TMI Blog2019 (1) TMI 1548X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable cases as part of operating expenses. This ground of appeal is accordingly allowed. Working capital adjustment - denial on the ground that there is a negative working capital adjustment and therefore, no adjustment shall be made - HELD THAT:- In the case of M/s Intoto Software (India) P Ltd vs. ITO, Bengaluru [2013 (10) TMI 599 - ITAT HYDERABAD] the decision of the Hyderabad Bench of the Tribunal in the case of Adaptec (India) P Ltd vs. ACIT [2015 (6) TMI 288 - ITAT HYDERABAD] was considered to direct the AO not to make any negative working capital adjustment. Respectfully following the same, we direct the AO not to make any negative working capital adjustment. Correct numbers with respect to average receivables/payables of the comparables selected in the TP order - we direct the TPO to adopt the correct figure of average receivables/payables for computing the working capital adjustment. Assessee’s grounds are accordingly treated as allowed for statistical purposes. - ITA No.2176/Hyd/2017 (Assessment Year:2013-14) - - - Dated:- 18-1-2019 - Smt. P. Madhavi Devi And Shri S.Rifaur Rahman, JJ. For Assessee: Shri S.P.Chidambaram For Revenue: Shri YVST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disregarding the fact that Company is engaged in the provision of diversified operations and having high scale of operations. Error in computation of margin of comparable companies 7. That on the facts and the circumstances of the case and in law, the AO/DRP erred in confirming the TPO's stand of treating the provision for bad and doubtful debts and bad debts written off as non-operating expenses for the purpose of margin computation of comparable companies as selected by TPO. Rejection of comparable companies 8. That on the facts and the circumstances of the case and in law, the TPO/AO/DRP erred by not including following companies as comparables: 1. Ace BPO Services Private Limited; 2. Informed Technologies India Limited and 3. Jindal Intellicom Limited 4. Crystal Voxx Ltd 9. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred by not including companies as per ground no 8 which are functionally comparable and meets the filter adopted by the TPO. 10. That on the facts and circumstances of the case and in law, the TPO j AO j DRP erred by not appreciating that Informed Technologies India Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concerned, they are consequential in nature and therefore, they need no adjudication except direction to the AO for giving consequential relief, if any, to the assessee. 4. As regards Grounds 4 to 6 are concerned, brief facts are as under. The assessee company furnished its return of income for the A.Y 2013-14 on 29.11.2013 electronically u/s 139(1) of the IT Act, declaring a total income of ₹ 5,01,65,750. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee has reported international transactions with its AEs and therefore, the determination of the ALP was referred to the TPO u/s 92CA of the Act. The TPO issued notices to the assessee, in response to which the assessee s representative appeared and submitted the details. 5. The TPO observed that the assessee is incorporated as a Private Limited Company and is engaged in the business of providing IT enabled back office services and infrastructure support to Harsco Group of Companies. He observed that the assessee has set up a Unit under the Software Technology Parks of India (STPI) Scheme at Hyderabad, India. He opined that the services offered by the assessee to Harsco Infra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom defects which resulted in selection of inappropriate comparables and rejection of appropriate comparables. Therefore, he rejected the TP document of the assessee and conducted an independent analysis by aggregating all the transactions under TNMM. He arrived at the ALP of the comparables at 21.67% and after allowing the working capital adjustment of 0.60%, he determined the ALP at ₹ 37,59,01,555/- and suggested an adjustment of ₹ 2,06,07,079. Accordingly, a draft assessment order was proposed, against which, the assessee preferred its objections to the DRP. The DRP granted partial relief to the assessee and in accordance with the DRP directions, the final assessment order was passed, against which, the assessee is in appeal before us by raising the above grounds of appeal. 7. In Grounds 4 to 6, the assessee is challenging the comparability of Capgemini Business services (India) Limited and Hartron Communications Limited on account of functional dissimilarities. 8. The learned Counsel for the assessee while reiterating the submissions made before the authorities below submitted that the comparability of these two companies with ITeS companies have been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the assessee that the activities of Capgemini Business Services are much more diversified than the activities of the assessee and unless and until a suitable adjustment can be made, the said company cannot be taken as a comparable. It has been held in a number of cases that where a comparable is into diversified activities, the same can be taken as a comparable provided the segmental results are available. As seen from Page No.1015 of the Paper Book, segmental results are not available for ITeS services. Therefore, we are of the opinion that Capgemini Business Services is to be excluded from the final list of comparables. 