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TMI Blog2015 (9) TMI 1547X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(2) were issued. The Assessing Officer called for the various details and referred the case to the Transfer Pricing Officer [TPO] u/s. 92CA of the Income-tax Act, 1961 ["the Act"] for the determination of the arm's length price (ALP) in respect of international transactions entered into by the assessee. 4. The TPO in her transfer pricing order dated 31.10.2011 passed u/s. 92CA of the Act, made a transfer pricing adjustment of Rs. 21,131,649 to the ALP adopted by the assessee. The AO subsequently passed the final assessment order dated 30.01.2012 u/s. 143(3) r.w.s 144C(3) r.w.s. 144C(4) of the Act assessing the total income at Rs. 2,11,31,649 after allowing deduction of Rs. 1,80,54,350 u/s. 10A of the Act, resulting in a . demand of Rs. 86,55,052. 5. During the relevant financial year 2007-08, international transactions that took place between the assessee and its associated enterprises (AEs) was provision of SWD services to them at a price of Rs. 170,844,091, for which a TP adjustment was made by the TPO to an extent of Rs. 21,131,649. 6. It is stated that assessee was not in receipt of notice for hearing issued by the Ld. CIT(Appeals), on account of change in its registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imcon Technologies Ltd., it was the assessee's submission that the assessee offers diversified operations such as software solutions, software development, consulting and information technology services to various clients. The assessee was also a products development company and has developed innovative product lines such as Dxchange, CARMA etc. Reliance was placed on the decision of 3DPLM Software Solutions Ltd. in IT(TP)A No.1303/Bang/2012 for AY 2008-09 and Trilogy E-Business Software India (P) Ltd. in ITA No.1054/Bang/2011 for AY 2007-08. 11. We find that there is merit in the objection of the ld. counsel for the assessee and hence we direct that Avani Cimcon Technologies Ltd. be excluded from the list of comparables selected by the TPO. 12. With regard to the other 8 comparables selected by the TPO, the ld. counsel for the assessee submitted that these companies were functionally different from the assessee for the following reasons:- 1. Celestial Biolabs Ltd. The company is into bio-informatics software product/services and in the development of products in the field of bio-technology and pharmaceuticals. 2. E-Zest Solutions Ltd. The company rendered product developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected by the TPO for the following reasons:- 1. Avani Cimcon Technologies Ltd. Functionally different, diversified operations: The company offers software solutions, software development consulting and information technology services to various clients. Product development company The company has developed innovative product lines such as Dxchange, CARMA etc. It was submitted that the website of this company substantiates the same. 2. Infosys Technologies Full-fledged risk assuming entrepreneur Ltd. It is a giant company in the area of software development and assumed all risks leading to higher profits and is therefore not comparable with to the assessee which is a captive unit of the parent company and assumes only limited risks. Holds technology and marketing intangible It is actively engaged in research & development activities and also owns intellectual property. It also partakes in activities and advertising for brand building. Infosys was ranked as the top IT services company in that year and therefore has significant brand value. Functionally different It provides end-to-end solutions encompassing technical consulting, design, development, re- engineering, maintenanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... level of inventories, debtors and creditors measured as a percentage of the total cost varies. There is an effect on profits from investing in different levels of working capital due to differences reflected in cash collection cycle. Such differences in collection cycle imply differences in credits granted to customers and such a credit function is akin to an additional service for which markets are willing to pay. iv. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Therefore, no profit maximizing/ entrepreneurial firm would hold working capital without a return. v. A working capital adjustment analysis seeks to adjust the profitability of each comparable company based on the working capital position of the Appellant to reflect the differences in working capital investment. Thus, the adjustment tries to isolate the interest effects (taking into account the time value of money) that result from the opportunity costs of holding working capital. The interest effects in the comparable company's data are not completely eliminated but rather adjusted to the Appellant's level of interest effects. Prime-lending rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating income attributable to those assets must also be adjusted before computing a profit level indicator in order to reflect the income and expense attributable to the adjusted assets. In certain cases it may also be appropriate to adjust the operating profit of the tested party and comparable parties. For example, where there are material differences in accounts payable among the comparable parties and the tested party, it will generally be appropriate to adjust the operating profit of each party by increasing it to reflect an imputed interest charge on each party's accounts payable." x. Making a working capital adjustment is an attempt to adjust for the differences between the tested party and potential comparables with an assumption that the difference should be reflected in profits. The grounds for using the working capital adjustment approach in TP have been provided in the Chapter - "Comparability Adjustments in Transfer Pricing" authored by Charles R Larson, Marios Karayannis and John Burgess in the "Transfer Pricing Handbook" by Robert Feinschreiber. xi. In this regard, the Appellant wishes to highlight that it had carried out a working capital adjustment in its TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 36). 19. We find that the claim of the assessee for providing working capital adjustment is to be upheld and hence we direct the AO/TPO to work out the same. 20. The ld. counsel for the assessee also brought to our notice the grounds of appeal at paras 5 and 6 of the appeal memo. Para 5(a) reads as follows:- "That the CIT(A) based on mere surmise and conjecture had concluded that the assessee is not interested in pursuing the grounds raised in the appeal and accordingly erred in upholding the order of AO." 21. Ground No.5(b) states that the AO erred in treating an amount of Rs. 5,85,777 being expenditure incurred on computer spare parts and consumables as capital expenditure. The ld. counsel for the assessee contended that it was only RAM of the computer, which was a spare part which had to be replaced and is in the revenue field. The ld. DR opposed the contention of the ld. counsel for the assessee and relied on the decision of the Hon'ble Supreme Court in the case of CIT v. Sharavana Spinning Mills, 293 ITR 201. 22. We have heard both the parties. Firstly, we are of the opinion that the CIT(Appeals) has passed an ex parte order and had no opportunity to go through the cos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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