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TMI Blog2023 (1) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... anding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loan and advances to international transaction would amount to double taxation. Hon ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. 2018 (2) TMI 1151 - ITAT DELHI - we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Working capital adjustment for computing the margin of the comparables - HELD THAT:- As decided in Huawei Technologies India P. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE there would remain no comparable uncontrolled transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst that the use of information under section 133(6) of the Act, which tantamounts to choosing secret comparable companies whose information were not available in public domain while undertaking the TP study for the respective financial year and without prejudice. not sharing the responses received under section 133(6) with the Appellant. 2.5 Conducting a fresh comparability analysis by rejecting certain filters applied by the Appellant in the TP documentation as below: * Research and development (R&D) > 3% of sales * Net fixed assets > 200% of sales 2.6 Applying additional / modified filters in the fresh comparability analysis undertaken as below: * Companies with export service income > 75% of sales were selected * Companies whose income from core service > 75% of sales were selected (the Appellant had also applied this filter with a lower threshold of 50%) * Companies with employee cost > 25% of operating cost were selected * Companies with different financial year ending were rejected 2.7. Using data, which was not contemporaneous, and which was not available in the public domain at the time of preparing the TP documentation. 2.8 Application of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies 3. That on the facts and in the circumstances of the case, the learned Panel and the learned AO erred in making an adjustment of INR 1,954,655 in respect of notional interest on outstanding receivables from associated enterprises (`AEs') to the income of the Appellant by considering overdue receivables from AEs as a separate international transaction under the provisions of section 92B of the Act. 3.1 That without prejudice, the learned AO / Panel ought to have considered the weighted average realization period of receivables for the Appellant, which is only 28 days in respect of the SWD services segment and 29 days in respect of the MSS segment. 3.2 That without prejudice, the learned AO / Panel erred in ignoring that, if at all a TP adjustment has to be sustained with respect to notional interest on overdue receivables. interest should be computed using LIBOR as against SBI short term deposit rate. 4. That on the facts and in the circumstances of the case, the learned Panel and the learned AO erred in not providing working capital adjustment for determining the arm's length price while relying on the judicial precedents based on a fact pattern, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,814/- Reimbursement of expenses received - others 52,63,595/- Remittance made on behalf of employees towards RSU 12,74,20,517/- Reimbursement of expenses paid towards ESPP Rs.5,90,21,834/- 2.4 The Ld.TPO noted that the assessee used TNMM as the most appropriate method and OP/OC as PLI to compute its margin under SWD and ITES segment. The assessee computed its margin at 11.4% for SWD segment and 7.99% for MSS segment. The assessee used following comparables under both the segments having SWD Segment: Sl.No. Name of the company Weighted average 1. CG-VAK Software & Exports Ltd. 9.83 2. Cigniti Technologies Ltd. 10.97 3. Kals Information Systems Ltd. 10.76 4. Melstar Information Technologies Ltd. -3.43 5. Mindtree Ltd. 20.84 6. Persistent Systems Ltd. 31.06 7. RS Software (India) Ltd. 28.85 8. TVS Infotech Ltd. 3.58 9. Tata Elxsi Ltd. 18.46 10. Tera Software Ltd. 13.14 11. Akshay Software Technologies Ltd. 0.04 12. Evoke Technologies Pvt. Ltd. 5.47 13. R Systems International Ltd. 24.36 14. Sasken Communication Technologies Ltd. 27.83 35th Percentile 9.83 Median 12.06 65th Percentile 20.84 MSS segment: Sl.No. Name of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. E-Zest Solutions Ltd. 10.87 3. Rheal Software Pvt. Ltd. 14.50 4. CG-VAK Software & Exports Ltd. 18.50 5. R S Software (India) Ltd. 20.87 6. Larsen & Toubro Infotech Ltd. 24.83 7. Nihilent Technologies Ltd. 26.36 8. Cigniti Technologies Ltd. 27.34 9. Inteq Software Pvt. Ltd. 28.20 10. Persistent Systems Ltd. 30.89 11. Infobeans Technologies Ltd. 32.42 12. Thirdware Solution Ltd. 36.90 13. Infosys Ltd. 38.61 14. Aspire Systems (India) Pvt. Ltd. 39.28 15. Cybage Software Pvt. Ltd. 66.45 35th Percentile 24.83 Median 27.34 65th Percentile 3 0.89 MSS Segment: Sl. No. Name of the Company Mark-up on Total Costs (WC-unadj) (in %) 1. Quadrant Communications Ltd. -0.34 2. Esha Media Research Ltd. -1.60 3. Goldmine Advertising Ltd. 5.94 4. Pressmine Advertising Ltd. 12.99 5. Ugam Solutions Pvt. Ltd. 17.75 6. Majestic Research Services & Solutions Ltd. 20.94 7. Killick Agencies & Marketing Ltd. 20.99 8. Scarecrow Communications Ltd. 23.12 9. Irunway India Pvt. Ltd. 25.09 35th Percentile 14.14 Median 17.75 65th Percentile 20.94 2.7 The Ld.TPO thus proposed the adjustment under both the segments being the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d herein are only pressed: 4. Ground No.2.10: That RS Software (India) Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd., Inteq Software Pvt. Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd. and Cybage Software Pvt. Ltd. ought to be excluded on account of the companies being functionally dissimilar to the assessee. 5. Ground No. 2.11: That the Ld.TPO erred in excluding Akshay Software Technologies Ltd, Sasken Communication Technologies Ltd. and Evoke Technologies Pvt. Ltd., even though the same are functionally comparable to the assessee. 6. Ground No. 2.12: That Killick Agencies & Marketing Ltd., Scarecrow Communications Ltd. and iRunway India Pvt. Ltd. ought to be excluded from the final list of comparables as the companies are functional dissimilar to the assessee. 7. Ground No. 2.13: That Cheers Interactive India Pvt. Ltd., MCI Management India Pvt. Ltd. and Showhouse Event Management India Pvt. Ltd., ought to be included in the final list of comparables as the companies are functionally comparable to the assessee. 