Working capital adjustments are made when comparing a tested party's transactions to potential comparable transactions to eliminate material differences in working capital levels like inventory, receivables, and payables. A working capital adjustment calculates the value of the working capital differences using an appropriate interest rate to adjust the profit of the comparable. Courts have upheld working capital adjustments but they must be reasonably accurate and eliminate material differences on a case by case basis.
Transfer Pricing
Objectives of Transfer Pricing
Methods of Transfer Pricing
Cost Based Transfer Pricing
Market Based Transfer Pricing
Negotiated Transfer Pricing
Advantages and Disadvantages
In this ppt i have given Introduction International Accounting which covers approaches in international accounting, importance of ia, introduction international accounting.
Subscribe to Vision Academy for Video assistance https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Transfer Pricing
Objectives of Transfer Pricing
Methods of Transfer Pricing
Cost Based Transfer Pricing
Market Based Transfer Pricing
Negotiated Transfer Pricing
Advantages and Disadvantages
In this ppt i have given Introduction International Accounting which covers approaches in international accounting, importance of ia, introduction international accounting.
Subscribe to Vision Academy for Video assistance https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
International Financial Reporting Standards (IFRS)AbhirajSingh67
Accounting for Managers
International Financial Reporting Standards(IFRS) – Meaning or Definitions
Frameworks for IFRS
Importance
Advantages & Disadvantages
Requirements of the IFRS
IFRS 15 Revenue from contracts with customers Nadir Malik
IFRS 15 Revenue from contracts with customers
Overview of new Standard
Back ground of revenue recognition standard
5 step Model
Contract Cost
Specific guidance
Transition
Presentation and Disclosure
Impacts, challenges and issues
Q&A discussion
1.1 identify the type of accounting
1.2 difference between Cost Accounting , Cost Accountancy and Costing
1.3 understand the Management information needs
1.4 identify the objectives of cost accounting
1.5 difference between Cost Accounting Vs. Financial Accounting
1.6 identify the role of cost accountant
Key Takeaways:
Common Issues in Transfer Pricing
Issues relating to Transactions and Specified Items
Issues relating to Comparable and Assesments
Issues arising pursuant to Covid-19
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
Running Head THE TMA QUESTIONS CASE STUDIES ANSWERS 1The TM.docxMARRY7
Running Head: THE TMA QUESTIONS CASE STUDIES ANSWERS 1
The TMA Questions Case Studies Answers 10
The TMA Questions Case Studies Answers
03 November 2013
PART A: Capital Budgeting – Zenobia Case Study
1. State the approaches that Zenobia might be used to recognize risk in capital budgeting (Hint: some research is mandatory here). (180 words)
The approach that Zenobia might be used to recognize risk in capital budgeting are
Net present value: The difference between the present value of inflows of cash and the present value of outflows of cash. NPV is applied in capital making allowance for to investigate the profitability of doing a project. A positive NPV shows that the project is feasible.
Payback period: The Payback period is the period which shows the time needed to realize the initial investment. If Cash flows are discounted using the appropriate discount rate to arrive at the Payback Period then it is called Discounted Payback period.
Internal Rate of Return: The discount rate often used in capital budgeting that makes the present value of all the future cash flows equal to zero. Generally, the higher a project's internal rate of return, the more attractive it is to attempt the project. As such, IRR can be used to grade some projects that a firm is considering. Assuming all other components are identical amidst the diverse projects, the project with the highest IRR would likely be advised as more feasible.
Profitability Index: A ratio of PV of all future cash flows of the project over Cost of investment in project.
= Present Value of the Future Cash Flows / Cost of Investment.
2. State for the Company what would be the effect of using a depreciation method other than straight-line when considering the role of income taxes on the net present value process. (100 words)
The straight-line method of depreciation is used to depreciate the cost of the asset over its useful life consistently over the years. As a result of utilizing a depreciation method other than straight-line, lets say Diminishing method of deprecation, the depreciation charge in the initial years will be high as compare to later years which means the Company will charge more expense to initial years of project and hence less cost in future years. This leads to decrease in net profit in the initial years and hence the income tax accordingly. This would affect the NPV in a positive manner as the Company earns higher taxable revenue in initial years so the increase in taxable expenditure would lead to less taxable net income.
