Failure to consider Benefit of working capital adjustment while computing ALP: ITAT Directs re adjudication against Schneider Electric India Pvt ltd [Read Order]

The New Delhi bench of the Income TaxAppellate Tribunal (ITAT) directed the re adjudication against the case of Schneider Electric India Private Limited regarding the allegation of failure to consider the benefit of working capital adjustments while computing the ALP.

Schneider Electric India Private Limited, the assessee’s appeal is against order dated 09.06.2023 of Commissioner of Income Tax (Appeals)-Delhi-44 (“ CIT(A)”) under Section 250 of the Income TaxAct, 1961 ( “the Act”) arising out of order dated 23.03.2016 of the Assistant Commissioner of Income Tax-22(2), New Delhi (“AO") under Section 143(3) ofthe Act for assessment year 2008-09.

The Appellant was primarily engaged in the manufacturing of low voltage and medium voltage equipment and distribution of electrical equipment and also provided e-content e-catalogue IPO services, contract R&D support services and business support services to its AEs.

The Appellant undertook various international transactions with its AEs which were duly reported in Form 3CEB and documented in the TP Report. The Appellant submitted the information and documentation as asked by TPO vide notice issued by the TPO under section 92CA(2) of the Act. Further the authorised representatives of the Appellant appeared before the TPO from time to time and submitted various documents and information as were required by the TPO.

The DRP, disregarded the additional evidences filed by the Appellant in support of the "transaction by transaction approach adopted by the Appellant in respect of its various international transactions and confirmed the addition made by the TPO/AO in its directions dated September 26, 2012.

The ITAT vide its order dated October 9, 2013, restored the matter to the files of the AO to ascertain the comparability of supplementary evidences to the case of the Appellant and analyse the pricing policy of the Appellant. The TPO rejected Appellant's claim for characterizing overseas AE as the tested party in respect of transaction pertaining to import of components and confirmed the earlier approach of aggregation of segmental accounts as followed by the TPO in the initial TP order.

However, while computing the amount of transfer pricing adjustment the TPO aggregated the international transactions with AEs namely, (i) import of components (for manufacturing), (ii) payment of royalty, (iii) payment of management support charges. (iv) payment of project support charges, (v) receipt of repair and maintenance services, (vi) reimbursement of expenses, so as to compute a higher ratio of related party transaction to total cost in the consolidated manufacturing segment.

In the show cause notice the TPO proposed to reject the 6 out of 15 comparables selected by the Appellant in the TP Study applying certain arbitrary filters which was contested by the Appellant. However, the TPO rejected the contentions of the Appellant and made an adjustment of INR 28,753,000.

The Appellant filed its objections before the DRP wherein the Appellant presented its contention against the approach followed by the TPO of applying additional filters, ignoring that the Assessee was entitled to claim deduction u/s 10A, and denying claim for adjustment on account of risk. However, the DRP vide its directions dated September 26, 2012, confirmed the addition made by the TPO.

The Tribunal vide its order dated October 09, 2013 set aside the entire matter for fresh consideration of the AO/ΤΡΟ. In the remand back proceedings, the TPO did not adjudicate in respect of the transaction of provision of contract R&D support services. Furthermore to the above, the AO while incorporating additions proposed by the TPO, erred in directly passing the final assessment order, and thereby deviated from his own position in prior assessment year and also from the relevant legal provision of the Act in force, thereby vitiating the Appellants right to file objections before the Dispute Resolution Panel.

The Assessee company e-filed return of income for A.Y. 2008-09 on 30.09.2008 declaring a loss of Rs.187214318. The return was subsequently revised declaring income at Rs. 215867840 on 06.03.2009. In the final assessment order dated 23.03.2016, the AO did not allow setoff of unabsorbed depreciation of Rs. 13851671 pertaining to A.Y. 2007-08 which was claimed by assessee.

The additional evidence is consistent with the claim made by the appellant. In appellant’s own case for assessment year 2007-08 involving adjudication of similar grounds raised by the appellant, Tribunal deemed it appropriate to remand the issues back to the file of TPO/A.O for fresh adjudication in the light of additional evidence/submissions placed on record before the Tribunal. Appellant had compiled supplementary documentation and conducted critical analysis to address the various contentions raised by the appellant/assessee. The appellant would crave that its pricing policy may be further analyzed considering the new evidence which would not be collated earlier.

With reference to the TP adjustments made in manufacturing segment, it is the case of the assessee that the TPO has omitted to examine the ALP applying ‘transactions by transactions approach’ in the light of additional evidences placed before the Tribunal and largely omitted to taking into account various submissions despite the matter having been set aside for fresh determination.

The TPO has only provided proportionate relief in respect of its manufacturing segment and restricted the TP adjustments to the quantum of international transactions entered with AE. Besides, the direction of the ITAT in its order dated 22.11.2022 to re-examine the contentions of the assessee towards R&D support service segment and business support service segment has not been given due effect.

The TPO has simply followed its previous order without adjudicating the issues pertaining to contract R&D support services and business support services segments. Similarly, the order passed under section 254(2) stands merged with the ITAT order earlier passed under section 254(1) of the Act and therefore the directions with respect to allowabilty of eligible claim of deduction under section 10A ought to have been given due consideration.

The observations made in the 254(2) order with reference to s.10A has not been weighed by the TPO/DRP/AO. The assessee further contends that principles applied by the Co-ordinate Bench of ITAT in the case of group company namely, Schneider Electric Infrastructure Ltd. for determination of transfer pricing adjustments by the Tribunal in similar circumstances should apply mutatis mutandis.

The assessee has filed detailed submissions in writing as well as made lengthy oral submissions as broadly extracted in the preceding paragraphs. The objections of the assessee ranges from failure to apply ALP principles in the assessment order passed under challenge; failure to apply interpretation rendered by Co-ordinate Benches and in disregarding multiple year/prior years data used by the assessee. As further contended, plea towards international transactions relating to import of components for manufacturing of electrical equipment would meet arm’s length principles on a transaction by transaction basis as canvassed by the assessee have been ignored.

The contention towards selection of overseas tested party is also alleged to have been disregarded contrary to position of law and based on incorrect appreciation of facts. The assessee also asserts that the TPO has included certain companies that are not comparable to the assessee in terms of the functions performed, assets employed and risks assumed. Likewise, as contended, the TPO has wrongly excluded certain comparables companies for the purposes of TP adjustments.

The benefit of working capital adjustment while computing the ALP has also not been borne in mind. In the light of order passed by the Tribunal under s. 254(12) of the Act, the assessee also claims tax holiday under s. 10A on profits arrived at after the adjustments so made in accordance with law and alleges that the lower authorities have failed to apply the principles laid down by the Jurisdictional High Court in the case of CIT vs TEI Technology Pvt.Ltd. 361 ITR 36 (Del).

The two member bench of Shri S Rifaur Rahman, Accountant Member and Shri Vimal Kumar, Judicial Member considered it expedient to restore all the issues placed before the Tribunal back to the file of the TPO/AO for fresh determination of such issues in the light of submissions made and various claims asserted before the Tribunal. It shall be open to the assessee to make such submissions and adduce such evidences as may be considered expedient. The TPO/DRP/AO shall pass fresh order in accordance with law by way of a speaking order”.

The adjudication of similar grounds and new evidence for analysis of pricing policy similar to preceding assessment year 2007-08 having been referred for adjudication afresh by TPO/A.O as per judicial precedents, it is considered expedient to restore all the issues placed before the Tribunal back to the file of TPO/A.O for fresh determination in accordance with law after giving fair and reasonable opportunity of being heard to the appellant/assessed.

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