2024 (6) TMI 1284 - AT - Income Tax

Negative working capital adjustment cannot be made for captive service providers in transfer pricing analysis

ITAT Bangalore ruled that negative working capital adjustment cannot be made for captive service providers, directing exclusion of such adjustment from ... TP Adjustment - Non-grant of working capital adjustment - HELD THAT:- As relying on M/S. SOFTWARE AG BANGALORE [2016 (3) TMI 1384 - ITAT BANGALORE] and M/S. TIVO TECH PRIVATE LIMITED [2020 (6) TMI 708 - ITAT BANGALORE] negative working capital adjustment cannot be carried out, where the assessee was a captive service provider. Here also it is an admitted position that assessee was a captive service provider and its services are entirely rendered to its AE abroad. Its share capital was entirely sourced from its AE abroad. Thus direct that no negative working capital adjustment shall be carried out on the average PLI of the final set of comparables Thus we direct the Ld.AO that no negative working capital adjustment shall be carried out in the light of above order of the Tribunal. Ordered accordingly. Comparable selection - HELD THAT:- Exclude L&T Infotech Ltd. and Infosys Ltd. from the final list as present assessee is found to be a captive service provider who carries out software development services in accordance with the direction of its associated enterprises and is compensated on a cost+mark-up basis. Persistent Systems Ltd. company is mostly into product development and owns huge intellectual properties. It is also noted that there is no segmental details available in respect of the various systems of revenue earned by this company. Under such circumstances, we do not find it appropriate to be included in the final list. Infobeans Technologies Ltd.is not functionally comparable to that of the assessee. Tata Elxsi Ltd. company is into research and development activities and has developed various product design, industrial design etc. It is also noted that though this company is into software development services, in the process has developed various products that has been sold and revenue has been generated from sale of products. The segmental details in respect of software services rendered and product sale is not available in the financials of this company. It is noted that Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. [2023 (3) TMI 597 - ITAT HYDERABAD] for similar reason has excluded this company from the final list. Mindtree Ltd. & Nihilent Ltd. companies are into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded. Cygnet Infotech Pvt. Ltd. company is not captive service provider like that of assessee and is an independent entrepreneur owning intangibles. Under such circumstances, it is not appropriate to consider this comparable with that of assessee. We direct the Ld.AO/TPO to exclude this company from the final list. Cybage Software Pvt. Ltd. be excluded from the list of comparables basing on functionally not comparable — diversified activities, product company, marketing services, presence of intangibles, lack of segmental data, abnormal margins, onsite revenue and non-contemporaneous data. Batchmaster Software Pvt. Ltd. comparable needs to be verified based on the annual reports and the filters in accordance with law. we remand this comparable back to the Ld.TPO for necessary verification and to consider the claim of assessee in accordance with law. Deduction u/s. 10AA - levy of interest u/s. 234A, 234B, 234C - AR submitted that assessing officer failed to include the deduction claimed even though the same was not disputed in the draft assessment order and there is an erroneous levy of interest even though assessee had filed the return of income before the due date - HELD THAT:- We note that all the above issues raised by assessee deserves necessary verification at the end of the Ld.AO. Assessee is directed to furnish details / evidences in respect of the same and the Ld.AO is directed to consider the claim of assessee in accordance with law. Issues Involved:1. Transfer Pricing Adjustment2. Non-grant of Working Capital Adjustment3. Exclusion of Certain Comparables4. Inclusion of Certain Comparables5. Corporate Tax IssuesDetailed Analysis:1. Transfer Pricing Adjustment:The assessee, a subsidiary of Intuit Inc., engaged in software development services, had its international transactions scrutinized for arm's length pricing. The Ld.TPO, dissatisfied with the assessee's comparables, conducted a fresh search and proposed a transfer pricing adjustment of Rs. 81,27,50,580/-. The Ld.AO made a draft assessment order, proposing a disallowance under Section 10AA. The DRP accepted some comparables and rejected others, leading to a final TP adjustment of Rs. 70,88,21,288/-.2. Non-grant of Working Capital Adjustment:The assessee argued for a working capital adjustment, citing Rule 10B(3) of the Income-tax Rules, 1962, which allows adjustments for economic differences. The Tribunal, referencing previous decisions, concluded that negative working capital adjustment should not be made for a captive service provider like the assessee, as it does not bear working capital risks. The Tribunal directed the Ld.AO to exclude negative working capital adjustment.3. Exclusion of Certain Comparables:The assessee sought the exclusion of several comparables, arguing functional dissimilarity:- Larsen & Toubro Infotech Ltd.: Excluded due to diversified activities, ownership of intangibles, and lack of segmental details.- Infosys Ltd.: Excluded for diverse services, significant R&D, brand value, and lack of segmental details.- Persistent Systems Ltd.: Excluded due to engagement in product development, R&D activities, and lack of segmental details.- Infobeans Technologies Ltd.: Excluded for providing KPO services, significant intangibles, and abnormal revenue increase.- Tata Elxsi Ltd.: Excluded for high-end services, R&D activities, and lack of segmental details.- Mindtree Ltd. & Nihilent Ltd.: Excluded for diversified services, significant onsite revenue, and lack of segmental details.- Great Software Laboratory Pvt. Ltd.: Excluded for diverse activities, ownership of intangibles, and lack of segmental details.- Cygnet Infotech Pvt. Ltd.: Excluded for diversified services, ownership of intangibles, and lack of segmental details.- Cybage Software Pvt. Ltd.: Excluded for diversified services, product development, and lack of segmental details.- Consilient Technologies Pvt. Ltd. & Aptus Software Labs Pvt. Ltd.: Remanded for fresh consideration based on annual reports and FAR analysis.4. Inclusion of Certain Comparables:The assessee sought the inclusion of:- Batchmaster Software Pvt. Ltd.: Remanded to the Ld.TPO for comparability analysis based on FAR.- Indianic Infotech Ltd.: Remanded for verification based on annual reports and filters.5. Corporate Tax Issues:The assessee raised issues regarding computational errors, incorrect consideration of returned income, non-inclusion of Section 10AA deduction, and erroneous levy of interest under Sections 234A, 234B, and 234C. The Tribunal directed the Ld.AO to verify these claims based on the evidence provided by the assessee.Conclusion:The appeal filed by the assessee was partly allowed, with directions for necessary verifications and adjustments as per the Tribunal's observations. The Tribunal emphasized the need for functional comparability and appropriate adjustments in transfer pricing cases.