8. Ground No. 3: Notional interest on delayed receivables computed by the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcompany agreement is compensated with a cost plus arm's length mark-up of 8% for the provision of the above services. Assets owned: Characterisation: Based on the facts as presented in the above analysis of functions performed, assets employed and risks assumed by ARM India, it is possible to characterize ARM India as a contract service provider engaged in the provision of contract software development services predominantly to ARM UK and a small portion of the software development services to ARM US. Based on the facts as presented in the functional analysis, ARM India can be characterized as a service provider engaged in rendering marketing and sales support services to ARM UK. ARM India bears limited risks associated with undertaking such activities. The functions performed by ARM India, risks assumed and assets used, do not lead to development or creation of any non-routine intangibles by ARM India. 11. Ground No.2.10: is raised by the assessee seeking exclusion of following comparables for functional dissimilarities: * RS Software (India) Ltd., * Larsen & Toubro Infotech Ltd., * Nihilent Ltd., * Inteq Software Pvt. Ltd., * Persistent Systems Ltd., * Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. Infobeans Technologies Ltd.: It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is specialised in business applications development for web and mobile. This company provides software engineering services primarily in Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. He placed reliance on page 1668 of annual report paper book. The services rendered by this company are different from the routine low end software development services rendered by the assessee as a captive service provider to its AE. The Ld.AR further submitted that, segmental details of such diverse activities carried on by this company are not available. He thus prayed for exclusion of this company from the final list. 15. Thirdware Solutions Limited It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exclude L&T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP. 16. When we examine profile of L&T from its financials, available at pages 6, 7 & 11 of the paper book, it is into providing application development and maintenance services providing digital solutions such as big data analytics, enterprise computing, cognitive computing, infrastructure management services and enterprise solutions. It has also been awarded and recognized by various forums for providing such niche services in the field of innovation in information technology category, analytics solutions/services etc., explained at page 11 of the paper book. 17. When we examine Notes forming Parts of Accounts at page 116 of the paper book, it is evident that L&T is having two segment accounts, namely, (i) Services Cluster Segment which in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year." 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- ( page 129 of PB-2) , which has not been allocated into three segments, and thus the segmental result are distorted. 6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L&T is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWARE) 40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable. 41. Perusal of Notes - Additional Information and Profit & Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head 'software services from local unit', 'export of software services', 'revenue from subscription & train ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the Tribunal in case of Pub Matic India (P.) Ltd. (supra). So, in view of the matter, we order to exclude Infobeans from the final set of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-à-vis the taxpayer which is a routine software development service provider working on cost-plus mark up model, henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Analytics, Big Data, Cloud, Mobile, Machine Learning, and IoT. He placed reliance on page 1420, 1421, 1422, 1391 of the annual report paper book. The Ld.AR submitted that as a part of Aepona acquisition, this company acquired development centers in Belfast, UK and in Colombo, Sri Lanka during the year under consideration. He placed reliance on page 1420, 1421 of the annual report paper book. He thus prayed for exclusion of this company from the final list. The Ld.AR submitted thus submitted that Persistant Systems Ltd, is not functionally similar with that of assessee who is a captive service provider to its AE. 20. Infosys Ltd.: It is submitted that this company is functionally dissimilar to the assessee on various counts, and therefore, it ought to be rejected from the final list of comparables. It is submitted that the Ld.TPO erred rejected contentions of the assessee and upheld the inclusion of the company in the final list of comparables. It is submitted that this company renders services like business IT services comprising of application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. vs. DCIT in ITA-TP.No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016- 17. On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 21. Before us, the Ld.DR has not been able to place anything on record contrary to the above submissions by the Ld.AR. We of the view that with such varied functions, these companies cannot be compared with assessee before us, which is a captive service provider. We accordingly direct the Ld.AO/TPO to exclude Persistent Systems Ltd., and Infosys Ltd. from the final list. 22. Aspire Systems (India) Pvt. It is submitted that, this company is functionally not comparable with the assessee as it earns income from power generation. The Ld.AR placed reliance on page 127 of Annual Report. The Ld.AR submitted that, the company owns significant intangibles in form of goodwill, customer contracts. He placed reliance on page 2077 & 2087 of annual report paper book in support. It is submitted that Applied Development Software (India) Pvt.Ltd., and Pure Apps Consulting Services Pvt. Ltd., amalgamated with the company that lead t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development activities as provided by the assessee. The Ld.AR further submitted that, this company has incurred significant expenses in foreign currency of 37.68%, 33.27% and 37.47% of its total expenditure during the FYs 2015-16, 2014-15 and 2013-14, respectively, which suggests that is engaged in provision of onsite services. And that, during the FY relevant to assessment year under consideration, this company acquired GNet Group LLC, a business intelligence and analytical company, and Intellect Bizware Services Pvt. Ltd., specialising in ERP and enterprise innovation. The Ld.AR submitted that, these acquisitions are bound to have a significant impact on the financials of the company. The Ld.AR thus submitted that, for all the above reasons this company cannot be considered to be comparable with. He relied on the decision of Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. v. ACIT (supra) On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bench of this Tribunal in Red Hat India Pvt. Ltd. v. ACIT (supra). We are of the view that, based on the functions performed by this company as submitted by the Ld.AR and the observations of Hon'ble Mumbai Tribunal, this comparable deserves to be excluded from the final list. