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2022 (6) TMI 329 - AT - Income TaxTP Adjustment - comparable selection by application of turnover filter - Turnover more than Rs.200 Crores - TPO excluded from the list of comparable companies chosen by the assessee in its TP study companies whose turnover was less than Rs.1 Crore - HELD THAT - As we hold that companies listed in Sl.No.(a) to (h) in paragraph 7 (i) above, which the assessee seeks exclusion and whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. No adjustment towards working capital has been allowed to the assessee - The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The tribunal observed that the guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. The Tribunal further observed that the data available with the assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the assessee to produce the correct information about the comparable companies. Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore, working capital adjustment has to be allowed. The issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, after affording the Assessee opportunity of being heard.
Issues Involved:
1. Choice of comparable companies chosen by the Transfer Pricing Officer (TPO). 2. Non-grant of working capital adjustment. Detailed Analysis: 1. Choice of Comparable Companies: The core issue pertains to the determination of the Arm’s Length Price (ALP) for the provision of Software Development Services (SWD services) by the assessee to its Associated Enterprises (AE). The assessee used the Transaction Net Margin Method (TNMM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The TPO, while accepting TNMM as the Most Appropriate Method (MAM), reworked the OP/OC and selected additional comparable companies, resulting in a higher PLI of 27.37% compared to the assessee’s 16.19%. The assessee contested the inclusion of eight specific companies (Tata Elxsi Ltd., Mindtree Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., R.S. Software Ltd., Cybage Software Pvt Ltd., and Nihilent Ltd.) chosen by the TPO, arguing that these companies had a turnover exceeding Rs. 200 Crores, whereas the assessee’s turnover was only Rs. 86.29 Crores. The DRP upheld the TPO's inclusion, relying on the Delhi High Court's decision in Chryscapital Investment Advisors India Pvt. Ltd Vs. DCIT, which held that high turnover does not automatically exclude a company if it is otherwise functionally comparable. The Tribunal, however, took a different view, emphasizing the importance of the turnover filter. It referenced several ITAT Bangalore Bench decisions, including Dell International Services India (P) Ltd. Vs. DCIT and Autodesk India Pvt. Ltd. Vs. DCIT, which supported the exclusion of companies with significantly higher turnovers to ensure comparability. The Tribunal concluded that companies with turnovers exceeding Rs. 200 Crores should be excluded from the list of comparable companies. 2. Non-grant of Working Capital Adjustment: The assessee also raised the issue of not being granted a working capital adjustment. The DRP had denied this adjustment, citing reasons such as the lack of demonstrated data on the impact of working capital on costs, price, or profit, and the variability of working capital requirements based on numerous factors. The Tribunal referred to its earlier decision in Huawei Technologies India Pvt. Ltd. v. JCIT, which emphasized the necessity of working capital adjustments to account for differences in the time value of money between the tested party and comparables. The Tribunal highlighted the OECD Transfer Pricing Guidelines, which explain that working capital adjustments are essential to reflect the timing effects on profits due to differences in accounts receivable, payable, and inventory levels. The Tribunal directed the TPO/AO to re-examine the issue of working capital adjustment, considering the guidelines and ensuring that both the tested party and comparables are on the same footing. The TPO/AO was instructed to provide the assessee with an opportunity to present their case. Conclusion: The Tribunal partially allowed the appeal, directing the exclusion of companies with turnovers exceeding Rs. 200 Crores from the list of comparables and ordering a re-examination of the working capital adjustment by the TPO/AO. The TPO/AO were instructed to compute the ALP for the international transaction in accordance with the Tribunal’s directions after affording the assessee an opportunity of being heard.
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