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IT(TP)A No.1616/Bang/2017
Assessment Year :2013-14
ORDER
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee and the same is directed against the
assessment order dated 29.05.2017 for Assessment Year 2013-14 passed by
the AO u/s. 143(3) r.w.s. 144C(13) of IT Act, 1961 as per the directions of DRP.
4.3 The Ld. TPO erred in selecting Larsen & Toubro lnfotech
Limited, Mindtree Limited (Seg.) and Persistent Systems Limited as
comparables in the order uls 92CA of the Act, despite their
turnover being more than ten times of the turnover of the Appellant
for the FY 2012-13. The said companies are functionally not
comparable to the IT services rendered by the Appellant. The said
companies have significant profitability on account of their brands,
own intangibles and incur significant onsite expenses. Larsen &
Toubro Infotech Limited and Persistent Systems Limited have
significant related party transactions for the FY 2012-13.
Accordingly, the said companies cannot be compared to the
Appellant, being a risk insulated captive IT service provider.
IT (TP) A No. 1616/Bang/2017
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4.4 The Ld. TPO erred in selecting ICRA Techno Analytics Limited as
comparable in the order uls 92CA of the Act, despite the said
company having significant related party transactions for the FY
2012-13. Accordingly, the said company cannot be compared to the ·
Appellant, being a risk insulated captive IT service provider.
TPO erred in law in not granting the variation as per the proviso to
Section 92C(2) of the Act.
4.12 The Ld. AO/ TPO erred in law and on facts in disregarding
the application of multiple-year data while computing the
margins of alleged comparable companies as such data had an
influence in determining the pricing policy of the Appellant.
5.2 The Ld. AO/ TPO erred in law in applying arbitrary filters to
arrive at a fresh set of companies as comparables to the Appellant,
without establishing functional comparability.
5.3 The Ld. AO/ TPO grossly erred in law in deviating from the
uncontrolled party transaction definition as per the Income-tax Rules
and arbitrarily applying a 25% related party criteria in accepting I
rejecting comparables.
5.4 The Ld. AO/ TPO also erred on facts and in law in arbitrarily
rejecting companies with different year ending (i.e. other than 31
March 2013) and applying the saidfilter inconsistently.
5.8 The Ld. AOITPO also erred on facts and in law in accepting
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11. Relief
11.1 On the facts and circumstances of the case and in law, the
Appellant prays that the Ld. AO be directed to grant all such relief
arising from the preceding grounds as also all relief cons_equential
thereto.
3. The assessee has also filed one additional ground of appeal which is as under.
IT (TP) A No. 1616/Bang/2017
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4. The Id. AR . of assessee has filed the synopsis of arguments which are
reproduced hereinbelow for ready reference:-
"SYNOPSJS OF THE APPELLANT'S ARGUMENTS
Notes:
(i) Unless repugnant to the context, all sections and rules referred to
herein are sections and rules of the Income Tax Act, 1961 and the
Income Tax Rules, 1962 respectively.
(ii) All grounds taken and arguments urged are without prejudice to
each other.
(iii) The following is not in derogation of the arguments advanced at
the hearing.
(a) The Appellant does not have any borrowings at all. It thus does not
incur any expenditure whatsoever in the maintenance of its working
capital.
10. The Appellant submits that while all three options are
reasonable, the second option is the most preferable. The third
option is acceptable too. However, the sensitivity factor (beta)
required to compute the return on equity as per the CAP !VI is not
determinable in the case of unlisted securities. The first option is
· less scientific than the other two. However, the Appellant does not
object to applying any of the options.
12. The learned DRP also held that the Appellant only sought an ad
hoc adjustment and that it did not provide a detailed computation.
This is untrue. Annexure 12 to the reference to the DRP in Form 35A
read with the enclosures thereto (all forming part of the memorandum
of appeal before this Tribunal) contains detailed computations for this
purpose.
13. The learned TPO has also held that the Appellant has "single
customer risk" and that thus no risk adjustment was warranted. This
reasoning has been expressly disapproved by this Honourable
Tribunal in lntellinet Technologies India Pvt. Ltd. v. ITO [2012) 22
taxmann.com 28 (Bang=Trib.).
14. The learned TPO relied on SAP Labs' case'". Meritor LVS'
case and Symantec's case. In both SAP Labs and Symantec's
cases, the risk adjustment was denied as it was either brought up
before the tribunal for the first time or that computations of the
adjustment were not furnished before the lower authorities. Both
these are not true in the present case. Additionally, the learned
DRP relied on the decisions in Zyme Solutions", CDC Software',
Stryker Global, and Aptara Technologies. In Zyme Solutions, the
attending circumstances were that the DRP had directed the TPO
to grant a risk adjustment of 1% without considering any of the
material. In the Appellant's case, it is plainly evident that the
learned DRP has denied the risk adjustment on non-existent
grounds. In Aptara's case. the Tribunal held that where no Arm's
Length Price adjustment was being made at all by virtue of the
margin provided for in the second proviso to section 920(2), the
ground relating to the risk adjustment was infructuous. The
learned DRP has misrepresented this as meaning that the 5% ipso
facto implied that no risk adjustment could be made. All the
precedents are thus distinguished.
(a) CIT v. Mercer Consulting (India) Pvt Ltd. [2017) 390 !TR 615,
627 (P&H) - The Punjab & Haryana High Court held that
different financial year would not itself entail the rejection of the
company so long as the data for the· relevant period is available.
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(c) G.E. India Exports Pvt. Ltd. v DCIT [2017} 82 taxmann.com 464
(Bangalore-Trib.) coordinate Bengaluru Bench of the Tribunal has
also adopted a view similar to that in e4e Business Solutions' case.
CG-VAKSOFTWAREANDEXPORTSLTD.
20. This comparable was selected by the TPO and has been
upheld by the Id. DRP. The Appellant's only submission before
this Honourable Tribunal is that the learned TPOIAO has
wrongly computed the P LI of this comparable. The Appellant
does not challenge the selection of this comparable and thus does
not press the relevant grounds.
