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TMI Blog2023 (12) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... h is engaged in providing IT and IT enabled services (ITeS) to Parexel Group companies which aid the clinical trial business. During the previous year relevant to the assessment year 2018-19, the learned Transfer Pricing Officer (learned TPO) proposed a total Transfer Pricing (TP) adjustment of Rs. 30,85,31,663/- comprising of three adjustments, viz., TP adjustment of Rs. 2,62,93,347/- in the IT/software development (SWD) segment, TP adjustment of Rs. 26,80,09,843/- in the ITeS segment and TP adjustment of Rs. 1,42,28,473 towards interest on overdue receivables vide learned TPO's order dated 31/07/2021. Incorporating the aforesaid TP adjustment, the learned Assessing Officer passed the draft assessment order dated 14/09/2021. 3. Aggrieved, assessee filed objections before the learned DRP. Learned DRP vide its directions dated 08/06/2022, partly allowed the objections raised by the assessee by deleting the entire TP adjustment of Rs. 2,62,93,347/- in the IT/SWD services segment. Further, in the ITeS segment, the learned DRP granted partial relief to the assessee by directing inclusion/exclusion of certain comparables and further upheld the adjustment on interest on overdue receivab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding high-end integrated services through managing their business processes, in addition to providing increased value and further, the company is engaged in diversified activities; that the company also renders onsite services at client sites or global development centers located in the same country where the client is based out of and the onsite revenue of the company is 77.3% of the total revenues; that majority-owned and controlled subsidiary of 'Infosys Limited'. Leverage on Brand value of "Infosys" - strong brand name across the globe including Europe, Latin America, Africa and USA; that the substantial amount of selling & marketing expenses (Rs. 166 crores) & brand building expenses (Rs. 3 crores); that the revenue from operations - Rs. 3061 crores; that the higher profit margin derived by Infosys BPM is predominantly due to brand building exercise undertaken; this by itself allows Infosys BPM to have a premium price for its products and services; that in comparison, the assessee is a captive service provider, rendering services to its overseas affiliate without having such benefit of brand image. 8. Regarding outsourcing costs, he submitted that cost of technical sub-contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r both the services and therefore cannot be strictly considered as KPO; further, high-end and low-end activity cannot be distinguished since only broad comparability is to be seen under TNMM. Learned DRP also held that there is nothing in the annual report to suggest that brand has contributed to the growth or profitability and marketing expenses equating to 18.51% of total sales are not much significant; that the company is involved in the business of providing KPO services and therefore, is functionally different from the assessee. The company is engaged in diversified activities such as quality monitoring insights, advanced analytics, technical operations, digital care services, financial services, digital marketing, digital branding and cable, telecom and analytics and advanced automation as also derivative trade support, high advertising marketing and promotion expenses. It had incurred significant sales and marketing costs (Rs. 21: crores), which corresponds to around 18.5% of the total revenue of Rs. 1142 crores; that such marketing and advertising activities carried out by the entrepreneurial companies result in creation of marketing intangibles and thereby demand a return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) (P.) Ltd. (supra), held that huge profit or a huge turnover, ipso facto does not lead to its exclusion; whereas in the case of CIT vs. M/s. Pentair Water India Pvt. Ltd. (2016) 69 taxmann.com 180, the Hon'ble Bombay High Court held that turnover is a relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases. Hon'ble Karnataka High Court, however, in the case of PCIT vs. M/s. Obopay Mobile Technology India Private Ltd., in ITA No. 586/2016, dated 23/07/2018, having noticed the view taken by the Hon'ble Delhi High Court in the case Chryscapital Investment Advisors (India) (P.) Ltd. (supra), and also the decision of the Hon'ble Bombay High Court in the case of CIT vs. M/s. Pentair Water India Pvt. Ltd. (supra), upheld the Tribunal's order excluding certain entities from the list of comparables on the ground of huge turnover, while following the principle that where two views are possible on an issue, the view favourable to the assessee has to be adopted. 15. Apart from this, in assessee's own case, for the assessment years 2009-10, eClerx Services Ltd., and for the assessment year 2011-12 Infosys BPM Services Pvt. Ltd., was consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee claimed for grant of working capital adjustment before the learned DRP as well. Learned AR submitted that detailed submissions from Pg. No. 202 to 208 of Form 35A clearly show wherein the assessee typically reasoned that to have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. However, the learned DRP denied working capital adjustment stating that though the assessee argued that there exist differences in the payable and receivable positions between assessee and comparables, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profit and as to whether such difference materially effect the price and cost or profits. According to the learned DRP, 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; that the working capital requirements and impact depends on various factors such as business cycle, the nature of business ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the power of the assessee to produce correct information about comparable companies. He further argued that Revenue, on the other hand has sufficient powers under section 133(6) of the Act to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defense to say that assessee has not furnished required details to deny any adjustment on account of working capital differences. Thus, learned AR insisted that the assessee wishes to re-iterate that working capital adjustment, which should be allowed on actuals. This means that working capital of the assessee and the comparables should be adjusted to ensure a fair comparison. He further submitted that the assessee submitted all the relevant details for the computation of the working capital adjustment to the lower authorities, but were outrightly rejected by them. In this regard, he placed reliance in the cases of Huawei Technologies India Pvt Ltd vs. JCIT, IT(TP)A No. 1939/Bang/2017, Parexel International Clinical Research Private Limited vs. ACIT: IT(TP)A No. 894/Bang/2022, Denso India Limited vs. ACIT, ITA No. 4788/Del/2010, DCIT vs. Apot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction relating 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, the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, the ld. DRP inclined to uphold the TPO's reasoning and rejected the assessee's claim for working capital adjustment. Against this assessee is in appeal before us. 9. 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: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m'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 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; EUR 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Page 6 mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nontrade 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 Arm's Length Price. The data available with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)EUR (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 20ransacttion 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 will materially affect the amount of net profit margin in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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