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TMI Blog2020 (1) TMI 616X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Working Capital Adjustment on actual basis and the TPO having arrived at 5.97%, ought to have adopted the same instead of restricting it to 1.71%. in view of the same, we deem it proper to remand this issue to the file of the TPO/A.O. for working out the ALP after giving adjustment of working capital as per the calculation of the A.O. in annexure D annexed to the transfer pricing order. This ground of appeal is accordingly allowed. - ITA No.978/Bang/2017, IT(TP)A No.1029/Bang/2017 - - - Dated:- 10-1-2020 - BEFORE SHRI A.K. GARODIA AND SHRI PAVAN KUMAR GADALE, JJ. Appellant By: S/Shri G.C. Srivastava Umashankar, Advocates. Respondent By: Smt. R. Premi, JCIT (D.R) ORDER SHRI PAVAN KUMAR GADALE, J. These are the cross appeals filed by the assessee and revenue against the order of Commissioner of Income Tax (Appeals)-5, Bangalore passed under Section 143(3) r.w.s. 144C(3) and 250 of the Income Tax Act, 1961 (the Act) Since the issues are common, they are Heard together and disposed off by consolidated order. For the sake of convenience, we shall take up the assessee appeal and facts narrated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s * 377657435 Operating Expenses ** 337079242 Operating (Profit)/Loss 40578193 Op Profit on cost % 12.03% * Excluding other income **Excluding Exchange variation. 3.1 International Transactions (as mentioned in the 92 CE report) Sl. No. Type of transaction Amount (Rs) 1 Purchase of fixed assets - 14,07,373 2 Software Development Services 37,76,57,435 3 Reimbursement 69,51,148 1,28,34,294 Total 38,46,08,583 1,42,41,667 The TPO called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and Assessed the total income at ₹ 3,94,85,126 and passed under Section 143(3) r.w.s. 144C(1) Dt. 9.3.2015. Subsequently, the final assessment order was passed under Section 143(3) r.w.s. 144C(3) dt. 17.4.2015. Aggrieved by the assessment order, the assessee has filed an appeal with the learned CIT(Appeals) .whereas the learned CIT(Appeals) dealt on the grounds of appeal, findings of the Ao and the submissions of the assessee and has granted partial relief on and partly allowed appeal of the assessee. Aggrieved by the Cit(A) order, the assessee has filed an appeal with the Tribunal. 4. At the time of hearing, the learned Authorised Representative has argued for exclusion of four comparables and inclusion of comparable and restricted his arguments to the extent of comparables only and filed chart and Paper Book to support the submissions. Contra, the learned Departmental Representative supported the orders of learned CIT(Appeals) and filed written submissions. 5. We heard the rival contentions and perused the material on record. Prima facie, the learned Authorized Representative has argued only on the exclusion and inclusion of the comparables a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admittedly less than 75% of the total operating revenue of this company. Therefore his company has to be excluded from the list of comparable companies. It was also brought to our notice that the ITAT Bangalore in the case of Applied Materials Pvt.Ltd., in IT (TP) A.No.17 39/Bang/2016 for AY 2011-12 order dated 21.9.2016 noticing the aforesaid facts excluded this company from the list of comparable companies in the case of a software development service provider such as the Assessee. We therefore hold that this company should be excluded from the list of comparable companies. (ii) Icra Technologies ltd. (iii) Persistent Systems Ltd. and (iv) Sasken Communication Technologies Ltd. have been excluded by the Tribunal in the decision of Finastra Software Solutions (India) Pvt. Ltd. Vs. ACIT (supra). The Hon'ble Tribunal has dealt and observed at page 9 para 17 which is read as under : 17. The following 7 companies were excluded by the Tribunal ITAT Bangalore in the case of Applied Materials Pvt.Ltd., a company which is also engaged in providing software development services in IT (TP) A.No.17 39/Bang/2016 for AY 2011-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables excluded by DRP out of 9 comparables excluded by DRP and exclude 4 comparables retained by DRP and we have already held that out of 9 comparables excluded by DRP, 3 have to come back being I) Evoke Technologies Pvt. Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. Now, we decide about LGS Global Ltd. As per the tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT (Supra), this is a good comparable and therefore, we direct the A.O. and TPO to include this comparable. So, there should be 4 comparables in the final list of comparable and on the basis of that, the AO/TPO should work out the ALP. We considering the co-ordinate bench decisions, direct the TPO to exclude the 4 comparables form the final list of comparables selected for the purpose of determining the ALP. 6. The Lrd AR at the time of hearing submitted that the comparable FCS Software Solutions pvt Ltd is only pressed for inclusion, which is functionally comparable and is engaged in providing Software Development Services . The learned Authorised Representative relied on the co-ordinate bench decision Finastra Software Solutions (India) Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these two companies, appear at paras 3.6.5.1, of her order which reads as under : b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded. 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , was in our opinion, incorrect. We set aside the orders of the lower authorities in this regard and direct these two companies to be included in the list of comparables for working out the average PLI. Following the order of co-ordinate bench of this Tribunal, we direct the A.O./TPO to include these two companies in the set of comparables for determining the ALP. We considering the ratio of the co-ordinate Bench decisions, direct the TPO to include the comparable in the final list in determination of ALP. And the appeal of the assessee is partly allowed for statistical purposes. Now we shall take up the Appeal in IT(TP)A No.1029/Bang/2017. 7. The revenue has raised the following grounds of appeal : 1. The Ld. CIT(A) is not justified in giving relief on the issue of Foreign Exchange loss, which is notional in nature. 2. The Ld CIT(A) has not appreciated the fact that the loss has occurred towards statement of advance received from its holding company which is capital item and not allowable expenditure u/s.43A of the I.T. Act 1961. 3. The CIT(A) erred in law by directing the AO to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g company which is not eligible for deduction under Section 43A of the Act. Further learned CIT (Appeals) has erred in allowing foreign exchange loss which is notional in nature. Contra, the ld. AR relied on the learned CIT (Appeals) order. 9. We found the learned CIT (Appeals) has dealt on this issue at para 10 page 61 as under : 10. The ground no. 16 is against the disallowance of foreign exchange loss of ₹ 37 made by the Assessing Officer by treating the same as being notional in nature. The foreign exchange loss of ₹ 37,49,314/- was recorded on account of exchange rate differences arising on account of restatement of balance in the debtors account/EEFC account and payment/receipt of forex to/from creditors/debtors. The appellant submitted that it has been consistency following the mercantile system of accounting in accordance with AS-Il which specifies that all exchange difference on foreign currency transactions should be recognize as income or expenses in the period in which they arise. In support its contention it relied on the Apex Court's decision in the case of CIT Vs. Woodward Governors 179 Taxmann 326 wherein the Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) and ld Cit(A) fallowed the Hon ble High court decision and Granted Relief. Accordingly we are not inclined to interfere with the order of Cit (A) and confirm the same and dismiss this ground of Appeal of the Revenue. 12. The Ld Dr argued on Ground of Appeal Nos.4 to 7, that the learned CIT (Appeals) has erred in selecting the comparables which are functionally different and the learned CIT (Appeals) erred in excluding E-infochip Ltd. in the absence of segmental data. whereas the learned Authorised Representative relied on the learned CIT (Appeals) order and the decision of Saxo India Pvt. Ltd. Vs. ACIT in IT (TP)A No.6148/Del/2015 Dt. 5.2.2015 at page 22 paras 10.1 to 10.2 which is read as under : (i) E-Infochips Limited: 10.1. The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71%. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the Working Capital Adjustment. He submitted that the CIT (Appeals) also has not applied his mind to this issue but has summarily confirmed the order of the Assessing Officer and therefore it has to be set aside. 14. On going through the TPO s order as well as annexure D refered to in the transfer pricing order on Working Capital Adjustment, we find that the TPO has computed it at 5.97% but has not given any basis for restricting the adjustment to 1.71%. In various cases relating to transfer pricing adjustment, this Tribunal has been directing to give Working Capital Adjustment on actual basis and the TPO having arrived at 5.97%, ought to have adopted the same instead of restricting it to 1.71%. in view of the same, we deem it proper to remand this issue to the file of the TPO/A.O. for working out the ALP after giving adjustment of working capital as per the calculation of the A.O. in annexure D annexed to the transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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