21. As regards the PLI, the learned TPOIAO has determined the PLI
at 20.45% at p. 12 of his order. However, he has finally considered
the PLI at 20.54%. The Appellant submits that the correct PLI is, in
fact, 15.41%. The following table shows the differences (highlighted in
yellow) between the computation of the learned TPOIAO and the
Appellant on the other hand.
23. It is thus prayed that the Tribunal hold that the margin is to be
computed as the Appellant contends, to arrive at a PLI of 15. 41 % in
respect ofCG-VAK.
25. So computed, the RPT percentage exceeds 25%, being the filter
adopted by the learned TPO as upheld by the learned DRP. In any
event the Appellant contends that the appropriate filter to be applied
is 15% and not 25%.
26. The Appellant has applied the 15% filter while the learned TPO
has applied a 25% filter. Therefore, it is common ground that an RPT
filter is to be applied. The only question concerns the percentage to be
considered. Firstly, there is no doubt that the 15% filter is being
regularly applied by various benches of the Tribunal. Secondly, on
the very question of how to choose between the 25% and the 15%
filters, a co-ordinate Bengaluru Bench has held in Dell's case that
the question turns on the availability of comparables. It has further
held that since there is no dearth of comparables in the software
development sector, the stricter 15% filter can be applied. Further,
in Siemens BPO's case, a co-ordinate Bengaluru Bench-has held
that, under normal circumstances, the tolerance level must be 15%.
Accordingly, it is submitted that the 15% filter must be applied. In
whatever manner the RFT computations are made, ICRA fails the
15%filter.
holds. This makes it clear that the operations ofMindtree extend much
beyondjust software development.
i) The learned TPO has taken figures from the "IT services"
segment of Mindtree. Page 58 of the Annual Report shows two
segments "IT services" and 'Product Engineering Servi es (P ES)".
ii) The graphs on page 57 of the annual report show the distribution
ofMindtree's revenue across service lines.
vii) In the paragraph above the segment table on page 58/90, the
company itself has stated· that as segmental assets are used
interchangeably between segments, meaningful ·disclosures in
that regard are not possible.
PERSISTENT SYSTEMS
32. This comparable has been selected by the learned TPO and upheld
by the learned DRP. The Appellant submits that this comparable
ought to be rejected on the grounds that:
33. RPT Filter The Appellant submits that it fails the 15% RPT
filter. By the TPO's own computation, the RPTs of Persistent is
19. 62%, thus failing the filter. It has already been submitted
above that a co-ordinate Bengaluru Bench of this Honourable
Tribunal has held that in the software sector, since there is no
dearth of comparables, the stricter 15% RPT filter is to be applied
in preference to the more lenient ~5% filter. It has also been
shown above that various coordinate benches have shown a
preference to the 15% filter in recent times.
34. Functionality
(a) Page 4 of the annual report shows that the company is tn
many lines of businesses such as product engineering, technology
consulting, strategic partnership to build platforms, and 1 Prled
business. The activities are thus wide and multifarious.
(b) Page 19, 27 and 31 of the annual report show a focus on IP-led
business and the acquisition ofIP during the year.
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35. Without prejudice, the learned TPO and the learned DRP have
wrongly treated provision for doubtful debts as being non-
operating in nature. If this is treated as operating, the margin will
come to 27% as opposed to the 28.27% determined by him.
Detailed arguments have been advanced in this respect in relation
to the comparable CG-VAK.
OTHER ISSUES
TDS ON COMMISSION
36. The Appellant paid commission ofRs. 4,34, 72,134 to parties based
abroad and having no permanent establishment (PE) . in India for
services rendered by them abroad No tax was deducted at source.
37. The DRP noted the factual position that the agents rendered
services and solicited orders outside India and the commission was
also remitted abroad It, however, upheld the disallowance on the
reasoning that as the order is executed by the assessee in India the
right to receive the commission also arose in India. TDS under section
195 was applicable.
40. The learned AO erred it not giving the Appellant credit for set off
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5. In the course of hearing before us, the Id. AR of assessee has submitted a big
chart containing assessee's arguments in respect of assessee's claim
regarding inclusion / exclusion of some comparables and it was submitted by
Id. AR of assessee that appeal of the assessee may be decided on the basis of
synopsis of the assessee's arguments and the big chart in respect of inclusion /
exclusion of various comparables. The Id. DR of revenue supported the final
assessment order and the order of DRP.
6. We have considered the rival submissions. We find that as per the synopsis of
arguments filed by Id. AR of assessee and reproduced above, in transfer
pricing issues, one matter to be decided is regarding negative working capital
adjustment done by the AO and the second TP issue is regarding the
assessee's claim for risk and other adjustments. In addition to this, the
assessee is requesting for inclusion of one comparable i.e. R Systems
International Ltd. (segment) and exclusion of five comparables i.e. 1) CG-VAK
Software and Exports Ltd., 2) ICRA Techno Analytics Ltd., 3) L&T lnfotech Ltd.,
4) Mindtree Ltd. (segment) and 5) Persistent Systems. In addition to TP issues,
there is one issue on corporate taxation i.e. TDS on commission. We decide
this appeal by deciding various issues one by one.
7. We first examine and decide the issue in respect of ·negative working capital
adjustment. In this regard, this is the submission of the assessee that 99.83%
of the assessee's share capital is held by Lifetree Cyberworks Pvt. Ltd., the
assessee's holding company and TecnotreeOyj, Finland, the assessee's
ultimate holding company and thus, the assessee does not have any working
capital risk at all. This is also the assessee's submission that a substantial
portion of the assessee's working capital arises out of transactions with its
related parties and in support of this contention, it was submitted that out of
total trade receivables of Rs. 163.35 Crores as on 31.03.2013, more than 77%
i.e. Rs. 126,40,42,576/- is receivable from its holding and subsidiary companies
and this is the claim of the assessee that this factual position reinforces the
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proposition that the assessee bears no working capital risk. The assessee has
placed reliance on several Tribunal orders as noted in para 4 of the synopsis of
the assessee's arguments reproduced above and therefore, we have to
consider and examine the applicability of these judgments. The first Tribunal
order on which reliance is placed is the Tribunal order of Hyderabad Bench of
the Tribunal rendered in the case of Adaptec (India) Pvt. Ltd. vs. ACIT as
reported in [2015] 57 taxmann.com 307. Copy of this Tribunal order is
available on pages 275 to 286 of compilation of case laws and in particular, our
· attention was drawn to paras 10 & 11 of this Tribunal order available on page
nos. 285 and 286 of paper book. Hence, for the sake of ready reference, these
paras are reproduced hereinbelow. The same are as under.
