TMI Blog2015 (5) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... `Provision of financial and accounts support services . He, therefore, merged these two segments into one for conducting the benchmarking analysis. Though the assessee initially used multiple-year data of comparables, however, during the course of the TP proceedings, such data was restricted to a single year, at the TPO s instance. The TPO observed that the assessee s OP/TC in the segment of `Provision of software development and maintenance services was at 13.23% and in the `Merged provision of back office support services and F A support services at 14.30%. The assessee initially chose 23 comparables in the `Software development and maintenance services segment. However, during the course of the proceedings before the TPO and by using the current year s data, the assessee came out with 20 comparables, which have been listed on page 11 of the TPO s order. The TPO finally selected 20 comparable cases as listed on page 79 of his order. The average OP/TC of such 20 companies was computed at 20.96%. By applying this PLI as a benchmark, the TPO worked out transfer pricing adjustment of ₹ 2,05,24,879/- under this segment. As regards the `Merged back office and F A support serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al adjustment claimed by the assessee, computed the ALP of this transaction at ₹ 32.13 crore. Before proceeding further, we want to make it clear that the assessee is aggrieved only against not allowing of working capital adjustment and inclusion of five companies in the final tally of comparables drawn by the TPO. Apart from these, the assessee is satisfied on all other aspects of the computation of the ALP of this transaction by the TPO. 6. As regards the working capital adjustment, the claim for which is common for both the segments, namely, the `Provision of software development and maintenance services and the merged segment of `Provision of back office support services , the assessee argued before the TPO that suitable adjustment on account of differences between the working capital be allowed. The TPO refused to allow such adjustment by noticing that the assessee has a consolidated profit and loss account and the segmental reporting of software development and back office support services was done only for the purposes of TP study of the international transactions. As the financials of the company showed consolidated income from both the segments, he opined that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only for the purposes of showing that its international transactions were at ALP, that it bifurcated the consolidated accounts into different segments. Such bifurcation of accounts into different segments has not been disputed by the TPO inasmuch as he has not challenged the correctness of the figures so deduced in respect of operating profits etc. of each segment. But, when it comes to the computation of working capital adjustment, one needs to look only at the figures of inventory, trade receivables and trade payables. These figures can be culled out only from the balance sheet without any reference to the segregated income statement of each segment. On a pointed query from the Bench, the ld. AR conceded that there may be some trade receivables or payables common to the `Software development segment and the other `Merged segment . In such a situation, it becomes relevant to see as to how the figures of such trade receivables or payables have been placed in the computation of working capital adjustment under each segment. The ld. AR argued that the working of the working capital adjustment was not challenged by the TPO and, hence, it should not be embarked upon afresh. We are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support services earned by the assessee and the remaining 80% is towards software maintenance support services. During the year under consideration, the assessee was compensated at cost plus 12.52% mark-up under this segment by Sun Life Ireland for which the invoices were raised on monthly basis in Canadian dollars. 12. With the above understanding of the nature of services carried out by the assessee in segment of `Provision of software development and maintenance support segment , let us examine if the five companies contested by the assessee are, in fact, comparable. Avani Cimcon Ltd. 13. This company was not chosen by the assessee as a comparable for the software development segment. The TPO included it by observing that it was also engaged into software development consulting company with client base in Australia, US, UK, Africa and the European Union with major focus on the travel and insurance industry. The DRP also rejected the assessee s contention against the inclusion of this company. 14. We have perused the Annual accounts of this company available in the assessee s paper book from pages 96 to 99. Apart from its Balance sheet, Profit loss account and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 16 comprising Notes to the Financial Statements gives background of this company to be engaged in development of software and software products since its inception. This company consists of STPI unit engaged in development of software and software products. Page 42 of the paper book contains segmental information of this company which has been divided into two parts, namely, `Application software segment and `Training segment . It is the `Application software segment of this company, which has been adopted by the TPO. The development of software and all software products have been clubbed under the Application software segment. Since the figures of this company taken by the TPO for making comparison with the assessee include the effect of software products as well, apart from software development services, the same cannot be considered as comparable for the same reasons as assigned above for eliminating Avani Cimcon Ltd. A product company cannot be compared with a company engaged in providing software development services because of difference in the inherent characteristics of both. We, therefore, order for the removal of this company from the set of comparables. Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon ble Delhi High Court held Infosys Ltd. to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the extant assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Technologies Ltd. is incomparable to the assessee company. Respectfully following the judgment of the Hon ble jurisdictional High Court in Agnity India (supra) , we hold that Infosys Technologies Ltd., ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. DR, with reference to the relevant figures, has pointed out that this company passes the filter of employee cost. This submission put forward by the ld. DR, was not controverted on behalf of the assessee. On a specific query, it was admitted that this company is otherwise functionally comparable. Under such circumstances, we approve the view taken by the authorities below in including this company in the final set of comparables. B. Merged back office and F A support services segment. 24. We have noticed above that the assessee rightly did not agitate the clubbing of back office support services with F A support services segment by the TPO for the purposes of benchmarking. The assessee s grievance against the computation of ALP under this merged segment is only confined to not allowing the working capital adjustment and against the inclusion of two companies in the final set of comparables. Apart from these, the assessee is satisfied on all other aspects of the computation of the ALP of this merged set transactions by the TPO. 25. While discussing the `Software development services segment above, we have analyzed the otherwise availability of working capital adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the paper book that it is outsourcing its major activities. Such outsourcing charges constitute around 90% of the total operating cost. As against this, the assessee is engaged in providing the services under this segment at its own without any outsourcing. This critical difference between the manner of performing services has an important bearing on the ultimate profitability. The Delhi Bench of the Tribunal in the case of Mercer Consulting (India) Pvt. Ltd. Vs. DCIT in ITA No.9666/Del/2014 , has approved the exclusion of this company from the list of comparables by, in turn, relying on the two Tribunal orders passed by the Mumbai Benches in Hapag Lloyd Global Services and ACIT vs. Mersk Global Services Centre (India) Pvt. Ltd. In view of the above reasons and respectfully following the precedents, we direct to eliminate this company from the list of comparables. Cosmic Global Ltd. 30. This company was included by the assessee in its list of comparables. However, it was argued before the Tribunal that it be eliminated. In support of the exclusion of this company, the ld. AR relied on the Tribunal order passed in the case of Mercer Consulting India Pvt. Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of telecommunication charges incurred in foreign currency attributable to delivery of computer software outside India. He, therefore, reduced this amount from `export turnover . The assessee s contention for giving similar treatment to this amount in the computation of `total turnover , was rejected. 34. After considering the rival submissions and perusing the relevant material on record, 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. It has been brought to our notice that the Tribunal in assessee s own case for the AY 2007-08 has decided this issue in the assessee s favour. A copy of the order passed by the Tribunal in ITA No.2575/Del/2012 dated 20.6.2014 has been placed on record. The ld. AR also invited our attention to the judgment of the Hon ble High Court rendered in the case of the assessee approving the view taken by the tribunal. Respectfully following the precedents, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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