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TMI Blog2020 (12) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... irement of law and international jurisprudence seeking comparable companies. iii) Whether the Ld CIT(A) was right in rejecting the comparable when selection of comparable in a case depends in transfer pricing on assessee specific FAR analysis. iv) The ld.CIT(A) ought to have decided the comparability of the company on the basis of specific facts brought on record by the TPO in the case of the assessee. 2. Exclusion of iGate Globale Solutions ltd. from the list of final comparable selected by the TPO in ITES segment:- i) Whether the Ld CIT(A)) was right in exclude the comparable while the company has qualified all the qualitative and quantitative filters applied by the TPO. ii) Whether the ld. CIT(A) was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence seeking comparable companies. iii) Whether the Ld CIT(A) was right in rejecting the comparable when selection of comparable in a case depends in transfer pricing on assessee specific FAR analysis. iv) The ld.CIT(A) ought to have decided the comparability of the company on the basis of specific facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Price Received 464577470 Shortfall being adjustment u/s 136,642,7401 The above shortfall of Rs. 13,66,42,740/- (Rupees Thirteen Crores, Sixty Six Laths, Forty Two Thousand, Seven Hundred and Forty Only) is treated as transfer pricing adjustment u/s 92CA in respect of ITES segment of the taxpayer's international transactions." 4. On appeal by the assessee, the CIT(Appeals) excluded some of the comparables and also held that the negative working capital adjustment should not be made. It can be seen from the earlier paragraph of this order that by imputing negative working capital, the average arithmetic mean of the profit margin of the comparable companies has gone up by 6.52%. The following were the observations of the CIT(Appeals) with regard to negative working capital adjustment:- "Having considered the submissions, I have considered the facts and circumstances of the appellant during this year to find that the same is similar to that of the appellant in the immediate succeeding year i.e. Assessment Year 2012-13, in respect of which the Hon'ble ITAT has directed the AO/TPO to compute ,.working capital adjustment by following the decision of the Hon'ble Hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that Acropetal Technologies Ltd., is engaged in the business of software development and services, contract centre service and IT enabled services and the same are reported together as one segment. In the absence of segmental details made available, the company could not be treated as a comparable. The TPO, while choosing the company as a comparable, has selected its Engineering Design Segment ('EDS' for short) which is in the nature of high end IT enabled services which are in the nature of Knowledge Process outsourcing ("KPO"). The high end services provided by the company cannot be compared with the routine services provided by the Assessee. This Is a settled position and reliance can be placed on the decision of this Hon'ble Tribunal's in the case of Symphony Marketing Solutions India Pvt. Ltd.(ITA No. 1316/Bang/2012) where it was held that Acropetal cannot be considered as a comparable to assessees performing routine low end IT enabled services function. As far as exclusion of company Jeevan Scientific Technology Ltd., we find that this company was rejected by the DRP for the reason that it was engaged in diverse functions and the same were reported under one segment witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en from the annual report, coding income is contributing 15% of the total income which activities are akin to software development activity while the assessee is a mere provider of IT enabled services. The company has invested huge sums in the development of EMR software. Segmental details of its various activities are unavailable. The company further owns significant intangibles. This Tribunal in the case of Swiss Re Shared India Pvt. Ltd. v. ACIT [TS-598-ITAT-2016(Bang)-TP at paras 9-20 on pages 7- 21] where, in similar circumstances and for the same assessment year, this Hon'ble Tribunal directed the exclusion of this company from the list of comparables. Accentia Technologies Ltd. is, therefore, not comparable to the Assessee and was rightly rejected as a comparable. As far as iGate Global Solutions Ltd., is concerned, DRP rejected this company as comparable company for the reason that the details regarding its diverse functions are reported under one segment without segmental details regarding the same being made available. Therefore, the comparability of the company cannot be determined. It is seen that iGate is engaged in provision of varied services and no segmental breakup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment proposed by the TPO was included in the final assessment order. In the absence of the appeal by the revenue, the directions of the DRP has become final. The assessee's turnover is Rs. 23.76 Crores. Therefore, the AO / TPO is directed to examine whether Infosys BPO Ltd., Mindtree Limited and I-Gate Global Solutions Ltd. are to be excluded on account of DRP direction on turnover filter. In the light of above, the Ground No.7 is allowed and Ground No.12 is restored to AO / TPO." (emphasis supplied) 7. As far as ground No.3 with regard to negative working capital adjustment is concerned, the ld. counsel for the assessee has placed reliance on the decision of the coordinate Bench in the case of DCIT v. M/s. Software AG Bangalore Technologies P. Ltd., IT(TP)A No.1628/Bang/2014, order dated 31.03.2016, wherein the Tribunal held as follows:- "12. In the Cross Objection, the assessee has raised various grounds, however, at the time of hearing, the Id. AR of assessee has submitted that the only effective grounds which are prayed by the assessee are ground Nos.5 & 6 in respect of the directions given by the CIT(Appeals) for reconsideration of working capital adjustment, eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as comparables. The assessee does not agree with the learned TPO as : * The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. * The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 3*08.2012 has given a finding as under: "7.7.4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., is concerned, it is seen that in the decision cited by the learned DR in support of remanding the comparability of this company has been remanded to the TPO for fresh consideration. This company was chosen as comparable company by the TPO and the TPO has considered the financials of the ITeS segment alone for the purpose of comparability (paragaraph 7.1 of TPO's order). In the decision cited by the learned counsel for the Assessee, the Tribunal held that segmental details were not available before the revenue authorities. However in the present case, the CIT(A) has analyzed the functional details and come to the conclusion that ICRA Online Ltd. is a Knowledge Process Outsource (KPO) company which is different from Business Outsource Company (BPO) which is the line of business of the Assessee in the present case. Hence, we uphold the exclusion of this company from the list of comparable companies. 11. As far as the prayer for inclusion of iGate Global Solutions Ltd. is concerned, the stand of the Assessee before TPO was that this company renders on site serves, is a product company and there are peculiar economic circumstances and hence should be excluded from the list of compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile comparing a company to that of similar companies, it is necessary to undertake comparability adjustments. Balance sheet adjustments are intended to account for different levels of inventories, receivables, payables, interest rates etc. The most common balance sheet adjustments made to reflect different levels of accounts receivable, account payable and inventory are known as working capital adjustments. As mentioned by the OECD, comparability adjustments should not be performed on a routine or mandatory basis but rather on a case by case basis depending on the facts and circumstances. Economic rationale of Working capital of a business is the capital used in its day-to-day trading operations. Working capital is affected by numerous business incidences. It is very common for tested 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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