TMI Blog2022 (10) TMI 1102X X X X Extracts X X X X X X X X Extracts X X X X ..... ect accordingly. Grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal in the case of Huawei Technologies India Pvt. Ltd [ 2018 (10) TMI 1796 - ITAT BANGALORE] after affording opportunity of being heard to the assessee. - IT ( TP ) A No. 304 / Bang / 2022 - - - Dated:- 29-9-2022 - SHRI N. V. VASUDEVAN , VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER Assessee by : Shri. Aliasgar Rampurawala , CA Revenue by : Shri. Sumer Singh Meena , CIT ( DR ) ( ITAT ) , Bengaluru ORDER Per N V Vasudevan , Vice President This is an appeal by the assessee against the final Order of Assessment dated 25.02.2022 passed by the National Faceless Assessment Centre, Delhi (DCIT, Circle 3(1)(1), Bengaluru), under section 143(3) read with Section 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called the Act ) in relation to Assessment Year 2017-2018. 2. The assessee in engaged in the business of provision of Engineering Design Services (EDS services), to its Associated Enterprises (AEs). In terms of Sec.92B(1) of the Act, the transaction of providing EDS Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable company viz., Tata Elxsi Ltd. The TPO on his own identified 9 other companies as comparable with the assessee company and worked out the average arithmetic mean of their profit margins as follows: Sl. No. Company name 2016-17 2015-16 2014-15 1 Indianic Infotech Ltd. 5.34 3.95 5.07 4.78 2 Taal Tech India Pvt. Ltd. 14.43 6.21 3.5 8.47 3 Prothious Engineering Services Pvt. Ltd. 0.47 28.26 -14.06 13.17 4 Mindtree Ltd. 21.15 19.66 14.1 17.92 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Yes Median Margin of comparable set M 18.93% Arm's Length Price ALP=(1+M)*OC 32,46,85,973 Price Received OR 30,56,64.071 Shortfall being adjustment ALP-OR 1,90,21,902 Summary of adjustments S. No Description Adjustment u/s 92CA (In Rs.) 1 EDS Segment Rs. 1,90,21,902/- Total adjustment u/s 92CA Rs. 1,90,21,902/- Thus a sum of Rs.1,90,21,902/- was added to the total income of the assessee on account of determination of ALP for provision of SWD services by the assessee to its AE. 5. The assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f) (2) For the purposes of sub-rule (1), the comparability of an internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In paragraph 2 of these guidelines, it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm s length principle, the conditions of a controlled transaction (i.e., a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 10. The assessee s turnover is only Rs. 40,39,51,067/-. The TPO excluded from the list of comparable companies chosen by the assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the assessee. The reason for excluding companies with low turnover was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10, relying on Dun and Bradstreet s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid decision, we hold that the following 3 companies viz., Exiliant Technologies Pvt. Ltd., Tata Elxsi Ltd., and Mindtree Ltd., whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 14. Another ground raised by the learned Counsel for the assessee in the form of an additional ground of appeal before the Tribunal is with regard to the action of the TPO in not giving effect to the directions of the DRP directing Devita Engineering (India) Ltd., as a comparable company. It is undisputed that the DRP in its directions directed Devita Engineering (India) Ltd., to be included as a comparable company (vide Paragraph 2.3.20.1 of the DRP s direction). The TPO, while giving effect to the order of the DRP, failed to give effect to this direction. We are of the view that it would be just and appropriate to direct the TPO/AO to include this company also as a comparable company in the list of comparable companies. We hold and direct accordingly. 15. Apart from the aforesaid exclusions and inclusion, leaned Counsel for the assessee has also prayed for grant of working capital adjustment. The grievance of the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in paragraphs 3.47-3.54 and in the Annexure to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. The Tribunal referred to Paragraphs 13 to 16 of the aforesaid OECD guidelines, wherein the need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 companies. If that power is not exercised to find out the truth then it is no defence to say that the assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. 19. We are therefore of the view that the issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, aft ..... X X X X Extracts X X X X X X X X Extracts X X X X
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