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TMI Blog2020 (2) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... ce [ALP]. In this appeal, we are concerned with determination of ALP in respect of international transaction of rendering SWD services and ITeS. 3. We shall first take up for consideration determination of ALP in respect of provision of SWD services. As far as provision of SWD services is concerned, the Transaction Net Margin Method (TNMM) was adopted as the Most Appropriate Method (MAP) for determining the ALP. The Profit Level Indicator [PLI] chosen for the purpose of comparison of the assessee's profit margin with the comparable companies was Operating Profit to Operating Cost [OP/OC]. The OP/OC of the assessee was 13.75%. The assessee had chosen 22 comparable companies in its TP study and the average arithmetic profit margin of those comparable companies was 10.82%. The assessee claimed that since its profit margin of 13.75% was much higher than the comparable companies the price charged in the international transaction had to be regarded as at arm's length. 4. The Transfer Pricing Officer (TPO), to whom the question of determination of ALP was referred by the Assessing Officer (AO) as mandated by the provisions of Sec.92CA of the Act, however, chose a set of 8 comparable com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition suggested by the TPO, to the extent it was sustained by the DRP was made to the total income of the Assessee. Aggrieved by the aforesaid addition on account of determination of ALP, and the consequent addition to the total income of the Assessee, the Assessee is in appeal before the Tribunal. 7. At the time of hearing, the ld. counsel for the assessee submitted that out of 7 comparable companies that remain after the order of DRP, the assessee seeks exclusion of 4 comparables viz., (i) Infosys Ltd., (ii) Larsen & Toubro (L&T) Infotech Ltd., (iii) Persistent Systems Ltd. and (iv) Thirdware Solutions Ltd. 8. The ld. counsel for the assessee brought to our notice that a decision of ITAT Bangalore Bench rendered in the case of LG Soft (P) Pvt. Ltd. in IT(TP)A No.3122/Bang/2018 for the AY 2014-15 dated 28.5.2019, which is a decision rendered in the case of SWD services provider such as the assessee, in whose case also the TPO had chosen similar/same set of comparable companies as was chosen in the case of the Assessee and the orders were also in relation to the same Assessment Year as that of the Assessee in the present appeal. In the aforesaid decision, 2 out of the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid order and in the subsequent order in MP No.95/Bang/2019 dated 27.9.2019, comparability of this company was considered and the Tribunal excluded it from the list of comparable companies observing as follows:- "10A. The assessee has sought exclusion of M/s L & T Infotech Ltd on the ground that there were extraordinary events during the year, it possesses brand and intangibles, it has not provided segmental information and it has got subcontracting expenses. The Ld A.R submitted that the above said company has been excluded by the co-ordinate bench in the case of Metric Stream Infotech P Ltd (IT(TP)A No.1418 & 2735/Bang/2017) relating to AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (IT(TP)A No.1506/Bang/2016 relating to AY 2011-12). The Ld A.R submitted that there is no change in facts in this year also and accordingly prayed for exclusion of the above said company. 10A.1 We heard Ld D.R and perused the record. We notice that M/s L & T Infotech Ltd has been excluded by the coordinate bench in the case of Metric Stream Infotech P Ltd (supra) for AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (supra) for AY 2011-12. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. If this has not been, the Tribunal as a fact-finding body has to take into account all the relevant material and determine the question as per the statutory regulations. We therefore remand the question of inclusion of this company as a comparable company to the TPO for fresh consideration in the facts brought to our notice referred to above and after affording due opportunity of being heard to the assessee. 14. As far as inclusion of the company I2T2 India Ltd. is concerned, this company was rejected by the assessee itself in the TP study and for the first time, the assessee seeks to include this company as a comparable company by pointing out that this company is functionally comparable with SWD services provider such as the assessee and that on basis of filters applied by the TPO. Our attention was drawn by the ld. counsel for the assessee to the decision of the ITAT in the case of LG Soft (India) Pvt. Ltd. (supra) wherein this Tribunal in para 12 found that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.5.1 Having considered the submissions, we note that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially affect the price, cost or profits. The 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparable uncontrolled transactions. In this context, to be comparable means that: * None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or * Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 19. The Tribunal analysed Paragraph 13 to 16 of the aforesaid OECD guidelines, which highlights the need for working capital adjustment as follows:- "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 21. The CIT(A) in the decision cited by the learned counsel for the Assessee also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No.2112/Mds/2011 (2013) 38 taxmann.com. The Tribunal held that the said decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. 22. The Tribunal further held that in the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment on account of working capital adjustment. 24. In the case of the Assessee in this appeal, neither the TPO nor the DRP have gone into the quantum of adjustment that is to be given towards working of working capital adjustment, we are of the view that it would be just and appropriate to remand the issue of granting of working capital adjustment to the TPO/AO for fresh consideration in accordance with law after due opportunity of being afforded to the Assessee. We hold and direct accordingly. 25. No other grounds were pressed for adjudication in the SWD services segment. We direct the TPO/AO to compute ALP as per the directions given above and after affording opportunity of being heard to the Assessee. ITeS Segment 26. As far as ITeS segment is concerned, the most appropriate method was TNMM and PLI chosen for comparison was OP/OC. The assessee's OP/OC was 12.57%. The assessee had chosen 11 comparable companies, their average arithmetic mean profit margin was 13.67% and assessee considered the transaction as at arm's length taking into account the permissible deviation to the profit margin permitted under 2nd proviso to section 92C(2) of the Act. The TPO did not accept the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompared to the assessee having turnover of Rs. 26.25 crores only. Further, it is submitted that it has a brand value and it employs substantial portion of its fixed assets in intangible assets. He submitted that the comparability of the said company had come up for consideration in the assessee's own case for the earlier A.Y 2011-12 and also in 2013-14. In A.Y 2011-12, the Tribunal had directed its exclusion while in 2013- 14, the DRP itself had directed its exclusion and the Revenue has not filed any appeal as against the same. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of Aginity India Ltd. (supra) wherein the said company has been directed to be excluded." Microland Ltd. "60. As regards Microland Ltd is concerned, the case of the assessee is that it is into business of rendering hybrid IT Infrastructure and it also undertakes R&D activities and has achieved abnormal growth of 149% during the current A.Y. Without prejudice to the above, the assessee also submitted that the correct margin of this company should be considered. 61. The learned DR, however, submitted that this company was taken up by the Assessee itself as compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information on RPT, it would not be proper to exclude this company and the AO should have used his powers u/s. 133(6) of the Act to call for the required details from this company. We therefore remand the question of comparability of this company to the TPO/AO for fresh consideration with a direction to get the required information u/s. 133(6) of the Act and thereafter decide the issue afresh in accordance with law, after opportunity to the assessee. 33. As far as Informed Technologies (I) Ltd. is concerned, it is the contention of the assessee that this company was functionally comparable as it was rendering BPO services, but the TPO held that it was functionally different. When the details of functional comparability were pointed out to the DRP, the DRP held that this company fails service income filter of more than 75% of the total income. It is the plea of assessee that while applying this filter, the other income portion was also considered which is incorrect. It was submitted that there was only one reportable segment for this company viz., BPO services and hence this company should have been taken as a comparable. We are of the view that based on these submissions, the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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