2022 (12) TMI 1256 - AT - Income Tax

TP Adjustment - working capital adjustment to be considered for the difference in working capital levels between the comparable companies and the assessee - HELD THAT - With regard to international transaction of provision of marketing services to Red Hat US, the assessee is seeking for working capital adjustment. We find that the Co-ordinate Bench of this Tribunal in assessee s own case for A.Y.2016-17 2022 (2) TMI 1283 - ITAT MUMBAI had indeed accepted to the plea that working capital adjustment shall be eligible to the assessee and the same shall be reckoned for the difference in working capital levels between the comparable companies and the assessee. Admittedly, the assessee had indeed furnished the workings for working capital adjustments before the ld. TPO as is evident - We direct the ld. TPO to grant working capital adjustment while determining the ALP of provision of marketing support related services to Red Hat US. The ground No.18 raised by the assessee for A.Y.2012-13 is allowed for statistical purposes. Inclusion and exclusion of certain comparables - Exclusion of Infobeans Technologies Ltd. from the final list of comparables as it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee. Exclusion of Ingenuinity Gaming Solutions - In absence of segmental data for the software development segment alone, the same cannot be held to be comparable with the assessee in IT segment. Accordingly, we direct the ld. TPO to exclude the same from the list of comparables. The segmental data for software development services segment alone also was not available in respect of this comparable. Hence, we direct the ld. TPO to exclude this company from the final list of comparables. As stated earlier, once the aforesaid two comparables are excluded and working capital adjustments are given, the ld. AR submitted that it would not be required to go into other grounds as the assessee would be well within the tolerance band of /-5% range. Hence, the ground Nos.5-7 are not hereby adjudicated and they are left open.

Summary

Issues:
1. Working capital adjustment for provision of marketing services.
2. Working capital adjustment for provision of software development services.
3. Inclusion and exclusion of comparables in transfer pricing analysis.

Working Capital Adjustment for Provision of Marketing Services (A.Y. 2012-13):
The Appellate Tribunal considered the appeal for A.Y. 2012-13 focusing on working capital adjustment sought by the assessee concerning the difference in working capital levels between comparable companies and the assessee in the provision of marketing services to Red Hat US. Referring to a previous decision in the assessee's own case for A.Y. 2016-17, the Tribunal directed the Transfer Pricing Officer (TPO) to grant the working capital adjustment. The Tribunal acknowledged the workings provided by the assessee before the TPO and allowed the appeal for statistical purposes.

Working Capital Adjustment for Provision of Software Development Services (A.Y. 2013-14):
In the appeal for A.Y. 2013-14, the Tribunal addressed the working capital adjustment issue concerning provision of software development services. The Tribunal noted that the assessee had submitted workings for working capital adjustments before the TPO and directed the TPO to grant the adjustment to account for differences in levels between comparable companies and the assessee. The appeal on this ground was allowed for statistical purposes.

Inclusion and Exclusion of Comparables in Transfer Pricing Analysis:
Regarding the inclusion and exclusion of certain comparables, the Tribunal deliberated on the exclusion of two companies, Infobeans Technologies Ltd. and Ingenuinity Gaming Solutions. For Infobeans Technologies Ltd., the Tribunal found it functionally dissimilar to the assessee based on its services and extraordinary growth during the year. Citing a previous order in the assessee's case, the Tribunal directed the TPO to exclude Infobeans Technologies Ltd. from the final list of comparables. Similarly, for Ingenuinity Gaming Solutions, the Tribunal observed the company's diverse services and exceptional growth, directing the TPO to exclude it from the final list of comparables. With the exclusion of these two companies and working capital adjustments, the Tribunal concluded that the assessee would fall within the tolerance range of +/-5%, thereby allowing the appeals for statistical purposes.

In conclusion, the Appellate Tribunal's judgment addressed various issues related to working capital adjustments and the inclusion/exclusion of comparables in transfer pricing analysis for the respective assessment years, providing detailed reasoning and directions for each issue to ensure a fair resolution in line with legal precedents and submissions made by the parties involved.