TMI Blog2020 (6) TMI 708X X X X Extracts X X X X X X X X Extracts X X X X ..... rect. No other contrary decision was brought to our notice. - Decided in favour of assessee. - IT(TP)A No.1619/Bang/2017 - - - Dated:- 12-6-2020 - Shri N.V. Vasudevan, Vice President And Shri B R Baskaran, Accountant Member Appellant by: Smt. Tanmayee Rajkumar, Advocate Respondent by: Shri Pradeep Kumar, CIT(DR)(ITAT), Bengaluru. ORDER N.V. Vasudevan, This is an appeal by the assessee against the final assessment order dated 07.06.2017 passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] relating to assessment year 2013-14. 2. The only issue that arises for consideration in this appeal is as to whether the Transfer pricing adjustment ( TP adjustment ) of ₹ 56,84,277/- made by Transfer Pricing Officer ( TPO ) towards the international transaction of provision of Software Development services( SWD ) to the Assessee's Associate Enterprise ( AE ) which was subsequently enhanced to ₹ 78,69,258/- by the AO on giving effect to the directions of the Dispute Resolution Panel ( DRP ) is valid and sustainable. 3. The Assessee is a company incorporated under the provisions of the Companies Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16.45 3 Spry Resources India Pvt. Ltd. 21.01 4 Cigniti Technologies Ltd 8.35 5 Persistent Systems and Solutions Ltd 16.55 6 KALS Information Systems Limited 9.95 7 Helios Matheson Information Technology Ltd. 15.16 8 Evoke Technologies Pvt Ltd 10.45 9 Acropetal Technologies Ltd 11.03 10 Sasken Communications Technologies Ltd 5.56 11 Mindtree Ltd 16.79 Arithmetical Mean 12.45 8. Out of the 11 comparables selected by the Assessee, the Transfer Pricing Officer (TPO) to whom the AO made a reference for determination of ALP u/s.92CA of the Act, accepted 2 comparables viz., RS Software (India) Ltd. and Mindtree Ltd. The TPO chose 5 more comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (WCA) ought not to have been made by the TPO and thereby the average arithmetic mean margin of comparable companies were increased by 4.25%. 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 is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the assessee does not stand to lose anything as it is compensated on a total cost plus basis. The assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. It was submitted that in the Assessee's own case for assessment year 2012-13, the CIT(A) has reversed the order of the TPO making negative working capital adjustments. Detailed submissions in this regard were made before DRP which are placed at pages 154155 and 333-337 of the paperbook. 11. The DRP issued the following directions:- The DRP directed the exclusion of Tech Mahindra Ltd. and ICRA Techno Analytics Ltd as being incomparable to the Assessee. The DRP did not agree with the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand to lose anything as it is compensated on a total cost plus basis. The assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. It was submitted that in the Assessee's own case for assessment year 2012-13, the CIT(A) has reversed the order of the TPO making negative working capital adjustments. Detailed submissions in this regard are placed at pages 154-155 and 333-337 of the paperbook. 16. The Assessee also places reliance on Digital Juice Animation Private Limited v. ACIT (order dated 06.02.2020 in IT(TP) No. 215/Bang/2017), Lam Research India Pvt Ltd, ITA No. 1473 1385/2014 (order dated 30.04.2015) and Software AG Bangalore Technologies Pvt Ltd in ITA No. 1628/2014 (order dated 31.03.2016) passed by this Hon'ble Tribunal, where it has been held that 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. The Tribunal in the aforesaid decisions have followed decision of ITAT Hyderabad Bench in the case of Adaptec (India) Pvt. Ltd. (infra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to this situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. 18. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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