2020 (12) TMI 1255 - AT - Income Tax

TP Adjustment - Comparable selection - negative working capital adjustment - HELD THAT - Referring to assessee ITeS company companies functionally dissimilar with that of assessee. Negative working capital adjustment - There is no allegation in the case of the assessee that the assessee has used any borrowed fund for working capital or there is any risk of money lost in credit time provided to the customers. Accordingly we hold that negative working capital adjustment is not justified in the case of the assessee. Inclusion of ICRA Online Ltd. - CIT(A) has analyzed the functional details and come to the conclusion that ICRA Online Ltd. is a Knowledge Process Outsource (KPO) company which is different from Business Outsource Company (BPO) which is the line of business of the Assessee in the present case. Hence we uphold the exclusion of this company from the list of comparable companies. I-Gate Global Solutions Ltd.- We uphold the exclusion of this company from the list of comparable companies by applying the turnover filter. Determining ALP under TNMM - As correct approach would be to look at the costs incurred by the assessee only and should not impute any additional cost as done by TPO which indirectly enhances the ALP artificially. The contrary view expressed in decision cited by the learned DR takes the view that Working capital adjustment is required in all cases as any credit extended to customers will result in cash locked up and will result in the assessee borrowing money from the banks and incur additional cost towards interest on these borrowings which cost will have effect on the price charged. It is the reasoning in these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal an entity having higher working capital will incur more interest cost which will reduce profitability. Hence no importance shall be given to pricing aspect. Since the assessee does not have any working capital risk the question of negative working capital does not arise.

Summary

Issues Involved:
1. Exclusion of ICRA Online Ltd. from the list of final comparables selected by the TPO in ITES Segment.
2. Exclusion of iGate Global Solutions Ltd. from the list of final comparables selected by the TPO in ITES Segment.
3. Negative working capital adjustment.

Detailed Analysis:

1. Exclusion of ICRA Online Ltd. from the list of final comparables selected by the TPO in ITES Segment:
The revenue challenged the exclusion of ICRA Online Ltd. from the list of comparables. The CIT(A) excluded ICRA Online Ltd. on the basis that it is a Knowledge Process Outsource (KPO) company, which is different from the Business Process Outsource (BPO) services provided by the assessee. The Tribunal upheld this exclusion, noting that segmental details were not available and that the CIT(A) had correctly analyzed the functional details to conclude that ICRA Online Ltd. was not comparable to the assessee.

2. Exclusion of iGate Global Solutions Ltd. from the list of final comparables selected by the TPO in ITES Segment:
The revenue also contested the exclusion of iGate Global Solutions Ltd. The CIT(A) excluded this company because it had multiple segments, including Software Development and Services, Contract Centre Service, and ITeS, without available segmental details. The Tribunal upheld this exclusion, applying the turnover filter, as iGate Global Solutions Ltd. had a turnover exceeding Rs. 1000 crores, which made it incomparable to the assessee with a turnover of Rs. 23.76 crores.

3. Negative working capital adjustment:
The CIT(A) held that negative working capital adjustment should not be made, following the decision of the ITAT in the case of Adaptec India Pvt Ltd., which stated that negative working capital adjustment is unnecessary when the assessee does not bear any working capital risk. The Tribunal upheld this view, noting that the assessee, a captive service provider fully funded by its AE, did not have any working capital risk. The Tribunal emphasized that working capital adjustments should be made on a case-by-case basis and that in this instance, a negative working capital adjustment was not warranted.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions to exclude ICRA Online Ltd. and iGate Global Solutions Ltd. from the list of comparables and to disallow the negative working capital adjustment. The Tribunal's decision was based on detailed functional analysis and adherence to established principles regarding comparability and working capital adjustments.