• The company does not bear any working capital risk since it is
been fully funded by it's A.E. from its inception and has no working
capital contingencies.
• The company has never taken any loans till date from the date of
incorporation nor has incurred any expense for meeting the
working capital requirement."
We have gone through the submissions and the order of the TPO. The
assessee pleaded that the DRP has acceded such a plea in some other
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I I. In view of the above, we are of the opinion that assessee 's case
being similar, there is no need for making any negative working
capital adjustment when assessee does not carry any working capital
risk. In fact, TPO should have done necessary working capital
adjustment to the profits of the selected comparables so as to make
them comparable to the assessee. In view of this, we direct the TPO
not to make negative working capital adjustment."
8. From the above paras reproduced from this Tribunal order, it is seen that in
that case, the Tribunal has reproduced the relevant para of the directions of
DRP in a different case i.e. Market Tools Research P. Ltd. and Mega Systems
Worldwide India P. Ltd. We find that in these paras of these directions of
DRP, this is the basis of decision of DRP that assessee company does not
bear any working capital risk since it has been fully funded by it's A.E. from its
inception and has no working capital contingencies and the company has
never taken any loans till date from the date of incorporation nor has incurred
any expense for meeting the working capital requirement. In that case, the
ORP has examined the direction of DRP, Hyderabad in some other case i.e.
Cordys Software India P. Ltd. for Assessment Year 2008-09 dated 03.08.2012
and the direction in _that case are also reproduced and as per the same, it is
held by ORP in that case that working capital adjustment is made for the time
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value of money lost when credit time is provided to the customers. In our
considered opinion, this very basis adopted by DRP in those cases that
working capital adjustment made is for the time value of money lost when
credit time is provided to the customers is incorrect because in TP analysis,
comparison is made of operating profit margin i.e. profit before interest and
therefore, interest cost has no relevance for TP analysis. In fact, the working
capital adjustment is made for this reason that if the sale is made on the terms
of cash payment to one customer and to second customer the sale is made
with the payment terms of one morith outstanding and to third customer with
payment terms of two months outstanding then the prices charged to the first
customer having cash payment terms will be minimum and the prices charged
for the second customer with the payment terms of one month credit will be
more as compared to the prices charged to first customer and the prices
charged to the third customer with the payment terms of two months credit will
be more than the prices charged to the first customer also. Similar is the
situation for creditors because if the assessee makes payment to its suppliers
on cash basis, the assessee will get least price and if the assessee is making
payment after one or two months then the prices charged to the assessee by
the supplier will be extra. Such extra pricing depending on the payment terms
is not for this reason that the -supplier is making payment of interest because
even if a supplier has its own money and has no interest burden then also he
will charge extra if the payment terms is for two months credit as against
payment terms of one month credit and payment terms of cash payment i.e.
immediately on supply. Hence it is seen that the very basis adopted by DRP
in those cases is wrong and the Tribunal has simply decided the issue on this
basis that since the assessee does not carry any working capital risk, negative
working capital adjustment is not called for. At this juncture, we feel it proper
to reproduce the relevant Para from the order of TPO in the present case from
page 31 of the order of TPO being Para 12.1 which reads as under.
"12.1 NEGATIVE WORKING CAPITAL ADJUSTMENT
A question that few !TAT benches have deliberated over lately
pertains to whether negative working capital adjustment should be
given. Most JTATs have equivocated that positive working capital
adjustment should be made on the comparables' margin. The adjusted
margin is [PLI-WCA}. Hence positive WCA reduces the mean margin
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9. From the above Para from the order of TPO, it is seen that as per the TPO in
the present case, working capital position affects the pricing of any service in
open market as discussed above. The TPO also held that whether positive or
negative working capital difference is not material .and the purpose of the
working capital adjustment is this that it increases comparability and the
purpose of working capital adjustment is not to benefit the assessee but to
increase comparability and be just. In our considered opinion, working capital
risk and whether there is interest burden or not are not relevant factors for
deciding working capital adjustment because in our considered opinion,
working capital adjustment is done because working capital position affects
the pricing of any service or goods in the open market. Since this aspect has
not been considered by Tribunal in that case, in our considered opinion, this
Tribunal order is not binding precedence for the purpose of deciding this ,
aspect that working capital position affects the pricing of any service or goods
in the open market because in the present case, this is the objection of the
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TPO as per relevant paras reproduced above and this aspect is not discussed
and decided by Tribunal in this case.
10. Now we examine the applicability of the second Tribunal order on which
reliance is placed and this Tribunal order is rendered in the case of Lam
Research (India) Pvt. Ltd. Vs. DCIT (supra), copy of this Tribunal order has not
been provided by the assessee in the compilation of case laws and no citation
is also provided and this is not a reported Tribunal order and therefore, we
cannot examine and consider the applicability of this Tribunal order and
hence, we hold that this Tribunal order is not applicable in the present case.
11. The third Tribunal order on which reliance is placed is the Tribunal order
rendered in the case of CAPCO IT Services India Pvt. Ltd. Vs. ITO (supra),
copy available on pages 287 to 295 of case law compilation and it was pointed
out before us that paras 13 to 17 of this Tribunal order are relevant and the
same are available on page no. 294 of paper book. These paras from this
Tribunal order are reproduced hereinbelow.
