2014 (6) TMI 636 - AT - Income Tax

Working capital adjustment Held that - Following M/s Avineon India Pvt. Ltd. Versus Dy. Commissioner of Incometax 2014 (5) TMI 107 - ITAT HYDERABAD - assessee contended that trade practice of advances and subsequent adjustment of these advances against invoices raised, being captive service provider has a bearing on profit margin, therefore, working capital requirement should be taken care of by way of adjustments - Whether similar conditions exist for other comparables require examination and adjustment towards working capital assessee furnished detailed annexure making working capital adjustment to justify 3.30% sought by Assessee as against 1.38% given the TPO thus, the matter is required to be remitted back to the TPO for verification with a direction to examine the veracity of Assessee s claim and take proper decision in correctly computing the working capital adjustment Decided in favour of Assessee. Selection of comparables Held that - Following M/s Avineon India Pvt. Ltd. Versus Dy. Commissioner of Incometax 2014 (5) TMI 107 - ITAT HYDERABAD - the TPO had included the company which was also engaged in portfolio management services and investment activities and such services cannot be compared to Assessee as both are in divergent sectors - the company cannot be a comparable, thus, the AO is directed not to treat the company as comparable to the assessee AO/TPO is directed to determine the ALP Decided in favour of Assessee.

Summary

Issues Involved:
1. Working Capital Adjustment
2. Selection of Comparables

Detailed Analysis:

1. Working Capital Adjustment:
The primary contention raised by the assessee was regarding the working capital adjustment. The assessee argued that the TPO committed an error by not including advances from customers while calculating the working capital adjustment. This issue was previously addressed in the assessee's own case for the assessment year 2007-08 by the Income-tax Appellate Tribunal, Hyderabad bench.

The Tribunal noted that the assessee had indeed raised this issue before the DRP, contrary to the DR's preliminary objection. The Tribunal referenced the grounds of objections submitted before the DRP, which clearly included a specific ground regarding the working capital adjustment. The Tribunal cited its earlier decision, where it was held that the working capital adjustment should be re-examined by the TPO to ensure accurate computation. The Tribunal directed the Assessing Officer/TPO to determine the ALP in accordance with the directions provided in the earlier case, thereby allowing this ground for statistical purposes.

2. Selection of Comparables:
The assessee objected to the selection of certain companies as comparables. Each company's suitability as a comparable was examined individually:

a. Asit C. Mehta Financial Services Ltd.:
The assessee argued that this company is functionally different and fails the RPT filter. The Tribunal noted that this company was excluded as a comparable in the assessee's own case for the assessment year 2007-08 due to its engagement in portfolio management services and investment activities, which are not comparable to the assessee's services. The Tribunal directed the AO/TPO to exclude this company from the list of comparables.

b. Vishal Information Technologies Ltd.:
The assessee contended that this company is engaged in high-end BPO services and has an abnormally low employee cost, indicating outsourcing of activities. The Tribunal referenced its earlier decision, where it was held that due to the significantly lower employee cost compared to the industry average, this company adopts different methods of rendering services and is not comparable to the assessee. The Tribunal directed the AO/TPO to exclude this company from the list of comparables.

c. Maple (e) Solutions:
The assessee objected to this company being treated as comparable due to the involvement of its directors in fraud, which might have affected its financial results. The Tribunal noted that multiple decisions by different benches have excluded this company as a comparable for similar reasons. The Tribunal referenced the DRP's decision in the assessee's case for the assessment year 2007-08, which excluded this company due to its involvement in money laundering offences. The Tribunal directed the AO/TPO to exclude this company from the list of comparables.

Conclusion:
The Tribunal directed the AO/TPO to determine the ALP in accordance with the directions provided, ensuring the exclusion of the specified companies from the list of comparables. The appeal was treated as allowed for statistical purposes, and the order was pronounced on 30-5-2014.