All Cases Income Tax Income Tax + AT Income Tax - 2015 (4) TMI AT This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2015 (4) TMI 722 - AT - Income TaxTransfer pricing adjustment - Income on account of determination of arm's length price of the international transactions entered by the assessee with its associated enterprises - CIT(A) deleted the addition - working capital adjustment working - Held that:- In-principle, we are in agreement with the stand of the assessee that while carrying out comparability analysis in the TNM Method, appropriate adjustment deserves to be allowed with respect to the working capital differences between the tested party and the potentially comparable concerns. In the present case, the assessee has not incurred any interest expenditure and therefore the stand of the Revenue is that no adjustment is to be allowed with respect to the working capital differences vis-à-vis the comparable concerns. In our considered opinion, the aforesaid objection of the Revenue is not in a correct perspective as it does not take into consideration other factors which have a bearing on the working capital requirements. No doubt, incurrence of interest expenditure for the funds used in business impact the operating margins. So however, the period of credit allowed to the customers also is a factor which would impact the working capital requirements and consequential sale realizations. In the present case, assessee has worked out the working capital difference for the time lag in recovery of the sale proceeds. In assessee’s case the said time lag is quite short inasmuch as it was also pointed out that in some cases assessee has received monies in advance. Nevertheless, assessee has placed a working regarding the difference in time lag in sale recoveries in the case of the assessee and that of the three comparables concerns selected by the TPO. The difference in such time lag is applied to the Prime Lending Rate (PLR) to compute the working capital adjustment. On this basis, an adjustment of 5.90% was determined, which was required to be applied to the operating margins of the three comparable concerns. The CIT(A), in our view, made no mistake in accepting the plea of the assessee for allowing of such working capital adjustment. The said action of the CIT(A), in our view, is liable to be affirmed. As before the CIT(A), assessee pointed out that while it calculated its own PLI i.e. operating cost/operating profit without including any interest expenditure as it was ‘Nil’, but advertently in respect of the comparable concerns, who had incurred interest costs, assessee did not remove such interest costs while working out their PLIs. In this manner, the assessee furnished a revised working of the PLIs of the three comparables concerns selected by the TPO. Accordingly, as against the average margin of 20.91% computed by the TPO, the revised average margin of the three comparable concerns was computed at 23.70%. The CIT(A) accepted the aforesaid position and thereafter he has accepted assessee’s plea for an adjustment of working capital differences between assessee and the three comparable concerns. The CIT(A) held that the denial of working capital adjustment by the TPO was not correct and that though the computation of the working capital adjustment was before him, it was not examined by the TPO. Therefore, for the limited purpose of verification of such working he has remanded the matter back to the file of the Assessing Officer. Thus no addition on account of the arm's length price of the international transaction to be made - Decided in favour of assessee.
|