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TMI Blog2021 (8) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. In the light of the aforesaid decision CSG Systems International (I) P. Ltd [ 2019 (8) TMI 350 - ITAT BANGALORE] we do find merit in ground raised by the Assessee and allow the same. Adjustment towards working capital differences - CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO s working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and whether segmental information in that regard is available or not. It has been submitted that as per the remaining three Tribunal orders rendered in the case of WM Global Technology Services (India) (P.) Ltd. [ 2018 (4) TMI 429 - ITAT BANGALORE] and in the case of Tecnotree Convergence Pvt. Ltd. [ 2018 (6) TMI 1688 - ITAT BANGALORE] the matter was remanded back to the TPO for fresh decision and therefore, in our considered opinion and in the facts of present case, we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. Software development services segment - We restore the matter back to the AO/TPO for fresh decision regarding the assessee s claim for exclusion of Larsen Toubro Infotech Ltd. and Persistent Systems Ltd. after providing adequate opportunity of being heard to the assessee and the issue should be decided after considering all available Tribunal orders for Assessment Year 2013-14 in respect of exclusion of these two companies. Accordingly ground Nos. 9 and 10 are allowed for statistical purposes. CG - VAK Software E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termining 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 11.81% by the assessee in its TP study. The operating income was Rs. 2,82,25,47,733/-. The assessee chose companies who are engaged in providing similar services such as the assessee. The assessee identified 16 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 the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO accepted 5 companies chosen by the assessee as comparable companies. The TPO on his own identified 5 companies as comparable with the assessee company and worked out the average arithmetic mean of their profit margins as follows: Sl. No. Name PLI 1. Infosys Ltd 45.01% 2. Kals Information Systems Ltd.(seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of software products, it incurs high sales and marketing expenses and that it has significant research & development expenditure. 11. The Ld. CIT(A) erred in law and on facts by including Persistent Systems Ltd. as a comparable to the Appellant on the ground that it is functionally comparable, whereas this comparable should have been excluded on the grounds that there exists extra-ordinary events during the year, it owns significant intangibles and that it is functionally not comparable to the Appellant. 13. The Ld. CIT(A) erred in rejecting the adjustment, provided by the Ld. TPO, for the differences in working capital of the Appellant and the comparable companies." 9. As far as ground No. 9 is concerned, the same relates to exclusion of Infosys Ltd., as a comparable company. The learned counsel for the assessee placed reliance on a decision of the ITAT Bangalore Bench in assessee's case for AY 2012-13 in IT(TP) A No. 1939/Bang/2017 wherein the Tribunal followed the decision rendered in the case of CGI Information Systems & Management Consultants (P) Ltd. Vs. ACIT (2018) 94 taxmann.com 97 (Bang Trib) which was also a decision rendered for AY 2012-13 where the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable company by applying the turnover filter. We direct that this company should be excluded as a comparable company. 13. The next grievance of the Assessee is regarding not excluding Persistent Systems Ltd. As far as exclusion of this company is concerned, the ld. counsel for the assessee drew our attention to a decision of this Tribunal rendered in the case of CSG Systems International (I) P. Ltd. v. DCIT, ITA No. 2026/Bang/2017, order dated 31.7.2016 (the Assessee in that case was also a SWD service provider such as the Assessee and the same comparables chosen in the case of the Assessee in this appeal was also chosen as comparable company by the TPO in that case) wherein the comparability of this company with the SWD services company such as the assessee came up for consideration. The Tribunal Vide para 20 of the very same aforesaid order of the Tribunal, Persistent Systems Ltd. was excluded from the list of comparable companies on the ground that these companies were engaged in diversified activities and earning revenue from various activities including licensing of products and income from maintenance contracts and there was no segmental reporting so that the operating ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-- (a) to (d) ...... (e) transactional net margin method, by which,-- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justed to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of 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 exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d needed to sell inventories to customers + (plus) the period needed to collect money from customers -(less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195 (Del-Trib) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 16. Respectfully following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly. 17. In the result, appeal by the Assessee is partly allowed. 18. As far as Revenue's appeal is concerned, the first two grounds of appeal of the Revenue reads thus:- "1. The ld. CIT(A) erred in following the ratio laid down by the Hon'ble High Court in the case of M/s. Tata Elxsi Ltd. (ITA No. 70/2009). 2. The ld. CIT(A) erred in holding that the expenses reduced from the Export Turnover must also be reduced from the Total Turnover since there is no provision under Sec. 10A for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com India Research (P.) Ltd. [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.), directed this company to be excluded in the case of assessees similar to the Assessee herein. We, therefore, find no ground to interfere with the order of CIT(A). 21. In the result, appeal by the Revenue is dismissed. 22. In the result, the appeal by the assessee is partly allowed while the appeal by the Revenue is dismissed. 23. IT(TP)A No. 1940/Bang/2017 for Assessment Year 2013-14 : This appeal by the assessee is directed against the order dated 24.08.2017 of CIT(A)-3, Bengaluru, in relation to AY 2013-14. 