3. Explain why it is useful for Zenobia if their accountants have to concern themselves with qualitative factors when making choices. (180 words)
It is helpful for Zenobia because the accountant address the qualitative components when taking decisions. They have to consider the project’s qualitative components and future advantages for Zenobia. The Qualitative components may include:
(1) Effect on workers ...
Transfer Pricing Forum: Transfer Pricing for the International Practitioner, ...Matheson Law Firm
Joe Duffy, Partner in the Tax Group, and Kathryn Stapleton, Solicitor in the Tax Department, co-wrote the Ireland section for Transfer Pricing Forum: Transfer Pricing for the International Practitioner, September 2016.
International Financial Reporting Standards (IFRS)AbhirajSingh67
Accounting for Managers
International Financial Reporting Standards(IFRS) – Meaning or Definitions
Frameworks for IFRS
Importance
Advantages & Disadvantages
Requirements of the IFRS
IFRS 15 Revenue from contracts with customers Nadir Malik
IFRS 15 Revenue from contracts with customers
Overview of new Standard
Back ground of revenue recognition standard
5 step Model
Contract Cost
Specific guidance
Transition
Presentation and Disclosure
Impacts, challenges and issues
Q&A discussion
1.1 identify the type of accounting
1.2 difference between Cost Accounting , Cost Accountancy and Costing
1.3 understand the Management information needs
1.4 identify the objectives of cost accounting
1.5 difference between Cost Accounting Vs. Financial Accounting
1.6 identify the role of cost accountant
Key Takeaways:
Common Issues in Transfer Pricing
Issues relating to Transactions and Specified Items
Issues relating to Comparable and Assesments
Issues arising pursuant to Covid-19
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
Running Head THE TMA QUESTIONS CASE STUDIES ANSWERS 1The TM.docxMARRY7
Running Head: THE TMA QUESTIONS CASE STUDIES ANSWERS 1
The TMA Questions Case Studies Answers 10
The TMA Questions Case Studies Answers
03 November 2013
PART A: Capital Budgeting – Zenobia Case Study
1. State the approaches that Zenobia might be used to recognize risk in capital budgeting (Hint: some research is mandatory here). (180 words)
The approach that Zenobia might be used to recognize risk in capital budgeting are
Net present value: The difference between the present value of inflows of cash and the present value of outflows of cash. NPV is applied in capital making allowance for to investigate the profitability of doing a project. A positive NPV shows that the project is feasible.
Payback period: The Payback period is the period which shows the time needed to realize the initial investment. If Cash flows are discounted using the appropriate discount rate to arrive at the Payback Period then it is called Discounted Payback period.
Internal Rate of Return: The discount rate often used in capital budgeting that makes the present value of all the future cash flows equal to zero. Generally, the higher a project's internal rate of return, the more attractive it is to attempt the project. As such, IRR can be used to grade some projects that a firm is considering. Assuming all other components are identical amidst the diverse projects, the project with the highest IRR would likely be advised as more feasible.
Profitability Index: A ratio of PV of all future cash flows of the project over Cost of investment in project.
= Present Value of the Future Cash Flows / Cost of Investment.
2. State for the Company what would be the effect of using a depreciation method other than straight-line when considering the role of income taxes on the net present value process. (100 words)
The straight-line method of depreciation is used to depreciate the cost of the asset over its useful life consistently over the years. As a result of utilizing a depreciation method other than straight-line, lets say Diminishing method of deprecation, the depreciation charge in the initial years will be high as compare to later years which means the Company will charge more expense to initial years of project and hence less cost in future years. This leads to decrease in net profit in the initial years and hence the income tax accordingly. This would affect the NPV in a positive manner as the Company earns higher taxable revenue in initial years so the increase in taxable expenditure would lead to less taxable net income.
3. Explain why it is useful for Zenobia if their accountants have to concern themselves with qualitative factors when making choices. (180 words)
It is helpful for Zenobia because the accountant address the qualitative components when taking decisions. They have to consider the project’s qualitative components and future advantages for Zenobia. The Qualitative components may include:
(1) Effect on workers ...
