TMI Blog2021 (8) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... e arithmetic profit margin of comparable companies - In the case of the Assessee in this appeal, neither the TPO nor the DRP have gone into the quantum of adjustment that is to be given towards working of working capital adjustment, we are of the view that it would be just and appropriate to remand the issue of granting of working capital adjustment to the TPO/AO for fresh consideration in accordance with law after due opportunity of being afforded to the Assessee. We hold and direct accordingly. Claim towards payment of leave encashment - HELD THAT:- In the light of the decision of the Hon ble Supreme Court in the case of Exide Industries [ 2020 (4) TMI 792 - SUPREME COURT] the assessee will not be entitled to claim deduction on leave encashment on the basis of the provision. Taking into consideration the circumstances under which the assessee did not claim a sum being leave encashment actually being paid during the previous year relevant to Assessment Year 2014-15 we are of the view that the assessee should be allowed leave encashment actually paid as per provisions of section 43B(f) of the Act. We remit the issue to the AO to verify the claim of the assessee and allow ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not accept the plea of the assessee and he chose 5 comparable companies whose average profit margins were 22.34% as per the following chart:- AVERAGE ITES Segment Amounts in Rs.Lakh Sl No. Company Name OR/Sales OC OP OP/OC (in %) 1 Infosys B P O Ltd. 2,30,900.00 1,81,200.00 49,700.00 27.43% 2 Microgenetic Systems Ltd. 225.97 191.41 34.56 18.06% 3 Microland Ltd. 34,47 1 .00 28,709.00 5,762.00 20.07% 4 B N R Udyog Ltd. (Seg) 142.59 114.00 28.59 25.08% 5 Crossdomain Solutions Pvt Ltd.. 7,462.75 6,164.00 1,298.76 21.07% 4. The T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee having turnover of Rs.26.25 crores only. Further, it is submitted that it has a brand value and it employs substantial portion of its fixed assets in intangible assets. He submitted that the comparability of the said company had come up for consideration in the assessee's own case for the earlier A.Y 2011-12 and also in 2013-14. In A.Y 2011-12, the Tribunal had directed its exclusion while in 2013- 14, the DRP itself had directed its exclusion and the Revenue has not filed any appeal as against the same. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of Aginity India Ltd. (supra) wherein the said company has been directed to be excluded. Cross Domain Solutions P. Ltd. 57. As regards Cross Domain Solutions Ltd is concerned, the case of the assessee is that it is functionally dissimilar as it renders KPO services. The learned DR, however, supported the orders of the TPO DRP. 58. As regards the services rendered by this company, we find that at Page 172 of the Paper Book which is the Website printout, it is shown as a knowledge center . The learned DR had submitted that if the contents of a Website given by a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. It was further noted that in the case of M/s. Excellence Data Research Pvt. Ltd., in ITA No. 159/Hyd/2015, the ITAT rejected the objection of assessee for exclusion of above company noting that the annual report refers only service and is in the pay roll service activity. Thus, stating DRP rejected assessee's objections. We do not find any reason to interfere with the said objections as the very basis of the contentions are based on the website information but not on the annual report. However, the DRP has directed the TPO to verify the margin which assessee submits that has not been considered. Therefore, while retaining the company as a comparable one, we direct the AO/TPO to examine the contentions with reference to margin computation of the above said company after giving due opportunity to assessee to make submissions. This issue is considered partly allowed. Following the said decision, we reject the contention of the assessee and retain this company as comparable. 8. We have considered the rival submissions. As far as exclusion of Infosys Ltd., is concerned, the decision of the ITAT Hyderabad Bench cited by the learned Counsel for assessee supports the pela f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y reflect as to whether it arises from transaction elating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, we also note that the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, we are inclined to uphold the TPO's reasoning and reject the assessee's claim for working capital adjustment. 10. The ld. counsel for the assessee submitted that a co-ordinate Bench of ITAT Bangalore in the case of Huawei Technologies India Pvt. Ltd. IT(TP)A No.1939/Bang/2017 has dealt with the issue of granting of working capital adjustment. The Tribunal held that a reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would 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 invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Tribunal in the decision cited by the learned counsel for the Assessee before us, relied on the decision of the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195 (Del-Trib) wherein it was held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... although the same was not claimed in the return of income filed by the Company for the AY 2014-15, owing to its claim of deduction of provision for leave encashment made in AY 2007-08 and AY 2013-14 based on the decision of Hon'ble Calcutta High Court decision in the case of Exide Industries Limited v. Union of India [2007] [164 taxman 9], which was subsequently rejected. Ground no. 16: Deduction in respect of 'education cess on income-tax' and secondary and higher education cess on income-tax' while assessing the total income of the Appellant The Assessing Officer ( Learned AO ) and Dispute Resolution Panel ( DRP ), while assessing the total income of the Appellant for the year under consideration, have erred in not allowing a deduction for education cess and secondary higher education cess (collectively known as education cess ) for the year under consideration, although not claimed as a deduction by the Appellant in the return of income filed for the year under consideration. The said grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, has remitted the issue back to the file of the AO through order dated 16 January 2017 in I.T(TP).A No. 1092/Bang/2011 and order dated 25 October 2019 in ITA No. 368(Bang)/2018 respectively to decide the issue based on the outcome of the Hon'ble Supreme Court's decision in the case of Exide Industries. 22. Subsequently on 24 April 2020, the Hon'ble Supreme Court vide Civil Appeal 3545/2009 overruled the decision of Calcutta High Court in the case of Exide Industries and upheld the constitutional validity for deduction of leave encashment on payment basis under section 43B(f) of the Act. In view of the Hon ble Supreme Court decision, the deduction on account of provision for leave encashment cannot be sustained. However, the assessee wants to raise additional grounds of appeal for allowing the deduction under section 43B(f) of the Act on the payments made towards leave encashment in AY 2014-15 which has not been claimed in the Return of Income for the year. 23. We have considered the submissions of the parties and are of the view that in the light of the decision of the Hon ble Supreme Court in the case of Exide Industries (supra), the assessee will not be entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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