24. The assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec. 92-A of the Act, the assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec. 92B(1) of the Act, the transaction of providing SWD Services was "international transaction" and in terms of Sec. 92(1) of the Act, the Any income arising from an international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted margin 18.72% Operating Cost' 4,55,38,08,913 Arms Length Price(ALP) 5,40,64,27,373 119.41% of Operating Cost) Price Received 5,00,59,91,046 Variation in Price 40,04,36,327 3% of price received 15,01,79,731 Shortfall being adjustment 40,04,36,327 The above shortfall of Rs. 40,04,36,327/-(Rupees Forty Crore Four Lakh Thirty Six Thousand Three Hundred Twenty Seven Only) is treated as transfer pricing adjustment 92CA in respect of software development segment of the taxpayer's international transactions." Thus a sum of Rs. 40,04,36,327/- was added to the total income of the assessee on account of determination of ALP for provision of SWD services by the assessee to its AE. 28. The assessee did not file objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the Assessee by the AO. The AO passed the final Order of Assessment against which the assessee filed appeal before CIT(A). To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 29. At the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . C.G. Vax Software and Exports Ltd., this company was excluded because it is not only engaged in the business of computer software development, but is also engaged in product manufacturing process, owns huge intangible assets and is also engaged outsourced product development. As far as exclusion of the company by name Spry Resources India Pvt. Ltd., is concerned, the learned Counsel for assessee relied on the order of a Co-ordinate Bench of this Tribunal in the case of Synamedia India (P) Ltd., [2020] 116 taxmann.com 852 for Assessment Year 2013-14 dealt with an identical claim made by the assessee who a SWD service provider such as the assessee and in whose case also, the very same 7 comparables chosen in the case of assessee in the appeal was chosen as comparable by the TPO. On inclusion of the company Spry Resources India Pvt. Ltd., (supra) the Tribunal held as follows: "(c) Spy Resources India Pvt. Ltd., 39. This comparable was excluded by Ld. TPO by observing that this company has reported trade receivables at Rs. 7.49 crores for year under consideration whereas, in immediately preceding year, total turnover was Rs. 3.45 crores only. Ld. AR submitted that, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal No. 1276 (Bang.) of 2017, dated 3-11-2017] (para 6), (iv) WM Global Technology Services (India) (P.) Ltd. v. Asstt. CIT [2018] 91 taxmann.com 403 (Bangaluru. - Trib.) (para 6), (v) Advice America Software Development Center (P.) Ltd. v. ITO [2018] 94 taxmann.com 179 (Bang. - Trib.) (para 6)" 33. The Tribunal after considering the above decisions held as follows: 8. We have considered the rival submissions. First of all, we decide ground Nos. 9 and 10 of the appeal of the assessee. Regarding the assessee's request for exclusion of Larsen & Toubro Infotech Ltd. for software development services segment, it is the submission of the learned AR of the assessee that this issue is covered in favour of the assessee by the Tribunal order rendered in the case of Pitney Bowes Software India (P.) Ltd. (supra) for the same Assessment Year. As per Para No. 3 of this Tribunal order, the TP adjustment was made in respect of provision of software development services to the AE. In the present case also, the issue in dispute is regarding exclusion or inclusion of this comparable i.e. Larsen & Toubro Infotech Ltd. in respect of the software development services segment of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s developed by the Assessee are platforms used by this company to enable design and developing software for use by a customer in particular industry. For e.g., the product UNITRAX is a Software that enables recording keeping enabling fund and insurance companies to manage the administration of their wealth management. Based on this software the Assessee designs Software for specific needs of a customer. No product is sold off the shelf by the company. Hence the objection of the Assessee that this company is a Software Product company was rightly held by the TPO/DRP to be not valid. 18. The objection with regard to absence of segmental information has been met by the TPO by pointing out that the whole segment of SWD services was considered for comparability. The objection of the Assessee in this regard is not specific and is vague and is on an assumption that this company operates in three segments. The TPO has pointed out that there is only one segment and hence this objection in our view was rightly disregarded by the revenue authorities. 19. As far as the objections regarding presence of intangibles, it is seen from the order of the TPO that the intangibles are nothing but Op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions do not relate to AY 13-14. We can therefore safely proceed on the basis that those decisions are rendered on their facts prevailing in the relevant AY. As far as the present AY 13-14 is concerned, the plea of the Assessee for exclusion of this company on the ground that it is a software product company is held to be without any basis and is rejected. No other arguments were advanced for exclusion of this company. Hence, we uphold the orders of the revenue authorities including this company in the list of comparable companies." 9. In respect of the applicability of this Tribunal order for exclusion of Larsen & Toubro Infotech Ltd., this has been submitted by ld. AR of assessee in the chart submitted before us that on page No. 698 of Annual Report paper book, this company has debited an amount of Rs. 27,10,89,274/- as cost of bought-out items for resale. But this fact was not brought to the notice of the Tribunal in the case of Advice America Software Development Center (P.) Ltd. (supra). It has also been submitted that on page No. 706 of Annual Report paper book, this has been reported that this company is engaged in sale of services to its related parties and this f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it has to be seen that what is the quantum of sale of goods by that company and whether segmental information in that regard is available or not. It has been submitted that as per the remaining three Tribunal orders rendered in the case of Microsoft Research Lab India (P.) Ltd. (supra), WM Global Technology Services (India) (P.) Ltd. (supra) and in the case of Tecnotree Convergence Pvt. Ltd. (supra), the matter was remanded back to the TPO for fresh decision and therefore, in our considered opinion and in the facts of present case, we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. We order accordingly. 11. In respect of software development services segment, we restore the matter back to the AO/TPO for fresh decision regarding the assessee's claim for exclusion of Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. after providing adequate opportunity of being heard to the assessee and the issue should be decided after considering all available Tribunal orders for Assessment Year 2013-14 in respect of exclusion o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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