JKM FERROTECH LIMITED,THIRUVALLUR vs. DCIT CORPORATE CIRCLE 2(2), CHENNAI

Aforesaid cross appeals for Assessment Year (AY) 2013-14 arises out of the order of learned Commissioner of Income Tax (Appeals)-5, Chennai [CIT(A)] dated 24-04-2019 in the matter of an assessment

The Order of the learned Commissioner of Income Tax (Appeals) is contrary to the Law and facts of the case. 1.1 The CIT(A) erred in granting working capital adjustment to the assessee failing to note that the basic condition for granting this adjustment, i.e. the international transactions of assessee requiring in lesser working capital as compared to the comparables, is not fulfilled as there are no receivables or payables with respect a to AE transactions. 1.2 The CIT(A) while granting working capital adjustment failed to note that out of the total sales of Rs.108,99,09,109/- only Rs.23,57,54,177/- is AE sales & similarly the negative working capital of Rs.18,41,47,684/- considered by the assessee for working capital adjustment is on account of non AE payables of Rs.33.99 crore which clearly establishes that the assessee does not deserve any adjustment on this account. 1.3 The CIT(A) while granting working capital adjustment failed to take notice of the fact that the assessee does not have trade payables and trade receivables in AE segment and hence no working capital adjustment is warranted. 1.4 The CIT(A) erred in quantifying the working capital adjustment at Rs.3,23,92,486/- by relying on the computation furnished by the TPO which was nothing but the claim made by the assessee before the TPO. 1.5 The CIT(A) failed to follow the correct procedure in calling for a remand report on the merits of the issue and his letter calling for a computation of working capital adjustment was misleading as the assessee has never furnished the separate working capital on account of AE transactions. 2.1 The CIT(A) erred in deleting the addition made on account of employees' contribution on ESI & PF when the same were not paid by the assessee within the due date of relevant Acts. 2.2 The CIT(A) ought to have appreciated that the employee's contribution to ESI & PF are governed by the section 36(1)(va) of the Act and not under section 43B of the Act. 2.3 The CIT(A) ought to have appreciated that the recent Board's Circular No.22/2015, dt.17.12.2015 has accepted the decision of the Supreme Court in the case of Alom Extrusions in respect of disallowance u/s 43B of the Act only and has stated that this Circular does not apply to the claim of deduction relating to employee's contribution to welfare funds which are governed by section 36(1)(va) of the Act. 2.4 The CIT(A) ought to have appreciated that the decision of Hon'ble High Court of Madras in the case of M/s.Unifac Management Services (India) Pvt Ltd [409 ITR 225], on similar issue, is in favour of revenue.

The Ld. Sr. DR advanced arguments and filed written submissions whereas Ld. AR justified the working capital adjustment. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing of metal castings. Proceedings before lower authorities 4. As the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. Transfer Pricing Officer-2(1), Chennai (TPO) for determination of Arm’s Length Price (ALP). The same include sale of finished goods to its AE for Rs.23.57 Crores. The assessee adopted Cost Plus Model for benchmarking these transactions. In the alternative, the assessee furnished benchmarking under CUP method also. However, both the methods were rejected by Ld. TPO while passing an order u/s 92CA (3) on 21-10-2016. In this order, the Ld. TPO proposed adjustment of Rs.657.19 Lacs against these transactions. While doing so, Ld. TPO adopted entity level TNMM method. The assessee claimed working capital adjustment. However, Ld. TPO held that the assessee was not operating with negative working capital. Further for the advances received from AEs, it was paying interest @3% p.a. which was shown as international transaction. Further, while making operating profit calculations, the said interest was taken as operating cost. Therefore, this adjustment was not granted. 5. The Ld. AO also noted that the assessee delayed the payment of Rs.13.61 Lacs towards Employees’ contribution to PF / ESI. The same was also disallowed in the assessment order.

The Ld. CIT(A), relying upon the decision of Tribunal in the case of M/s Foxteq Services India Pvt. Ltd. (ITA No.174/Mds/2016, dated 01-09- 2016), directed Ld. TPO to compute working capital adjustment. The Ld. TPO, vide letter dated 13-03-2019, revised the proposed adjustment to Rs.333.27 Lacs. Accepting the same and rejecting other submissions of the assessee, Ld. CIT(A) restricted the impugned adjustments to the extent of Rs.333.27 Lacs. The issue of delayed remittance of PF / ESI was decided in favor of the assessee. The adjudication has led to cross- appeals before us. Our findings & Adjudication 7. Upon perusal of impugned order, it could be seen that the working capital adjustment has been granted by Ld. CIT(A) considering the cited order of Tribunal. In this order, the bench, in para-7, held that the capital employed by the assessee including working capital, is one of the relevant factors for determination of ALP. Similar are the other decisions of Tribunal as placed on record. We also find that the assessee is able to demonstrate this adjustment before Ld. TPO. The revenue contends that TPO has not accepted the grant of working capital adjustment. However, considering the aforesaid decision of the Tribunal and in view of the fact that the assessee was able to quantify the same, the same has rightly been allowed by Ld. CIT(A). We do not find any infirmity in the same. The corresponding grounds raised by the revenue stand dismissed. 8. The issue of late payment of PF / ESI is covered against the assessee by the recent decision of Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. Vs CIT (143 Taxmann.com 178; dated 12.10.2022). Therefore, the impugned disallowance as made by Ld. AO stand confirmed and the adjudication of Ld. CIT(A) stand reversed. The