TaxTMI 
TaxTMI 
2021 (1) TMI 775
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....ot rejecting the following companies from the list of comparable companies: * Infosys Ltd. * Wipro Ltd. * Megasoft Ltd. * Flextronics Software Systems Ltd. * KALS Information Ltd. * Ishir Infotech Ltd. * Avani Cimcon Technologies Ltd. * Lucid Software Ltd. * E-Zest Solutions Ltd. * Persistent Systems Ltd. * R. Systems International Ltd. * Celestial Labs Ltd. * Helios & Matheson Information Technology Ltd. 11. The Hon'ble CIT(A) has erred disallowing the working capital adjustment allowed by the ld. TPO." 4. It will be appropriate to deal with ground Nos. 4 to 6 raised by the revenue in its appeal also together with ground No. 9 raised by the revenue as the same is interlinked with ground No. 9 raised by the assessee. 5. The assessee is a company engaged in the business of software development. It rendered software development services to its Associated Enterprise (AE). The issues that arise for consideration in grounds of appeal set out above are with regard to determination of arm's length price [ALP] in respect of international transaction of rendering software deve....
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....thmetic mean 25.14% Computation of Arm's Length Price Particulars Amount INR Arithmetic mean PLI 25.14% Less: Working Capital Adjustment 0.50% Adjusted Arithmetic mean PLI 24.64% Arm's Length Price Particulars Amount INR Operating cost 24,45,93,369 Arm's Length Margin 24.64% of t the operating cost Arm's Length Price (ALP) @ 124.64% of operating cost 30,48,61,175 Price Received vis-a-vis the Arm's Length Price Particulars Amount INR Arm's Length Price @ 124.64% of operating cost 30,48,61,175 Price received 27 03 85 879 Shortfall being adjustment u/s 92CA 3,44,75,296 9. The addition suggested by the TPO was incorporated in the draft assessment order of the AO. The assessee did not file any objections before the Dispute Resolution Panel (DRP) against the draft assessment order and therefore the final assessment order was passed by the AO. The assessee preferred appeal before the CIT (Appeals) against the final assessment order. The CIT (Appeals) excluded Tata Elxsi Ltd. from the list of comparable companies and also directed that only segmental margin pertaining to software development segment of comparable company, Me....
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.... 2007-08) in which the comparability of this company for clinical trial research segment was considered. It was therefore submitted that this company is not a pure software service provider such as the Assessee. The Tribunal accepted the plea of the Assessee and held that this company ought not to have been considered as comparable to a SWD service provider such as the Assessee. (iii) E-Zest Solutions Ltd. The Tribunal held in the decision cited that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act without examining whether the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, the tribunal found that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., was rendering product development services and high end technical services which come under the category of KPO services. The Tribunal followed co-ordinate bench order of Tribunal in the case of Capital I-Q Inform....
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.... that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider and that the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, the Tribunal held that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. (viii) Wipro Limited As far as this company is concerned, the Tribunal held that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The Tribunal followed the order of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No. 227/Bang/2010) wherein it was held that this company was owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and h....
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....d computation of margins of this company on a segmental basis. As far as this objection is concerned, we find that the CIT(A) while giving the aforesaid direction has taken note of the fact that the financials in public domain did not reflect the segmental details. The AO obtained segmental details by issue of notice u/s. 133(6) of the Act. The CIT(A) directed that only segmental profit margins relatable to software development services segment should be taken for the purpose of comparison. The plea of revenue is that the profit margin at the entity level should be taken, which in our view, cannot be accepted. In the TNMM, what is to be compared is only the transaction and margin from the transaction. The transaction for which the ALP is sought to be determined is rendering of software development services and therefore the plea of revenue to take the enterprise level profit margin is devoid of any merit. 17. As far as ground No. 6 raised by the revenue is concerned, it is the plea of assessee that Tata Elxsi Ltd. which was excluded from the list of comparable companies satisfies all the filters and therefore should be retained as a comparable. On this aspect, we find that the CIT....
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....lled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred ....
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....een a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: * None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or * Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of 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 p....
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.... the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be ....
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....on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working h....