2021 (2) TMI 267 - AT - Income Tax

TP Adjustment - comparable selection - Selection on the basis of turnover filter - THAT - Excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT 2018 (7) TMI 1862 - ITAT BANGALORE . The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores. Thus we exclude the two comparable companies Infosys BPO Ltd., and TCS e-Serve Ltd. (having turnover of ₹ 1312.14 Crores and ₹ 1578.44 Crores respectively) by application of the turnover filter. The Assessee's turnover is only ₹ 94 crores (less than 100 crores and less than 1/10th of the turnover of the aforesaid two comparable companies. Therefore the aforesaid two companies are directed to be excluded from the list of comparable companies. Grant of negative working capital adjustment - HELD 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 TPO is directed to compute the ALP in the light of the directions as given above, after affording Assessee opportunity of being heard.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Exclusion of certain comparable companies based on turnover.
3. Adjustment for negative working capital.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:
The Assessee filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) to justify the price paid in the international transaction. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI), arriving at an OP/OC of 17.48%. The Transfer Pricing Officer (TPO) accepted TNMM and OP/OC but identified different comparable companies, resulting in an average arithmetic mean margin of 28.11%. This led to an addition of ?15,34,72,676 to the Assessee's income.

2. Exclusion of certain comparable companies based on turnover:
The Assessee requested the exclusion of companies with high turnover (more than 10 times the Assessee's turnover) and low turnover (less than 1/10th of the Assessee's turnover). The Tribunal referred to the Delhi High Court's judgment in Chryscapital Investment Advisors (India) Private Limited, which emphasized that differences in turnover must materially affect the price or cost for exclusion. The Tribunal remanded the issue back to the AO/TPO to examine the turnover impact and make reasonable adjustments. The Tribunal upheld excluding Infosys BPO Ltd. and TCS e-Serve Ltd. due to their significantly higher turnovers compared to the Assessee.

3. Adjustment for negative working capital:
The Assessee argued against the negative working capital adjustment, citing that it is a captive unit funded entirely by its Associated Enterprise (AE) and has no working capital risk. The Tribunal referred to the decision in DCIT v. M/s. Software AG Bangalore Technologies P. Ltd., which held that negative working capital should not be computed and adjusted. The Tribunal agreed with this view, noting that the Assessee does not have any working capital risk, and therefore, the question of negative working capital does not arise.

Conclusion:
The Tribunal directed the TPO to recompute the ALP excluding Infosys BPO Ltd. and TCS e-Serve Ltd. and without making a negative working capital adjustment. The appeal of the Assessee was partly allowed.