"13. It was further submitted that for the purpose of the Economic
Analysis, the cost plus mark-up of the Appellant is compared against
that of uncontrolled companies engaged in similar services and that
such independent comparable uncontrolled companies, who operate
under uncontrolled conditions, bear risk during the course of its
operations including market risk, research and development risk,
technology risk credit risk, currency fluctuation risk, liquidity risk,
default risk etc. As a result, the resultant profitability of such
comparable uncontrolled companies is directly related to the level of
risk borne, which is not so it the case of a captive service provider
similar to the Appellant as it assumes minimal risks and being an
entity with a fixed mark-up on the cost earn steady return year on
year.
• Sony India (P.) Ltd v. Dy. CIT [2008] 114 !TD 448 (Delhi)
• E-Gain Communication (P) Ltd v. ITO [2009J 118 !TD
243/[2008] 23 SOT 385 (Fune)
• Mentor Ruling
• Motorola Solutions India (P) Ltd v. Asstt. CIT [2014] 48
taxmann.com 248/[2015] 152 !TD 158 (Delhi - Trib.)
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15. Further, in addition to the above rulings, the principle has also
been upheld by the recent High Court ruling the case of Chryscapital
Investment Advisors (India) (P) Ltd v. Dy. CIT [2015] 376 ITR
183/232 Taxman 20/56 taxmann.com 417 (Delhi), wherein the
Hon'ble Court has held that appropriate adjustments should be
carried out in situations where there are differences between the
tested parties and comparables and in case such differences
perceptible in the comparables cannot be eliminated on account of
adjustments or otherwise, then such comparables have to be rejected.
12. We find that in this case also, the decision of Tribunal is on this basis that
working capital adjustment is made for the time value of money lost when
credit time is provided to the customers and there is no decision in this case
also on this aspect that working capital position affects the pricing of any
service or goods in open market as the case made out by TPO in the present
case as per Para 12.1 of TPO's order reproduced hereinabove. Hence we
hold that in the present case, this tribunal order is also not applicable.
13. Now we examine the applicability of the fourth Tribunal order on which
reliance is placed having been rendered in the case of ITO Vs. lntoto Software
(India) Pvt. Ltd. (supra), copy available on pages 61 to 73 of case law
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compilation and it was pointed out before us that Para 14 on pages 71 and 72
are relevant and hence, the same is reproduced hereinbelow.
"14. Ground No.14 is raised as an additional ground stating that
TPOIDRP has erred in making a negative working capital
adjustment of (-)0.61% while computing the adjustment uls. 92CA.
It was the submission that negative working capital adjustment was
not allowed in various decisions and relied on the decision of
Adaptec (India) P. Ltd., Vs. ACITin !TA No. 206/Hyd/2014, dt. 25-
03-2015, in the above referred case.
"JO. Ground No.8 pertains to the issue of negative working
capital. As briefly stated above, after arriving at the arithmetic
mean of all comparables at 22.03%, the A.O. worked out
negative working capital adjustment of 3.22% thereby, making
arms length price at 25.25%. Even though, DRP refused to
interfere with the ·objections of the assessee in its order, we were
informed that DRP has directed the TPOIA.O. not to make any
negative working capital adjustment in some of the cases in the
next assessment year, in the cases of Market Tools Research P.
Ltd., and Mega Systems Worldwide India P. Ltd., assessee
placed on record copies of orders of DRP. In that DRP
considered the issue and directed the TPO as under :
• The company does not bear any working capital risk since
it is been fully funded by it's A.E. from its inception and has
no working capital contingencies.
• The company has never taken any loans till date from the
date of incorporation nor has incurred any expense for
meeting the working capital requirement. "
We have gone through the submissions and the order of the TPO.
The assessee pleaded that the DRP has acceded such a plea in
some other case. On examination, we find that the DRP,
Hyderabad in the case of Cordys Software India P. ltd., for A. Y
2008-09 in its directions dated 03.08.2012 has given a finding as
under:
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14. From the above Paras reproduced from this Tribunal order, it is seen that in
this case also, the decision is on the basis of Tribunal order rendered in the
case of Adaptec (India) Pvt. Ltd. vs. ACIT (supra). As we have already seen
that the tribunal order rendered in the case of Adaptec (India) Pvt. Ltd. Vs.
ACIT (supra) is not applicable in the present case because it was found that in
that case, the Tribunal decision is not on this aspect that working capital
position affects the pricing of any services or goods in open market as the
case made out by the TPO in the present case. Hence we hold that this
. Tribunal order is also not relevant in the present case.
15. The last Tribunal order on which reliance is placed is the Tribunal order
rendered in the case of TNS India Pvt. Ltd. Vs. ACIT (supra), copy available
on pages 296 to 310 of case law compilationand before us, it was pointed out
that para 8.1 on page nos. 298 & 299 is relevant and hence, we reproduce
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Page 27 of 42
para 8.1 from pages 298 & 299 of the compilation of case laws. The same is
as under.
"8.1. This ground pertains to incorrect computation of working
capital adjustment. It was submitted that working capital adjustment
was wrongly considered by considering the total receivables and
arrivals including third party transactions and making a negative
working capital adjustment. A OITPO is directed to examine this issue
and work out the working capital adjustment afresh, as certain
comparable companies are being considered separately. In case the
working capital adjustment comes negative, AOITPO is directed not to
make any negative working capital adjustment as the same is not
approved in various Co-ordinate Bench decisions. The Co-ordinate
Bench of !TAT in the case ofAdaptec (India) P. Ltd., Vs. ACIT in !TA.
No. 206/Hyd/2014 (AY 2009-10) dt. 25-03-2015, has decided the issue
of negative working capital as under:
• The company does not bear any working capital risk since it is
been fully funded by it's A.E. from its inception and has no working
capital contingencies.
