TaxTMI 
TaxTMI 
2020 (6) TMI 268
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....PO for working capital adjustments. The data/information relating to said working capital adjustments were not readily available with the assessee during the DRP proceedings therefore assessee could not submit the same before the ld DRP, and consequently the ld DRP could not direct the TPO to take into account to compute the arm`s length price adjustments (Transfer Pricing adjustments) and this had resulted into wrong determination of arm`s length price of the assessee`s transactions. The Ld Counsel further submits that now the assessee got the data/information for working capital adjustments, therefore, he prays the Bench that additional evidences relating to working capital adjustments may be admitted and ld TPO may be directed to consider the same to compute the transfer pricing adjustments, if any. 3. The additional evidences submitted by the assessee by its letter dated 30.04.2019, are reproduced below: "1. The instant appeal for the Assessment Year 2011-12 was filed by your petitioner against an order dated July 27, 2017 passed by the Deputy Commissioner of Income Tax (Appeals) - 12(1), Kolkata made under section 144C of the Income-tax Act, 1961 (hereinafter refer....
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....itioner most humbly prays for:- (a) An order admitting the aforesaid additional evidence being Annexure "A" of the instant application in the instant appeal being ITA No. 2110/Kol/2017 for the Assessment Year 2011-12; (b) Such further or other order or orders be made and/or directions be given as to this Hon'ble Tribunal may seem fit and proper." 4. Learned DR for the revenue objected that these additional evidences should not be accepted, as it is an afterthought to evade tax liability. Why these evidences were not submitted by the assessee during the DRP proceedings? Therefore, ld DR strongly opposed that these additional evidences should not be admitted. 5.Per contra, ld Counsel submitted before us that the assessee wanted to submit these additional evidences before ld DRP but it was beyond his control, as the information/data were not readily available with the assessee and therefore the assessee was prevented by sufficient cause from producing these additional evidences during the DRP proceedings. The ld Counsel also pointed out that the omission of the detailed computation of working capital before the Hon'ble DRP was not willful or unreasonable. T....
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....f the assessee and the facts have been carefully considered. Working capital is measured by trade receivables/debtors, trade payables/creditors and inventories, Interest cost will be high if the trade receivable/debtors time cycle is large. Interest cost will be low if the company can pay its liabilities after a longer period. Holding of inventory has an interest cost and interest cost will be lower if inventory turnover is within a shorter period. The amount of trade debtors, trade creditors and inventories affects the overall results of a company. If the comparables have a higher intensity of accounts receivable, or inventories to sales, relative to the tested party, then it shows that the comparables were in effect, also providing a valuable financing function to their customers which would be compensated through higher prices. In such a situation the comparables are carrying out more value added functions than the tested party, therefore, the margins of the comparables should be adjusted downwards to enable a better comparison with the margins of the tested party. On the other hand, if the comparables have a higher level of accounts payable to sales r....
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.... TPO has given elaborate reasons and has followed laid down for rejecting the assessee's TP study and for selecting his own comparables. Specific comparables have already been discussed. As far as calculation of PLI is concerned, the TPO is directed to adopt uniform approach for calculating PLI for the assessee as well as comparables. The objection is accordingly disposed off." 7. We note Ld DRP held that "the assessee has not provided the necessary data/details with computation of the working capital of the tested party and the comparables, in absence of the relevant data, the Panel is unable to give any direction to the TPO for working capital adjustments". From the above findings of the ld DRP, it is abundantly clear that during the DRP proceedings the assessee company could not furnish the data relating to working capital adjustments therefore ld DRP could not direct the TPO to consider working capital adjustments to compute the arm`s length price (ALP) of assessee`s transactions. 8. Now, the assessee has submitted the relevant information/ data for working capital adjustments, before the Bench by way additional evidences in the form of Annexure-A, wh....
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....nce it is found that the party intending to lead evidence before the Tribunal for the first time was prevented by sufficient cause to lead such an evidence and that this evidence would have material bearing on the issue which needs to be decided by the Tribunal and ends of justice demand admission of such an evidence, the Tribunal can pass an order to that effect to admit the additional evidence." We note that aim of the transfer pricing law is to determine the correct arm`s length price of the assessee`s transactions with its associated enterprises(AE). For the sake of argument, let say, if these additional evidences were not admitted by us, then it would have not been possible to determine the correct transfer pricing adjustments (ALP-adjustments) and as a result there will not be correct determination of tax liability of the assessee company. Therefore, we have to admit these additional evidences. In the light of the facts and circumstances, as explained above, and in the interest of justice and fair play, we admit these additional evidences (relating to working capital adjustments) filed before us and we remit these additional evidences to the file of ld TPO with the d....
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....ions with a significant reduction in cost, and accelerate change initiatives by providing domain specific re-engineering expertise. Assessee provides a broad suite of services that allow its clients to operate on a day to day basis, including trade processing, reference data, accounting and finance, and expense management activities. Assessee`s professional services practice includes consulting, business analysis and solution testing. As a specialist assessee is able to provide complex process support, promote best practices among clients, and continuously improve processes. The assessee`s shared services support functions, such as knowledge management allows assessee to quickly institutionalize process knowledge, while assessee`s IT teams allow assessee to deconstruct, design, and automate functions leading to control and efficiency. [PB Pg. No. 215] The eClerx powers the operations of the Sales & Marketing divisions of some of the largest Fortune/ Financial Times/Internet Retailer 500 scale companies globally, augmenting bandwidth to drive greater quality and control to their digital operations, data management and analytics needs. Some of the key Sales & Marketing function....
