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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 ..... an 100 crores and less than 1/10th of the turnover of the aforesaid two comparable companies. Therefore the aforesaid two companies are directed to be excluded from the list of comparable companies. Grant of negative working capital adjustment - HELD 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 working capital will incur more interest cost which will reduce profitability. Hence no importance shall be given to pricing aspect. Since the assessee does not have any working capital risk, the question of negative working capital does not arise TPO is directed to compute the ALP in the light of the directions as given above, after affording Assessee opportunity of being heard. - N. V. Vasudevan , Vice President And B. R. Baskaran , Member (A) For the Appellant : Padamchand Khincha, CA For the Respondents : Neera Malhotra, CIT (DR) ORDER N. V. Vasudevan, Vice President This is an appeal by the Assessee against the order dated 1.10.2018 of DCIT-3(1)(1), Bengaluru, relating to AY 2012-13. 2. The grounds raised in the appeal by the Assessee are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90 0.05 6. Microgerietic Systems Ltd. 1,29,93,217 1,08,63,390 19.61 7. T C S E-Serve Ltd. 15,78,44,000 9,64,28,000 63.69 8. B N R Udyog Ltd.(Seg)(Medical Transcription) 1,47,04,000 97,87,000 50.61 9. Excel InfowaysLtd.(Seg)(IT/B VPO) 790,96,95,000 559,06,04,000 29.79 10. e4e Healthcare Services Pvt Limited 89,50,04,209 74,59,23,078 19.85 Average PLI 28.11% 5. The TPO computed the Addition to total income on account of adjustment to ALP as follows: 12.4 Computation of Arm's Length Price: The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: Arm's Length Mean Margin on cost 28.11% Less: Working Capital Adjustment -3.17% (As per Annex. C) Adjusted margin 31.21% Operating Cost 80,32,95,000 Arms LengthPrice(ALP) 1,05,45,65,676 131.28% ( of Operating Cost) Price Received 90,10,93,000 Shortfall being adjustment u/s 92CA: 15,34,72,676 5% of price received 4,50,54,650 Since the shortfall is exceeding 5% of the International Transaction, adjustment is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this basis, the assessee is requesting exclusion of 2 companies i.e., Infosys BPO Limited and TCS e4e Healthcare Business Services Private Limited (Supra). The assessee is also requesting for exclusion of 3 comparable companies on the basis of low turnover i.e., less than 1/10th turnover of assessee company and these companies are; 1) Informed Tech. India Limited 2) Microgenetic Systems Limited 3) BNR Udyog Limited As per the judgment of the Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) Private Limited (Supra), the matter should go back to the file of the AO/TPO to examine these aspects as to whether the difference in turnover is affecting the price or cost and this attempt is also to be made regarding reasonable adjustment to eliminate the material effect of such difference in turnover and thereafter only, any comparable can be excluded on the basis of turnover filter i.e., whether high turnover or low turnover. We also feel that when the matter is to be re-decided by the AO, he will examine this claim of this assessee also that there is margin computation error in respect of 2 comparables i.e., M/s. Accentia Tech. Limited and M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause if this is done, it will give an absurd result. Hence we feel it proper to restore back this matter to the file of AO/TPO for fresh decision after examining this aspect and we hold that if the foreign exchange gain/loss is in respect of the present year turnover then the same should be considered as profit/loss of the current year for working out the profit percentage of the tested party but if such foreign exchange gain/loss is not in respect of current year turnover then the same should be considered in the case of tested party. Similarly, in the case of comparable companies also, if there is any foreign exchange gain/loss and this information is available in the annual report of the concerned company as to whether the fluctuation gain/loss is in respect of the current year turnover or earlier year turnover then the same treatment should be given to foreign exchange gain/loss in case of comparable company also but if such information is not available in the annual report of such company then it should be taken as foreign gain/loss in respect of earlier year's turnover because in most of the cases, such foreign exchange gain/loss is in respect of turnover of the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 12. In the light of the aforesaid decision of the Tribunal, we exclude the two comparable companies Infosys BPO Ltd., and TCS e-Serve Ltd. (having turnover of ₹ 1312.14 Crores and ₹ 1578.44 Crores respectively) by application of the turnover filter. The Assessee's turnover is only ₹ 94 crores (less than 100 crores and less than 1/10th of the turnover of the aforesaid two comparable companies. Therefore the aforesaid two companies are directed to be excluded from the list of comparable companies. Grd. No. 2(c) is accordingly allowed. 13. As far as Gr. No. 2(d) is concerned, the same is with regard to grant of negative working capital adjustment. With regard to this ground regarding grant of negative working capital, the Ld. counsel for the assessee has placed reliance on the decision of the coordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed party and each of the potential comparables to differ materially in the amount of working capital (inventory, accounts receivables and payable). Such differences are mainly caused due to differences in the terms of purchase and sale, levels of inventory etc. For example: If the business advances a trade credit of (say) 60 days, its cash gets locked up for 60 days and reduces the working capital. It will have to borrow from open market to meet its working capital requirement, and hence incur expenses. Similarly, if it avails of trade credit of 60 days, it has surplus cash at its disposal. It will need to borrow less money to fund operational requirements. Hence, working capital position affects the additional cost incurred by a business by way of interest on borrowing from the open market. Working capital adjustments seeks to adjust for the differences in time value of money between tested parties and potential comparables with an assumption that differences should be reflected in profits Working capital adjustment has a strong rationale in economic theory. It facilitates to increase the comparability between the tested party and comparables working in an industry which is compet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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