TaxTMI 
TaxTMI 
2023 (3) TMI 1429
X X X X Extracts X X X X
X X X X Extracts X X X X
....prises. 6. On the facts and in the circumstances of the case and in law, Ld. TPO / Ld. AO / Ld. Panel erred in: a. rejecting the transfer pricing documentation which was maintained in good faith and with due diligence by the Appellant; b. rejecting certain filters as applied by the Appellant in selection of the comparable companies at the time of preparation of the transfer pricing documentation; and c. applying certain filters not relevant to the Appellant while undertaking fresh comparability analysis. 4. These grounds are general in nature, which do not require any adjudication. 5. Ground Nos.7 & 8 of assessee's appeal are reproduced as under: 7. On the facts and in the circumstances of the case and in law, Ld. TPO / Ld. AO / Ld. Panel erred in including following companies in the final set which are not comparable to the Appellant's functions, asset base and risk profile: Sipra Labs Limited a. Aavanira Biotech Private Limited b. Veeda Clinical Research Private Limited c. MS Clinical Research Private Limited d. Prado Preclinical Research & Development Organisation Private Limited ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially affect the price, cost or profits. The 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable' position stated in the Balance Sheet may not exactly reflect as to whether it arises f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....argin 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 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 subclause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid 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 the following reasons: (i) T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es and payables 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 (Delhi - 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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." 23. The aforesaid decision clearly lays down the proposition that working capital adjustment is to be given effect to while determining ALP while adopting TNMM method. Respectfully following the said decision, we allow this issue in favour of the assessee." 9.1 In view of the above order of the Tribunal in assessee's own case, we decide the issue in favour of the assessee and against the department. 10. Ground No.11(b) of the assessee's appeal is with regard to risk adjustment, which is reproduced below: 11. "On the facts and circumstances of the case, and in law, Ld. TPO / Ld. AO / Ld. Panel erred in: not granting risk adjustment." 10.1 The ld. DRP stated in his report that he did not agree with the assessee's plea that it does not bear any significant risk. The ld. DRP was of the view that the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere made each month for any work that had to be redone; it seems APCI's payments were reduced as a result. In addition, the evidence was that the Assessee collected its fees in advance from its customers while APCI was paid 30 or more days later, so it would seem APCI may technically have been at greater credit risk due to delay in payment, although, practically speaking, when the party that makes the payment also benefits from two-thirds of the profit from it, it becomes rather hard to suggest that there was much risk of non-payment. On the other hand, I agree with Mr. Wall's assertion that since APCI had only one customer, namely the Assessee, if APCI lost that customer, it would have been for all intents and purposes _finished in business and hence bore the biggest market risk. This is what in frict happened. To suggest, as Dr. Wright did, that since APCI was handed a guaranteed market by the :4ssessee, resulting in high profitability from day one, seems to ignore the reality that having one's eggs' ail ke one basket .voti can be out of business at the whim of that sole customer as well." The ld. DRP stated that the above ratio is equally applicable to the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to he made is not shown to be computable with reasonable certainty and accuracy, in our considered opinion, the ratio of this judgment becomes applicable and no risk adjustment can be allowed on an arbitrary basis. Hence, this claim of risk adjustment is rejected:" Accordingly, this objection towards allowance of risk is not found acceptable and rejected by the ld. DRP. Against this assessee is in appeal before us. 11. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in IT(TP)A No.3270/Bang/2018 in assessee's own case vide order dated 18.4.22 wherein held as under: "26. We heard the rival submissions and perused the materials on record. We will look at the provisions of sub-rule (3) to rule 10B which reads as follows (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and facilitator for the performance of clinical trials; c. considering that the reimbursement of investigator fees is a value- added service which mandates mark-up. 13. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessment year 2013-14 in assessee's own case in IT(TP)A No.2634/Bang/2017 dated 7.10.2021 wherein the Tribunal held as under: "50. We have considered the rival submissions. In this case, the assessee coordinated between the individual investigator and Paraxel International GmbH Germany. The contention of the assessee is that assessee has not undertaken any risk and all risk was taken over by Paraxel International GmbH Germany and relied on the Addendum dated 19.9.2007. However, the fact is that the assessee acted as coordinator and facilitator in selecting the investigator so as to conduct clinical trial. Selection of the investigator demonstrates that clinical trial is important task in the whole work undertaken by the assessee. The assessee invested considerable time and resources in this. The plea of assessee is that assessee has not received any amount as fee for doing th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Sponsor on a cost to cost basis to PIC or any other contracting affiliate. The Parties agree that PICRPL will not load any margin on the recharge of such pass through cost. PICRPL shall maintain complete, accurate and up-to date accounting records relating to such 'Pass through Costs' which can be produced to PIC. 4.4. These terms are based on the parties determination of an amount equal to Arm's Length compensation that are adequate to compensate for the functions performed, assets employed and risks assumed by PICRPL and will be determined by PIC and PICRPL in accordance with arm's length standards. Any changes to the fees shall be communicated between the parties in writing and such written communication shall be considered as addendum to this agreement. Any taxes leviable in India on the above fees shall be borne by PIC. Further, PIC may withhold taxes to the extent required to do so as applicable in its jurisdiction. 4.5 Sponsor, for the purposes of section 4.3, shall mean and refer to a customer / 'company who have entered into a contract with PIC for the provision of Clinical Services. 4.6. Investigator, for the purposes of se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under consideration, it was treated as pass through cost under the head 'recovery of expenses' and there was no mark-up paid to the assessee. The assessee failed to explain why in this assessment year there was no mark-up on the investigator payments. The assessee only relied on the Addendum filed by the assessee, wherein it was mentioned that it was only pass through costs. As discussed earlier, this Addendum is only a make believe story and the AO has right to go beyond this document to find out the real intention of the parties. We observe that the real intention to this Addendum is different from what it appears ex facie. Hence, we have to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es Ltd. in IT(TP)A No.3284/Bang/2018 dated 18.3.2021, wherein held as under: 24. "We have heard both the parties and perused the material on record. The ld. AR fairly conceded that outstanding amount on account of sales/services billed to AE akin to loan advanced by assessee is an international transaction. As held by the Hon'ble Delhi High Court in the case of Avenue Asia Business Advisors (P.) Ltd. v. DCIT [2017] 398 ITR 120 (Del), there should be TP adjustment on this count after making proper TP study by the TPO after considering the period of credit enjoyed by the comparables and also applicable LIBOR rate in the place of AEs for benchmarking the rate of interest to arrive at the ALP. With these observations, we remit the issue in dispute to the file of AO/TPO to benchmark the interest rate in the light of the decisions cited by ld. DR. Further, we make it clear that the TPO should compute the interest only for the relevant assessment year after going through the relevant agreements entered by the assessee with AEs while computing the ALP. 15.1 However, the ld. A.R. submitted that no adjustment to be made towards notional interest of outstanding receivables without....