2020 (2) TMI 1473 - AT - Income Tax

TP Adjustment - ALP determination - non application of upper limit Turnover filter - AR submitted that the turnover of the assessee from ITES segment is around 9 crores and hence it falls under the category of 1 to 200 crores category - whether TPO has erred in failing to apply the upper limit Turnover filter, absence of which has resulted in selection of improper comparables leading to the determination of a highly distorted and excessive Operating Margin under the TNMM? - HELD THAT - Admittedly, the assessee-company falls in the bracket of companies having turnover exceeding 1 crore but not exceeding 200 crores. It has been held in the case of Autodesk India (P) Ltd. v. DCIT 2018 (7) TMI 1862 - ITAT BANGALORE that the companies having turnover exceeding ₹ 200 crores cannot be considered as comparable companies in respect of those companies having turnover of less than ₹ 200 crores. The above said decision was followed in the case of Micro Focus Software India (P) Ltd 2019 (12) TMI 678 - ITAT BANGALORE . Accordingly, by following the decision rendered by the coordinate Bench in the case of Autodesk India (P) Ltd. (supra), we direct the AO / TPO to exclude companies having turnover exceeding ₹ 200 crore. BNR Udyog Limited - In the case of Mobily Indotech India (P.) Ltd. 2018 (8) TMI 1890 - ITAT BANGALORE as well as FNF India (P.) Ltd 2019 (7) TMI 1760 - ITAT BANGALORE the above said company has been restored to the file of the AO / TPO for examining it afresh. Following the above said decisions, we also restore FNF India (P.) Ltd., to the file of AO / TPO with similar directions. Adjustment of negative working capital - HELD THAT - We noticed that the co-ordinate Bench in the case of FNF India (P.) Ltd. (supra) has followed the decision rendered by the Hyderabad Bench of the Tribunal in the case of Autodesk India (P) Ltd. (supra), in order to hold that working capital adjustment in respect of negative working capital is not called for. Following the same, we direct the A.O. to delete the adjustment made towards negative working capital.

Summary

Issues Involved:
1. Application of Turnover Filter.
2. Comparability of BNR Udyog Limited.
3. Adjustment for Negative Working Capital.

Detailed Analysis:

1. Application of Turnover Filter:
The assessee argued for the application of an upper limit turnover filter, contending that companies with turnovers exceeding ?200 crores should not be considered comparable. The Tribunal acknowledged that the assessee's turnover from ITES segment is around ?9 crores, placing it in the 1 to 200 crores category. Citing precedents from the cases of "Autodesk India (P) Ltd. v. DCIT" and "Micro Focus Software India (P) Ltd. v. ACIT," the Tribunal directed the AO/TPO to exclude companies with turnovers exceeding ?200 crores from the list of comparables. Consequently, Infosys BPO Limited, TCS E-Service Limited, and Excel Infoways Ltd. were excluded.

2. Comparability of BNR Udyog Limited:
The assessee contested the inclusion of BNR Udyog Limited, arguing it was not comparable. The Tribunal referred to previous decisions in "FNF India (P.) Ltd." and "Mobily Indotech India (P.) Ltd. v. Dy.CIT," which had restored the issue to the AO/TPO for fresh examination. The Tribunal noted that the functional differences and RPT (Related Party Transactions) filter at the segment level had not been adequately analyzed. Therefore, it remanded the matter back to the AO/TPO for a detailed re-examination, consistent with the directions in the cited cases.

3. Adjustment for Negative Working Capital:
The assessee objected to the TPO's adjustment for negative working capital, asserting that as a captive service provider with no borrowing, it bore no working capital risk. The Tribunal cited the "FNF India (P.) Ltd." case, which followed the Hyderabad Bench's decision in "Adaptec (India) P. Ltd. v. ACIT." It was held that a captive service provider, fully funded by its AE, does not bear working capital risks, and hence, no negative working capital adjustment should be made. The Tribunal directed the AO to delete the adjustment made towards negative working capital, aligning with the precedent that working capital adjustments should not apply to entities without working capital risks.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain high-turnover companies from the comparables list, remanding the issue of BNR Udyog Limited's comparability for fresh examination, and deleting the negative working capital adjustment. The judgment emphasized adherence to established precedents and the specific financial and operational context of the assessee.

Order pronounced on February 17, 2020.