9911796707
TMI Blog2022 (11) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is remitted back to the file of AO/TPO to examine the issue in the light of above details of functions furnished by the assessee before us. Mind Tree Ltd. - A.R. furnished the details of functionality before us. These facts are not at all commented by the AO/TPO or by Ld. DRP. Hence, the issue is remitted back to the file of AO/TPO for fresh consideration in the light of above functionality of Mind Tree Ltd. company. Persistent Systems Ltd. - This issue is infructuous in view of our findings on the basis of turnover filter of this company. Aptus Software Labs Pvt. Ltd. - Main contention of assessee is that the employee cost filter applied by AO/TPO is 20%, whereas in this case, employee cost filter is less than 20%. Hence, it should be excluded - In our opinion, these facts are to be examined by AO/TPO in the relevant assessment year 2016-17. Accordingly, the issue is remitted back o the file of AO/TPO only in respect of assessment year 2016-17. Consilient Technologies Pvt. Ltd. - As it is appropriate to remit this issue to the file of AO/TPO to consider it afresh in the light of submissions made by the Ld. A.R. with regard to functionality of the comparable. This issue is ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. The Honorable DRP has erred in partially confirming the action of the Assessing officer. 1.3 The lower income tax authorities have erred in: a) making transfer pricing adjustment of Rs. 5,91,00,534 (Software Development Segment) and Rs. 1,17,44,791 (ITeS Segment); b) not appreciating that there is no amendment to the definition of "income" and charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and c) passing the orders without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable. Segmental Profit and loss 2. Grounds relating to Segmental Profit and loss Accounts 2.1 The Learned TPO erred in not considering the submission of segmental profit and loss account with its associated enterprises under false and erroneous reasons. 2.2 The Learned TPO/ Hon'ble DRP err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey are not functionally comparable to the appellant: (a) Datamatics Business Solutions Ltd (b) Ultramine & Pigment Ltd. (c) InfosygBPM Ltd (d) SPI Technologies India Pvt Ltd (e)Tech Mahindra business services Ltd (f) Inteq BPO Services Pvt. Ltd. 4.3 The Learned TPO/Hon'ble DRP erred in facts and in law: (a) by calculating the RPT percentage by separately considering RPT Sales over Total Sales and RPT expenses over Total expenses notwithstanding that RPT percentage is to be calculated by adopting a common denominator of total operating sales. (b) by adopting the RPT filter at 25% instead of 15% of operating sales. 4.4 The Learned TPO/Hon'ble DRP erred in excluding the following companies, even though they are functionally comparable to the appellant: (a) Suprawin Technologies Ltd (b) Cosmic Global Ltd (c) Allsec Technologies Ltd (d) iSN Global Solutions Pvt Ltd (e) R Systems International Ltd 4.5 The Learned TPO/Hon'ble TPO erred in facts and in law: (a) by modifying the comparable filter of persistent losses filter by excluding companies with operating losses in at least two out of three years as against the filter adopted by the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration, it earned a margin of 24.58% (OP/OC) from the software segment and 25.88% (OP/OC) from the ITES segment in respect of its international transactions. 2.3 The Company had filed its original income tax return electronically for AY 2017-18 declaring a total income of Rs. 9,21,28,650. Subsequently a revised return was filed on 08.02.2019 declaring a total income of Rs.9,25,46,830. The tax liability of Rs 3,05,98,758, was discharged by TDS and advance tax aggregating to Rs. 5,67,94,546, resulting in refund of Rs. 2,61,95,790. 2.4 The aforesaid revised return was picked up for scrutiny by the Assessing Officer under CASS. Notices were issued from time to time for which the Company duly replied. The Transfer Pricing Officer ('TPO') issued an Order dated 28.01.2021 proposing an adjustment of Rs. 6,57,71,606 on account of software development segment and Rs. 1,17,44,791/- on account of ITeS segment. The total adjustments amounted to Rs. 7,75,16,397/- 2.5 The Assessing officer issued Draft assessment order under section 144C of the Income-tax Act, 1961 ['the Act' for short] on 04.04.2021 incorporating the adjustment amounting to Rs. 7,75,16,397 proposed by TPO. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by holding the turnover of a company in the IT-BPO industry does not have any impact on the margins earned. The assessee took the same contention before the Ld. DRP. The Ld. DRP relied on the decision of the Delhi High Court in the case of Chryscapital Investment Advisors India Pvt Ltd v DCIT (2015) 376 ITR 183 (Del), wherein it was held a company which is otherwise functionally comparable cannot be excluded merely on account of high turnover filter. 4.2 The Ld. A.R. for the assessee further submitted that the ITAT in assessee's own case for AY 2016-17 in IT(TP)A No. 252/Bang/2021 dated 11.07.2022 has held that companies whose turnover exceeded Rs. 200 crores during the relevant year should be excluded from the list of comparable companies. The relevant observations of the Tribunal are noted at paras 11 to 14 (internal page 9 to 14) of the order. The finding of the Tribunal as noted in para 14 of the order was extracted below by the Ld. A.R.: " 14. In view of the aforesaid decision, we hold that 7 companies listed in grd.No.4 of the concise grounds whose turnover in the current year is more than Rs. 200 crores should be excluded from the list of comparable companies." 