2023 (10) TMI 1184 - AT - Income Tax

TP Adjustment - Disallowing economic adjustments for difference in working capital employed by assessee and its comparables - Comparability analysis - HELD THAT - For negative working capital of the comparables, this issue has been settled in the case of Software AG (India) Pvt. Ltd 2015 (11) TMI 1895 - ITAT PUNE and for this, even the OECD guidelines also confirmed the position. In the present case and noted that the Atmel India CDS segment operates with relatively favourable working capital position than that of comparable companies and as a result of this Atmel India working capital percentage on operating cost turns out to be negative i.e. -9.71%. We noted that this fact does not hamper from claiming of working capital adjustment as the Tribunal is consistently allowing this claim as held in the case of Software AG (India) Pvt. Ltd., supra. Hence, we direct the TPO to allow the claim of assessee accordingly. This issue of assessee s appeal is allowed. TPO rejecting Akshay Software Technologies Limited - As before us, argued that Akshay Software Technologies Ltd., is involved in procurement, installation, implementation, support and maintenance of ERP products services. It was also argued that Akshay Software Technologies Ltd., is financially comparable as it is engaged in providing computer software services with the assessee company. Actually this fact needs to be verified whether the Akshay Software Technologies Ltd., is comparable with the functions of the assessee or not. Hence, this issue needs to be referred back to the file of the TPO who will find out whether Akshay Software Technologies Ltd., is comparable to the assessee or not. R Systems International Ltd. rejected as adopted statutory year ending on 31 st December, 2012 as financial year as against the financial year ending for tax 31 st March, 2013 in the present year - We noted that this does not make any difference whether a company is maintaining its books of accounts for the December ending or March ending. Only a suitable adjustment has to be made in view of different fiscals. Hene, we direct the TPO to take this company as comparable after making suitable adjustments. We direct the TPO / AO accordingly. Appeal filed by the assessee is partly-allowed for statistical purposes.

Summary

Issues Involved:
1. Working Capital Adjustment
2. Rejection of Comparables by Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP)

Summary:

1. Working Capital Adjustment:
The assessee, Atmel R&D India Private Limited, contested the TPO's rejection of working capital adjustment, arguing that the TPO erred by not allowing economic adjustments for differences in working capital employed by the assessee and its comparables. The TPO dismissed the claim, stating that the adjustment was only relevant if the assessee's working capital was negative, which was not the case. The DRP upheld this decision. However, the Tribunal found merit in the assessee's argument, noting that the working capital percentage on operating cost was negative (-9.71%) and directed the TPO to allow the working capital adjustment, referencing the decision in Software AG (India) Pvt. Ltd.

2. Rejection of Comparables by TPO and DRP:
- Akshay Software Technologies Limited: The TPO rejected this company as a comparable, citing its predominant engagement in onsite development, whereas the assessee was engaged in offshore development. The DRP upheld this rejection. The Tribunal remitted the issue back to the TPO for verification of functional comparability, referencing the decision in Qualcomm India Pvt. Ltd.
- R Systems International Limited: The TPO and DRP rejected this company due to its different financial year ending (31st December, 2012) compared to the assessee's financial year ending (31st March, 2013). The Tribunal directed the TPO to consider this company as comparable after making suitable adjustments in line with Rule 10B(3) of the Income Tax Rules, emphasizing that the difference in fiscal year endings does not materially affect comparability.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the TPO to reconsider the working capital adjustment and the inclusion of Akshay Software Technologies Limited and R Systems International Limited as comparables after appropriate adjustments.