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2016 (4) TMI 1201 - AT - Income TaxTPA - working capital adjustment - Held that - TPO s main objection was that since assessee was maintaining consolidated accounts therefore the trade creditors/ debtors in regard to IT support service segments were not available separately. Ld. counsel has pointed out that as noted earlier that segmental details are available and therefore this objection does not survive. As regards the objections of ld. DRP that average day to day working capital deployment cannot be computed we are of the opinion that this objection cannot be accepted because as rightly observed by ld. DRP in AY 2009-10 that it is the average working capital deployment which is to be considered which can be computed with referene to opening and closing balances of working capital deployed. Thus we direct the ld. TPO to allow working capital adjustment to assessee as per the directions given by ld. DRP in AY 2009-10 as noted earlier. Selection of comparable - Held that - If the employee cost is more than 25% then the comparable is to be included in the list of comparables selected by TPO.
Issues Involved:
1. Working Capital Adjustment 2. Inclusion/Exclusion of Comparables 3. Computation of Margins for Softsol India Ltd. Detailed Analysis: 1. Working Capital Adjustment: The main objection by the TPO was the lack of segmented financials for trade creditors and debtors specific to the IT support services segment. The DRP also rejected the adjustment due to the unavailability of daily average working capital data. However, the tribunal noted that segmental details were available and that the average working capital deployment could be computed using opening and closing balances. The tribunal directed the TPO to allow the working capital adjustment as per the DRP's directions for AY 2009-10. 2. Inclusion/Exclusion of Comparables: - CG VAK Software & Exports Ltd.: The TPO excluded this comparable due to employee compensation being less than 25%. The DRP upheld this, noting the absence of a specific 'salary cost' line item. However, the tribunal found that 'cost of services' primarily referred to employee costs, including contributions to PF, ESI, gratuity, and ex-gratia payments. The tribunal directed the TPO to reapply the employee cost filter correctly and include the comparable if the employee cost exceeded 25%. - Ancent Software International Ltd.: The TPO excluded this comparable due to a turnover of less than ?1 crore. The tribunal referenced the Delhi High Court's decision in Chryscapital Investment Advisors (India) Pvt. Ltd., which held that turnover filter is not appropriate. The tribunal directed the inclusion of this comparable, noting no adverse comments on functional analysis by the lower authorities. - Softsol India Ltd.: The DRP increased the margin from 14.95% to 25.58%, based on the JCIT's computation, which included incorrect depreciation figures. The tribunal found the basis for attributing expenses to rental income unclear and directed the TPO to exclude only the direct expenses attributable to rental income (?23,37,991) and recompute the margins. 3. Computation of Margins for Softsol India Ltd.: The tribunal noted discrepancies in the figures adopted for depreciation and the lack of a clear basis for attributing expenses to rental income. The tribunal directed the TPO to exclude only the direct expenses attributable to rental income and recompute the margins accordingly. Conclusion: The assessee's appeal was partly allowed for statistical purposes, with directions to the TPO to re-evaluate the working capital adjustment and recompute the margins for the comparables as per the tribunal's findings. The tribunal emphasized the need for accurate adjustments and functional comparability in the transfer pricing analysis.
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