Transfer Pricing Forum: Transfer Pricing for the International Practitioner, ...Matheson Law Firm
Joe Duffy, Partner in the Tax Group, and Kathryn Stapleton, Solicitor in the Tax Department, co-wrote the Ireland section for Transfer Pricing Forum: Transfer Pricing for the International Practitioner, September 2016.
The Financial Accounting Standards Board (FASB) released its long-awaited improvements to ASC Topic 815, Derivatives and Hedging in late August. The hedging project began as a significant overhaul to hedge accounting as proposed in 2008 and 2010 Exposure Drafts. However, upon reactivating the hedging project, the FASB determined such broad based changes were not necessary; rather, several targeted improvements could achieve the objectives.
These amendments, provided in Accounting Standards Update (ASU) 2017-12, are designed to address concerns expressed by preparers and users of financial statements regarding difficulties in applying hedge accounting as well as the clarity with which hedging activities are presented in the financial statements.
This article analyzes a current financial reporting and accounting issue regarding diversity in
financial reporting practice. Since the Financial Accounting Standards Board (FASB) first issued accounting
statement 157 Fair Value Measurements, entities have been required to measure investments at fair market
values. This included the requirement to categorize investments within a fair value hierarchy in preparation to
report such in the financial statements. To do this, the FASB allows companies to either categorize the
investment in the fair value hierarchy using three different input levels (Level 1, 2 and 3) or by estimating the
net asset value as a practical expedient. If the entity uses the practical expedient, the investment would be
placed within the fair value hierarchy based on whether the investment is redeemable with the investee at the
measurement date, never redeemable, or redeemable in the future. Based on this information, the investment
would be placed in either level 2 or 3 of the hierarchy. As a result, there is diversity in practice when estimating
the length of time in the near term the investment would be redeemed. This article reports the results of
evaluating how can the diversity in accounting practice related to how certain investments measured at net asset
value are categorized within the fair value hierarchy be resolved. The results of the qualitative research
conducted on the FASB proposal concluded that fourteen out of the eighteen public comment letters agreed
with FASB proposal that eliminating the requirements to classify these investments in the fair value hierarchy
would increase comparability in accounting practice among entities.
This article analyzes a current financial reporting and accounting issue regarding diversity in financial reporting practice. Since the Financial Accounting Standards Board (FASB) first issued accounting statement 157 Fair Value Measurements, entities have been required to measure investments at fair market values. This included the requirement to categorize investments within a fair value hierarchy in preparation to report such in the financial statements. To do this, the FASB allows companies to either categorize the investment in the fair value hierarchy using three different input levels (Level 1, 2 and 3) or by estimating the net asset value as a practical expedient. If the entity uses the practical expedient, the investment would be placed within the fair value hierarchy based on whether the investment is redeemable with the investee at the measurement date, never redeemable, or redeemable in the future. Based on this information, the investment would be placed in either level 2 or 3 of the hierarchy. As a result, there is diversity in practice when estimating the length of time in the near term the investment would be redeemed. This article reports the results of evaluating how can the diversity in accounting practice related to how certain investments measured at net asset value are categorized within the fair value hierarchy be resolved. The results of the qualitative research conducted on the FASB proposal concluded that fourteen out of the eighteen public comment letters agreed with FASB proposal that eliminating the requirements to classify these investments in the fair value hierarchy would increase comparability in accounting practice among entities.
UNIVERSITY OF LA VERNEECBU 500D – BUSINESS FINANCEFINAL EXAM.docxouldparis
UNIVERSITY OF LA VERNE
ECBU 500D – BUSINESS FINANCE
FINAL EXAM
DECEMBER 3, 2019
“STUDENT NAME”
A key difference between replacement and expansion project analyses is that with replacement, the incremental cash flows are measured as the net difference between projected cash flows from the current productive assets and cash flows of the proposed new productive assets.
True / False
The weighted average cost of capital increases if the total funds required call for an amount of equity in excess of what can be obtained as retained earnings.
True / False
Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.
