TMI Blog2020 (7) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... see to its Associated Enterprise (AE) u/s. 92 - Comparable selection - HELD THAT:- Referring to software development services provided by the assessee we are of the view that Persistent Systems Ltd. should be excluded from the list of comparable companies as into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee's profit margin. RPT filter applied by the TPO - Related Party Transaction - As far as Tech Mahindra Ltd. is concerned, the learned counsel made a prayer that the related party transaction (RPT) of this company was more than 25% - it would be just and proper to set aside the order of DRP on this issue and remand the issue to AO/TPO for consideration of the contention of the assessee with regard to the exclusion of this company by application of RPT filter. Ad justment on account of working capital at 5.23% - In keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of the Appellant amounting to ₹ 820,022/-, being the amount of employees contribution toward EPF u/s 36(1)(va) of the Act on the ground that the same was paid to the credit of the Government after due date mentioned therein, even though the same was paid and accordingly claimed before return filing date as provided in the section 43B, being a non-obstante provision. 3.0 That the AO/ TPO/ DRP erred in making and confirming the addition of ₹ 74,69,142 on account of transfer pricing adjustments, on the ground that there were several defects in the transfer pricing benchmarking undertaken by the appellant. 4.0 That DRP erred in law by confirming the arms' length price determined by AO/ TPO on account of following comparables inclusion/ exclusion: 4.1 That DRP erred in law by confirming AO/TPO rejecting the comparable companies without considering the functions, filters applied by the Appellant. 4.2 That DRP/TPO erred in selecting 'Persistent Systems Limited' as comparable to the Appellant without appreciating the fact that (i) It is functionally different and (ii) the turnover of the said company is significantly high as compared to the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial to the appellant, and to which the provisions of section 144C(1) of the Act could apply. 9.0 That the AO erred on facts and in law in charging interest u/s 234B of the Act in case of the appellant. 10.0 That the AO erred on facts and in law in charging interest u/s 234C of the Act in case of the appellant. The appellant craves leave, to add, to amend, modify, rescind, supplement, or alter any of the grounds stated here-in-above. 3. The first issue projected by the Assessee in ground No.2 is whether payments of employees contribution by the Assessee towards provident fund and Employees State Insurance which are not deposited on or before the due date to the respective organizations but which are deposited before the due date for filing return of income u/s.139(1) of the Act, cannot be disallowed u/s.36(1)(va) of the Act. The Hon ble Karnataka High Court in the case of CIT Vs. Sabari Enterprises (213 CTR 269) has taken the view that contributions made by the Assessee to PF and ESI are allowable deductions even though made beyond stipulated period as contemplated under the mandatory provisions off Sec.36(1)(va) read with Section 2(24)(x) of the Act provided such co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies after giving allowance for working capital adjustment, determined the ALP and addition to be made to the total income as follows:- Sl. No. Name of the company OP/OC 1 CG-VAK Software Exports 20.54% 2 I C R A Techno Analytics Ltd. 17.10% 3 Larsen Toubro Infotech Ltd. 26.06% 4 Mindtree Ltd. (Seg) 18.19% 5 Persistent Systems Ltd. 28.27% 6 R S Software (India) Ltd. 17.41% 7 Tech Mahindra Ltd. (Segmental) 18.72% Arithmetic Mean 20.90% 7. Computation of arm's length price by the AO/TPO and the adjustment made was as follows:- Arm's length mean margin 20.90% Less: Working capital adjustment (as per Annex.B) 5.23% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profit margin in the software development services segment could not be compared with the assessee's profit margin. In the light of judicial precedents which remain uncontroverted, we are of the view that Persistent Systems Ltd. should be excluded from the list of comparable companies. 13. As far as Tech Mahindra Ltd. is concerned, the learned counsel made a prayer that the related party transaction (RPT) of this company was more than 25%. Related Party Transaction Transaction / Net Sales 25,739,000,000 / 60,019,000,000 (42.88%). Hence, the company fails the RPT filter applied by the TPO and hence should be rejected. 14. We are of the view that it would be just and proper to set aside the order of DRP on this issue and remand the issue to AO/TPO for consideration of the contention of the assessee with regard to the exclusion of this company by application of RPT filter. 15. The next submission of the ld. Counsel for the assessee was that the TPO while concluding his order u/s.92CA of the Act, allowed adjustment on account of working capital at 5.23%, but the DRP in its order held that working capital adjustment need not be given. The issue raised by the Assessee is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin referred to in sub-clause ( iii ); ( v ) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [ or the specified domestic transaction ] ; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [ or a specified domestic transaction ] with an uncontrolled transaction shall be judged with reference to the following, namely:- ( a ) the specific characteristics of the property transferred or services provided in either transaction; ( b ) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; ( c ) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; ( d ) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No.2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm s L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO s working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 192 of the Assessee s paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take 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. I t is not the case of the CIT(A) that differences in working capital requirements of the international t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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