TMI Blog2021 (8) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... it in ground raised by the Assessee and allow the same. Adjustment towards working capital differences - CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that as per the remaining three Tribunal orders rendered in the case of WM Global Technology Services (India) (P.) Ltd. [ 2018 (4) TMI 429 - ITAT BANGALORE] and in the case of Tecnotree Convergence Pvt. Ltd. [ 2018 (6) TMI 1688 - ITAT BANGALORE] the matter was remanded back to the TPO for fresh decision and therefore, in our considered opinion and in the facts of present case, we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. Software development services segment - We restore the matter back to the AO/TPO for fresh decision regarding the assessee's claim for exclusion of Larsen Toubro Infotech Ltd. and Persistent Systems Ltd. after providing adequate opportunity of being heard to the assessee and the issue should be decided after considering all available Tribunal orders for Assessment Year 2013-14 in respect of exclusion of these two companies. Accordingly ground Nos. 9 and 10 are allowed for statistical purposes. CG - VAK Software Exports Ltd. - CG - VAK Software Exports Ltd. is a software development compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate Method (MAM) of determining ALP. The assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the assessee was arrived at 11.81% by the assessee in its TP study. The operating income was Rs. 2,82,25,47,733/-. The assessee chose companies who are engaged in providing similar services such as the assessee. The assessee identified 16 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 5 companies chosen by the assessee as comparable companies. The TPO on his own identified 5 companies as comparable with the assessee company and worked out the average arithmetic mean of their profit margins as follows: Sl. No. Name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain directions. To the extent the assessee did not get relief from the CIT(A), the assessee has preferred appeal before the Tribunal. To the extent the TPO's order was modified, the Revenue has preferred appeal before the Tribunal. 8. We shall take up for consideration assessee's appeal first. Though the assessee has raised many grounds in its appeal, at the time of hearing, the learned Counsel for the assessee submitted that the assessee wishes to press for adjudication only ground Nos. 9, 11 and 13. These grounds read as follows: 9. The Ld. CIT(A) erred in law and on facts by including Infosys Ltd. as a comparable to the Appellant on the ground that it is functionally comparable, whereas the scale of operations of this comparable is significantly larger than that of the Appellant, it earns significant brand profits and owns significant intangible assets, it has income from sale of software products, it incurs high sales and marketing expenses and that it has significant research development expenditure. 11. The Ld. CIT(A) erred in law and on facts by including Persistent Systems Ltd. as a comparable to the Appellant on the ground that it is functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06.07.2018. The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:- 17.7. We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 12. In view of the aforesaid decision of the Tribunal, we are of the view that the CIT(A) ought to have excluded Infosys Ltd., as a comparable company by applying the turnover filter. We direct that this company should be excluded as a comparable company. 13. The next grievance of the Assessee is regarding not excluding Persistent Systems Ltd. As far as exclusion of this company is concerned, the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 15. The learned counsel for the Assessee brought to our notice the decision of the Tribunal in Assessee's own case for AY 2012-13 wherein on an identical issue, the Tribunal held that working capital adjustment cannot be denied to the Assessee, in IT (TP) A.No. 1939/Bang/2017 Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). 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 as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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(1)(e)(iii) of the Rules read with Sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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) This time gap is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No. 2112/Mds/2011 (2013) 38 taxmann.com. 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 companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the assessee, by placing reliance of the decision of this Hon'ble Tribunal in Assessee's own case for the Assessment year 2009-10. The company is engaged in the development of software products and providing related services. It also provides implementation and maintenance of software products. It has developed a range of products such as Shine ERP software, Docuflo, Dac 4 Cast, CMSS, La Vision, Virtual Insure and Aldon. The annual report also confirms that the company is engaged in development of software and software products. The company holds significant inventories which account for 27% of the total current assets which demonstrates that it is a product development company as against a pure software service provider like the assessee. The functions carried out by the two companies being substantially different, this company ought to stand rejected as a comparable. The company is being consistently excluded from the list of comparables in similar cases. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. This Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as at Arm's Length. 26. 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. The TPO computed the OP/OC of the Assessee at 12.55%. The TPO identified 7 companies as comparable with the Assessee company and worked out the average arithmetic mean of their profit margins as follows: SL. NO. NAME OF TAX PAYER OP/OC (in %) 1 C G-V A K Software Exports Ltd. 20.54% 2 I C R A Techno Analytics Ltd. 17.10% 3 Larsen Toubro Infotech Ltd. 26.06% 4 Mindtree Ltd. (Seg) 18.19% 5 Persistent Systems Ltd.(Seg) 28.27% 6 R S Software (India) Ltd. 17.41% 7 Tech Mahindra Ltd.(Segmental) 18.72% AVERAGE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Ltd. He also prayed for inclusion of 1 company rejected by the TPO and CIT(A) viz., Spry Resources India Private Limited. All other grounds with regard to determination of ALP as raised in the grounds of appeal before Tribunal were not pressed except Ground No. 14 with regard to Working Capital adjustment. 