True / False
Other things held constant, an increase in financial leverage will increase a firm's market risk as measured by its beta coefficient.
True / False
The post-audit is a simple process in which actual results are compared to forecasted results and any discrepancy indicates a change in factors that are completely under management's control.
True / False
Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.
True / False
Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.
True / False
Since the degree of total leverage is equal to the degree of operating leverage times the degree of financial leverage, the degree of total leverage must always be greater than or equal to positive 1.0.
True / False
If the information content, or signaling, hypothesis is correct, then changes in dividend policy can be important with respect to firm value and capital costs.
True / False
A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process. The main objective of such a system is to reduce carrying costs.
True / False
The best and most comprehensive picture of a firm's liquidity position is obtained by examining its cash budget.
True / False
A firm’s goal should be to lengthen the cash conversion cycle since shorter cash conversion cycles leads firms to increase their dependence on costly external financing.
True / False
Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.
True / False
The primary goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item).
True / False
The ex-dividend date is the date on which a firm actually mails (funds) divid ...
The third quarter was all about hedging and complex financial instruments. Two accounting standards updates will simplify accounting for entities and the users of their financial statements.
Long Term Visa (LTV) is granted to the following categories of persons of Bangladesh, Afghanistan and Pakistan coming to India on valid travel documents i.e. valid passport and valid visa, and seeking permanent settlement in India with a view to acquire Indian citizenship:-
i. Members of minority communities in Bangladesh/ Afghanistan/ Pakistan, namely Hindus, Sikhs, Buddhists, Jains, Parsis and Christians.
ii. Bangladesh/ Pakistan women married to Indian nationals and staying in India; or Afghanistan nationals married to Indian nationals in India and staying in India.
iii. Indian origin women holding Bangladesh/ Afghanistan/ Pakistan nationality married to Bangladesh/ Afghanistan/ Pakistan nationals and returning to India due to widowhood/ divorce and having no male members to support them in Bangladesh/ Afghanistan/ Pakistan.
iv. Cases involving extreme compassion.
Non-resident Indians are a section of people whose roots belong to India and who have migrated from India. The Indian Government is aware of the importance of Indian Diaspora in the form of NRIs/PIOs which is spread all across the world and which despite being away from India is making significant contribution to the Indian economy on a global platform and to the economic, financial and social benefits which have been brought to India; therefore, it attempts to provide benefits to them to attract their investments. They are also called for taking part in the economy. The Indian government gives lot of benefits to NRI not only with respect to ease of making investment in India but also in Taxation. The investment from NRIs is easy money available and provides the much needed leverage to the economy. The Indian Diaspora today constitutes an important, and inimitable, part of the Indian economy. The PPT discusses about he various account that can be opened by NRIs in India
In a move to further rationalize and liberalise the overseas investment central Government and Reserve Bank of India notified Foreign Exchange Management (Overseas Investment) Rules, 2022 and Foreign Exchange Management (Overseas Investment) Regulations, 2022 respectively on 22 Aug 2022.
The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics. Immense clarity on Overseas Direct Investment and Overseas Portfolio Investment has been brought in and various overseas investment related transactions that were earlier under approval route are now under automatic route, significantly enhancing "Ease of Doing Business".
As per section 92 of the Income Tax Act,1961 “Any
income arising from an international transaction shall
be computed having regard to the arm's length
price” Where in an international transaction two or
more associated enterprises enter into a mutual
agreement or arrangement for the allocation or
apportionment of, or any contribution to, any cost or
expense incurred or to be incurred in connection with
a benefit, service or facility provided or to be
provided to any one or more of such enterprises, the
cost or expense allocated or apportioned to, or, as
the case may be, contributed by, any such enterprise
shall be determined having regard to the arm's
length price of such benefit, service or facility, as the
case may be.
The 2008 Financial Crisis changed the world of Banking. Many malpractices by the Banks and various financial institutions came into light and the regulators started scrutinizing and penalizing them. The world’s most important number “LIBOR” came under the sword of the Regulators. In this article we will explore the origins and the fall of the once revered LIBOR rate.
