TMI Blog2018 (5) TMI 1776X X X X Extracts X X X X X X X X Extracts X X X X ..... es by 2.34% by allowing Working Capital Adjustment - Held that:- We are inclined to direct the Assessing Officer to consider the working capital adjustment as computed by him while determining the ALP of international transactions of the assessee with its AEs. Hence, this ground of appeal taken by the assessee is partly allowed. - IT(TP)A No. 331/Coch/2017 - - - Dated:- 16-5-2018 - SHRI CHANDRA POOJARI , AM GEORGE GEORGE K., JM For the Appellant : Shri Raghunathan S., Adv. For the Respondent : Shri Shantham Bose CIT(DR) ORDER Per CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the order of the Assessing Officer passed u/s. 143(3) r.w.s. 92CA r.w.s. 144C of the I.T. Act dated 08/05/2017 which was passed in consequence to the directions of the DRP dated 03/04/2017. 2. The assessee has raised the following grounds of appeal: 1 Assessment and Reference to Transfer Pricing Officer are bad in law 1.1 The Assistant Commissioner of Income Tax - Circle- 1(1) ('AO') erred in making a reference to the Deputy Commissioner of Income Tax, (Transfer Pricing) ('TPO'), without recording an opinion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellant in the response to show cause notice. The Ld. DRP erred in upholding the actions of the TPO/AO and failed to consider in completeness, the grounds of objections filed by the Appellant regarding the functional comparability of companies selected by the TPO. 2.7 The TPO/AO erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. DRP erred in upholding the actions of the TPO/AO. 2.8 The Ld. TPO/AO erred using information obtained by exercising powers under section 133(6). The Ld. DRP erred in upholding the actions of the TPO/AO. 2.9 The Ld. TPO/AO erred on facts in wrongly computing the operating margin of certain companies identified as comparable by the TPO. The Ld. DRP erred in upholding the actions of the TPO/AO. 2.10 The Ld. TPO/ AO erred on facts in wrongly considering provision for bad and doubtful debts as non-operating while computing the margin of certain comparable companies. The Ld. DRP erred in upholding the actions of the TPO/AO. 3 Erroneous data used by the TPO/AO 3.1 The TPO/AO has erred in law in using data, which was not contemporaneous and which was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds and also all relief consequential thereto. 9.2 The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the Appeal. 9.3 Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/ TPO and upheld by the Ld. Panel is bad in law and liable to be deleted. The Appellant submits that the above grounds are independent and without prejudice to one another. 2.1 However, at the time of hearing, the Ld. AR has pressed only Ground Nos. 2.2, 2.7 and 4 of the appeal. The Ld. AR has made an endorsement to the effect that the assessee is not interested to pursue the other grounds of appeal raised by it. Accordingly, we proceed to adjudicate only Ground Nos. 2.2, 2.7 and 4 and other grounds of appeal are dismissed as not pressed. 3. The first ground, Ground No. 2.2 is with regard to determination of arm s length price by the TPO/AO in relation to the software development services segment. 3.1 The facts of the case are that the assessee was incorporated as a private limited company under the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment, it would not matter as to what kind of customer it serves as the broad range of services remain the same and that is the development of software. Further it was observed that it will not matter whether the company develops complete software for its clients e.g. develops a final product as per demand of the client or develops only some software modules, as per the requirements of its client and the function remains the same. However, according to the DRP, a company can be considered in the business of software products, if it is itself developing and selling the products developed by it as then it owns the IPR of the product and exploits it by selling the product/software license to different customers. It was found that this company was operating in multiple segments including software products as well as reselling of ERP products, however segmental data of the same was not available. 3.3 The assessee relied on the decision of the ITAT, Bangalore Bench in the case of Metric Stream Infotech (2017) (78 taxman.com 87) to support its case. But according to the DRP, the decision of the Tribunal in the case of Cisco Systems Ltd. (2014) (50 taxman.com 280), it was held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected as comparable to the assessee s case. We find force in the argument of the Ld. AR. Akshay Software Technologies Limited was considered as valid comparable by the ITAT, Bangalore Bench in the case of Metric Stream Infotech vs. DCIT (78 taxman. Com 87) wherein it was held as under: 15. With respect to Akshay Software Technologies Ltd. we find that it offers software services and products. The sale of products is only 4% of the total revenue. Vertical of this company is financial services. Major assets undertaken by this Company are manpower and computers. This company also passes all filters applied by the TPO. We direct the retention of Akshay Software Technologies in the list of comparables. 3.9 The decision of the ITAT, Bangalore Bench in the case of Cisco Systems (India) (P.) Ltd. vs. DCIT (50 taxman.com 280) relied upon by the DRP was passed on 14/08/2014. However, it was overlooked by the ITAT, Bangalore Bench while passing the order in the case of Metric Stream Infotech vs. DCIT (2017) (78 taxman. Com 87) which was passed on 09/12/2016. Hence, we are of the opinion that Akshay Software Technologies Limited is to be considered as comparable while determinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 5.2 The DRP held that the average working capital will not show the actual working capital employed during the year. According to the DRP the adjustment sought by the assessee is for the differences in the working capital levels between the tested party and the comparable companies. However, such difference in working capital levels cannot be measured with reasonable accuracy and what is disclosed in the balance sheet is only the opening and closing figures of debtors and creditors. The DRP observed that these opening and closing figures are the balances as they existed on the opening and closing day of the year respectively and they do not show the movements in their accounts during the year. According to the DRP working capital are not uniform during the entire period of the year and they differ with the changes in the working capital cycle and the regularity of sales and purchases and the working capital requirements during the year is influenced by the nature of market in which the company is operating. Considering the above, the DRP directed the TPO to disallow working capital adjustment allowed to the assessee and re-compute the ALP of the international transactions wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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