4.3 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its TP study companies whose turnover was less than Rs.1 Crore. The contention of the assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age Software Pvt Ltd. - Rs. 758.87 crores (g) Nihilent Ltd. - Rs. 259.38 crores (h) R Systems International Limited - Rs. 263.75 crores (i) Tech Mahindra Limited - Rs.24,058.30 crores 6.3 In view of the above, we are of the opinion that the turnover of the assessee company from software development (IT) segment is only Rs.75.43 crores. Being so, following the decision in the case of Mindteck (India) Ltd. cited (supra), above companies are directed to be excluded from the list of comparables. 7. Now we reproduce ground No.3.2 once again as follows:- "3.2 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they are not functionally comparable to the appellant: (a) Great Software Laboratory Pvt. Ltd (b) Mindtree Ltd. (c) Persistent Systems Ltd` (d) Aptus Software Labs Pvt. Ltd. (e) Consilient Technologies Pvt. Ltd." 7.1 The assessee seeks exclusion of following companies on the basis of functionality: (a) Great Software Laboratory Pvt. Ltd. 7.2 The Ld. A.R. submitted that this company is functionally different. For this, he referred an extract from page 7 of the Annual Report (Page 920 of Annual Report Compilation filed on 19.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. low end to high end in services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of SWD services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly. qualified/skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before Ld. DRP to show that margins in the high end segments of SWD services is high compared to low end services. Therefore, Ld. DRP was unable to accept the argument advanced by the assessee that this comparable company belonging to high end segments should be excluded from the comparability list on this ground alone. In fact, the skill set and the languages that required for both programming and developing software applications are broadly similar. Computer programmers and software developers share a similar work atmosphere. Bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok. 10.6 Further, this company was held to be not a comparable company to the case of a software development services provider in Yahoo Software Development India P. Ltd. v JCIT [(2020) 115 taxmann.com 60 (Bangalore - Trib.) - Para 41-42 of the order]. In view of the above, the ld AR for the assessee requested for exclusion of Mindtree from the final set of comparable companies. Incidentally, the turnover of this company is more than Rs. 200 crores. 11. The Ld. D.R. submitted that on perusal of the annual report of this company by the Ld. DRP, he noted that this company is engaged in rendering of software development services in different verticals and comparable to the assessee. As seen from the annual report of this company (refer page 115), it is engaged in international information technology consulting and implementation delivering business solutions through global software development. Further, as per Note 3.12 of the annual report, the company's earnings in foreign currency from software development services was Rs.42.73 millions. As per the Note on Revenue Recognition, it has stated the principles adopted in recognizing revenue from software development services. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different. 12.2 Without prejudice, it fails employee cost filter for two years: The ld AR further submitted that the TPO has applied a filter for including companies having employee cost of more than 25% of turnover. The assessee, in its reply to the show cause notice issued by the TPO, had submitted the following calculation to support that the company fails the aforesaid filter for two years (He referred Page 544-545 of Paperbook): Particulars 2017 2016 2015 Employee Cost 1,61,45,378 69,80,436 38,84,756 Operating Revenue 3,86,03,935 4,29,59,630 4,19,86,023 Employee Cost/Operating Revenue 41.82% 16.25% 9.25% Paper book reference Page 656 of Annual Report Compilation Page 656 of Annual Report Compilation Page 545 of Paperbook Compilation 12.3 In this connection, the assessee relied on the decision of the ITAT in assessee's own case for AY 2016-17 in IT(TP)A No. 252/Bang/2021 dated 11.07.2022 [He referred Page 1713 to 1746 of compilation filed on 02.09.2022], wherein it has been held that if a company fails a particular filter for any one or more years, the margins for such years have to be excluded if the company is selected as a comparable. The relevant obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. Against this assessee is in appeal before us. 14. We have heard the rival submissions and perused the materials available on record. The main contention of assessee is that the employee cost filter applied by AO/TPO is 20%, whereas in this case, employee cost filter is less than 20%. Hence, it should be excluded. In our opinion, these facts are to be examined by AO/TPO in the relevant assessment year 2016-17. Accordingly, the issue is remitted back o the file of AO/TPO only in respect of assessment year 2016-17. (e) Consilient Technologies Pvt. Ltd. 15. The Ld. A.R. submitted as follows: 15.1 Significant intangibles: The ld AR for the assessee referred to an extract from page 44 of the Annual report (Page 831 of Annual Report Compilation) extracted below shows existence of intangible assets: 15.2 He further referred page 65 of the annual report (Page 853 of Annual Report Compilation) which states the class of the intangible assets to be 'copyrights'. 