THERE ARE QUITE A FEW REGULATORY SPACES
WHICH NEEDS TO BE KEPT IN CONSIDERATION
WHILE MAKING THE REPORT. IN THIS ARTICLE WE
SHALL DISCUSS REGARDING DRAFTING AND THE
CONTENT OF VALUATION REPORT ONE BY ONE IN
DETAIL.
One of the important aspect of Start up is raising of funds. Fundraising is a necessary, and most important task in the life of Start ups. IN THIS ARTICLE GIVES PRELIMINARY INSIGHTS INTO FUND RAISING BY STARTUPS
In 2020, the Ministry of Home Affairs established a committee led by Prof. (Dr.) Ranbir Singh, former Vice Chancellor of National Law University (NLU), Delhi. This committee was tasked with reviewing the three codes of criminal law. The primary objective of the committee was to propose comprehensive reforms to the country’s criminal laws in a manner that is both principled and effective.
The committee’s focus was on ensuring the safety and security of individuals, communities, and the nation as a whole. Throughout its deliberations, the committee aimed to uphold constitutional values such as justice, dignity, and the intrinsic value of each individual. Their goal was to recommend amendments to the criminal laws that align with these values and priorities.
Subsequently, in February, the committee successfully submitted its recommendations regarding amendments to the criminal law. These recommendations are intended to serve as a foundation for enhancing the current legal framework, promoting safety and security, and upholding the constitutional principles of justice, dignity, and the inherent worth of every individual.
A "File Trademark" is a legal term referring to the registration of a unique symbol, logo, or name used to identify and distinguish products or services. This process provides legal protection, granting exclusive rights to the trademark owner, and helps prevent unauthorized use by competitors.
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How to Obtain Permanent Residency in the NetherlandsBridgeWest.eu
You can rely on our assistance if you are ready to apply for permanent residency. Find out more at: https://immigration-netherlands.com/obtain-a-permanent-residence-permit-in-the-netherlands/.
Synopsis On Annual General Meeting/Extra Ordinary General Meeting With Ordinary And Special Businesses And Ordinary And Special Resolutions with Companies (Postal Ballot) Regulations, 2018
3. Introduction
The most important facet of transfer pricing provisions is to derive an accurate Arm’s Length
Price (ALP) for the International Transactions. This ALP can be determined by using the
methods specified under TP provisions which require identification of comparables.
Comparables belong to varied economic conditions and must be facing different set of
challenges. Therefore, while comparing a company (herein after referred to as a tested party) to
that of similar companies (herein after referred to as comparables), it is necessary to undertake
Comparability Adjustments in order to arrive at a refined search.
Many clouds surround the concept of comparability adjustments. Hence, one needs to identify
and have a clear understanding of this important concept. Chapters I and III of the OECD
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TPG)
contain extensive guidance on comparability analyses for transfer pricing purposes. Revised
Guidance (approved by the Council of the OECD on 22 July 2010) on “comparability
adjustments” is found in the Annex to Chapter III of the TPG.
There exists a misconception that the concept of comparability adjustments is intertwined with
Transfer Pricing Adjustments, which is not true. Comparability adjustments are made to
comparables in uncontrolled transactions inorder to eliminate any material difference between
them and controlled transactions whereas transfer pricing adjustments are those which are made
after comparing the transaction price of international transactions to the ALP determined
subject to a condition that there exists a difference which is more than the allowable limit under
TP provisions.
Rule 10B of Income Tax Rules, 1962 which deals with determination of arm’s length price under
section 92C permits such Comparability adjustments. There is no other provision or rule under
Income Tax Act or Rules backing such adjustments. However, the judiciary in India has upheld
the use of OECD Transfer Pricing Guidelines for computing working capital adjustments.
As per Rule 10B of Income Tax Rules, 1962 (3)
An uncontrolled transaction shall be comparable to an international transaction if—
none of the differences, if any, between the transactions being compared, or between the enterprises entering into
such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such
transactions in the open market; or
reasonably accurate adjustments can be made to eliminate the material effects of such differences.
