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TMI Blog2023 (5) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... ween assessee and AE. Respectfully following the ratios laid down in plethora of decisions hereinabove, we remand this issue back to the Ld.AO/TPO to consider the claim in accordance with law. Non-granting of working capital adjustment - HELD THAT:- DRP may be correct in denying working adjustment due to unavailability required data, however there is no merit in observations of DRP/TPO as supported by Ld.CIR DR, in denying working capital adjustment due to absence of details for working out adjustments in comparable companies chosen. If we appreciate the argument advanced by Ld.CIT.DR, there would remain no comparables for the purpose of comparability analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis. Endeavor should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines. As respectfully following decision of Huawei Technologies India (P.) Ltd. [ 2018 (10) TMI 1796 - ITAT BANGALORE] we direct working capital adjustment to be computed and to allow as per actual, after co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have erred in law and on facts in making transfer pricing adjustment of Rs. 8,52,25,669/- to the return of income filed by the Appellant and in holding that the international Transaction of provision of Software Development Segment and Trading Segment was not at Arm's Length and further erred in law and on facts in imputing interest on delayed receivables from its Associated Enterprises. 2. The AO/DRP/TPO have erred in rejecting the TP study of the Appellant and conducting fresh search process with additional and/or modified filters for selecting the companies comparable to the Appellant. 3. The AO/DRP/TPO have erred in rejecting companies if the data pertaining to FY 2017-18 are unavailable in the public databases. 4. The AO/DRP/TPO have erred in law in rejecting certain comparable companies merely on the ground that the financial year ending of the Appellant and the comparable company are different. 5. The AO/DRP/TPO have erred in law in rejecting the application of upper turnover filter without appreciating the fact that the lower turnover filter of Rs. 1 Crore have been applied on the comparable companies. 6. The AO/DRP/TPO have erred in law i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.9. E-Zest Solutions Limited 10.10. Kals Information Systems Limited 10.11. Ace Software Exports Limited 10.12. Batchmaster Softwarre Private Limited 10.13. IECS Consultancy Ltd 10.14. Indianic Infotech Limited 10.15. Minvesta Infotech Limited 10.16. Synfosys Business Solutions Limited 11. The AO/DRP/TPO have erred in law and on facts in considering the following companies as comparable to the Appellant in the Trading Segment without appreciating that the said companies are not comparable to the Appellant due to multiple reasons including functionality, lack of segmental data, inadequate financial information etc 11.1. RMD Mediaids Ltd 11.2. Biolitec India Pvt Ltd 12. The AO/DRP/TPO have erred in law and on facts in not including the following companies in the final list of comparable companies in the Trading Segment which are also in the business of trading in medical devices similar to the Appellant 12.1. Hicks Thermometers (India) Limited 12.2. ADS Diagnostics Limited 12.3. Cardiomed India Limited 12.4. Aishwarya Technologies and Telecom Limited 12.5. Kusam Electrical Industries L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P/TPO have erred in law and on facts in restricting the credit period to thirty (30) days for the purpose of computing the interest on trade receivables. 23. Without prejudice to the above grounds, the AO/DRP/TPO have erred in law and on facts in erroneously applying State Bank of India (SBI) short term deposit as against the London Inter-Bank Offered Rate (LIBOR). 24. The AO has erred in short granting of credit of tax deducted at source. Further, the AO has erred in not granting credit of INR 50,56,162 reflecting in PAN AABCT1733D of the entity merged with the Company. 25. The AO has erred in law and on facts in erroneously computing interest under section 234C of the Act on 'assessed income' instead of 'returned income'. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. Brief facts of the case are as under: 2.1 Assessee is engaged in the business of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Income Revenue from operation 594466445 919086990 1513553435 Operating revenue 594466445 919086990 1513553435 Expense 0 Purchase of traded goods 181490953 181490953 (Increase)/decrease in inventories of traded goods 6055499 6055499 Consumption of stores and spares 71479661 71479661 Total 259026113 259026113 Gross Profit 335440332 919086990 1254527322 Employee benefit expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Backoffice I T Services India Pvt. Ltd. 26.74 19.49 14.13 19.44 6 Larsen Toubro Infotech Ltd. 19.21 20.78 18.36 19.59 7 Great Software Laboratory Pvt. Ltd. 17.88 23.87 17.31 19.73 8 X S Cad India Pvt. Ltd. 27.57 18.93 15.96 20.40 9 Temenos India Pvt. Ltd. 18.47 20.37 20.6 20.60 10 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24.83 20.61 11 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 21.19 12 Mindtree Ltd. 26.11 20.12 18.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.6 In respect of trading segment, the Ld.TPO shortlisted a set of 4 comparables with an average margin of 9.85%, the details of which are as under: Sl.No. Company Name Wt.PLI OP/OR (%) 1. Kox Med Lab Pvt. Ltd. 5.31 2. Hospimax Healthcare Pvt. Ltd. 7.32 3. RMD Mediaids Ltd. 9.53 4. Biolitec India Pvt. Ltd. 17.23 Average 9.85% 2.7 The Ld.TPO has thus proposed an adjustment under the software development segment as well as the trading segment being the shortfall which is as under: Sl.No. Description Adjustment u/s 902CA (In Rs.) 1. SWD Segment 5,45,76,108 2. Trading segment 5,52,85,136 The Ld.TPO also did not grant working capital adjustment to the assessee in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L T Infotech Ltd. 6,906.40 4. Mindtree Ltd. 5,325 5. Persistent Systems Ltd. 1,733 6. Wipro Ltd. 44,710 7. Tata Elxsi Ltd. 1,386 8. Nihilent Ltd. 280 9. Infosys Ltd. 60,941 10. Cyb age Software Pvt. Ltd. 737 4.1 The Ld.AR relied on the following decisions in support of his contention. 