9. As regards Hartron Communications Ltd is concerned, the learned Counsel for the assessee submitted that this company is also functionally dissimilar as it provides multiple services like BPO, LPO, Back Office Software Development, Technical Solutions, Medical Building, etc., and that the segmental information is not available. It was also brought to our notice that the Auditor has clarified about the non-compliance regarding provisions for retirement benefits and impairment of the assets. Further, he submitted that the assessee has taken the objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in ITeS services as per its Annual Report and the Company's Website and the RPT data is available in the Annual Report. 13. The learned DR, however, supported the orders of the authorities below. 14. Having regard to the rival contentions and the material on record, we find that from the Annual Report of Ace BPO Services Ltd, at Page Nos. 1318 and 1368 of the paper book, this company is into BPO services and the transactions with related parties are also reported. Therefore, we are of the opinion that this company needs to be considered as a comparable. The AO is directed to verify the information filed by the assessee and if it satisfies the RPT filter, then the same should be considered as a comparable. 16. As regards Informed Technologies Ltd is concerned, the TPO had rejected the same on the ground that it is functionally not comparable while the DRP stated that it fails income from ITeS more than 75% to total operating revenue filter. The learned Counsel for the assessee submitted that the said company is engaged in ITeS services as per the Annual Report and was accepted as a comparable in the assessee's own case for the A.Ys 2011-12 and 2012-13. With reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had submitted the same during the assessment proceedings. Since Crystal Voxx Ltd is engaged in only segment, BPO, and it also satisfied the other filters adopted by the TPO, we deem it fit and proper to direct the TPO to verify the comparability of this company. Therefore, the matter is remitted to the file of the TPO for fresh analysis . 13. Since the facts and circumstances before us are similar, respectfully following the decision of the Coordinate Bench to which one of us (J.M) is the signatory, we direct the AO/TPO to verify the comparability of these companies afresh. Thus, the matter is remitted to the TPO for fresh analysis and the ground is treated as allowed for statistical purposes. 14. As regards Ground No.7, it is the case of the assessee that the provisions for bad and doubtful debts and bad debts written off should be considered as part of operating expenses for the purpose of margin computation of comparable companies selected by TPO. The learned Counsel for the assessee relied upon the decision of the Coordinate Bench of the Tribunal in the case of Kenexa Technologies Pvt. Ltd vs. Dy.CIT in ITA No.243/Hyd/2014 for the A.Y 2009-10 for this pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubtful debts do not form part of operating expenses. We agree with the findings of the Coordinate Bench that the provision of bad and doubtful debts is part of the operating expenses. Therefore, respectfully following the decision of the Coordinate Bench, we direct the AO/TPO to consider the provision for bad and doubtful debts both in the assessee as well as comparable cases as part of operating expenses. This ground of appeal is accordingly allowed. 16. As far as working capital adjustment in Grounds 13 14 is concerned, we find that the AO and the DRP have not allowed the working capital adjustment, on the ground that there is a negative working capital adjustment and therefore, no adjustment shall be made. In support of this contention, he placed reliance upon the following decisions. i) Adaptec (India) P Ltd vs. ACIT (ITA No.206/Hyd/2014) for the A.Y 2009-10. ii) M/s Intoto Software (India) P Ltd vs. ITO, Bengaluru IT (TP)A No.529/Bang/2016) and (IT(TP)A No.491/Bang/2016) for the A.Y 2011-12. 17. Having gone through the material on record, we find that the Coordinate Bench of the Tribunal in the case of Adaptec (India) P Ltd vs. ACIT (Supra) at Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to this situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. 11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment . 18. Similarly in the case of M/s Intoto Software (India) P Ltd vs. ITO, Bengaluru at Para 14, the decision of the Hyderabad B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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