TMI Blog2020 (12) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... plying the turnover filter. Determining ALP under TNMM - As correct approach would be to look at the costs incurred by the assessee only and should not impute any additional cost as done by TPO, which indirectly enhances the ALP artificially. The contrary view expressed in decision cited by the learned DR takes the view that Working capital adjustment is required in all cases as any credit extended to customers will result in cash locked up and will result in the assessee borrowing money from the banks and incur additional cost towards interest on these borrowings which cost will have effect on the price charged. It is the reasoning in these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed, whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal, an entity having higher working capital will incur more interest cost which will reduce profitability. Hence no import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in the case of the assessee. 3. Negative working capital adjustment was impermissible:- i) The Ld. CIT(A) erred by holding that negative working capital adjustment cannot be granted in. the case of the assessee. ii) The ld. CIT(A) ought to have considered hat allowing working capital adjustment would result into better comparison. iii) The ld.CIT(A) ought to have considered the fact that working capital adjustment is computed scientifically and negative or positive working capital adjustment is only consequential. 3. The assessee is a company engaged in providing Information Technology enabled Services [ITeS]. The assessee rendered ITeS to its Associate Enterprise [AE] and received a sum of ₹ 45,77,476 for providing such services. In accordance with the provisions of section 92 of the Act, the arm s length price [ALP] in respect of international transaction and the income arising therefrom had to be determined by the AO. The AO referred the question of determination of ALP to the Transfer Pricing Officer(TPO) u/s. 92CA of the Act. The TPO after rejecting the Transfer Pricing analysis conducted by the assessee arrived at a final set of 10 comparable com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant during this year to find that the same is similar to that of the appellant in the immediate succeeding year i.e. Assessment Year 2012-13, in respect of which the Hon'ble ITAT has directed the AO/TPO to compute ,.working capital adjustment by following the decision of the Hon'ble Hyd Bench of the ITAT in the Case of Adaptec India Pvt Ltd in ITA 206/Hyd/2014, wherein it was held that there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. Respectfully following the binding decision of the Hon'ble ITAT in the case of the appellant for the Assessment Year 2012-13, I allow this ground of the appellant, by directing the TPO to make only positive working capital adjustment if any. 5. Aggrieved by the exclusion of 2 out of 10 comparable companies chosen by the TPO and aggrieved by the action of the CIT(A) in holding that negative working capital adjustment should not be made, the revenue has preferred the present appeal before the Tribunal. 6. As far as grounds 1 2 are concerned, the ld. counsel for the assessee relied on the decision of the coordinate Bench of the Tribunal in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a comparable to assessees performing routine low end IT enabled services function. As far as exclusion of company Jeevan Scientific Technology Ltd., we find that this company was rejected by the DRP for the reason that it was engaged in diverse functions and the same were reported under one segment without segmental details regarding the same being made available. The DRP is right in excluding the company as without segmental details, the comparability of the company cannot be determined. In any event, the ERP segment of the company is not comparable to the assessee, the BPO segment of the company fails the filter of service income being greater than 75% of total revenue, and the company suffers from huge fluctuations which indicate that certain peculiar circumstances influencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. It is submitted that the ERP implementation services are not in the nature of IT enabled services which were notified by CBDT vide Notification No. SO 890(E) dated 26.09.2000. If the BPO segment is considered, the company fails to satisfy the TPO s own filter of service revenue from the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reason that the details regarding its diverse functions are reported under one segment without segmental details regarding the same being made available. Therefore, the comparability of the company cannot be determined. It is seen that iGate is engaged in provision of varied services and no segmental breakup of the same is available in its Annual Report. Further, the company s software services segment is clubbed with its ITES segment and there is no breakup between the revenues generated from the two segments. During the year under consideration, the company has acquired majority equity interest in Patni Computer Systems Ltd. rendering it incomparable due to it failing the TPO s own filter of having peculiar economic circumstances. In addition, the company owns significant intangibles in its name, which is evident from the balance sheet of the company for the Financial Year 2010-11. For the reasons above, the company is not comparable to the Assessee and the DRP s findings on exclusion of iGate is right in law. As far as the company ICRA Online Ltd., is concerned, the DRP excluded this company for the reason that the details regarding its diverse functions are reported un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. In the Cross Objection, the assessee has raised various grounds, however, at the time of hearing, the Id. AR of assessee has submitted that the only effective grounds which are prayed by the assessee are ground Nos.5 6 in respect of the directions given by the CIT(Appeals) for reconsideration of working capital adjustment, even if it found negative. 13. We have heard the Id. AR and the Id. DR as well as considered the relevant material on record. The Id. AR of the assessee has submitted that when the assessee has not claimed any working capital adjustment, then the TPO cannot make a negative adjustment on account of working capital. He has further contended that when the assessee has not used any borrowed funds for working capital purpose, then the TPO is not justified in making a negative working capital adjustment. In support of this contention, he has relied upon the decision of the Hyderabad Bench of the Tribunal dated 25.3.2015 in the case of Adaptec (India) P. Ltd. v. ACIT, ITA No.206/Hyd/2014 and submitted that the Tribunal has held that when the assessee is a captive service provider running its business without any working capital risk, then there is no need for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant 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 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. 11. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he exclusion of this company from the list of comparable companies. 11. As far as the prayer for inclusion of iGate Global Solutions Ltd. is concerned, the stand of the Assessee before TPO was that this company renders on site serves, is a product company and there are peculiar economic circumstances and hence should be excluded from the list of comparable companies. The TPO however held that the Assessee has accepted that this company has only one segment i.e., ITeS and hence he included this company as a comparable company. The CIT(A) held that this company has three segments viz., Software Development and services, Contract Centre Service and ITeS and there were no segmental details available and hence should be excluded from the list of comparable companies. In the decision cited by the learned counsel for the Assessee rendered in the case of M/S.TRX Technologies India Pvt.Ltd. (supra), this company was excluded on the ground that it had turnover of more than ₹ 1000 crores. Though in the case cited by the learned DR in the case of M/s. Indecomm Global Services Pvt.Ltd. (supra), this Tribunal remanded the comparability of this company to the TPO for fresh consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables to differ materially in the amount of working capital (inventory, accounts receivables and payable). Such differences are mainly caused due to differences in the terms of purchase and sale, levels of inventory etc. For example: If the business advances a trade credit of (say) 60 days, its cash gets locked up for 60 days and reduces the working capital. It will have to borrow from open market to meet its working capital requirement, and hence incur expenses. Similarly, if it avails of trade credit of 60 days, it has surplus cash at its disposal. It will need to borrow less money to fund operational requirements. Hence, working capital position affects the additional cost incurred by a business by way of interest on borrowing from the open market. Working capital adjustments seeks to adjust for the differences in time value of money between tested parties and potential comparables with an assumption that differences should be reflected in profits Working capital adjustment has a strong rationale in economic theory. It facilitates to increase the comparability between the tested party and comparables working in an industry which is competitive. Working capital adjustment can wor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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