According to the United Nations Transfer Pricing (UNTP) Manual, comparability adjustments
can be divided into the following three broad categories:
❖ Accounting adjustments
❖ Balance sheet/working capital adjustments
❖ Other adjustments
The most important amongst them is Balance sheet /Working Capital Adjustments
4. Balance sheet adjustments are intended to account for different levels of inventories, receivables,
payables, interest rates etc. The most common balance sheet adjustments made to reflect
different levels of accounts receivable, account payable and inventory are known as working
capital adjustments. As mentioned by the OECD, comparability adjustments should not be
performed on a routine or mandatory basis but rather on a case by case basis depending on the
facts and circumstances.
Economic rationale
Working capital of a business is the capital used in its day-to-day trading operations. Working capital is affected
by numerous business incidences.
It is very common for tested party and each of the potential comparables to differ materially in
the amount of working capital (inventory, accounts receivables and payable).Such differences
are mainly caused due to differences in the terms of purchase and sale, levels of inventory etc.
For example: If the business advances a trade credit of (say) 60 days, its cash gets locked up for 60 days and
reduces the working capital. It will have to borrow from open market to meet its working capital requirement,
and hence incur expenses. Similarly, if it avails of trade credit of 60 days, it has surplus cash at its disposal. It
will need to borrow less money to fund operational requirements. Hence, working capital position affects the
additional cost incurred by a business by way of interest on borrowing from the open market.
Working capital adjustments seeks to adjust for the differences in time value of money between
tested parties and potential comparables with an assumption that differences should be
reflected in profits
Working capital adjustment has a strong rationale in economic theory. It facilitates to increase
the comparability between the tested party and comparables working in an industry which is
competitive. Working capital adjustment can work out to be positive or negative. A positive
working capital adjustment (WCA) will tend to reduce the arm’s length PLI while a negative
WCA will tend to increase the arm’s length PLI. Whether WCA is positive or negative should
not ideally matter, for it’s an adjustment to increase comparability. However, these adjustments
should be done only if such adjustments can be reasonably made and they improve comparability
The process of calculating working capital adjustments is as under:
• Identify differences in the levels of working capital. Generally, trade receivables, inventory and
trade payables are the three accounts considered. The transactional net margin method is applied
relative to an appropriate base, for example, costs, sales or assets. So, if the appropriate base is
sales, then any differences in working capital levels should be measured relative to sales.
• Calculate a value for differences in levels of working capital between the tested party and the
comparable relative to the appropriate base and reflecting the time value of money by use of an
appropriate interest rate.
• Adjust the result to reflect differences in levels of working capital. The following example adjusts
the comparable’s result to reflect the tested party’s levels of working capital. Alternative
calculations are to adjust the tested party’s results to reflect the comparables levels of working
capital or to adjust both the tested party and the comparable’s results to reflect “zero” working
capital.
5. A practical example of calculating working capital adjustment is given below: -
6. Observations
Generally, a question arises while making working capital adjustments as to at what point in time
are the Receivables, Inventory and Payables compared between the Tested Party. In the above
example, their levels are compared on the last day of the financial year. This may not be
appropriate if it does not portray representative levels of working capital over the year. In such
cases averages can be used to carry out working capital adjustments.
Another major issue in working capital adjustments involves the selection of appropriate interest
rate. The rate or rates of interest should be determined with reference to rate (s) of interest
applicable to a commercial enterprise operating in the same market as a tested party. In cases of
tested party’s working capital being negative (that is Payables > Receivables + Inventory) a
different rate is applicable. In the above example, same rate of interest is assumed to be the same
for both the parties.
Judicial Pronouncements
1. Dy.CIT v. BMC Software India Pvt Ltd.
In this case, the assessee was engaged in rendering software development services.
The assessee received advances from its group entities against services to be performed.
The tribunal allowed the benefit of working Capital Adjustment to assessee after taking into
account advances so received from customers.
7. 2. Philips Software Centre (P.) Ltd. v. ACIT
In this case the ITAT approved comparability adjustments being made to eliminate differences
on account of different functions, assets and risks, and specifically for differences in risk profile,
working capital and accounting policies.
On the other hand, if the differences between the companies or transactions are so material that
it is not possible to perform a reasonably accurate adjustment, then the “comparables” should
be rejected.
