TMI Blog2023 (3) TMI 1429X X X X Extracts X X X X X X X X Extracts X X X X ..... Non-granting of working capital adjustment - DRP observed that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profit - HELD THAT:- We are of the opinion that similar issue came for consideration before this Tribunal in assessee s own case as held there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Non granting risk adjustment - DRP stated in his report that he did not agree with the assessee's plea that it does not bear any significant risk and was of the view that the assessee bears single customer risk, as its entire business activity and survival depends on the AEs.- HELD THAT:- We are of the opinion that similar issue came for consideration before this Tribunal in assessee own case though the assessee in the TP report has stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lieve 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 receive any consideration for facilitating investigations. We have to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction. In the immediate earlier AY 2012-13, the assessee has shown investigator payment with mark-up a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Associated Enterprises. 6. On the facts and in the circumstances of the case and in law, Ld. TPO / Ld. AO / Ld. Panel erred in: a. rejecting the transfer pricing documentation which was maintained in good faith and with due diligence by the Appellant; b. rejecting certain filters as applied by the Appellant in selection of the comparable companies at the time of preparation of the transfer pricing documentation; and c. applying certain filters not relevant to the Appellant while undertaking fresh comparability analysis. 4. These grounds are general in nature, which do not require any adjudication. 5. Ground Nos.7 8 of assessee s appeal are reproduced as under: 7. On the facts and in the circumstances of the case and in law, Ld. TPO / Ld. AO / Ld. Panel erred in including following companies in the final set which are not comparable to the Appellant s functions, asset base and risk profile: Sipra Labs Limited a. Aavanira Biotech Private Limited b. Veeda Clinical Research Private Limited c. MS Clinical Research Private Limited d. Prado Preclinical Research Development Organisation Private Limited e. Cliantha Research Limited f. Q P S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially affect the price, cost or profits. The 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable' position stated in the Balance Sheet may not exactly reflect as to whether it arises from transaction relating to Revenue Account or Capital Account as there is no uniformity in the accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be 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 subclause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. 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. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly lays down the proposition that working capital adjustment is to be given effect to while determining ALP while adopting TNMM method. Respectfully following the said decision, we allow this issue in favour of the assessee. 9.1 In view of the above order of the Tribunal in assessee s own case, we decide the issue in favour of the assessee and against the department. 10. Ground No.11(b) of the assessee s appeal is with regard to risk adjustment, which is reproduced below: 11. On the facts and circumstances of the case, and in law, Ld. TPO / Ld. AO / Ld. Panel erred in: not granting risk adjustment. 10.1 The ld. DRP stated in his report that he did not agree with the assessee's plea that it does not bear any significant risk. The ld. DRP was of the view that the assessee bears single customer risk, as its entire business activity and survival depends on the AEs. As per the agreement, the AE can refuse to make payment if the work delivery is not on the expected requirement. If the technology and the products developed, for which the taxpayer provides services, fails in the market, it would also directly impact the assessee as it would not get farther contract. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment also benefits from two-thirds of the profit from it, it becomes rather hard to suggest that there was much risk of non-payment. On the other hand, I agree with Mr. Wall's assertion that since APCI had only one customer, namely the Assessee, if APCI lost that customer, it would have been for all intents and purposes _finished in business and hence bore the biggest market risk. This is what in frict happened. To suggest, as Dr. Wright did, that since APCI was handed a guaranteed market by the :4ssessee, resulting in high profitability from day one, seems to ignore the reality that having one's eggs' ail ke one basket .voti can be out of business at the whim of that sole customer as well. The ld. DRP stated that the above ratio is equally applicable to the assessee. The ld. DRP also relied on the following decisions. 10.3 Further, the ld. DRP observed that the Hon'ble ITAT Mumbai in the case of Symantec Software Solutions Pvt Ltd Vs ACIT (2011) 46 SOT' 48 (Mumbai) has in paragraph 16 observed that ..........As regards the difference in function and risk level adjustment, the assessee has raised this issue without quantification of such adjustment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in IT(TP)A No.3270/Bang/2018 in assessee s own case vide order dated 18.4.22 wherein held as under: 26. We heard the rival submissions and perused the materials on record. We will look at the provisions of sub-rule (3) to rule 10B which reads as follows (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. 27. According to rule 10B(3) therefore the adjustment towards working capital, risk etc., should be arrived at on a reasonably accurate basis. In the given case, we notice that the assessee has not established the material impact of the risk adjustments to the profitability as compared to that of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions. In this case, the assessee coordinated between the individual investigator and Paraxel International GmbH Germany. The contention of the assessee is that assessee has not undertaken any risk and all risk was taken over by Paraxel International GmbH Germany and relied on the Addendum dated 19.9.2007. However, the fact is that the assessee acted as coordinator and facilitator in selecting the investigator so as to conduct clinical trial. Selection of the investigator demonstrates that clinical trial is important task in the whole work undertaken by the assessee. The assessee invested considerable time and resources in this. The plea of assessee is that assessee has not received any amount as fee for doing this coordinator and facilitator job. In our opinion, this is an inter-group services provided by the assessee to its parent company and assessee must charge some fee as it would have, had the services been provided to a third party. The contention of the ld. AR is that remuneration for these services has already been included in the provision of clinical trial services and no separate fee is charged for coordinating and facilitating with the investigators. As per OECD gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and risks assumed by PICRPL and will be determined by PIC and PICRPL in accordance with arm's length standards. Any changes to the fees shall be communicated between the parties in writing and such written communication shall be considered as addendum to this agreement. Any taxes leviable in India on the above fees shall be borne by PIC. Further, PIC may withhold taxes to the extent required to do so as applicable in its jurisdiction. 4.5 Sponsor, for the purposes of section 4.3, shall mean and refer to a customer / 'company who have entered into a contract with PIC for the provision of Clinical Services. 4.6. Investigator, for the purposes of section 4.3, shall mean and refer to a physician, medical doctor, medical consultant, or a hospital, which has entered into an investigation contract with PICRPL and/or Sponsor to administer pharmaceutical drugs for the purposes of clinical research trials. 4.7. PIC shall pay the remuneration on the basis of invoices duly issued by PICRPL within 3o (thirty) days after the end of the month. PICRPL shall maintain true and accurate books of accounts and records reflecting the services and cost incurred in connection therewith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal intention to this Addendum is different from what it appears ex facie. Hence, we have to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction. 53. In the present case, in the immediate earlier AY 2012-13, the assessee has shown investigator payment with mark-up and in this year on the basis of Addendum entered by the parties as discussed earlier, made the investigator payment as pass through costs and claimed as reimbursement without any profit element, which is against the agreed norms in the earlier years which cannot be eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LIBOR rate in the place of AEs for benchmarking the rate of interest to arrive at the ALP. With these observations, we remit the issue in dispute to the file of AO/TPO to benchmark the interest rate in the light of the decisions cited by ld. DR. Further, we make it clear that the TPO should compute the interest only for the relevant assessment year after going through the relevant agreements entered by the assessee with AEs while computing the ALP. 15.1 However, the ld. A.R. submitted that no adjustment to be made towards notional interest of outstanding receivables without prejudice to the above. She submitted that Without prejudice to the above, it is humbly submitted that the appellant is a debt-free company and therefore, no adjustment qua notional interest on receivables should be made. In this regard, reliance is placed on the Delhi HC s decision in the case of Boeing India P. Ltd. [(2023) 146 taxmann.com 131) Without prejudice to the above, it is humbly submitted that for the receivables falling out of the working capital adjustment, the rate of interest should be restricted to LIBOR + 2%. In this regard, reliance is placed on the Bombay HC s decision in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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