TMI Blog2020 (8) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... down in the case of Genisys Integrating [2011 (8) TMI 952 - ITAT BANGALORE] . Negative working capital adjustment - Negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. MAT Credit not allowed - At the time of hearing, the ld. counsel for the assessee submitted that the MAT credit would be consequential to the decision rendered in AY 2009-10 , 2010-11 2011-12 with regard to exemption u/s. 10A of the Act in those years - HELD THAT:- We accept the prayer of the ld. counsel for the assessee and direct the AO to given consequential relief based on the outcome of the earlier assessment years. Ground is accordingly treated as allowed for statistical purposes. - IT(TP)A No.1700/Bang/2017 - - - Dated:- 21-8-2020 - Shri N V Vasudevan, Vice President And Shri G Manjunatha, Accountant Member For the Appellant : Ms. Tanmayee Rajkumar, Advocate For the Respondent : Shri Muzaffar Hussain, CIT(DR)(ITAT), Bengaluru. ORDER PER N.V. VASUDEVAN, VICE PRESIDENT This appeal by the assessee is directed against the order dated 13.6.2017 of the DCIT, Cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating cost) was ₹ 20,12,87,383. Thus the OP/TC was arrived at 25.14%. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified 9 companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm s Length. 4. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO accepted two companies chosen by the Assessee as comparable companies. The TPO on his own identified five companies as comparable with the Assessee company and worked out the average arithmetic mean of their profit margins as follows:- Comparables selected by the TPO and their arithmetic mean Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) Mark-up on Total Costs (WC adj) (in %) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were grounds 5.1 to 5.4, 6.5 6.8, which read as under:- 5. Comparability Analysis and Determination of Arm's Length Price Ld. Panel and Ld. AO/TPO erred in computing a negative working capital adjustment on the margins of the comparable companies: 5.1 The Ld. TPO/ AO erred on facts and in law, in computing a negative working capital adjustment on the margins of the comparable companies without appreciating the fact that Appellant is a risk insulated captive software development service provider and does not carry any working capital risk. The Ld. Panel further erred in upholding / confirming the action of the Ld. TPO/ AO. Grounds of Appeal for rejection of comparables selected by the Ld. TPO in the order issued u/s 92CA of the Act 5.2 The Ld. AO/ TPO grossly erred on facts in confirming the benchmarking of transactions of software development services of the Appellant with companies operating as fullfledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis- -vis comparable companies. The Ld. Panel erred in upholding the actions of the Ld. TPO/AO. 5.3 The Ld. TPO erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent in the sense that it was engaged in software product development and absence of segmental data. The TPO DRP took the view that product development was part of software development services. 10. The ld. counsel for the assessee brought to our notice a decision of ITAT Bangalore in the case of NXP India P. Ltd. v. DCIT [2020] 116 taxmann.com 421 [Bang Trib.] wherein in the case of an assessee for AY 2013-14 engaged in Software development services such as the assessee it was held that CG Vak Software Exports Ltd. was not a good comparable. The following were the relevant observations of the Tribunal:- III. C G Vax Software Exports Limited 24. The learned AR submitted that this company should be excluded for the reason that C G VAX Software Exports Limited is engaged in software development and sale of products which involves high degree of R D expenditure and to demonstrate the same, he drew our attention to the paper book page Nos.1018 and 1034 and submitted that the nature of the business of software development involves inbuilt, constant Research and Development as a part of its process of manufacturing (development). The company is developing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process, whereas the present assessee is not in product manufacture activity. M/s. C G VAX Software Exports Ltd. owns huge intangible assets and also engaged in outsourced product development. In view of the foregoing reasons, we hold that the said company cannot be considered for inclusion in the list of comparables. We, therefore, direct the TPO to exclude the said company from the list of comparables. 11. Following the aforesaid decision, we direct the exclusion of CG Vak Software Exports Ltd. from the list of comparable companies. 12. As far as grounds 5.4 and 6.5 raised by the assessee is concerned, the assessee seeks exclusion of 3 companies viz., Laresen Toubro Infotech Ltd.; Mindtree Ltd. Persistent Systems Ltd. as comparable companies. 13. One of the arguments by the assessee before the TPO as well as DRP was that these companies had turnover which was in excess of ₹ 200 crores and therefore these companies cannot be regarded as a comparable in the case of assessee whose turnover was only ₹ 100 crores. The TPO as well as DRP took the view that the functional comparability of the companies were alone to be seen and turnover was not an importa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grievance of the assessee is with regard to negative working capital adjustment carried out by the TPO which was confirmed by the DRP. It is the plea of the assessee that though the TPO has observed that the Assessee has a healthy margin, the TPO has erred in making an adjustment towards working capital and the DRP further erred in upholding the same. 19. It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however does not bear any risk and has no working capital contingencies. The Assessee has not incurred any expenses for meeting the working capital requirement. The Assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to Tavant US. Therefore, requirement for adjustment of negative working capital does not arise. Detailed submissions in this regard are placed at pages 136-141 and pages 628-633 of the paperbook. 20. The learned counsel for Assessee placed reliance on Tivo Tech Private Limited v. DCIT (order dated 12.06.2020 in IT(TP)A No. 1619/Bang/2017), Lam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment years 2009-10 to 2011-12 are pending before the CIT(A) for 10A exemption. In this regard, it is submitted that the Respondent has computed the exemption under Section 10A of the Act by reducing telecommunication, insurance and expenditure incurred in foreign currency from the export turnover only and not from the total turnover. The Appellant placing reliance on the decision of the Hon ble High Court of Karnataka in CIT v. Tata Elxsi which was also upheld by the Hon ble Supreme Court in Commissioner of Income Tax, Central-III v. HCL Technologies Ltd [(2018) 93 taxmann.com 33 (SC)] submits that the said expenses reduced from the export turnovers should also be correspondingly reduced from its total turnovers. Therefore, the demand raised due to such adjustment would be nullified by the CIT(A) and the MAT credit available to the Appellant would be eligible for set off. 25. At the time of hearing, the ld. counsel for the assessee submitted that the MAT credit would be consequential to the decision rendered in AY 2009-10 , 2010-11 2011-12 with regard to exemption u/s. 10A of the Act in those years. She prayed for a direction to the AO to give consequential effect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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