15.3 Revenue from royalties: He further referred to an extract from page 82 of the annual report (Page 869 of Annual Report Compilation), reproduced below, which states that the company earns revenue from royalties. 15.4 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns has no basis. The nature of activity performed by this company is given at page 115 of the annual report, as under: "We offer an extensive range of IT services like application development, maintenance and outsourcing, enterprise solutions, infrastructure management services and testing and digital solutions to clients in diverse industries". 16.1 In view of the above information, Ld. DRP observed that it is very clear that this company is engaged in software development services only and hence functionally comparable. As the company is primarily engaged in software development services and earns the revenue from this activity, the Ld. DRP opined that there is no need of providing segmental information as per AS 17. Thus, the plea of the assessee was not accepted by the ld. DRP. Against this, assessee is in appeal before us. 17. We have heard the rival submissions and perused the materials available on record. In our opinion, it is appropriate to remit this issue to the file of AO/TPO to consider it afresh in the light of submissions made by the Ld. A.R. with regard to functionality of the comparable. This issue is accordingly remitted to the file of AO/TPO for fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Page 1713 to 1746 of compilation filed on 02.09.2022] has included this company as comparable subject to the fact that the company has made a profit in any one out of the 3 financial years. He extracted the relevant observations of the Tribunal recorded at para 20 (internal page 21-22) of the order which are as follows: "The TPO will verify if this company suffered financial loss in all the earlier Financial Years and even if in one Financial Year, the company has made a profit, it has to be regarded as a comparable company" 20.5 In view of the above, the assessee requested for inclusion of Sagarsoft in the final set of comparable companies. 21. The Ld. D.R. submitted that the Ld. DRP observed that as per the annual report (page no.16), it was found that the comparable is into support services that include system administration, Human resource and training and administration and facilities. These fall under the category of information security management system which cannot be solely classified as software development services as that of what taxpayer is performing. Hence, this company is functionally different and rejected by ld. DRP. Against this assessee is in appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed sl.no.(d) Sankya Infotech Limited & (e) Infomile technologies Ltd. Accordingly, these grounds are dismissed as not pressed. 25. Ground No.4 is relating to Information Technology enabled Services (ITES) segment. Ground No.4.1 is reproduced below: "4.1 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: a) Microland Ltd b) Tech Mahindra Business Services Ltd c) Infosys BPM Ltd d) SPI Technologies India Pvt Ltd e) Ultramine & Pigment Ltd." 25.1 The Ld. A.R. seeks exclusion of above comparables on the basis of turnover filter, which is as follows in respect of each company: a) Microland Ltd Rs.530.55 Cr. b) Tech Mahindra Business Services Ltd Rs.709.00 Cr. c) Infosys BPM Ltd Rs.2940.00Cr. d) SPI Technologies India Pvt Ltd Rs.391.55 Cr. e) Ultramine & Pigment Ltd." Rs.31.63 Cr. 25.2 After hearing both the parties, we are of the opinion that the companies which are having more than Rs.200 Crores are to be excluded in view of the decision of the Tribunal in the case of Mindteck (India) Pvt. Ltd. cited (supra). Further, we make it clear that M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the ld DRP observed that as per the Form No. MGT-9 forming part of the annual report, the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. Therefore, the company is functionally similar to the assessee as it is being predominantly into ITES company. On perusal of the submissions of the assessee, ld DRP noted that the comparable may be into many activities but the undisputed fact remains that its major revenue is from information technology enabled services. Thus, the ld DRP upheld the action of the TPO. Against this assessee is in appeal before us. 26.7. We have heard the rival submissions and perused the materials available on record. We have carefully gone through the paper book submitted by the assessee in pages 1331 & 1332 wherein annual report of the above company has been shown, which is as follows: 26.8 Further, the assessee has made significant investment which can be seen from the paper book at page Nos.1336 & 1359 and the assessee is engaged in diversified range of activities. In our opinion, these are to be relooked into by the AO/TPO while examining the functionality of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Case law compilation], following the decision of its co-ordinate bench in EMC Software and Services (P.) Ltd v JCIT (2020) 115 taxmann.com 293, held that a company involved in business process management services cannot be considered comparable to a company providing ITeS such as the assessee. 