M/S. LINEAGE POWER PVT LTD., ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

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ITTPA 60/BANG/2024Status: DisposedITAT Bangalore19 April 2024AY 2015-168 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the assessee's claim for working capital adjustment should be allowed. It noted that the assessee had provided details for the adjustment and relied on the decision in Huawei Technologies India (P) Ltd. The Tribunal found that the DRP's reasons for rejection, such as the need for daily balances, segmental working capital, break-up of debtors/creditors, and cost of capital, were not sustainable. The Tribunal reasoned that insisting on daily balances is impractical, and details like segmental working capital or trade/non-trade debtor breakdowns are often beyond the assessee's power to obtain from comparable companies. It also referred to OECD guidelines for adopting interest rates for the cost of working capital. The Tribunal concluded that if working capital adjustments are not allowed, the comparable uncontrolled transactions would have to be treated as not comparable under Rule 10B(3), rendering the transfer pricing exercise futile. Therefore, the working capital adjustment as claimed by the assessee was directed to be allowed. The Tribunal also directed the AO to verify and grant credit for Self-Assessment tax and Regular Assessment taxes, as a rectification application was pending.

What were the facts?

The assessee, M/s. Lineage Power Pvt. Ltd., filed an appeal against the order of the Assessing Officer (AO) passed under section 143(3) r.w.s. 254 r.w.s. 144B of the Income-tax Act, 1961, for Assessment Year 2015-16. This was the second round of proceedings before the ITAT. Previously, the Tribunal had set aside the issue of working capital adjustment to the AO/TPO. The TPO rejected the assessee's claim for working capital adjustment and made a transfer pricing adjustment of Rs. 1,08,78,064. The Dispute Resolution Panel (DRP) upheld the TPO's decision, stating the assessee had not demonstrated the impact of working capital differences on prices, costs, or profits. The AO then passed the impugned order.

What were the issues?

1. Whether the Tribunal had to decide if the assessee's claim for working capital adjustment should be allowed, considering the differences in working capital cycles between the assessee and comparable companies. The assessee argued that material differences in working capital necessitate adjustments to improve comparability, citing its long credit period from related parties and presenting various financial ratios. It relied on decisions in Huawei Technologies India (R) Ltd. v. JIT (OSD), M/s Euronet Services India Pvt Ltd vs DCIT, and others. The revenue, represented by the lower authorities (TPO and DRP), rejected the claim, arguing the assessee failed to demonstrate the impact of working capital on prices, costs, or profits, and that year-end balance sheet figures are insufficient to measure such impact. The DRP also stated that working capital requirements depend on various factors not captured by year-end figures and that accurate adjustments are not possible.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 254,Section 144B,Section 234B,Section 10B(1)(e),Section 10B(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C” BENCH : BANGALORE

Before: SMT. BEENA PILLAI & SHRI LAXMI PRASAD SAHU

For Appellant: Shri Narendra Kumar Jain, Advocate
For Respondent: Shri Subhash K.R., CIT(DR)(ITAT), Bengaluru
Hearing: 03.04.2024Pronounced: 19.04.2024

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

IT(TP)A No.60/Bang/2024 Assessment year : 2015-16

M/s. Lineage Power Pvt. Ltd., Vs. The Deputy Commissioner Plot No.V-12, Industrial Estate, of Income Tax, Bengaluru-Mysore Highway, Circle 4(1)(1), Kumbalagodu, Bangalore. Bangalore – 560 074. PAN : AAFCP 5474M APPELLANT RESPONDENT

Appellant by : Shri Narendra Kumar Jain, Advocate Respondent by : Shri Subhash K.R., CIT(DR)(ITAT), Bengaluru.

Date of hearing : 03.04.2024 Date of Pronouncement : 19.04.2024 O R D E R Per Laxmi Prasad Sahu, Accountant Member This appeal is filed by the assessee against the DIN & Order No.ITBA/AST/S/143(3)/2023-24/1058659115(1) dated 11.12.2023 of the Assessing Officer passed u/s. 143(3) r.w.s. 254 r.w.s. 144B of the Income-tax Act, 1961 [the Act] for the AY 2015-16 in the second round of proceedings before the ITAT. The Tribunal in IT(TP)A No.2309/Bang/2019 vide order dated 28.9.2020 set aside the issue of working capital adjustment to the file of AO/TPO. Subsequently, the

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TPO discussed the issue in para 4.2 to 4.2.4 and rejected the claim of assessee to allow working capital adjustment and made TP adjustment of Rs,1,08,78,064 which was incorporated in the draft assessment order. The assessee raised objections before the DRP.

2.

