TMI Blog2023 (12) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted to the assessee apart from in sister concern s case of Parexel International Clinical Research Private Limited [ 2023 (3) TMI 1429 - ITAT BANGALORE] we set aside this issue to the file of the learned Assessing Officer/learned TPO to decide the issue afresh in the light of the above, after obtaining necessary information from the assessee. Grounds are accordingly treated as allowed for statistical purposes. - Shri Rama Kanta Panda, Vice President And Shri K.Narasimha Chary, Judicial Member For the Assessee : Shri Aliasgar Rampurwala And Shri Yogesh Malpani, ARs For the Revenue : Ms. TH Vijaya Lakshmi, CIT-DR ORDER PER K. NARASIMHA CHARY, J.M: Aggrieved by the order dated 29/07/2022, passed by the Learned Assessing Officer ( Ld. AO ) in the case of M/s. Parexel International (India) Private Limited, ( the assessee ) for the assessment year 2018-19, under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (for short the Act ), consequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru ( DRP ), assessee filed this appeal. 2. Brief facts of the case as per record are that the assessee is a subsidiary of Parexel Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee before the learned TPO was that because of the functional differentials, possession of brand value, being a market leader and its global presence and incurring consultancy expenses in the nature of sub-contracting charges, Infosys BPM Services Pvt. Ltd., is not a comparable company. He further submitted that in respect of eClerx Services Ltd., also assessee canvassed before the learned TPO that this entity too functionally not comparable, because segmental details are not available. Assessee further submitted in respect of eClerx Services Ltd., that this company possessed global intangibles, incurs advertising and sales promotion expenses apart from sub-contracting expenses. Learned AR submitted that in spite of this, the learned TPO did not consider that the huge turnover and brand value of these companies, but brushing this aside, the learned TPO held that these two companies are good comparables. 7. In respect of Infosys BPM Services Pvt. Ltd , he submitted that the company is functionally different and is engaged into diversified activities. Infosys BPM Services Pvt. Ltd was formerly known as Infosys BPO Ltd. The company provides new age services such as Business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITeS segment. The exclusion of the above two companies from the list of comparables in the ITes segment in the case of Cadence Design Systems (I.) (P.) Ltd. (supra) has been upheld by the Hon'ble Delhi High Court in the case of PCIT vs. Cadence (2020) 119 taxmann.com 415 and the SLP against the order of the Hon ble Delhi High Court was dismissed by the Hon ble Supreme Court reported in (2020) 119 taxmann.com 416 SC. 9. Learned AR also relied in the case of Equant Solutions India (P.) Ltd. [(2020) 113 taxmann.com 517 - P H HC], wherein it was decided that the brand of Infosys BPO (Infosys BPM) definitely results in higher profits and hence, the same could not be compared to the assessee being an ITeS provider. In the case of Symphony Marketing Solutions India P. Ltd. [(2020) 113 taxmann.com 77 Delhi HC) also Infosys BPO (now Infosys BPM) excluded since it was engaged in business process management services whereas the assessee was a routine captive service provider. Further, Infosys had high goodwill, significant marketing expenses etc. Relies on another Delhi High Court decision [ITA 420 of 2019] which held that Infosys BPO, being a Infosys group company was a giant corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business by relying upon another decision to hold that eClerx Services Ltd., is involved in diverse nature of services, no segmental data is available and it is a KPO, hence, not comparable to the assessee; 12. In respect of this entity also, learned AR submitted that in all the decisions cited with reference to the Infosys BPM Services Pvt. Ltd., are equally applicable in respect of eClerx Services Ltd., also and he invited our attention to the relevant portions of such judgment. 13. Per contra, learned DR vehemently disputed the objection of the assessee, basing on the turnover and brand. By taking the turnover, operating profit and costs of Infosys Technology Ltd., as an example, learned DR submitted that over a period of twenty years, the turnover of this company has increased from Rs. 139 crores to Rs. 61.941 crores, but the OP/OR remained around 25.90% only with small fluctuations here and there. She placed reliance on the decision of the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT [2015] 56 taxmann.com 417 (Delhi), for the principle that huge profit or a huge turnover, ipso facto does not lead to its exclusion. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems (I.) (P.) Ltd. [(2018) 93 taxmann.com 227 (Delhi ITAT), was upheld by the Hon ble Delhi High Court in the light of its decision in the case of Avaya India (P.) Ltd., vs. ACIT [2019] 108 taxmann.com 222. An SLP filed by the Revenue against the same was dismissed by the Hon ble Apex Court in the decision reported in [2020] 119 taxmann.com 416 (SC). 16. In these circumstances, following the foot prints of the Hon ble Karnataka High Court in the case of Obopay Mobile Technology India Private Ltd., (supra), Hon ble Delhi High Court in the case Avaya India (P.) Ltd., vs. ACIT (supra) and in the case of Cadence Design Systems (I.) (P.) Ltd. (supra), we hold that the turnover and brand name are relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases. We, therefore, direct the learned Assessing Officer/learned TPO to exclude these two entities from the list of comparables. 17. Coming to the other issue relating to the denial of working capital adjustment, it is submitted that the assessee had carried out working capital adjustment in the transfer pricing study report and further, the assessee was asked for working capital adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te such material differences so as to warrant and adjustment. Learned DRP accordingly upheld the learned TPO s reasons and reject the assessee s claim for working capital adjustment. 18. Learned AR submits that transfer pricing analysis is an estimation and not an exact science. There is always an element of estimation and working capital adjustment must be based on opening and closing working capital deployed and daily working capital requirements data cannot be insisted upon. One has to see that reasonable adjustment be made where-ever it is needed so as to bring both comparables and tested party on the same footing. Moreover, assessee cannot be asked to provide for segmental details and details of trade and non-trade debtors of comparable companies as these details are beyond power of assessee to obtain, unless they are available in public domain. Thus, where complete working capital adjustment working had been given by assessee and no specific defect had been pointed out in these workings, then working capital adjustment as worked out by the assessee must be allowed. Further, even OECD guidelines (at paragraphs 13 to 16), emphasizes need for working capital adjustment in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs of the Tribunal are extracted hereunder for the sake of completeness: 8.1 The ld. 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 profits. The assessee has argued for working capital 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be determined by any of the following methods, being the most appropriate method, in the following manner, namely ; (a) to (b)** ** ** transactional net margin method, by which, (i) the net profit margin 15ransact by the enterprise from an international transaction [or a specified domestic 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 15ransact 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 marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should 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 foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi Trib.). has 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 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We hold and direct accordingly. 9. The aforesaid decision clearly 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. 22. in view of the fact that for the assessment years 2009-10 and 2011-12, working capital adjustment is said to have been granted to the assessee apart from in sister concern s case of Parexel International Clinical Research Private Limited (supra), we set aside this issue to the file of the learned Assessing Officer/learned TPO to decide the issue afresh in the light of the above, after obtaining necessary information from the assessee. Grounds are accordingly tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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