The Banglore Bench Income Tax Appellate Tribunal (ITAT) directed AO to allow working capital adjustment after affording a reasonable opportunity of hearing.
The assessee, M/s. Inflow Technologies Private provided the detailed working capital adjustment working before AO / TPO and the DRP. No defect with regard to the assessee’s working capital adjustment was pointed out by the AO / TPO nor by the DRP. In terms of Rule 10B(1)(e)(iii) of the I.T.Rules, the net margin arising in comparable uncontrolled transactions should be taken 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.
The differences in working capital requirements of the international transactions 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 the Revenue Authorities working capital adjustment cannot be allowed to the profit margin, 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 Income Tax Rules.
The assessee has contended that the TPO erred in not providing working capital adjustment to the margins of the comparable companies adopted by him. Hon’ble DRP erred in rejecting the plea of the appellant.
the Revenue Authorities were not justified in denying the claim of the assessee for deduction. Hence, the AO / TPO is directed to allow the working capital adjustment in the light of the material placed on record, after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly.
The two-member bench Accountant Member Chandra Poojari and Judicial Member George George K held that the Revenue Authorities were not justified in denying the claim of the assessee for deduction. Hence, the AO / TPO is directed to allow the working capital adjustment in the light of the material placed on record, after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly.
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