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TMI Blog2015 (4) TMI 722X X X X Extracts X X X X X X X X Extracts X X X X ..... mpact the operating margins. So however, the period of credit allowed to the customers also is a factor which would impact the working capital requirements and consequential sale realizations. In the present case, assessee has worked out the working capital difference for the time lag in recovery of the sale proceeds. In assessee’s case the said time lag is quite short inasmuch as it was also pointed out that in some cases assessee has received monies in advance. Nevertheless, assessee has placed a working regarding the difference in time lag in sale recoveries in the case of the assessee and that of the three comparables concerns selected by the TPO. The difference in such time lag is applied to the Prime Lending Rate (PLR) to compute the working capital adjustment. On this basis, an adjustment of 5.90% was determined, which was required to be applied to the operating margins of the three comparable concerns. The CIT(A), in our view, made no mistake in accepting the plea of the assessee for allowing of such working capital adjustment. The said action of the CIT(A), in our view, is liable to be affirmed. As before the CIT(A), assessee pointed out that while it calculated its ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaring a total income of ₹ 12,225/-. The Assessing Officer noted that assessee company had entered into certain international transactions with its associated enterprise based in USA towards Provision of services, whose income was liable to be computed in terms of section 92(1) of the Act having regard to their arm's length price. As a consequence, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for the purpose of computing the arm's length price in relation to the international transactions entered by the assessee with its associated enterprise. The TPO after considering the material and evidence furnished by the assessee passed an order u/s 92CA(3) of the Act dated 21.10.2008 determining the arm's length price of the international transaction at a figure higher than the stated value by a sum of ₹ 1,52,21,969/-. On receipt of the order of the TPO, the Assessing Officer proceeded to compute the total income of the assessee having regard to the arm's length price so determined by the TPO. Accordingly, in an assessment finalized u/s 143(3) r.w.s. 144C(11) of the Act dated 29.12.2008, the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost (OP/TC). The TPO accepted the selection of TNM Method as the most appropriate method for the purposes of benchmarking the international transactions entered by the assessee with its associated enterprise. However, the TPO has differed with the assessee on the adoption of the comparables. The TPO considered the following final set of comparables whose arithmetic mean of the margins was determined at 20.91%. The same is detailed as under :- Sr.No. Name of the company PLI (Operating Profit/Total Cost) 1 Compucom Software Ltd. (Seg) 28.63% 2 Sasken Network Systems Ltd. 14.15% 3 Sankhya Infotech Ltd. 19.94% ARITHMETIC MEAN 20.91% 5. Since the arithmetic mean of the margin of the comparables was higher than the margin of the assessee, the TPO worked out an amount of ₹ 1,52,21,969/- that was required to be added to the stated value of the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the working capital required by the appellant is very minimal as the payments are received either in advance or within 30 days of the invoice. The appellant has further submitted that the Assessing Officer/ TPO in the A.Y. 2006-07 has accepted the aforesaid arguments and has not made any adjustments in similar facts and circumstances of the case. The copies of the notices issued by the TPO and reply submitted by the appellant along with the order of the TPO passed in the case of the appellant for A.Y. 2006-07 was placed on record to establish the above contention. On careful consideration of the facts and the arguments made by the appellant, it is an admitted fact that the working capital adjustment has to be granted to the appellant vis-a-vis the result of the comparables adopted by the Assessing Officer. The facts very clearly show that the requirement of the working capital is much different in the case of the appellant as compared to the comparables adopted by the TPO. The denial of this adjustment by the TPO was not correct and was based on facts which were not properly appreciated. From the computation submitted by the appellant, it has been demonstrated that after th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the CIT(A), Revenue is in appeal before us. 8. The aforesaid discussion by the CIT(A) reveals that the solitary Ground on which assessee has been allowed relief is the grant of working capital adjustment. Before the TPO, assessee submitted that while considering the margins of the comparable cases, an appropriate adjustment be allowed on account of differences in the working capital position. The contention of the assessee was that it was a captive service provider rendering software and design services to its associated enterprise only. It was also pointed out that payment cycle in the case of assessee-company was much shorter as compared to the case of three comparable companies selected by the TPO. The assessee also justified the allowance of working capital adjustment on the basis of OECD guidelines. The TPO had rejected the plea of the assessee by noticing that the operating profit considered by the assessee for computing its PLI was after considering the interest expenditure and therefore there was no question of allowing any adjustment on account of working capital differences. 9. Before us, the Ld. Departmental Representative appearing for the Revenue has cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e working capital difference for the time lag in recovery of the sale proceeds. In assessee s case the said time lag is quite short inasmuch as it was also pointed out that in some cases assessee has received monies in advance. Nevertheless, at page 102 of the Paper Book, assessee has placed a working regarding the difference in time lag in sale recoveries in the case of the assessee and that of the three comparables concerns selected by the TPO. The difference in such time lag is applied to the Prime Lending Rate (PLR) to compute the working capital adjustment. On this basis, an adjustment of 5.90% was determined, which was required to be applied to the operating margins of the three comparable concerns. The CIT(A), in our view, made no mistake in accepting the plea of the assessee for allowing of such working capital adjustment. The said action of the CIT(A), in our view, is liable to be affirmed. We hold so. 12. We may also make a mention here that before the CIT(A), assessee pointed out that while it calculated its own PLI i.e. operating cost/operating profit without including any interest expenditure as it was Nil , but advertently in respect of the comparable concerns, wh ..... 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