9911796707
TMI Blog2020 (6) TMI 708X X X X Extracts X X X X X X X X Extracts X X X X ..... ") is valid and sustainable. 3. The Assessee is a company incorporated under the provisions of the Companies Act, 1956 and is a wholly owned subsidiary of Veveo Inc., USA and provides software development services to Veveo Inc. 4. During the previous year relevant to the assessment year 201314, the Assessee provided SWD services to Veveo Inc., its Associated Enterprise ("AE") for which it received a consideration of Rs. 14,61,26,880/-. Since the transaction between the Assessee and its AE was an international transaction, the income from the said international transaction has to be determined having regard to Arm's Length Price (ALP) as laid down in Sec.92 of the Act. 5. In support of its claim that the price received in the international transaction was at Arm's Length, the Assessee filed a Transfer Pricing analysis. The Details of the Assessee's international transaction were as follows:- Particulars Amount in Rs. TP adjustment pursuant to the DRP Directions Software Development Services 14,61,26,880 Adjustment of Rs. 78,69,259/- 6. There is no dispute that in terms of Rule 10B of the Income Tax Rules, 1962 (Rules), the Transaction Net Margin Method (TNMM) was the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25.15% Operating Cost Rs. 12,50,30,954/- Arm's Length Price - 125.15% of Operating Cost Rs. 15,64,79,300/- Price Received Rs. 15,07,95,023/- Shortfall being adjustment u/s. 92CA Rs. 56,84,277/- 10. The addition suggested above was incorporated by the AO in the draft order of assessment. The Assessee preferred objections to the draft order of assessment before the Dispute Resolution Panel (DRP u/s.144C of the Act. Apart from challenging the correctness of comparable companies chosen by the TPO and correctness of the action of the TPO in rejecting comparable companies chosen by the Assessee in its TP Study, the Assessee also submitted that negative Working Capital Adjustment (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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that the TPO and the DRP erred in adding to the average arithmetic profit margin of the comparable companies chosen by the TPO, negative working capital adjustment. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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