TMI Blog2018 (10) TMI 1796X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 - N.V.Vasudevan, Vice President And Inturi Rama Rao, Accountant Member Kanchan Koushal, CA for the Appellant. C.H. Sundar Rao, CIT for the Respondent. ORDER N.V. Vasudevan, This is an appeal by the Assessee against the order dated 24.8.2017 of CIT (A)-3, Bengaluru, relating to AY 2012-13. 2. The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) to its holding company Huawei Tech Investment company Ltd., Hong Kong which in turn is a subsidiary of Huawei China. The transaction of rendering software development services to holding company was a transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm's Length Price (ALP). 3. It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee is in appeal before the Tribunal. 5. Before us the issues that were pressed for adjudication were (i) exclusion of 4 out of the remaining 9 comparable companies that remain for comparison after the order of CIT (A); (ii) not allowing deduction on account of working capital adjustment to the arithmetic mean of the profit margin of the comparable companies. 6. As far as exclusion of 4 out of 9 comparable companies are concerned, the learned counsel for the Assessee placed reliance on a decision of the ITAT Bangalore Bench in the case of CGI Information Systems Management Consultants (P.) Ltd. v. Asstt. CIT [2018] 94 taxmann.com 97 (Bang. - Trib.) which was also a decision rendered for AY 2012-13 where the Assessee was a company engaged in rendering soft ware development services such as the Assessee. The very same 10 comparable companies had been chosen by the TPO in the case of the said Assessee also. The 4 companies which were directed to be excluded in the aforesaid decision were (i) Genesys International Corporation Ltd. (ii) Infosys Technologies Ltd., (iii) Larsen Toubro Infotech Ltd. and (iv) Persistent Systems Ltd. 7. The following were the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion rendered by ITAT Delhi Bench in the case of Cash Edge India (P.) Ltd. v. ITO ITA No.64/Del/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in this regard are contained in Paragraphs 4.14 to 4.16 of its order. 30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP bas endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. 31. The learned DR. next submitted that Genesys International Corporation Ltd., should be excluded from the list of comparable companies. The comparability of this company with the Assessee has been discussed by the TPO in page-11 of his order. The Assessee objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software services is rejected. 6.2.3 The Panel holds that the software for financial product is much more complex than a geospatial software. Therefore, the panel holds that the Genesys is a valid comparable. 34. The learned counsel for the Assessee submitted that the DRP has completely proceeded on wrong facts which does not either emanate from the order of the TPO or the submissions of the Assessee. He reiterated submissions made before the TPO and DRP. The learned OR relied on the order of the DRP/TPO. 35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering G1S based services and this is clear from the annual report which specifies that since the company carries on only one line of business vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the ground for exclusion by the Tribunal in the case of CGI Information System (supra) is not only on the ground that these two companies are software product company but also on the ground of want of segmental information regarding SWD services and SW Products. Apart from the above, we find that this was never the case of the TPO that the Assessee was a SW product company. The product life cycle of SWD services is given at page-77 of the Assessee's paper book and it shows that the Assessee does not own IPR in SW developed by it. It may that the IPR of the SWD services are ultimately owned by the wholly owned holding company of the Assessee. That will not make the Assessee a SW product company. We therefore find no merits in this line of argument advanced by the learned DR. 10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT (A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction]if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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