1) Decision of Coordinate Bench of this Tribunal in case of Autodesk India (P) Ltd. reported in (2018) 96 taxmann.com 263 2) Decision of Coordinate Bench of this Tribunal in case of Arista Networks India (P.) Ltd. reported in (2021) 133 taxmann.com 204 3) Decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. in IT(TP)A No. 250/Bang/2022 4.2 The Ld.AR submitted that as per the Dun Bradstreet classification of software industry, the companies could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of classification of companies as per the report of Dun and Bradstreet. As regards the specific plea of the learned DR that if turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company, we find this plea was rejected by the Bangalore Bench of the Tribunal in the case of Northern Operating Services Pvt Ltd. (supra). The relevant submission of the parties and the finding of the Tribunal in case of Northern Operating Services Pvt. Ltd. (supra) read as follows:- 15. The ld. DR submitted that the Hon ble High Court of Karnataka in the case of M/s. Acusis Software (I) P. Ltd. V. ITO in ITA No.223/2017, judgment dated 14.08.2018, has taken the view that if the turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company. The ld. DR drew our attention to the turnover of 10 comparable companies which is as follows:- Sl, No. Name of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs.1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs.45.33 lakhs which is any case does not satisfy any filter of turnover in comparison to the assessee s turnover more than Rs.27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee s turnover then the company which is having less than Rs. 2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs. 45.33 lakhs turnover cannot be considered as a good comparable to the assessee . 15. From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of the context or circumstances calling for exclusion/inclusion of the comparables. The finding in each case is therefore a finding of fact. He pointed out that the Tribunal in the case of Autodesk (I) P. Ltd. v. DCIT [2018] 96 taxmann.com 263 [Bang. Trib.] after analysing the entire cases on the point, came to the conclusion that the decision rendered by the Tribunal in the case of Genesis Integrated Systems (I) P. Ltd. [2012] 53 SOT 159 lays down the correct law on the application of turnover filter and that decision has to be followed. He pointed out that the DRP in the present case has followed the ruling in the case of Genesis Integrated Systems (I) P. Ltd. (supra) and therefore the order of DRP has to be upheld. 18. We have given a careful consideration to the rival submissions and are of the view that as rightly submitted by the ld. Counsel for the assessee, the decision rendered by the Hon ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) does not positively say that for a company to be excluded on the basis of high turnover, the tolerance range of turnover of 10 times on both the sides of assessee s turnover has to be seen. Even the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not 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). 19. In the given facts and circumstances of the case, we find no grounds to interfere with the order of DRP on this issue. Consequently, ground Nos.4 5 raised by the revenue are dismissed as without any merit. 20. In the result, the appeal by the revenue is dismissed. 13. Accordingly, by following the above orders of the Tribunal, we direct the AO / TPO to apply appropriate upper turnover filter and exclude a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 2) Decision of Hon ble Bombay High Court in case of Alstom Projects India Ltd. reported in 2016 (12) TMI 1408 3) Decision of Hon ble Bombay High Court in case of Hindustan Unilever Ltd. reported in (2016) 72 taxmann.com 325 4) Special Leave Petition filed has been dismissed in (2018) 99 taxmann.com 135 (SC). 7.2 The above principle has also been upheld by this jurisdictional Bangalore Tribunal in the following cases. Continental Automotive Components India Pvt. Ltd. in IT(TP)A No. 713/Bang/2017 Tokai Rika Minda India Pvt. Ltd. in IT(TP)A No. 2327/Bang/2016 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 7.3 We direct the Ld.AO/TPO to restrict the adjustment if any only in respect of the value of international transaction between assessee and AE. Respectfully following the ratios laid down in plethora of decisions hereinabove, we remand this issue back to the Ld.AO/TPO to consider the claim in accordance with law. Accordingly this ground raised by assessee stands allowed. 8. Ground no. 17 is in respect of non-granting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he data available with the assessee and Department should 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 its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, Hon ble Delhi Bench in case of ITO v. E Value Servc.com reported in (2016) 75 taxmann.com 195 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. 8.10. It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where ever it is needed, so as to bring both comparable and test party on same footing. In present facts of case, DRP may be correct in denying working adjustment due to unavailability required data, however there is no merit in observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same is subsumed in the ALP of the principal transaction. The Assessee also contends the outstanding receivables could not be made subject matter of TP adjustment as the same is not covered under the provisions of Section 92B of the Act. Also, it is submitted that the Assessee is a debt free company and does not bear any working capital risk since it is fully funded by its AEs. The Assessee has not incurred any interest expenses for its working capital requirement. Hence, the Assessee does not have any interest cost in the funds blocked on deferred receivables from AEs as it is entirely funded by its AEs for its working capital requirements. 9.2 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 9.3 This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, 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. Alternatively, it has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, ground nos. 19-23 raised by assessee stands partly allowed for statistical purposes. 10. Ground nos. 24-25 is in respect of short grant of TDS and interest u/s. 234C. 10.1 It is submitted that the Ld.AO has erroneously short granted the credit of TDS. It is submitted that an amount of Rs.50,56,162/- reflecting in PAN AABCT1733D of the entity merged with the company has not granted to the assessee. Further, it is submitted that the Ld.AO has erroneously levied interest u/s. 234C of the act on the assessed income instead of returned income as required under the provision of the Act. 10.2 We direct the Ld.AO to grant credit of TDS in accordance with law after carrying out necessary verifications in respect of the interest u/s. 234C, it is directed that the levy of interest must be on the returned income as mandated u/s. 234C of the act. Accordingly the Ld.AO is directed to carry out necessary corrections in accordance with l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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