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TMI Blog2021 (2) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm's length price [ALP]. 3. The Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the Assessee was arrived at 17.48% by the Assessee in its TP study. The operating income was Rs. 94,37,10,000/- and the Operating Cost was Rs. 80,32,95,000/-. The Operating profit (Operating income - Operating cost was Rs. 14,04,15,000/-. Thus the OP/TC was arrived at 17.48%. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm's Length. 4. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income of the Assessee by the AO. The DRP gave certain directions to exclude 3 comparable companies chosen by the TPO. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee preferred appeal before the Tribunal. 7. Aggrieved, the Assessee filed an appeal against the final order of the AO. The Hon'ble Tribunal vide its order in IT(TP)A No. 244 (Bang) 2017 dated 28.07.2017 remanded back to the AO/TPO with the following direction:- 7. We have considered the rival submissions. First of all, we reproduce para-33 of the judgment of the Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) Private Limited (Supra) as under:- "33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile in respect of the activity in question can be viewed independently from other activities cannot be subject to a per se standard of loss making company or an abnormal profit making concern or huge or mega turnover company. As explained earlier, Rule 108(2) guides the six methods outlined in cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 250/Bang/2017 in IT(TP)A No. 244/Bang 22017 dated 15.12.2017, the Hon'ble ITAT Bangalore gave the following direction:- We have considered the rival submissions. We find that at the time of hearing of the appeal, the Ld. AR of assessee has filed a chart and the appeal was heard on the basis of chart. In the said chart, the contentions are raised regarding margin computational error in the respect of two comparables i.e., Accentia Technologies Ltd. and e4e Healthcare Business Private Limited and for the remaining four comparables, the only contention raised was regarding turnover filter and there is no contention raised regarding the functionality aspect. Hence on this aspect, we find no apparent mistake in the impugned Tribunal order because it appears that no argument was made in respect of this aspect. Regarding the second aspect i.e. regarding Foreign Exchange fluctuation gain/loss, in the chart, several judgments are cited by Ld. AR of assessee but in the impugned Tribunal order although ground No. 9 is reproduced by the Tribunal on page No. 4 of the Tribunal order, there is no decision on this aspect and therefore, this is an apparent mistake in the impugned Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal stands allowed for statistical purposes. 9. Pursuant to the above, the TPO passed order dated 01 October 2018 giving effect to the order of the Hon'ble ITAT. In this order, the TPO considered foreign exchange gain as part of the operating profits of the Assessee for the purpose of comparing Assessee's profit margin with that of comparable companies. The TPO in this order made an adjustment of INR 14,30,29,841 in relation to the ALP of international transaction of provision of IT enabled services was re-determined. Based on this order of the TPO the AO issued a draft assessment order on which the assessee filed objections before DRP. 10. On objection by the Assessee to the order of the TPO/AO the DRP excluded BNR Udyog Ltd., from the list of comparable companies. Therefore only 6 out of the 10 comparable companies remained as comparable companies after the order of the DRP. In this appeal the Assessee seeks only two reliefs viz., (i) exclusion of two comparable companies Infosys BPO Ltd., and TCS e-Serve Ltd. (having turnover of Rs. 1312.14 Crores and Rs. 1578.44 Crores respectively) and (ii) delete the addition to the average arithmetic mean margin of comparables n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the IT AT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incuriam as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 27.06.2018 wherein it was held that negative working capital should be allowed. 14. On this issue, we are of the view that working capital adjustment is made for the time value of money lost when credit period is given to customers. It is the submission of the Ld. counsel for the assessee in this case that the assessee is a captive unit which is entirely funded by the AE. The assessee has no borrowings and is fully compensated by the parent on a total cost plus. The assessee has no working capital risk - in other words, it is a risk-insulated service provider to the parent. The only customer of the company is its parent company. The Ld. counsel for the assessee has relied on a host of ITAT decisions, the main decision being that of M/S. Software AG Bangalore Technologies Pvt. Ltd. (supra) which in turn has relied on the decision of ITAT Hyderabad in the case of Adaptec (India) Private Limited and contended that no negative working capital adjustment is called for. The Ld. DR's reliance is on the decision in the case of Technotree Convergence P. Ltd. (supra) wherein it was held that negative working capital adjustment has to be allowed. 15. Comparables chosen operate under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware AG Bangalore Technologies Pvt. Ltd. and therefore we are inclined to delete the negative working capital adjustment. In determining ALP under TNMM, the correct approach would be to look at the costs incurred by the assessee only and should not impute any additional cost as done by TPO, which indirectly enhances the ALP artificially. The contrary view expressed in decision cited by the learned DR takes the view that Working capital adjustment is required in all cases as any credit extended to customers will result in cash locked up and will result in the assessee borrowing money from the banks and incur additional cost towards interest on these borrowings which cost will have effect on the price charged. It is the reasoning in these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed, whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal, an entity having higher work ..... X X X X Extracts X X X X X X X X Extracts X X X X
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