TaxTMI 
TaxTMI 
TaxTMI 
2022 (8) TMI 1285
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....smissed. Out of 16 sub-grounds raised by the assessee with regard to TP adjustment, ground No.3.5 pertains to applying / modifying of certain filters and ground no 3.14 relating to working capital adjustment. The ld AR during the course of hearing presented arguments relating to TPO not applying the correct filter for turnover while modifying the filters applied by the assessee for selecting comparables and the working capital adjustment and prayed that these issues can be taken up for adjudication leaving the rest of the grounds relating to TP adjustments open. 4. The brief facts are that the assessee operates as a global offshore service entre for the Atos group. It renders IT services to its AE and also to third parties in India. The assessee filed return of income for AY 2016-17 on 30.11.2016 declaring an income of Rs.21,12,75,670. The case was selected for scrutiny through CASS and notice u/s. 143(2) of the Act was duly served on the assessee. Since the assessee had international transactions with its AE, the matter was referred to the Transfer Pricing Officer (TPO) in order to determine the Arms Length Price (ALP) of the international transaction. The TPO passed the order u/....
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....racting charges - 27,593,262 27,593,262 Employee benefit expenses 1,156,062,332 1,025,578 1,157,087,910 Depreciation/ amortisation expenses 172,779,722 - 172,779,722 Corporate support services 22,632,176 - 22,632,176 Other expenses 308,533,991 - 308,533,991 Total operating cost ('TC') 1,660,008,221 28,618,840 1,688,627,061 Operating Profit ('OP') 233,747,351 1,324,811 235,072,162 OP/ TC 14.08% 4.63% 13.92% 8. The TPO rejected 5 comparables selected by the assessee and accepted 3 companies. He applied fresh filters and selected the comparables the margin of which worked out to 25.59% as given below:- Sr No. Name of the Comparable Company Margins (OP/OC) 1. Kals Information Systems Ltd. (seg) 8.60% 2. E-Zest Solutions Limited 10.87% 3. Rheal Software Private Limited 14.50% 4. CG-VAK Software & Exports Limited 18.50% 5. Cigniti Technologies Ltd. 19.43% 6. R S Software (India) Ltd. 20.87% 7. Tata Elxsi Limited 22.17% 8. L&T Infotech Ltd. 24.83% 9. Nihilent Limited 26.36% 10. Inteq Software Private Limited 28.2o% 11. Persistent Systems Ltd. 30.89% 12. Infobeans Technologies Ltd 32.42% 13. ....
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....CIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper....
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....n of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 14. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision holding that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:- "17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dict....
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....low the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (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). In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.4 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the ....
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....e open market. 12. 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 3.47-3.54 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 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 Parag....
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....king 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 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....
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....es for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. 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 opening 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 exact 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. 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. R....
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.... 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." 19. Respectfully following the above decision of the Tribunal in the case of Huawei Technologies India (P) Ltd. (supra), we direct the AO to allow the working capital adjustment and re-compute the ALP accordingly. 20. The rest of the grounds raised with regard to TP adjustment are left open. Notional interest on outstanding receivables 21. Ground No.4 raised by the assessee reads as follows:- "4. On the facts and circumstances of the case and in law, the Learned AO/ Learned TPO erred in making an TP adjustment of INR 1,20,95,493/- as interest on outstanding receivables from Associated Enterprises (`AEs'). While doing so, the Learned AO/ Learned TPO erred in not recomputing the adjustment as directed by the Hon'bl....
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.... 66 USD 30/11/2015 30/12/2015 22/12/2015 181,366,411 22 3,990,061,036.72 6 Atos IT Outsourcing Services, LLC 82 USD 31/12/2015 30/01/2016 26/01/2016 191,261,611 26 4,972,801,883.92 7 Atos IT Outsourcing Services, LLC 98 USD 31/01/2016 01/03/2016 22/02/2016 182,724,271 22 4,019,933,965.52 8 Atos IT Outsourcing Services, LLC 114 USD 29/02/2016 30/03/2016 21/03/2016 186,354,558 21 3,913,445,711.70 9 Atos IT Outsourcing Services, LLC 130 USD 31/03/2016 30/04/2016 11/04/2016 201,180,258 11 2,212,982,834.92 Total-Export A 1,730,605,493 37,717,602,266.98 10 Atos IT Outsourcing Services, LLC Unbilled INR Revenue 31/03/2016 B 163,150,079 Revenue as per Financials A+B 1,893,755,572 Computation of Weighted Average Days 37,717,602,267 = 21/79 days < Agreed credit period....
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....ese sections of the Act have not been placed before Hon'ble SC in Smiff Securities or before Hon'ble SC/HC/ITAT in other cases cited above. We have cited relevant SC decisions to support our contention that the decisions cited above should be read only in the context of issues which were placed before them and the issues which were not before them should be decided independently on merit. We have demonstrated that the actual cost of goodwill acquired by the transferee company is to be taken as goodwill pre existing with the company before a slump sale in view of provisions of explanation 7 to section 43(1) and explanation 2 to section 43(6)(c)." 28. The DRP confirmed the disallowance. 29. The ld. AR submitted that the assessee has taken over the business in relation to Information Technology Outsourcing services from XBSIPL as a going concern on slump sale basis, pursuant to the agreement dated 24.3.2015 for a consideration of Rs.98,09,65,904. Out of the total consideration, Rs.93,51,41,592 represents intangible assets like business, employees, customer contracts and business records. The same is accounted as goodwill in the books of accounts itself, value being the diffe....
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.... ITR 26, the facts and circumstances of which are similar to the present case, wherein the Hon'ble HC allowed the claim of depreciation on goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon'ble SC in the case of Smifs Securities (Supra). iii. Further, we place reliance on the following decisions, wherein it was principally held that goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale: Areva T & D India Ltd. 345 ITR 21 Truine Energy Services (P) Ltd. 65 taxmann.com 238 Toyo Engineering India Limited TS-811-HC-2012 Volvo India Pvt. Ltd. TS 391-ITAT-2019 Dorma India Pvt. Ltd. TS-735-ITAT-2019 13.11. The sixth proviso to Section 32(1) of the Act also not applicable. It is applicable, only in case of assets already existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the pract....