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....ny. The eClerx Services limited is not a comparable company so far Segment Reporting is concerned. The eClerx Services limited operates under a single primary segment i.e. data analytics and process outsourcing services therefore different from the assessee company. Besides, due to high turnover with significant fluctuations in revenues and profits, the eClerx Services limited should not be selected as comparable company. For that we rely on the following precedents wherein the eClerx Services limited was rejected as a comparable company: (i). Pr. CIT vs. B. C. Management Services Pvt. Ltd (AY 2011-12) [ITA 1064/2017 &CM No. 43177/2017] wherein the hon`ble Delhi High Court upheld ITAT decision of excluding eClerx services on account of functional dissimilarity and absence of segmental data. Earlier the ITAT had held that the Assessee provides IT enabled services in infrastructure development and testing, system and performance operations management and support etc. while eClerx provided high value financial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics etc and thus excluded it as a c....
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....Clerx Services limited should not be selected as comparable company. Therefore, we direct the TPO/AO to exclude the eClerx Services limited, as this company is not a comparable company, as explained above, hence it requires to be excluded. 17. TCS eServe International Limited (TCS eServe). This company contains margin of 53.89%. The Ld. TPO has considered this company as functionally comparable (Vide pb170). Aggrieved by the order of the ld TPO, the assessee filed the objections before the ld DRP. The ld DRP examined the issue and held as follows: (1). The Function, Asset and Risk (FAR) of TCS eServe International Limited (TCS eServe) is similar to that of the Assessee. (2). High profits do not render an entity excludible. Only differences on account of FAR are material. (3). Taxpayer has not shown how payment of Tata Brand Equity and ownership of high profit margin is leading to high profit margin. Therefore, ld DRP retained TCS eServe International Limited (TCS eServe) as comparable company. 18. Aggrieved by the order of the ld DRP/TPO, the assessee is in appeal before us. 19. We heard both the parties and carefully gone through the su....
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....comparison to previous year while its profits increased by an abnormal percentage of 117% over the preceding year. TCS E-serve Ltd. has super normal profits of about 54% during the year. This increase was mainly attributed to its starting of operations in Chennai and this being the second year of acquisition by TCS.[PB Pg. No 346]. Therefore, the TCS eServe International Limited (TCS eServe) should not be treated as comparable company. 21. We note that following are the precedents, where the TCS eServe International Limited (TCS eServe) company was rejected as a comparable. (i). Pr.CIT vs. Evalueserve SEZ (Gurgaon) Pvt. Ltd (AY 2010-11) [ITA 241/2018] wherein the Hon`ble Delhi High Court upheld ITAT's decision of excluding TCS eServe International and noted that it had a high brand value and, therefore, was able to command greater profits, besides, it operated on economic upscale. The ITAT [ITA No. 1467/Del/2017] in its order had directed the exclusion of TCS eServe International considering that the company is engaged in the business of software testing, verification and validation and thus not comparable. (ii). Evalueserve SEZ (Gurgaon) Pvt. Ltd vs. ACIT,....
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....hat profits of business of undertaking would include its entire business income, including receipt on account of interest. For that ld Counsel relied on the judgment of the Hon`ble High Court of Calcutta in the case of Hindustan Gum & Chemicals Ltd, [2016] 72 taxmann.com 90(Cal), wherein it was held as follows: "4. Mr. Dudhoria, learned Advocate appearing for the revenue drew our attention to a judgment of the Madras High Court in the case of International Components India Ltd. v. Asstt. CIT [2015] 372 ITR 190/59 taxmann.com 32 wherein the following view was taken : "In the light of the above said decision, we are of the firm view that the interest earned from deposits with Corporation Bank, Electricity Board and on staff advances does not have direct or immediate nexus with the business of the assessee's undertaking and, consequently, they are not eligible for grant of deduction under Section 10B of the Act, which is akin to Section 80HH of the Act dealt with in the decision referred supra." 5. Mr. R.N. Bajoria, Learned senior advocate rightly pointed out that the judgment of the Madras High Court is of no relevance for the simple reason that sub-....
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....ismissed." We note that Hon`ble High Court of Calcutta in the case of Hindustan Gum & Chemicals Ltd (supra) held that in order to compute deduction under section 10B of the Act, the profits of the business of the undertaking would include its entire business income including interest income on fixed deposits. We note that judgment of the Hon`ble High Court of Calcutta (supra) is in the context of section 10B of the Act but the ratio of this judgment is squarely applicable to section 10A deduction. Therefore, respectfully following the judgment of the Hon`ble High Court of Calcutta in the case of Hindustan Gum & Chemicals Ltd (supra), we direct the AO/TPO to allow deduction under section 10A in respect of interest income of fixed deposits of Rs. 61,63,346/-. 25. Learned Counsel, during the course of hearing, has pressed the ground relating to additional evidences, ground relating to two comparable companies, viz:(i). eClerx Services Limited (eClerx), and (ii). TCS eServe International Limited (TCS eServe) and ground No.5, which we have adjudicated in our earlier paras. Other remaining grounds raised in form No. 36, were not pressed therefore, we do not adjudicate them. 26. ....