2015 (5) TMI 1090 - AT - Income Tax

Transfer pricing adjustment under the segment of Provision of software development and maintenance support services on one hand and Provision of back office support services including Provision of finance and accounts support services - grant of working capital adjustment - Held that - Such an adjustment is restricted to inventory trade receivables and trade payables. If a company carries high trade receivables it would mean that it is allowing its customers relatively longer period to pay their amounts which will result into higher interest cost and the resultant low net profit. Similarly by carrying high trade payables a company benefits from a relatively longer period available to it for paying back to its suppliers which reduces the interest cost and increases profits. In order to neutralize the difference on account of inventory trade payables and trade receivables it is of utmost importance to allow working capital adjustment for bringing the case of the assessee at par with the other otherwise functionally comparable entities. We therefore agree in principle with the grant of working capital adjustment. The entitlement of the assessee to the working capital adjustment cannot be denied. When the TPO rejected the assessee s claim for the grant of any working capital adjustment at the threshold itself there was no reason for him to examine the veracity of the computation of working capital adjustment as put forth on behalf of the assessee. Under such circumstances we direct the AO/TPO to compute working capital adjustment if any available under both the segments namely Provision of software development and maintenance services and Merged provision of back office support services and F&A support services distinctly in the light of our above discussion. Needless to say the assessee will be allowed an opportunity of hearing in such fresh determination of the working capital adjustment if any. Reducing lease line charges from total turnover after excluding it from export turnover - assessee claimed the benefit of section 10A - Held that - We find force in the contention raised by the ld. AR requiring the exclusion of this amount from total turnover as well. The obvious reason is that when a particular item does not form part of export turnover which in turn is a necessary ingredient of the total turnover the same has to be necessarily excluded from the computation of latter.

Issues Involved:
1. Transfer pricing adjustment for software development and maintenance support services.
2. Transfer pricing adjustment for back office support services and finance and accounts (F&A) support services.
3. Working capital adjustment.
4. Inclusion of specific companies in the list of comparables.
5. Exclusion of lease line charges from total turnover for section 10A benefit.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development and Maintenance Support Services:
The assessee, an Indian company part of Sun Life Group, provided software development and maintenance support services to its associated enterprises (AEs). The Transfer Pricing Officer (TPO) observed that the assessee's Operating Profit to Total Cost (OP/TC) in this segment was 13.23%. The TPO selected 20 comparables with an average OP/TC of 20.96%, resulting in a transfer pricing adjustment of Rs. 2,05,24,879/-. The assessee challenged the inclusion of five companies in the final tally of comparables and the non-allowance of working capital adjustment.

2. Transfer Pricing Adjustment for Back Office Support Services and F&A Support Services:
The TPO merged the segments of back office support services and F&A support services for benchmarking, resulting in an OP/TC of 14.30%. The TPO selected four comparables with an average OP/TC of 22.85%, leading to a transfer pricing adjustment of Rs. 44,12,714/-. The assessee did not object to the merger but challenged the inclusion of two companies in the comparables list and the non-allowance of working capital adjustment.

3. Working Capital Adjustment:
The TPO refused the working capital adjustment due to the consolidated profit and loss account and the segmental reporting done only for the TP study. The Dispute Resolution Panel (DRP) added that daily average working capital deployment was necessary. The Tribunal disagreed, stating that working capital adjustment is crucial to neutralize differences in inventory, trade receivables, and payables. The Tribunal directed the AO/TPO to compute the adjustment based on annual averages of opening and closing figures, allowing the assessee an opportunity for hearing.

4. Inclusion of Specific Companies in the List of Comparables:
- Avani Cimcon Ltd.: Excluded due to being a product-based company with intellectual property rights, unlike the assessee, which provides software development and maintenance services.
- KALS Information Systems Ltd. (Seg.): Excluded because it includes software products in its segment, making it non-comparable with the assessee.
- Infosys Technologies Ltd.: Excluded due to its giantness, risk profile, nature of services, and ownership of branded products, which are incomparable to the assessee's captive service provider model.
- Thirdware Solutions Ltd.: Excluded due to significant revenue from SEZ/STPI units and sale of licenses, making it non-comparable.
- Helios and Matheson Information Technology Ltd.: Included as it passes the employee cost filter and is functionally comparable.

5. Exclusion of Lease Line Charges from Total Turnover for Section 10A Benefit:
The AO reduced lease line charges of Rs. 2,09,67,887/- from export turnover but did not exclude it from total turnover. The Tribunal held that if an item is excluded from export turnover, it should also be excluded from total turnover. This view was supported by precedents in the assessee's own case and judgments from higher courts.

Conclusion:
The Tribunal set aside the impugned order on the determination of ALP under both segments and remitted the matter to the AO/TPO for fresh determination in line with the Tribunal's directions, allowing the assessee a reasonable opportunity of being heard. The appeal was partly allowed, with specific directions for recalculating working capital adjustments and excluding lease line charges from total turnover.

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