ITAT Upholds DRP’s Order to Compute the Working Capital Adjustment by using the OECD Methodology [Read Order]

While upholding the order pronounced by the DRP Delhi bench of Income Tax Appellate Tribunal (ITAT) proclaimed in its recent order that OECD methodology can be adopted to compute the working capital adjustment.

Assessee Company in the present case duly filed its return of income for the relevant assessment year declared a total income of Rs. 19,32,894. During the scrutiny period while considering the international transactions of the assesee the Assessing Officer (AO) determined the total income as 14,71,48,937 referred the matter to the Transfer Pricing Officer (TPO) for determining the arm’s length price of the international transactions as per the provisions of Section 92CA of the Income Tax Act.

The TPO, however, did not agree with the various filters used by the assessee in its TP study and by using certain more filters, he rejected 6 comparables from assessee’s set and selected 11 new comparables. After that the AO passed the draft assessment order to assess the assessee at an income of Rs.2,62,86,830.

Aggrieved by the order, the assessee filed an appeal before the DRP against the draft assessment order. The most confused issue submitted the assessee before DRP was related to the denial of adjustment on account of working capital while working out the average margins of the comparable.

After considering the submissions of the assessee DRP directed the TPO to give working capital adjustment using the OECD methodology and to apply SBI Prime Lending rate as the interest rate. DRP was of the view that the average of opening and closing balance of the inventories and of trade receivable/payable, trade debtors/creditors, for the relevant year may be adopted which may broadly give the representative level of working capital over the year.

After considering all these facts and circumstances the bench comprising of Judicial Member Kuldip Singh and Accountant Member N. K. Saini also upheld the order of the DRP.

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