• The company has never taken any loans till date from the date of
incorporation nor has. incurred any expense for meeting the
working capital requirement. "
We have gone through the submissions and the order of the TPO. The
assessee pleaded that the DRP has acceded such a plea in some other
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"7. 7. 4 Thus, working capital adjustment is made for the time value of
money lost when credit time is provided to the customers. The
applicant is not an entrepreneur but a captive service provider. Its
entire funding needs are provided by the A.E. This being so, the
applicant does not stand to lose anything as it is compensated on a
total cost plus basis. The TPO probably was carried away by the large
amount of receivables appearing in the books of the applicant. But the
applicant is running its business without any working capital risk
while comparable companies have such a risk for them. If at all any
working capital adjustment is to be made to t his situation, only a
positive adjustment has to be made to the comparables so that they
are brought on par with the applicant. In view of the same, the Panel
directs that negative working capital adjustment to the arithmetic
mean margin of the comparables shall not be made. "
In view of the above, the Panel directs that negative working capital
adjustment to the arithmetic mean margin of the cornparables shall
not be made. "
11. In view of the above, we are of the opinion that assessee 's case
being similar, there is no need for making any negative working
capital adjustment when assessee does not carry any working capital
risk. In fact, TPO should have done necessary working capital
adjustment to the profits of the selected cornparables so as to make
them comparable to the assessee. In view of this, we direct the TPO
not to make negative working capital adjustment"."
16. From the above paras, we find that in this case-also, the issue is decided by
Tribunal by following Tribunal order rendered in the case of Adaptec (India)
Pvt. ltd. Vs. ACIT (supra) and we have already seen that this Tribunal order is
not relevant in the present for the reasons mentioned above and therefore, we
hold that this Tribunal order is also not applicable in the present case. We
also find that in para 5 of the synopsis of arguments reproduced above, this is
the submission of the assessee that the basis of the working capital
adjustment is the existence of a difference in the cost of working capital and it
is also stated that this is relevant because the cost is stated to affect the
margin and in the assessee's case, the assessee has demonstrated that it
holds its working capital at no cost, completely out of its own funds without any
borrowings at all. In our considered opinion, these factors are not relevant for
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17. Now we decide the assessee's claim regarding risk and other adjustments.
We first reproduce Para no. 13 available on page nos. 31 & 32 of TPO order.
The same is as under.
"13. RISK ADJUSTMENT:
Risk adjustment involves two vital preconditions. They are that
difference in risk level exists between the tested party and the
uncontrolled comparables; and that it is. possible to calculate in
terms of numbers the differences in risk so that adjustment can be
made. But in case of the taxpayer, both the prerequisites are missing.
Neither the difference in risk level of the tested party and uncontrolled
comparables has been established nor is it possible to convert the
difference in risk level, if there is any, into numbers. If there is any
difference, for a moment academically speaking, it. rests in the realm
of quality and not quantity. There is no reliable method to convert the
qualitative difference into quantitative difference and to make
adjustment on account of risk level. As per the provisions of Rule I OB
(3), if any adjustment should be made, it should be reasonably
accurate to eliminate the material effects of such differences. But in
case of risk adjustment, neither reasonably accurate adjustment can
be made for want of method to do so nor has it been established that
there is a material effect that is affecting the comparisons due to risk
level. If the taxpayer is suggesting that there exists a difference in the
risk level assumed by the tested party and uncontrolled comparables,
it is academic in nature and not based on any study whose results has
been validated
Further, it is not out ofplace to reiterate that single customer risk is a
huge risk which the uncontrolled comparables are not assuming. By
having more customers, the risk is shared or spread. In other words,
if one customer goes out of business still there are others which will
sustain the business of the tested party. But in case of the taxpayer
there being only one client, the entire risk is concentrated on one
client, and therefore, if the client is out of business the taxpayer will
also be out of business.
Moreover, the proviso to Sec. 9 2C (2) of the Act provides for adopting
arithmetical mean of the different prices. This provision neutralizes
the effect of difference in the risk profile, if any between the tax payer
IT (TP) A No. 1616/Bang/2017
Page 30 of 42
and the comparables as realized risk may pull down the profitability
below the risk free return. This stand is supported by the decision of
the Hon 'ble ITAT Bangalore bench in the case of Mis SAP Labs India
(P.) Ltd. [2012] 17 taxmann.com 16 (Bang.) and Mis Meritor LVS
India Pvt. Ltd. [2015] 64 taxmann.com 136 (Bangalore - Trib.) and
also by the Hon 'ble ]TAT, Mumbai bench in the case of Mis. Symantec
Software Solutions Pvt. Ltd. Vs ACIT (2011) 46 SOT 48 (Mumbai).
Based on the above discussions, no risk adjustment is allowed."
18. We also reproduce Para no. 10 available on page no. 13 of DRP directions.
"10.0 Objection no 12
The Ld. TPO erred in not allowing appropriate adjustments on
account of difference in functional, risk and operational profile. The
Ld. AO erred in upholding the actions of the TPO.
>" Symantec Software Solutions (P.) Ltd [2011] 11 taxmann. com 264
(Mumbai) Followed in
>" SAP Labs India (P.) Ltd. [2012] 17 taxmann.com 16 (Bang.)