27.3 In view of the above, the assessee requested for exclusion of Inteq BPO from the final set of comparable companies. 27.4 The Ld. D.R. submitted that the ld DRP in his reported observed that the services offered by Inteq BPO are in Revenue Cycle Management, Claims Processing services and Document & Data Processing. The principal business activity of the company at page 5 of the annual report is business process outsourcing (BPO). However, the assessee stated that business activities of the comparable company are more in the nature of business process management in the form of revenue cycle management, claims processing. It cannot be compared to Assessee Company which is rendering IT enabled services. In this regard, the contention and understanding of the assessee on the functional aspect of comparable company vis-a-vis IT enabled services is not correct. Information Technology Enab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the following companies, even though they are functionally comparable to the appellant: (a) Suprawin Technologies Ltd (b) Cosmic Global Ltd (c) Allsec Technologies Ltd (d) iSN Global Solutions Pvt Ltd (e) R Systems International Ltd" 29.1 The assessee wants inclusion of following comparables on the basis of functionality basis: (a) Suprawin Technologies Ltd (b) Cosmic Global Ltd (c) Allsec Technologies Ltd (d) iSN Global Solutions Pvt Ltd (e) R Systems International Ltd" (a) Suprawin Technologies Ltd., (b) Cosmic Global Ltd. & (c) Allsec Technologies Ltd. 29.2 At the time of hearing, the Ld. A.R. has not pressed sl.nos.(a) Suprawin Technologies Ltd., (b) Cosmic Global Ltd. & (c) Allsec Technologies Ltd. and hence, the ground raised on these comparables is dismissed as not pressed. (d) ISN Global Solutions Pvt. Ltd. 29.3. The Ld. A.R. submitted that ISN Global is primarily engaged in the business of data processing services including financial document services, sales support services and contact centre such as 24/7 Customer Service Desk, after hours support, etc. (He referred Page 1642 and 1656 of Annual Report Compilation). This company was rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to, is similar. Therefore, market differences do not make significant impact as far as export transactions are concerned. Therefore, ld DRP agreed with the TPO on this filter. Moreover, he opined that export revenue filter is impliedly approved in the following cases: 1. Cisco Stems (India) P Ltd v DC1T(2014) 50 taxmann.coni 280 (bang) para 27.4 Motorola Solutions Pvt Ltd (TS-240-1TAT-(2014) (Del)-TP) 2. Hyundai Motors _India Engg (P) Ltd vs ITO (2014) 44 taxmann.com 34 (Hyd) para 7(x) 3. 24/7 Customer.com Pvt Ltd v DC1T(2013) 140 1TD 344 4. Genisys Integrating Systems (India) Put Ltd vs DCIT(2011) 64 DTR (Bang) (Trib) 225 5. Exxon Mobil company India Pvt Ltd vs DCIT ITA 8311/Mum/2010 dated 10.06.2011 Keeping in view of the above discussion, ld DRP did not accept the plea of the assessee. Against this assessee is in appeal before us. 31. We have heard the rival submissions and perused the materials available on record. In this case, the AO/TPO has applied filter that minimum 75% of operating revenue should be from exports. However, this comparable fails this test. Hence, in our opinion, the AO/TPO is justified excluding this company ISN Global Solutions Pvt. Ltd. (ISN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in all the 3 previous Financial Years and even if in one Financial Year it makes a profit, then that company has to be regarded as a comparable company if it is otherwise a comparable company. In the light of the aforesaid decision and in the light of the facts brought to our notice, we are of the view that the comparability of this company has to be considered afersh by the AO/TPO in the light of the facts brought to our knowledge as above. The TPO will verify if this company suffered financial loss in all the earlier Financial Years and even if in one Financial Year, the company has made a profit, it has to be regarded as a comparable company. In view of the above, the ld AR for the assessee contended that the action of the TPO in modifying the persistent losses filter is incorrect. 33. The Ld. D.R. submitted that the Ld DRP observed that M/s R Systems International Ltd does not figure in the search matrix of the TPO. Ld. DRP already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard 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)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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. 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. 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 3.473.54 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 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 opeing 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 excact 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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." 35.2 In view of above order of the Tribunal, we remit this issue to the file of AO/TPO to calculate working capital adjustment and grant the same accordingly. 36. Ground No.5.2 is consequential and mandatory in nature. Accordingly dismissed. Additional grounds: 37. Now coming to the additional grounds, the assessee has submitted a petition for admission of additional groun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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