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The Dy. Commissioner of Income Tax, Circle 1 (2) , Pune Versus Emptoris Technologies India Pvt. Ltd and Vica-Versa

Working Capital Adjustment to the profit of the assessee - whether assessee is not eligible for the benefit of +/- 5% as standard deduction in view of provisions of section 92C(2) - selection of comparables - Held that:- On account of peculiar circumstances under which the assessee is carrying on its business i.e. providing services to its associate enterprises only with mark-up of 10% on the cost and where there is no adversity on account of working capital, then such working capital adjustment .....

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rprises on the basis of an Agreement, under which it is entitled to a mark-up of 10% on cost, working capital adjustment on such account merits to be allowed to the assessee. The OECD has provided guidelines for such working capital adjustment and the said guidelines are one of the accepted modes of computing working capital adjustment. In view thereof, we hold that the assessee is entitled to the working capital adjustment, which in turn is to be computed as per the OECD guidelines. The assesse .....

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e direct the Assessing Officer to complete the exercise of working capital adjustment to be allowed to the assessee within a period of 45 days from the date of this order, after affording reasonable opportunity of hearing to the assessee.

Upholding the order of CIT(A) with regard to the allowability of working capital adjustment, we dismiss the grounds of appeal raised by the Revenue. In view of the concession of the learned Authorized Representative for the assessee that in case the .....

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Cross appeals filed by the Revenue and the assessee are against the order of CIT(A)-I, Pune, dated 15.12.2011 relating to assessment year 2007-08 passed under section 143(3) of the Income Tax Act , 1961. 2. The Cross appeals filed by Revenue and the assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The Revenue in ITA No. 1500/PN/2012 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case th .....

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ppreciate the fact that the assessee is not eligible for the benefit of +/- 5% as standard deduction in view of provisions of section 92C(2) of the Act, where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean by an amount not exceeding 5% of such arithmetical mean and when the ALP of the international transactions undertaken by the assessee falls beyond the 5% margin of the price of International Transaction comput .....

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of the case and in law - 1. The learned Commissioner of Income Tax (Appeals) - I Pune erred in rejecting some grounds as academic and not adjudicating the same. 2.1 The learned Commissioner of Income Tax (Appeals) - I Pune erred in confirming the rejection of some of the companies considered as comparable by the Appellant Company on the ground of functional differences (different business activities) as well as in some cases on the ground of being loss making companies. 2.2 He erred in not foll .....

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xpenses incurred for training of employees while calculating operating profits from as well as operating costs related to the International transaction of export of services. He erred in not appreciating that such expenses did not form part of the "Service Provider costs" as per the terms of the Inter-company services agreement. 4.1 The learned Commissioner of Income Tax (Appeals) - I Pune erred in not appreciating that the operating margins of the Appellant Company as per the Inter-co .....

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ny. 5.1 The learned Commissioner of Income Tax (Appeals) - I Pune erred in not granting any adjustment towards lower risk borne by the Appellant Company as compared to the companies considered as comparable by the learned Transfer Pricing Officer. 5.2 He erred in not appreciating that the Appellant Company had submitted all the relevant information, on its risk profile. 6. The Commissioner of Income Tax (Appeals) - I Pune erred in not appreciating that for the purposes of bench-marking, profit a .....

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ransactions as there was no benefit in shifting profits outside India. 7.2 Further he erred in not appreciating that the effective tax rate in USA was higher than the applicable tax rate in India and the organization of the Associated enterprise of the Appellant Company was significantly stronger and substantially larger as compared to the Appellant Company. Further the Associated Enterprise had incurred operating losses during the year under consideration. 8. The Appellant Company craves leave .....

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rking capital adjustment is allowed to the assessee by the Assessing Officer / TPO, then the margins shown by the assessee would be within benefit of +/- 5% of the average margins of the comparables and no adjustment is to be made in the arm's length price of the international transactions of the assessee with its associate enterprises. It was fairly pointed out by the learned Authorized Representative for the assessee that the directions have been given by the CIT(A) to allow working capita .....

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as per him, were in line with the guidelines issued by the OECD. But the learned Departmental Representative for the Revenue till the close of hearing was unable to get the aforesaid rectifications carried out by the Assessing Officer / TPO. Accordingly, we proceed to decide the cross appeals filed by the Revenue and the assessee. 8. We have heard the rival contentions and perused the record. Briefly, in the facts of the case, the assessee was a subsidiary of Emptoris Inc, USA, which was a provi .....

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uch as documentation, customization of repairs and working on add-on modules for existing software products of Emptoris Inc, USA. The assessee was thus, a service company engaged in rendering software development and support as well as testing and documentation services to its associate enterprises. The assessee benchmarked its international transactions with the companies engaged in software development services being comparable to it. As per the agreement between the assessee and its associate .....

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e above said factors including working capital adjustment. The assessee had picked up certain comparables which were not accepted by the TPO and another set of comparables was proposed to be adopted for working out the arm's length price of the assessee. After considering the submissions and objections of the assessee, the TPO observed that the business of the companies which were earlier rejected, were not comparable to the business of the assessee and the companies which were retained by t .....

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her, working capital adjustment was also not allowed to the assessee and the TPO determined the adjustment at ₹ 1,01,98,528/-. 9. Before the CIT(A), various grounds of appeal were raised in relation to the adjustments to be made in respect of the comparables which have been picked up by the TPO and also objections were raised against the rejection of the comparables, which were picked up by the assessee. The assessee also raised various grounds of appeal against different aspects of the ad .....

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essee was a wholly owned subsidiary of the parent AE company and works only for the said company at cost plus 10% margin, as per the Agreement approved by the RBI. Therefore, the company does not have to take risk for market, recovery of dues, etc. and even the working capital requirement was very nominal compared to other comparables. The assessee claimed that comparative analysis was made by bringing the figures of comparables for the working capital requirement to the same level and the Asses .....

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ed and allowed the working capital adjustment. The CIT(A) observed that the working capital adjustment has to be granted to the assessee vis-à-vis the results of the comparables adopted by the Assessing Officer. It was further held by the CIT(A) that the denial of adjustment by the TPO was not correct and was based on facts which were not properly appreciated. Referring to the computation filed by the assessee, the CIT(A) observed that since the computation was not analyzed and discussed .....

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Officer consequent upon passing of the order of CIT(A), had granted certain adjustments, against which the assessee filed a rectification application on 16.07.2012 pointing out the errors in the working capital adjustment. Another rectification application was filed before the Assessing Officer on 10.09.2013. The assessee has enclosed the above said communication at pages 2 to 5 of the Paper Book - 2 along with copy of order of Assessing Officer giving effect to the order of CIT(A) placed at pag .....

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pointing out the detailed reasons and also referred to the relevant pages of the annual report of the different companies which were picked up as comparables to whose results working capital adjustment is to be made. 11. On perusal of the record and in the totality of the facts and circumstances of the case, on account of peculiar circumstances under which the assessee is carrying on its business i.e. providing services to its associate enterprises only with mark-up of 10% on the cost and where .....

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