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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI B. RAMAKOTAIAH & SHRI NARENDRA KUMAR CHOUDHRY
This appeal and Cross Objection are directed against an order dated 27-11-2014 of Dispute Resolution Panel, for the assessment year 2010-11.
2. The revenue raised the following grounds;
“1. The directions of the DRP are opposed to law and facts of the case.
On the facts and in the circumstances of the case, whether the DRP is correct in directing the TPO/AO to provide freight subsidy where the figure of freight subsidy is not separately available in the annual report of the assessee company namely, Global Green Co.Ltd..,
3. On the facts and circumstances of the case, whether the DRP is correct in directing the TPO/AO to provide working capital adjustment in the case of assessee following judicial pronouncements in various cases which are involved either in SWD or ITES business.
4. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the DRP in so far as it relates to the above grounds may be reversed.
5. The assessee craves leave to add, alter, amend and/or delete any of the grounds mentioned above.
Brief facts of the case are as under;
The assessee company is engaged in manufacturing processing and export of vegetables. For the assessment year 2010-11, the assessee company filed its return of income on 18-09-2010 declaring an income of Rs.,56,66,761/-. However, the same was set off against the carried forward losses. The return of income was processed u/s 143(1) of the IT Act, 1961. Subsequently, the case was selected for scrutiny and the notice u/s 143(2) was served on the assessee within the due time. Thereafter the Draft Assessment order was served to the Ld Assessee and the Assessee challenged the said order before DRP and finally the DRP passed an order dated 27-11-2014.
3.1 That against the DRP Order, the Revenue feeling aggrieved filed the instant appeal and the Assesse also preferred to file the Cross Objections
It is submitted by the learned DR that they are aggrieved mainly on two points, with regard to the direction to the TPO to provide freight subsidy is not separately available in the annual report of the assessee comparable namely, Global Green Company Ltd., Secondly on the point whether the Dispute Resolution Panel (DRP) is correct in directing the TPO/AO to provide working capital adjustment in case of assessee following the judicial pronouncements in various cases which are involved either in SWD or ITES business.
The learned counsel for the assessee on the contrary submitted that they have filed cross objection to the instant appeal of the revenue, however it was fairly submitted that it was just for academic exercise and do not want to press the same.
We have given our thoughtful consideration to the submissions of the rival parties and also relevant order passed by the DRP, as the DRP held in its order that “ Having heard the objection, it is noticed by us, from the findings given in the paragraph 9.3 of the order of the TPO that the figures of the freight subsidy is not separately available in the annual report and therefore, in absence of such figure, the adjustment cannot be computed. We are not in agreement with the findings of the TPO, in view of the fact that in para-20 schedule to the notes of account of the annual report of global green, it is clearly mentioned that transportation outward expenses are net of freight subsidy. IT was further observed that by the DRP in such circumstances, in the absence of any contradictory evidence, it cannot be presumed that the freight subsidy has not been reduced from the operating cost and therefore, in the absence of information even though adjustment is not possible, but in such circumstances, for uniform comparability, the freight subsidy in the case of the assessee company has to be considered as operating in nature. The AO is accordingly,
directed to consider the said subsidy as part of operating revenue”.
With regard to working capital adjustment, the DRP held as under;
It is submitted that the assessee had made working capital adjustment in the TP study. Before the TPO also it was submitted that the working capital adjustment should be granted. The ld.TPO has rejected the working capital adjustment on the ground that claim of huge adjustment on account of working capital adjustment is not allowable as such adjustment indicates that profit margin is decided more due to financial activities and not due to operating business activity. It is also submitted that working capital adjustment should be granted working capital adjustment is in attempt to iron out the difference in time value of money between the tested party and comparable, since the difference will be reflected in profits. The underlying reasoning is that; a. A company will need funding to cover the time gap between the time it invests money (i.e pays money to suppliers) and the time it collects the investments (i.e collects money from customer). b. This time gap is calculated as the period needed to sell inventories to customers + the period needed to collect money from customers –the time period granted to pay debts to supplier.
Since assessee is a captive manufacturer selling products to its AE. The payment cycle in the case of assessee is shorter as against a considerable time lag in the case of comparable. Comparable company has a considerable working capital loan whereas the taxpayer has no working capital loan. It means that either the assessee uses its internal accruals for financing the working capital requirement which otherwise would have been invested and received income there from and/or has received advances from its customers to finance the working capital. In contrary, the comparable financed its working capital requirements by way of borrowing from financial institutions. If an appropriate adjustment is not done for this difference in the financials of the assessee and comparable company the determination of ALP would give absurd results. It is further submitted by the learned DR that the working capital materially affects the amount of net profit margin in the open market and same should be adjusted for. In this regard, the assessee has drawn your honour’s attention to guidance note on report u/s 92E of the IT Act, 1961 wherein it is observed as follows; “6.30 Rule 10B(e)(iii) requires that transaction level and enterprise level differences should be adjusted if such differences materially affect the amount of net profit margin”. To support the objection, the assessee relied on the decision of the Delhi Tribunal in the case of Mentor Graphics (Noida) Pvt.Ltd Vs DCIT 109 ITD 101 and following other judicial pronouncements;
- Philips Software Centre (P) Ltd., Vs DCIT (2008) 26 SOT 226 (Bag) - Demag Cranes & Components (Ind) Pvt.Ltd Vs DCIT (2012) 17 Taxman.com 190(Pune). - Emerson Process Management (ind.) Pvt.Ltd Vs DCIT (2011) 13 Taxmann.com 149(Mum.) - Acts Advisers Pvt.Ltd.,Vs DCIT TS -688 ITAT- 2012(Del.)TP “Having heard the objections and perusal of the judicial pronouncements on which the reliance has been placed by the assessee are of the view that the working capital adjustment needs to be allowed. The AO is accordingly, directed to allow the working capital adjustment”.
We are of the considered opinion, that DRP has passed the order on the reasonable grounds, while considering the facts and circumstances of the case in its proper perspective and the learned DR failed to demonstrate any material to establish that the order of the DRP is illogical, unreasonable and opposed to law and acts of the case. Hence, the appeal filed by the revenue stands dismissed.
C.O.No.90(Bang)/2015(AY : 2010-11)
The learned counsel for the assessee fairly submitted that the cross objection is only an academic exercise and needs no emphasize. In the aforesaid facts and circumstances the C.O filed by the assessee is disposed off as withdrawn.
In the result, the appeal of the revenue is dismissed whereas the cross objection of the assessee stands disposed of.
Order pronounced in the open Court on 18th March, 2016.