DCIT CIR 1(1)(2), MUMBAI vs. EXEDY INDIA LTD (FORMERLY KN OWN AS CEEKAY DAIKIN LTD), MUMBAI

At the outset, learned Counsel for the assessee, on instructions submitted, if the issue relating to claim for working capital adjustment as raised in the cross objection is decided in favour of the assessee, he would not contest the grounds raised in Revenue’s appeal. Further, he submitted, in that eventuality, the other grounds raised in the cross objection viz. grounds no.2, 3 and 4, would not be pressed. Keeping in view the aforesaid submissions of the learned Authorised Representative, we proceed to adjudicate ground no.5 of the cross objection relating to claim of working capital adjustment.

Brief facts are, the assessee, an Indian company, is engaged in the business of manufacturing and sale of clutches. The manufactured products are supplied to the local vehicle manufacturers and also to aftermarket customers. In the previous year relevant to the assessment year under dispute, the assessee had entered into various

Learned Commissioner (Appeals) granted partial relief to the assessee by excluding some of the comparables selected by the 4 Exedy India Ltd. Transfer Pricing Officer. However, he did not allow assessee’s claim of working capital adjustment.

The learned Authorised Representative drawing our attention to the transfer pricing study report, a copy of which is at Page–301 of the paper book, submitted that the assessee had provided for working capital adjustment, since, as per rule 10B(e)(iii) enterprise level differences in net margin of comparable companies has to be adjusted to factor in differences that have a material impact on net profit margin. In this context, he also drew our attention to the computation of working capital adjustment of comparables. He submitted, as against the credit period of 85 days of the comparables, the assessee has given credit period of 1,118 days. Therefore, suitable adjustment for working capital has to be provided. He submitted, though, detailed submissions were made before the Transfer Pricing Officer, however, while rejecting the claim of working capital adjustment, he has not assigned any reason. He submitted, learned Commissioner (Appeals) simply relying upon his decision in the assessment year 2011–12, has disallowed claim of working capital adjustment. The learned Authorised Representative submitted, though, in the appeal filed before the Tribunal in the assessment year 2011–12, the assessee had raised the issue, however, it became academic since the transfer pricing adjustment got deleted on other issues. The learned Authorised

In this regard learned Authorised Representative specifically drew our attention to the decision of the Tribunal, Kolkata Bench, in Dong Fang Electric India Pvt. Ltd. v/s DCIT (supra), to submit that parameters have been laid down for computing working capital adjustment. He submitted, the computation of working capital adjustment by the assessee may be verified by the Assessing Officer and the Transfer Pricing Officer keeping in view the aforesaid parameters laid down by the Tribunal, Kolkata Bench.

The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals).

We have considered rival submissions and perused the material on record. Undisputedly, in the transfer pricing study report, the assessee has made adjustment on account of working capital investment. However, neither the Transfer Pricing Officer nor learned Commissioner (Appeals) have allowed assessee’s claim. On a perusal of the orders passed by the Departmental Authorities, we are of the view that disallowance of assessee’s claim of working capital adjustment was not on valid reasoning but by way of general observations. Now, it is fairly well settled that adjustment on account of working capital investment has to be allowed, as it is a crucial factor impacting the pricing and profitability in the open market. Rule 10B(e)(iii) also provides for such adjustment. The learned Authorised Representative has demonstrated before us that as against credit period ratio of 85 days of comparables the credit period ratio of the assessee is 1118 days. Therefore, in principle, we agree with the contention of the learned Authorised Representative that adjustment on account of working capital has to be made while computing the margin of the comparables. The Tribunal, Kolkata Bench, in Dong Fang Electric India Pvt. Ltd. (supra), has laid down certain parameters for working capital adjustment. It is the contention of learned Authorised Representative, that a working of margins of the comparables after providing for working capital adjustment following the parameters laid down in case of Dong Fang Electric India Pvt. Ltd. (supra) has been 7 Exedy India Ltd. placed on record vide paper book Page no.–81. In view of the aforesaid, we direct the Assessing Officer/Transfer Pricing Officer to verify the computation of working capital adjustment made by the assessee and compute the margin of the comparables and determine the arm's length price of the international transaction. Accordingly, this ground is allowed.

Grounds no.6 and 7, being general in nature do not require adjudication.

In the result, cross objection is partly allowed. ./2018) Revenue’s appeal for A.Y. 2012–13

In grounds no.1,2 and 3 Revenue has challenged the decision of learned Commissioner (Appeals) excluding three comparables selected by the Transfer Pricing Officer.

In view of the submissions of learned Authorised Representative that on the instructions of the assessee he would not be contesting the grounds raised by the Revenue, we do not find it necessary to delve much into the issues raised in these grounds. Accordingly, grounds no.1, 2 and 3 are allowed.

In ground no.4, the Revenue has challenged the decision of the learned Commissioner (Appeals) in directing the Assessing Officer to 8 Exedy India Ltd. include the unutilized MODVAT credit to the value of the closing stock and allow the consequential effect to the opening stock in terms of section 145A of the Act.

At the time of hearing, learned Counsels appearing for the parties have agreed before us that this issue is covered by the decision of the Tribunal in assessee’s own case for the assessment year 2011– 12, vide order dated 21st February 2018, passed in ITA no.6885/Mum. /2016. On a perusal of the aforesaid order, we find that the Tribunal while deciding identical issue, in the order referred to above, has upheld the decision of learned Commissioner (Appeals) in directing the Assessing Officer to include the unutilized MODVAT credit to the value of closing stock and allow consequential effect to the opening stock. That being the case, respectfully following the aforesaid decision of the Co–ordinate Bench, we dismiss the ground raised by the Revenue.

In the result, Revenue’s appeal is partly allowed.