>" Aptara Technologies Pvt Ltd [TS-309-1TAT-2016(PUN)-TP}
19. From the above Para no. 10 reproduced from the directions of DRP, it is seen
that this is the basis of DRP directions that as per the Tribunal order rendered
in the case of Symantec Software Solutions (P.) Ltd. Vs. ACIT (supra) in which
the issue was decided against the assessee on this basis that the assessee
did not quantify the alleged adjustments on account of difference in risk, the
assessee, first time filed certain calculation before the DRP in support of its
IT (TP) A No. 1616/Bang/2017
Page 32 of 42
claim and although the same calculation is also not on the basis of any
formula or principle rather it is general in nature.This finding is also given by
DRP that the DRP asked the assessee to give detailed working of the risk
adjustment which the assessee was seeking and the basis thereof. But the
assessee just sought of adhoc adjustments on this account based on various
Tribunal decisions. The DRP has given a categorical finding that the
assessee does not have any scientific backing and the assessee's claim is
only a theoretical one. As per para 13 of the order of TPO also, a categorical
finding has been given by TPO that the assessee has not established the
difference in risk level of the tested party and uncontrolled comparables and
this is also not established that it is possible to convert the difference in risk
level, if there is any, into numbers. He has also given a finding that there is no
reliable method to convert the qualitative difference into quantitative difference
to make adjustment on account of risk level. The TPO has also referred to
Rule 1 OB (3) of IT Rules which says that if any adjustment should be made, it
should be reasonably accurate to eliminate the material effects of such
differences. Before us also, as per the synopsis reproduced above, the
assessee has pointed out three options for risk adjustment but these are
general in nature and the assessee has not established that there is any risk
difference between the tested party and the comparables. In the absence of
any working having been provided by the assessee showing difference in risk
between the tested party and comparables and in the absence of any working
regarding . the assessee's claim for risk adjustment, we find no reason to
interfere in the order of DRP on this issue also. This issue is also decided
20. Now we examine the assessee's claim for inclusion of one comparable i.e. R
Systems International Ltd. (segment). On this aspect, it is submitted that this
comparable was excluded by the TPO and DRP on this basis that it has a
different Financial Year i.e. year ending 31st December as opposed to the
assessee's 31st March. Reliance was placed on _the judgment of Punjab &
Haryana High Court rendered in the case of CIT Vs. Mercer Consulting (India)
IT (TP) A No. 1616/Bang/2017
Page 33 of 42
Pvt. Ltd. as reported in [2017] 390 ITR 615. Para nos. 27 to 32 of this
judgment are relevant and hence these paras are reproduced hereinbelow.
"27. The Transfer Pricing Officer excluded the case of R. Systems
International Limited from the list of comparables. The Income-tax
Appellate Tribunal included the same. The Transfer Pricing Officer
excluded the case of R. Systems International Limited on the ground
that it follows the calendar year, i.e., 1st January to 31st December
for maintaining its annual account whereas the accounting year of the
assessee is 1st April to 31st March. The Transfer Pricing Officer
followed an order passed by the Mumbai Bench of the Tribunal in
Asst. CIT v. Hapag Lloyd Global Services P. Ltd. 2013-TII-68-
ITATMUM- TP in which it had been held that a company with a dif-
ferent financial year ending cannot be compared.
28. We are unable to agree with the decision of the Transfer Pricing
Officer and of the Dispute Resolution Panel that affirmed it. The view
taken by the Tribunal commends itself to us. It is not the financial year
per se that is relevant. Even if the financial years of the assessee and
of another enterprise are different, it would make no difference. If it is
possible to determine the value of the transactions during the
corresponding periods, the purpose of comparables would be served.
The question in each case is whether despite the financial years of the
assessee and of the other enterprise being different, the financials of
the corresponding period of each of them are available. If they are,
the Transfer Pricing Officer must refer to the corresponding period of
both the entities in determining whether the two are comparable or
not for the purpose of determining the arm's length price.
30. This View is not contrary to rule I 0B(4) which reads as under:
31. The Rule does not exclude from consideration the data of an entity
merely because - its financial year is different from the financial year of
the assessee. What the Rule requires is that the data to be used in
analyzing the financial results of an uncontrolled transaction with an
IT (TP) A No. 1616/Bang/2017
Page 34 of 42
21. We find that this was held by Hon'ble Punjab & Haryana High Court that if
thedata relating to the financial year in which the international transaction has
been entered into is directly available from the annual accounts of that
comparable, then it cannot be held as not passing the test of sub-rule (4) of
rule 1 OB. In para no. 29 this judgment, it is noted by Hon'ble High Court that it
is noted by Tribunal in that case that the audited accounts of R System
International Ltd. for the year ending December 31, 2008 had been given
under one column and the data for the quarter ending March 31, 2009 and
March 31, 2008 (both audited) had been given in two other columns. In the
present case, the assessee has submitted annual report of R Systems
International for the year ending 31.12.2013 by way of additional evidence
containing 1 to 188 pages and we find that the P&L account is available and
although statement of P&L account is for year ended 31.12.2013 in the said
additional evidence paper book but it is not shown to us that the figures for
31.03.2012 and 31.03.2013 are also available on any page of this additional
evidence as has been noted by Punjab & Haryana High Court in that case.
But still we feel it proper to restore this matter back to the file of AOrf PO for
fresh decision and we order accordingly. The AOff PO is directed that if the
assessee can establish that the figures for Financial Year ending on
31.03.2013 can be worked out from audited accounts of that company then it
should be adopted and this comparable should be included in the list of
comparables. If the assessee is not in a position to do so, then the TPO may
22. In addition to this, the assessee has also placed reliance on three Tribunal
orders as per the synopsis reproduced above. But since, we are deciding the
issue by following the judgment of Hon'ble Punjab & Haryana High Court; we
feel that those Tribunal orders are not required to be considered separately.
Hence on this issue, we restore the matter back to the file of TPO for fresh
decision in the light of above discussion in the light of judgment of Hon'ble
Punjab & Haryana High Court after providing reasonable opportunity of being
heard to assessee.
23. Now we take up the issue in respect of CG-VAK Software and Exports Ltd.
Regarding this comparable, this is the case of the assessee that the assessee
does not challenge the selection of this comparable and therefore, does not
press the relevant ground. The assessee's case is only to determine the PU
of this company correctly. As per the assessee, the PLI of this company
should be adopted at 15.41 % as against 20.54% computed by the TPO/AO.
In the synopsis reproduced above, the basis of difference in working of the PLI
of this comparable is this that the AO has reduced the amount of 39,97,218
being the provision for doubtful debts from the operating and other expenses
of this company and in the result, the profit of that company has been
increased by AO by this amount resulting in increase of PU. But as per the
assessee, provision for doubtful debts is operating expenses and therefore, it
should not be excluded from the operating and other expenses. In support of
this contention that provision for doubtful debts is an operating expenditure,
reliance has been placed by Id. AR of assessee on various judicial
pronouncements as noted in para 22 of synopsis of arguments reproduced
above. In our considered opinion, only this aspect is covered by these
Tribunal orders that provision for doubtful debts is an operating expenditure
but for the purpose of TP analysis, this alone is not enough. Even after holding
that provision for doubtful debts is an operating expense, it has to be seen that
as to whether the same can be considered as an expenditure for TP analysis.