3. Mentor Graphics (ibid) and Egain Communication (P.) Ltd. v. Income-tax Officer
It was held in this case that a working capital adjustment should not be performed in a particular
case if its effect would be very marginal.
4. John Deere India Pvt Ltd v. Assistant Commissioner of Income Tax
In this case it was held that working capital is a factor which influences the price in the open
market and therefore requisite adjustment on account of working capital has to be made while
determining arm’s length operating margin of comparables.
A remaining difficulty is the subjective question of determining what a “reasonably
accurate comparability adjustment” is addressed in the following judicial
pronouncements.
5. Sony India (P.) Ltd. v. Deputy Commissioner of Income-tax
ITAT upheld an overall flat adjustment of 20 per cent proposed by the Transfer Pricing Officer
for differences in intangible ownership and risks assumed in the controlled transaction and
“comparables” as being “fair and reasonable”
6. CIT v. Philips Software Centre Pvt. Ltd. (contrary to the above case)
In this case, the High Court of India examined whether the Tribunal was correct in allowing a
flat comparability adjustment of 11.72% (6.46% working capital adjustment +5.25% risk
adjustment)
“ignoring all important issues like the quality of adjustment data, purpose and reliability of the
adjustment performed to be considered before making adjustment on account of capital and
risk”, found this contrary to Rule 10B(3)(ii)1
which provides for only reasonably accurate
adjustment, and accordingly stayed the operation of judgement of ITAT.
1
Rule 10 (3)- 3) An uncontrolled transaction shall be comparable to an international transaction [or a
specified domestic transaction] if: -
(i) none of the differences, if any, between the transactions being compared, or between the
enterprises entering into such transactions are likely to materially affect the price or cost charged
or paid in, or the profit arising from, such transactions in the open market;
(ii) Reasonably accurate adjustments can be made to eliminate the material effects of such
differences.
8. 7. NITT DATA India Enterprise Application Services Pvt Ltd v. Assistant commissioner of
Income Tax
It was held in this case that revenue authorities were not justified in making negative working
capital adjustment in the course of transfer pricing adjustments.
The reason for such an order passes was that the assessee did not pay interest on working capital
loans and did not bear any working capital risk.
9. About Taxpert Professionals:
Taxpert Professionals is a conglomeration of multi-diverged professionals known for providing
concentrated services in relation to taxation and corporate laws in a seamless manner. Taxpert
professionals believe in the creation of value through advising and assisting the business. At Taxpert
the pool of professionals from different spectrum like tax, accountancy, legal, costing, management
facilitate the conversion of knowledge into beneficial transaction.
About CA. Sudha G. Bhushan :
Sudha is qualified Chartered Accountant and a Company Secretary with more
than a decade of experience in the Foreign Exchange Management Act, RBI,
Transfer pricing and International taxation matters. She is a noted speaker and
author.
Her articles are regularly published in the Journals of several institutes and at
various other forums and has authored the following books:
Practical aspects of FDI in India published by Institute of Company
secretaries of India
Due Diligence under Foreign Exchange Management Act, 1999 published by CCH.
Comprehensive Guide to Foreign Exchange Management in two volumes published by
CCH.
Practical Guide to Foreign Exchange Management published by CCH, a Walter Kluwers
company.
Handbook on FEMA, Publication of Institute of Chartered Accountants of India
A scholar throughout her life she has been awarded many awards and recognitions including
“Women Empowerment through CA Profession” by Northern India Regional Council (NIRC) of
Institute of Chartered Accountants of India (ICAI). Backed by experience in International firms she
has extensive experience of handling international transactions. She advises corporate as well as
government authorities in lot of intricate transactions. Rendering tax and regulatory advisory
services, she has overseen and played a crucial role in the execution of complex international
transactions involving issues revolving around tax, repatriation, minimization of tax exposure,
Foreign Investment (Inbound and outbound) etc.
She is on the Board of many esteemed listed companies as Independent director. She is member of
Committee of International Taxation of WIRC, ICAI, Member of Editorial Committee of WIRC of
ICAI and Committee of women empowerment of ICAI.
She can be contacted at sudha@taxpertpro.com || 09769033172