The DRP after discussing the working capital adjustment in para 3.1 rejected the claim of the assessee. The DRP observed that the assessee has not demonstrated with any data or information as to the impact of such difference on the price, cost or profits. The ‘Accounts payables’ and ‘Receivables’ shown in the balance sheet only reflects the position as at the end of the financial year and it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, market share etc. all of which cannot be captured in the year end receivable or payable position. Besides, the payable and receivable position in the balance sheet may not exactly reflect as to whether it arises from transaction relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, cost of money in the economy it operates, etc., and reasonable accurate adjustment is not possible. The DRP upheld the TPO’s reasoning and rejected the objections of the assessee. The AO

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passed the impugned order against which the assessee is in appeal before the Tribunal in the second round.

3.

The ld. AR has raised ground No.2 and filed written submissions on the working capital adjustment as under:-

“2.2 The Appellant submits that if there are material differences between the controlled transactions and uncontrolled comparable transactions the same need to be adjusted to improve the reliability of the transfer pricing analysis. The Appellant submits it is engaged in business of energy management solutions. For companies engaged in manufacturing, the working capital cycle plays as important role and optimum utilization of working capital components like raw materials, receivables, inventory and payables is very important. 2.3 The Appellant is given long credit period by the related party and is therefore not exposed to the working capital risks unlike comparable companies. The Appellant has tabulated below various ratios for comparison: Ratios Acme Cleantech Nu Tek India Appellant Solutions Limited Limited Debt-to-Capitalization Ratio 0.05% 0.08% 0.00% Accounts Payable 3.18 0.89 6.70 Turnover Ratio (Times) Accounts Receivables Turnover 2.81 1.33 4.77 Ratio (Times) Inventory Turnover 3.77 171.56 10.34 Ratio (Times)

2.4 The variation in ratios reflect that all companies adopt different funding model and have different working capital cycle. This difference deserves an adjustment to iron out the differences between Appellant and Comparables to achieve higher level of comparability.

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2.5 The Appellant further submits that it has given detailed submissions against each of the reasons given by the TPO for rejection of working capital adjustment at pages 137 to 153 of PB-1. The DRP has not considered submissions of the Appellant and gave general reasons to reject working capital adjustment. No defect or mistake in working capital adjustment of the Appellant is highlighted. Thus, rejection of working capital adjustment by TPO/DRP is without basis. 2.6 The Appellant places reliance on the decision of Honourable Bangalore tribunal in the case of Huawei Technologies India (R) Ltd. v. JCIT (OSD) [2019] 101 taxmann.com 313 (Bangalore - Trib.) wherein it was held that if complete working capital adjustment working had been given by assessee and no defect had been pointed out, the working capital adjustment computed by the assessee should be allowed. [Para 17]. The decision also addresses all the reasons of rejection of working capital adjustment given by the DRP[decision is attached as Annexure 1]. 2.7 The Appellant also places reliance on following decisions wherein working capital adjustment was granted: • M/s Euronet Services India Pvt Ltd vs DCIT [IT(TP)A No.962/Bang/2022, dated 31.08.2023] [Page 178 of PB-II] • Parexel International Clinical Research (P.) Ltd vs ACIT [2023] 152 taxmann.com 355 (Bangalore-Trib.); • Parexel International (India) (P.) Ltd vs ACIT [2023] 156 taxmann.com 609 (Hyderabad -Trib.); • Medtronic Engineering and Innovation Centre Pvt Ltd vs DCIT [ ITA No.225/Hyd/2021, Hyderabad Tribunal] 2.8 Based on all the above, the appeal and submits that working capital adjustment computed by the Appellant should be granted.” 4. The ld. AR submitted that the details were provided to the TPO, however he has rejected the claim of assessee. The ld. DRP has also

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recorded adverse observations at para 3 and rejected the assessee’s submissions. He relied on the decision of Huawei Technologies India (P) Ltd. [2019] 101 taxmann.com 313 (Bang. Trib.).

5.

The ld. DR relied on the orders of lower authorities.

6.

After considering the rival submissions, we note that the assessee has provided the details for working capital adjustment which is extracted supra. The ld. AR also relied on the decision of the coordinate Bench of Tribunal in Huawei Technologies India (P) Ltd. (supra) wherein it is held as under:-

15.

In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons:

(i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non- trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee

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was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the

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Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if—

(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly

7.

Accordingly, respectfully following the above judgment we restore the issue to the AO/TPO for fresh consideration with a direction to grant working capital adjustment to the assessee in accordance with law to be on par with comparable companies.

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8.

Ground No.3 : The ld. AR submitted that credit for Self Assessment tax of Rs.59,32,150/- and Regular Assessment taxes of Rs.74.39,100/- should be granted. The Appellant has filed rectification application on 11.01.2024 but the same is not disposed till date. The AO is directed to verify and grant the same.

9.

Ground No.4 relating to levy of interest u/s. 234B is consequential in nature.

10.

In the result, the appeal by the assessee is partly allowed for statistical purpose.

Pronounced in the open court on this 19th day of April, 2024. Sd/- Sd/- ( BEENA PILLAI ) (LAXMI PRASAD SAHU ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 19th April, 2024.

/Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. Pr.CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.

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