In TP analysis, percentage of profit of the tested party and the comparable is
worked out by dividing the profit by the turnover. If a receipt or expenditure is
not related to the turnover of the present year being the denominator to work
IT (TP) A No. 1616/Bang/2017
Page 36 of 42
out the profit percentage then such receipt or expenditure also cannot be
considered to compute the profit percentage of that tested party or comparable
being numerator because if we reduce the numerator by the amount of
provision for doubtful debts and the denominator is not reduced by the amount
of related turnover then the result will be absurd. Hence it has to be found out .
from the annual report of the concerned company as to whether provision for
doubtful debts is in relation to sale of the present year or of an earlier year. As
per the annual report of this company available on pages 559 to 608 of paper
. book, this cannot be ascertained as to whether the provision for doubtful debts
is against the turnover of the present year or of an earlier year. Generally the
provision for doubtful debts is created in a later year when it is felt that the
debt has become bad or doubtful and therefore, in the absence of any
categorical reporting in the annual report that the provision for doubtful debts
is against the turnover of the present year, it should be considered as
provision against the turnover of an earlier year and therefore, the same
cannot be considered as operating expenses for the current year in TP
analysis. In this view of the matter, we find no infirmity in the order of
authorities below on this aspect. Therefore, we decline to interfere in the
orders of lower authorities on this aspect and various judgments cited by Id.
AR of assessee in the synopsis are not rendering any help to assessee
because these judgments are only on this aspect that provision for doubtful
debts is an operating expenditure but in our considered opinion, even after
accepting this contention that provision for doubtful debts is operating
expenditure, the same has to be excluded in TP analysis for the reasons
discussed above.
24. Now we examine and decide about the assessee's claim is for exclusion of
four comparables i.e. ICRA Techno Analytics Ltd.,L&T lnfotech Ltd.,Mindtree
25. Regarding ICRA Techno Analytics Ltd., this is the case of the assessee that
RPT% of this company is either 26.76% or 26.19% and since it is more than
25%, this comparable should be excluded because of RPT filter of 25%
IT (TP) A No. 1616/Bang/2017
Page 37 of 42
adopted by the TPO. This is also the claim of the assessee that in the present
case, the RPT filter should be adopted at 15% and not 25%. In this regard, we
feel it proper that regarding the working of RPT% of this comparable company,
the issue should be restored back to the file of TPO for fresh decision after
examining these contentions of Id. AR of assessee because we find that from
page no. 12 of TPO order, the RPT% of this comparable has been worked out
by the TPO at 0% as against the working of the assessee in the synopsis that
it should be 26.76% or 26.19%. Hence we restore this matter back to the file
of TPO for fresh decision after providing adequate opportunity of being heard
to assessee. The TPO should examine the working of the assessee regarding
RPT% of this comparable as provided in the synopsis reproduced above and
such RPT% should be worked out by way of speaking and reasoned order
after providing adequate opportunity of being heard to assessee.
26. Regarding this contention of Id. AR of assessee that permissible RPT% should
be adopted at 15% and not 25% because there is no dearth of comparable in
the present case, we find that as per page no. 32 of the order of TPO, 7
comparables have been selected and out of the same, the assessee is
requesting for exclusion of four comparables i.e. ICRA Techno Analytics Ltd.,
L&T lnfotech Ltd., Mindtree Ltd. (segment) and Persistent Systems Ltd. (Seg)
and if these four comparables are excluded, the remaining comparables will
be 3 only and hence, in our considered opinion, in the facts of the present
case, 25% RPT filter is proper and not 15%.
27. Now we examine the assessee's claim in respect of exclusion of L&T lnfoTech
Ltd. This is the case of the assessee that this company should be excluded
because this company has substantial brand value and this is functionally
different. The assessee has placed reliance on Tribunal order rendered in the
case of Cisco Systems (India) Pvt. Ltd. Vs. DCIT as reported in 50
taxmann.com 280 (Bangalore-Trib.), copy available on pages 181 to 211 of
case law compilation. We find that this Tribunal order is for Assessment Year
2009-10 whereas in the present case, Assessment Year involved is
Assessment Year 2013-14 and therefore, this Tribunal order is not relevant.
IT (TP) A No. 1616/Bang/2017
Page 38 of 42
28. The next company for which the assessee is requesting for exclusion is
Mindtree Ltd. (seg.). The contentions raised by the assessee regarding
exclusion of Mindtree Ltd. are contained in Para nos. 29 to 31 of the synopsis
reproduced above. As per the same, this is the contention raised that
Mindtree is offering various services such as IT Strategy consulting,
application development and maintenance, data warehousing and business
intelligence, package implementation, product architecture, design and
engineering, embedded software, technical support, testing, infrastructure
management services etc., to its customers. It is also pointed out that this
company is having substantial research and development and have
substantial. intellectual property. This is also contended that this company is
having wide range of operations and there is lack of information from segment
reporting. This is also pointed out that the graphs on page 57 of the annual
report of this company show the distribution of Mindtree's revenue across
service lines and as per this graph, development represents only 25% of
Mindtree's revenue but this is not clear whether this development includes
product development i.e. development of products for its own exploitation and
sale or software development i.e. development of software at the instructions
of its customers where the intellectual property would eventually vest in such
IT (TP) A No. 1616/Bang/2017
Page 39 of 42
29. "(he last company for which the assessee is requesting for exclusion is
Persistent Systems Ltd. This is the claim of the assessee that this company is
functionally different fromthe assessee and this company's RPT is 19.62% as
per the TPO. On this aspect that this company is having RPT of 19.62%, we
hold that since this company is having RPT% less than 25%, this company
cannot be excluded by applying RPT filter. There is one more argument on
account of this company that while working out the PLI of this company also,
the AO has reduced the provision for doubtful debts from the operating
expenses and as a consequence, the profit margin has been increased from
27% to 28.27% . This is the claim of the assessee that provision for doubtful
debts should be part of operating expenditure. Hence it was submitted that for
this issue, the same arguments should be considered which were advanced
for the other company i.e. CG-VAK Software and Exports Ltd. While deciding
the issue in respect of CG-VAK Software and Exports Ltd., we have held that
provision for doubtful debts can be accepted as operating expenditure but the
same cannot be considered for the purpose of TP analysis because it is not
possible to find out whether such provision for doubtful debts is in relation to
the turnover of the present year or earlier year. Hence it should be accepted
that such provision is in relation to the turnover of earlier year and therefore, it
cannot be considered in TP analysis. Accordingly, on the same line, this
argument is rejected for this company also. The third contention of assessee
regarding this comparable company is that this company is not functionally
comparable.
