TMI Blog2023 (3) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... AT:- We direct the Ld.AO/TPO to compute the Working Capital Adjustment on actuals. The assessee has also sought risk adjustment in this ground which may be considered by the Ld.TPO only if the assessee is able to establish the difference in risk undertaken by assessee with the comparables that remains for computing the margin. Treating the recovery of passthrough costs by the assessee as operating in nature - HELD THAT:- Considering the fact that there is no change in facts and the nature of pass-through costs being identical, respectfully following the above view taken by this Tribunal, in assessee s own case for A.Y. 2013-14 [ 2021 (10) TMI 908 - ITAT BANGALORE] we hold that the recovery of expenses is a separate international transaction that needs to be determined and the Ld.TPO has rightly computed the markup of such transaction. - IT(TP)A No. 189/Bang/2021 - - - Dated:- 21-10-2022 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER For the Assessee : Ms. Chandini Shah, CA For the Revenue : Shri Praveen Karanth, CIT-DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions, the Ld.AO passed the impugned order by making addition in the hands of the assessee to the extent of Rs.1,07,62,545/-. Aggrieved by the order of the Ld.AO, the assessee is in appeal before this Tribunal. 3. Before we start the comparability analysis, it is necessary to understand the functions performed by assessee, assets owned and risks assumed. 4. Based on the above, we shall consider the comparables sought for exclusion by the assessee which are as under: a) Icon Clinical Research India Pvt. Ltd. and b) Syngene International Ltd. 5. Icon Clinical Research India Pvt. Ltd. 5.1 The Ld.AR submitted that this company has a high level RPT transaction and hence liable to be excluded. It is the submission of the Ld.AR that this comparable has 100% RPT transaction whereas the Ld.TPO has applied filter of RPT transaction at 25%. He submitted that this comparable did not satisfy the filter applied by the Ld.TPO itself. 5.2 On the contrary, the Ld.DR referring to page 21 of the order u/s. 92CA, submitted that the objection of assessee was also raised before the Ld.TPO which were rejected. He thus submitted that as there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in the TP study is that the effect on profits fron investing in different levels of working capital must be taken into account for the purpose of comparison. The TPO rejected the working capital adjustment done by the assessee on the basis that the assessee has not been able to demonstrate that the working capital differences had impacted its profits and that the adjustment as done based on broad approximations estimations and assumptions which may not lead to reliable results. The assessee raised its objections before the DRP stating that the assessee acts as a facilitator and coordinator service provider in relation to Paraxel group assuming less than normal risk and accordingly the assessee does not bear any working capital risk since it is fully funded by its AE with no working capital contingencies. The DRP rejected the submissions of the assessee and confirmed the decision of the TPO. 22. With regard to the question whether working capital adjustment should be given or not, we find that the reasons given by the DRP for not allowing working capital adjustment are the same reasons as was given in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to 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 unco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. 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 Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the 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 is at pages 173 192 of the Assessee's paper book. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We shall reproduce the observations of this Tribunal in A.Y. 2013-14 on this issue which is as under: 52. Thus, new word pass through cost was introduced to show the amount incurred by the assessee to be reimbursed by the parent company and called the investigation fees as part of pass through cost. The ld. AR argued that there is no investigation fees payable to assessee for the work done on behalf of parent company. In our opinion, the Addendum is w.e.f. 1.4.2012 wherein no date of execution is mentioned therein. The Addendum was solely made with an intention to evade payment of taxes and this is only a self-serving document by the assessee with the sole intention to evade taxes. Since both the parties were in a position to enter into this agreement being inter-related companies, that agreement cannot be given any credence which is a non-genuine and make believe story and it cannot be recognized as a true agreement and no benefit can be given on the basis of this agreement. Therefore, the lower authorities are justified in not giving any credence to this Addendum entered into by the assessee on the basis of which assessee has claimed that assessee is not entitled to receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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