9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2020 (6) TMI 708 - AT - Income TaxTP adjustment - Negative Working Capital adjustment - international transaction of provision of Software Development services( SWD ) - Whether TPO and the DRP erred in adding to the average arithmetic profit margin of the comparable companies chosen by the TPO, negative working capital adjustment? - HELD THAT - No need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment. It is undisputed that the Assessee is also a captive service provider such as the Assessee in the case decided by the Adaptec (India) P. Ltd. 2015 (6) TMI 288 - ITAT HYDERABAD and therefore making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks, was not correct. No other contrary decision was brought to our notice. - Decided in favour of assessee.
Issues Involved:
1. Validity and sustainability of the Transfer Pricing (TP) adjustment. 2. Inclusion and exclusion of comparable companies in the TP study. 3. Appropriateness of negative working capital adjustment. Detailed Analysis: 1. Validity and Sustainability of the Transfer Pricing (TP) Adjustment: The appeal concerns the TP adjustment of ?56,84,277/- made by the Transfer Pricing Officer (TPO) towards the international transaction of software development services provided by the assessee to its Associate Enterprise (AE). This adjustment was later enhanced to ?78,69,258/- by the Assessing Officer (AO) following the directions of the Dispute Resolution Panel (DRP). The core issue is whether this adjustment is valid and sustainable under the provisions of the Income-tax Act, 1961. 2. Inclusion and Exclusion of Comparable Companies in the TP Study: The assessee, a wholly-owned subsidiary of Veveo Inc., USA, filed a TP analysis to support its claim that the price received for software development services was at Arm’s Length Price (ALP). The Transaction Net Margin Method (TNMM) was deemed the Most Appropriate Method (MAM) under Rule 10B of the Income Tax Rules, 1962. The TPO accepted only 2 out of 11 comparables selected by the assessee and added 5 more, resulting in an average arithmetic mean margin of 25.15%. The DRP directed the exclusion of Tech Mahindra Ltd. and ICRA Techno Analytics Ltd. from the comparables but upheld the inclusion of others. The final list of comparables post-DRP included CG-VAK Software Exports Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., and RS Software (India) Pvt. Ltd. 3. Appropriateness of Negative Working Capital Adjustment: The assessee contended that the TPO and DRP erred in making a negative working capital adjustment, arguing that as a captive service provider funded entirely by its AE, it does not bear any working capital risk. The Tribunal noted that in similar cases, such as Adaptec (India) Pvt. Ltd. and Digital Juice Animation Pvt. Ltd., it was held that negative working capital adjustments should not be made for captive service providers. The Tribunal concluded that since the assessee does not carry any working capital risk, the negative working capital adjustment was inappropriate. Conclusion: The Tribunal directed the TPO to recompute the ALP without making a negative working capital adjustment, rendering other grounds of appeal regarding the inclusion and exclusion of comparables unnecessary to adjudicate. The appeal was partly allowed, with the Tribunal emphasizing the need to afford the assessee an opportunity of being heard during the recomputation process. The other grounds related to the international transaction of software development services were not pressed at this stage but were left open for future proceedings if necessary.
|