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Nihilent Technologies Ltd from the final list. 24. Cybage Software Pvt.Ltd. It is submitted that this company is engaged in the provision of diversified services which include product engineering, testing & quality assurance services, specialized services, support services, etc. It is submitted that this company is engaged in product development and has developed a product called 'excelshore' apart from providing spectrum of services including ITeS and BPO services and that segmental information of the diverse business functions undertaken by the company is not available. The Ld.AR submitted that this company is making super normal profits and that it is not reflective of the performance of the industry in which it operates. Particulars FY 2013-14 FY 2014-15 FY 2015-16 OP/OC 68.82% 67.75% 62.04% Reliance in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware (I) Pvt.Ltd, from the final list. Accordingly this ground raised by the assessee stands allowed. 26. Ground No. 2.11: That the Ld.TPO erred in excluding Akshay Software Technologies Ltd, Sasken Communication Technologies Ltd. and Evoke Technologies Pvt. Ltd., even though the same are functionally comparable to the assessee. It is submitted that this company is engaged in providing software development services. It is submitted that these comparables were not considered by the Ld.TPO as they did not appear in the search matrix carried out by him, which has been upheld by the DRP. He placed reliance on the decisions of coordinate bench of this Hon'ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this Tribunal in case of Prism Networks Pvt. Ltd.(supra) observed and held as under: 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the order passed by authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra) observed and held as under: Further, we note that this company is entirely in a different activity with that of the assessee. Undisputedly, this company is acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder propulsions and other equipments and machineries. As observed by coordinate bench in case of this Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd.(supra) this company is functionally not similar with that of the assessee. We therefore direct exclusion of this company from the final list. 29. Scarecrow Communications Ltd. It is submitted that this company has operated without having a single employee during the financial year 2015-16. The company acts as an intermediary in providing its services which is contrary to the activity undertaken by the assessee as a marketing support service provider. The company having operated without a single employee shows that the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation available in public domain. Accordingly this ground stands allowed for statistical purposes. 32. Ground No. 3 is in respect of notional interest on delayed receivables computed by the Ld.TPO. 32.1 The Ld.AR submitted that the amounts outstanding have been settled by the AE on an on-going basis in the normal course of business having regard to economic and commercial factors. Since the outstanding receivables related to the SWD and the MSS services rendered by the assessee, the assessee submits that, the determination of ALP of the outstanding receivables is not warranted as the same is subsumed in the ALP of the principal transaction. The assessee also submits that the outstanding receivables cannot be made subject matter of TP adjustment as the same is not covered under the provisions of Section 92B of the Act. She placed reliance on decision of coordinate bench of this Tribunal in case of Avnet India (P.) Ltd. v. DCIT reported in (2016) 65 taxmann.com 187, wherein it was observed as under: "8.There is no dispute that the transaction in question falls within the ambit of international transactions u/s 92B of the IT Act. However, this transaction is not an independen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include-- ...... (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' . 32.5 Ld.CIT.DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transaction. 32.8 This Bench referred to decision of Special Bench of Kolkotta Tribunal in case of in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15- 7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 32.9 Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loan and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & 2200/Bang/2016 (AY 09-10 & 11-12). 33.2 We have heard the submissions of both sides on this issue based on the records placed before us. 33.3 We note that, this issue has been considered by this coordinate bench of this Tribunal in the case of Huawei Technologies India P. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein, it was held as under: "10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submisSions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, 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)transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 1. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to 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. 2. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or reduce the amount of cash surplus which it is able to invest. Note that the interest sate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: * A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) * This time gap is calculated as: the period 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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate 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 compari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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