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2021 (7) TMI 44 - AT - Income TaxTP Adjustment - improper working capital adjustment - HELD THAT:- Advances to suppliers and advances from customers are integral part of working capital adjustment in the same way in which there are trade receivables and trade creditors. Such advances, ergo, cannot be excluded in computing the working capital adjustment. Reference to trade receivables and trade payables in the example given in Annexure to Chapter III of the OECD transfer pricing Guidelines, 2010 should be construed as including advances to suppliers and advances from customers. It is only for simplification purpose that the example refers to trade receivables and trade payables to the exclusion of advances to suppliers and advances from customers. We, therefore, amplify the direction of the ld. CIT(A) to the AO/TPO for adopting the method of working capital adjustment as provided in the example given in Chapter III of the OECD Guidelines by also considering Advances to suppliers and Advances from customers, in the same way as Trade receivables and Trade payables. The figures of Advances to suppliers and Advances from customers, as given by the assessee for the first time before the ld. CIT(A) pertaining to self and the comparables, have not been verified by any authority. These need to be examined and evaluated by observing that only advances to or from customers/suppliers should be included in the computation of working capital of the assessee as well as the qualifying comparables - no advance or outstanding other than relating to purchase or sale of goods should find its place in the computation of working capital. Filter of Manufacturing sales more than 75% of total sales - Exclusion of Fives Cail KCP Ltd. on improper application of one of the accepted filters - The filter under consideration - 'Manufacturing sales not less than 75% of the total sales' - applies at the first level of company selection so that only the companies engaged mainly in manufacturing activity get selected at the entry level. It has no application at the second level of transaction level comparison. If a company has passed the filter and entered the first level, it will have to pass the transaction level comparison also so as to get eligible for inclusion in the final list of comparables. In order to become comparable to an international transaction of Manufacturing, a company will get included only if it is either exclusively in Manufacturing or if it is not so exclusively in manufacturing (having 75% or more as manufacturing), but its segmental information of the Manufacturing is separately available. Adverting to the facts of the extant case, we find that Fives Cail KCP Ltd. passes the filter of Manufacturing sales not less than 75% of the total sales and ex consequenti the company level test is through, but it fails the transaction level test inasmuch as it is albeit largely a manufacturing company but also has service income of 17% of its total revenue and admittedly no segmental information for the Manufacturing activity is available. So, this company having manufacturing activity at 83% cannot be considered as comparable to the international transaction under consideration of 100% Manufacturing activity. We, therefore accord our imprimatur to the exclusion of this company from the list of comparable.
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