30. The learned counsel for the assessee submitted that in the case of M/s. Hewlett Packard (I) Software Operation Pvt. Ltd., Vs. ACIT in IT(TP)A No. 2866/Bang/2017 : Asst.Year 2013-2014 order dated 10.03.2021, this Tribunal excluded three of the comparable companies which the assessee now seeks exclusion in this appeal and has included the company which the assessee seeks inclusion. The case decided by the Tribunal is also a case of a SWD service provider such as the assessee and the case relates to AY 2013-14. Further in the case cited by the learned counsel for the assessee, the very same comparable companies chosen in the case of the assessee in this appeal was also chosen by the TPO as comparable companies. Tribunal in the said order, following its decision in the case of M/s. NXP India Ltd. In IT(TP)A No. 3861/Bang/2017 order dated 27.04.2020, held that in earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate. 40. Ld. CIT DR placed reliance upon orders passed by authorities below. 41. We have perused submissions advanced by both sides in light of records placed before us. 42. We are of opinion that this comparable needs to be relooked into by Ld.AO/TPO, as this has not been raised before DRP and nothing has been filed before DRP in respect of this comparable. Ld.CIT DR did not object for considering this comparable and therefore in the interest of Justice, we direct Ld.AO/TPO to look into export income earned by this comparable. 43. Accordingly this comparable is set aside to Ld.AO/TPO for due verification. 31. The learned DR relied on the order of the Tribunal in the case of WM Global Technology Services Pvt. Ltd., 91 taxmann.com 403 (Bang - Trib) wherein the Tribunal upheld exclusion of C.G. Vax Software and Exports Ltd., and remitted for fresh consideration inclusion and exclusion of L T Infotech Ltd., Persistent Systems Ltd., and Spry Resources (P) Ltd. We however find that the reasons given by the DRP are the same reasons which the Tribunal has not accepted in its order in the case of NXP India Pvt. Ltd. (supra). Therefore, respectful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Infotech Ltd., the Tribunal order rendered in the case of Advice America Software Development Center (P.) Ltd. (supra) is against the assessee. Copy of this Tribunal order is made available before us. Paras 14 to 21 of this Tribunal order are relevant for decision in respect of exclusion of Larsen Toubro Infotech Ltd. and Persistent Systems Ltd. respectively. Hence for ready reference, these paras from this Tribunal order are reproduced hereinbelow. 14. Larsen Toubro Infotech Ltd. As far as this company is concerned, this company also renders SWD services. In page-15 of the TPO's order, the functional similarity of this company with that of the Assessee has been tabulated by the TPO. The objections of the Assessee for rejecting such objections has been set out at pages-21 to 23 of the TPO's order. The DRP upheld the order of the TPO including this company as a comparable company. 15. The grounds on which the Assessee seeks exclusion of this company from the list of comparable companies is on the ground that (i) this company is functionally dissimilar to that of SWD service provider and that it develops Software products; (ii) Segmental Informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d therefore cannot be the basis to hold that this company is functionally not comparable with the Assessee. As far as the objection regarding presence of brand value is concerned, it has been held by the TPO that there is no intangible in the form of brand owned by this company. The scale of operations of this company cannot be the basis to hold that this company is not comparable when functionally it is found to be comparable. 20. None of the objections raised by the Assessee meet the criteria for excluding this company in terms of comparability criteria laid down in Rule 10B(2) of the Rules. We therefore uphold the inclusion of this company in the list of comparable companies. 21. Persistent Systems Ltd.: The objection of the Assessee for excluding this company from the list of comparable companies is on the ground that this company is also engaged in making software products and is not only in providing SWD services and that the segmental details of revenue from sale of Software Products and revenue from rendering SWD services are not available. This objection is examined in the light of the Annual Report of this company for 2013 which is at pages 648 to 84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen we examine paras 14 to 20 of this Tribunal order where there is discussion regarding inclusion/exclusion of Larsen Toubro Infotech Ltd., we find that there is no discussion on these two aspects that this company is having significant amount of cost of bought-out items for resale and it is engaged in sale of services and products to its related parties and hence, in our considered opinion, this Tribunal order cannot be considered as a binding precedence because this Tribunal order is silent on these two important aspects as to this aspect that this company is having sizeable amount of bought out items for resale and have related party transactions in respect of sales of services and products. We also find that in the case of remaining three Tribunal orders i.e. Microsoft Research Lab India Pvt. Ltd.'s case (supra), WM Global Technology Services (India) (P.) Ltd. (supra) and in the case of Tecnotree Convergence Pvt. Ltd. (supra), the matter was remanded to the TPO for fresh decision. Hence, we feel it proper that in the present case also, this issue should go back to the file of TPO for fresh decision after providing adequate opportunity of being heard to the assessee and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid decision we remand the issue of comparability of the aforesaid two companies to the TPO/AO for fresh consideration in the light of the directions as contained in the aforesaid order. 35. As far as exclusion of Spry Resources is concerned, the issue is settled by the decision cited by the learned counsel for the Assessee and in the decision cited by learned DR, the tribunal remanded the issue only because there was no opportunity afforded to the Assessee. Hence, we uphold inclusion of Spry Resources India Pvt. Ltd., as a comparable company. 36. What remains for consideration now is only inclusion of CG VAk Software and Exports Ltd. In the decision cited by the learned DR, this company was included as a comparable company for the reason that the annual report showed that CG - VAK Software Exports Ltd. is a software development company and not a product company and that to brand CG - VAK Software Exports Ltd. as a software product development company, it was incumbent upon the assessee, to prove that CG - VAK Software Exports Ltd. is having its own software products, over which it has proprietary right or any other right. The tribunal further held that from the bare pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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