31. Regarding assessee's request for exclusion of Larsen & Toubro lnfotech Ltd.
and Persistent Systems Ltd., we have come across a Tribunal order rendered
in the case of W M Global Technology Services (India) (P.) Ltd. Vs. ACIT as
reported in [2018] 91 taxmann.com 403(Bengaluru-Trib) in which one of us i.e.
Ld. Judicial Member is the author. As per this Tribunal order, the issue
regarding assessee's request for exclusion of L&T lnfotech Ltd. and Persistent
Systems Ltd. has been restored back to the file of TPO for fresh decision.
Para nos. 8 to 11 of this Tribunal order are relevant and hence these paras are
reproduced hereinbelow for ready reference.
"LARSEN & TOUBRO INFOTECH Ltd & PERSISTENT SYSTEMS
Ltd:
08. In this regard the Ld. AR has submitted that L & T Infotech Ltd is
engaged in software product development and is having substantial
amount of intangibles assets. Further it also has a significant brand
value and is engaged in diversities including IP Led business
activities. It was also the case of the assessee that segmental
information is not available and therefore cannot be compared with
the assessee. Similar argument was submitted before us in respect of
Persistent Systems Ltd, wherein the assessee has submitted that the
comparable is engaged in software product development and further
engaged in diversified business in IP Led and therefore the segmental
information is not available and therefore has sought the exclusion of
these two companies. Further it was submitted by the Ld. AR that the
facts of the present case are similar to that of Microsoft Research Lab
India P. Ltd [TS-994- JTAT-2017(Bang)], wherein the coordinate
bench, in which one of us i.e., the Accountant Member was a party to
the order, remanded the matter back to the - file of the TPO for
examining afresh the contention of the assessee as well as with respect
to the functionality of these two comparables.
09. On the other hand the Ld. DR has submitted that in terms of the
decision of the Tribunal in Microsoft Research Lab India P. Ltd
IT (TP) A No. 1616/Bang/2017
Page 41 of 42
(supra), the matter may be remitted back to the file of the TPO for
examining afresh in the light of the observations made by the Tribunal
in the said matter.
10. We have heard the rival contention and perused the record. In the·
light of the reliance by both parties on Microsoft Research Lab India
P. Ltd (supra), we would like to remand the matter to the file of TPO
to the similar effect as done in the matter of Microsoft (supra)
however we would like to add a word of caution that it will be unsafe
to follow one decision passed by the Tribunal in any other case unless
the assessee demonstrates that the profile of the assessee company as
well as the assessee in other case are materially comparable with
each other and there is no element of distinction between the profile of
those two companies. However at this stage we do not wish to
examine the profile of the assessee company as well as the profile of
Microsoft Research Lab India P. Ltd(supra) as we are remitting back
the matter and we leave it to the wisdom of the TPO to consider the
facts of the present case (assessee) with that of Microsoft Research
Lab India P. Ltd, and apply the decision of Microsoft Research Lab
India Ltd (supra).
11. Following the above order of the coordinate bench, these two
comparables namely LARSEN & TOUBRO INFOTECH Ltd &
PERSISTENT SYSTEMS Ltd are restored back to the file of the TPO
to decide afresh in terms of the observations made hereinabove."
32. From the above paras reproduced from this Tribunal order, it is seen that our
decision regarding these two comparables to restore back the matter to the file
of TPO is fortified by this Tribunal order also in which, the tribunal has
considered one more Tribunal order rendered in the case of Microsoft
Research Lab India (P.) Ltd. vs. ACIT as reported in [2017] 85 taxmann.com
352 (Bang.-Trib.).
33. Regarding corporate tax issues in respect of disallowance of Rs. 4,34, 72, 134/-
being payment of commission disallowed by the AO u/s. 40(a)(i), reliance has
been placed on the judgement of Hon'ble Madras High Court rendered in the
case of CIT Vs. Faizman Shoes (P) Ltd. as reported in 367 ITR 155. We find
that this was held by Hon'bleMadras High Court in this casethat where the
assessee paid commission to non-resident agent for procuring orders for
leather business from overseas buyers wholesalers or retailers, as the case
may be, the non-resident agent is paid 2.5% commission on FOB basis. That
appears to be a commission simpliciter and did not provide any technical
IT (TP) A No. 1616/Bang/2017
Page 42 of 42
services for purposes of running business in India. The assessee was not
liable to deduct tax on such commission paid. As per the assessment order,
this . is not the case of the AO that the non-resident agent provided any
technical services for the purposes of running business of the assessee in
India. Hence in our considered opinion, this judgment of Hon'ble Madras High
Court is squarely applicable in the present case. Respectfully following this
judgment of Hon'ble Madras High Court, we hold that the TDS was not
required to be deducted from this payment of commission of Rs. 4,34,72,134/-
and therefore, disallowance made of this amount u/s. 40(a)(i) is not justified
34. In the result, the appeal filed by the assessee is partly allowed in the terms
indicated above.
Order pronounced in the open court on the date mentioned on the caption page.
Sd/-
Sd/- (ARUN KUMAR GAROOIA)
(LALIET KUMAR) Accountant Member
Judicial Member
Bangalore,
Dated, the 27th June, 2018.
/MS/
Copy to:
1. Appellant 4. CIT (A)
2. Respondent 5. OR, ITAT, Bangalore
3. CIT 6. Guard file
By order