Appeal Details
Counselvise Citation
[2016] 123 COUNSELVISE.COM (IT) 2042 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
10 month(s) 25 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
31-03-2016
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
21-03-2016
Assessment Year
2010-2011
Appeal Filed On
06-05-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI ABRAHAM P. GEOGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER IT(TP)A NO.1628/BANG/2014 ASSESSMENT YEAR : 2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(1)(2), BANGALORE. VS. M/S. SOFTWARE AG BANGALORE TECHNOLOGIES PVT. LTD., EXORA BUSINESS PARK, WING B, 1 ST FLOOR, ELECTRA, MARATHAHALLI SARJAPURA OUTER RING ROAD, BANGALORE 560 103. PAN: AAACW 5438M APPELLANT RESPONDENT CO NO.72/BANG/2015 [IN IT(TP)A NO. 1628/BANG/2014] ASSESSMENT YEAR : 2010-11 M/S. SOFTWARE AG BANGALORE TECHNOLOGIES PVT. LTD., BANGALORE 560 103. PAN: AAACW 5438M VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(1)(2), BANGALORE. CROSS OBJECTOR RESPONDENT REVENUE BY : SHRI SARAVANAN, JT. CIT(DR) ASSESSEE BY : SHRI CHAVALI NARAYAN, CA DATE OF HEARING : 21.03.2016 DATE OF PRONOUNCEMENT : 31.03.2016 IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 2 OF 12 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 12.11.2014 OF THE CIT(APPEALS)-IV, BANGALORE FOR THE ASSESSMENT YEAR 2010-11. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 3 OF 12 3. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT R EQUIRE ANY SPECIFIC ADJUDICATION. 4. GROUND NOS.2 & 3 ARE REGARDING EXCLUSION OF TELE COMMUNICATION EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE EXPO RT TURNOVER AS WELL AS FROM TOTAL TURNOVER. 5. WE HAVE HEARD THE LD. DR AND THE LD. AR AS WELL AS CONSIDERED THE MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT TH IS ISSUE IS COVERED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF AC IT V. TATA ELXSI LTD., 349 ITR 49 [KARN], WHEREIN THE HONBLE HIGH COURT HAS H ELD AS UNDER:- 10. THE BOMBAY HIGH COURT HAD AN OCCASION TO CONSIDER THE MEANING OF THE WORD 'TOTAL TURNOVER' IN THE CONTEXT OF SECTION 10- A, IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. [2011] 330 ITR 175 [2010] 194 TAXMAN 192 (BOM.). INTERPRETING SUB-SECTION (4) OF SECTION 10-A, IT IS HELD AS UNDE R: 'UNDER SUB-SECTION (4) THE PROPORTION BETWEEN THE E XPORT TURNOVER IN RESPECT OF THE ARTICLES OR THINGS, OR, AS THE CASE MAY BE, COMPUTER SOFTWARE EXPORTED, TO THE TOTAL TURNOV ER OF THE BUSINESS CARRIED OVER BY THE UNDER-TAKING IS APPLIE D TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN COMPUTING THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN COMPUTING THE PROFIT S DERIVED FROM EXPORT. IN OTHER WORDS, THE PROFITS OF THE BUSINESS OF THE UNDERTAKING ARE MULTIPLIED BY THE EXPORT TURNOVER I N RESPECT OF THE ARTICLES, THINGS OR, AS THE CASE MAY BE, COMPUT ER SOFTWARE AND DIVIDED BY THE TOTAL TURNOVER OF THE BUSINESS CARRI ED OR BY THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE = PROFITS OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURNOVER IN RESPECT OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 4 OF 12 UNDERTAKING. THE FORMULA WHICH IS PRESCRIBED BY SUB -SECTION (4) OF SECTION 10A IS AS FOLLOWS: THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY TH E UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPORT AND THE T URNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NU MERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNO VER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR INASMUCH A S THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANING AS THE EXPORT TURNOVER WHICH IS A CONSTITUE NT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLAT URE HAS PROVIDED A DEFINITION OF THE EXPRESSION 'EXPORT TUR NOVER' IN EXPLANATION 2 TO SECTION 10A BY WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY T HE UNDERTAKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED I N, OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN E XCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTIC LES THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUS ION OF FREIGHT AND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF TH E REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIA BLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EX CLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXP RESSION 'TOTAL TURNOVER' HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF SECTION 10A. HOWEVER THE EXPRESSION 'EX PORT TURNOVER' HAS BEEN DEFINED. THE DEFINITION OF 'EXPO RT TURNOVER' EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOV ER HAS BEEN DEFINED BE PARLIAMENT AND THERE IS A SPECIFIC EXCLU SION OF FREIGHT AND INSURANCE, THE EXPRESSION 'EXPORT TURNOVER' CAN NOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PR OVISION TO THE CONTRARY. HOWEVER, NO SUCH PROVISION HAVING BEE N MADE, THE PRINCIPLE WHICH HAS BEEN ENUNCIATED EARLIER MUST PR EVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTH ER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF TH E REVENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ. 'EXPORT TURNOVER' WOULD IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 5 OF 12 HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD T O A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH IT HAS BEEN SPE CIFICALLY EXCLUDED FROM 'EXPORT TURNOVER' FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE 'EXPOR T TURNOVER' WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVI SION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED.' THE SPECIAL BENCH OF THE TRIBUNAL, IN THE CASE OF ITO V. SAK SOFT LTD. [2009] 313 ITR (AT) 353/ 30 SOT 55 (CHENNAI) ALSO HAD AN OCCASION TO CONSIDER THE MEANING OF THE WORD 'TOTAL TURNOVER '. AFTER REFERRING TO THE VARIOUS JUDGMENTS OF THE HIGH COURT AS WELL AS THE SUPREME COURT HELD AS UNDER: '53. FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PU RPOSE OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTI ON 10-B, THE FREIGHT TELECOM CHARGES OR INSURANCE ATTRIBUTABLE T O THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN P ROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE F ORMULA.' THE FORMULA FOR COMPUTATION OF THE DEDUCTION UNDER SECTION 10-A WOULD BE AS UNDER: PROFITS OF THE BUSINESS X EXPORT TURNOVER TOTAL TURNOVER FROM THE AFORESAID JUDGMENTS, WHAT EMERGES IS THAT, THERE SHOULD BE UNIFORMITY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA, SINCE OTHERWISE IT WOUL D PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10-A IS A BENE FICIAL SECTION. IT IS INTENDED TO PROVIDE INCENTIVES TO PROMOTE EXPORTS. THE INCENTIVE IS TO EXEMPT PROFITS RELATABLE TO EXPORTS. IN THE CASE OF COMBINED BUSINESS OF AN ASSESSEE, HAVING EXPORT BUSINESS AND DOMESTIC BUSINESS, THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCERTAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING THE TOTAL PROFITS O F THE BUSINESS ON THE BASIS OF TURNOVERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNOVER WAS ACCEPTED AS A METHOD OF ARRIVING AT EX PORT PROFITS. IN THE EASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSESSEE, WHEREAS IN SECTION 10-A, IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 6 OF 12 THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL B USINESS OF THE UNDERTAKING. EVEN IN THE CASE OF BUSINESS OF AN UND ERTAKING, IT MAY INCLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN O THER WORDS, EXPORT TURNOVER AND DOMESTIC TURNOVER. THE EXPORT T URNOVER WOULD BE A COMPONENT OR PART OF A DENOMINATOR, THE OTHER COMPONENT BEING THE DOMESTIC TURNOVER. IN OTHER WORDS, TO THE EXTEN T OF EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEEN THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA. IN VIEW OF THE COMM ONALITY, THE UNDERSTANDING SHOULD ALSO BE THE SAME. IN OTHER WOR DS, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPU TING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DE NOMINATOR. THE REASON BEING THE TOTAL TURNOVER INCLUDES EXPORT TUR NOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERATOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE, THOUGH THERE IS NO DEFINITION OF THE TERM 'TOTAL TURNOVER' IN SECTION 10-A, THERE IS NOTHING IN THE SAID SECTION TO MANDATE THAT, WHAT I S EXCLUDED FROM THE NUMERATOR THAT IS EXPORT TURNOVER WOULD NEVERTH ELESS FORM PART OF THE DENOMINATOR. THOUGH WHEN A PARTICULAR WORD IS N OT DEFINED BY THE LEGISLATURE AND AN ORDINARY MEANING IS TO BE AT TRIBUTED TO THE SAME, THE SAID ORDINARY MEANING TO BE ATTRIBUTED TO SUCH WORD IS TO BE IN CONFORMITY WITH THE CONTEXT IN WHICH IT IS US ED. WHEN THE STATUTE PRESCRIBES A FORMULA AND IN THE SAID FORMUL A, 'EXPORT TURNOVER' IS DEFINED, AND WHEN THE 'TOTAL TURNOVER' INCLUDES EXPORT TURNOVER, THE VERY SAME MEANING GIVEN TO THE EXPORT TURNOVER BY T HE LEGISLATURE IS TO BE ADOPTED WHILE UNDERSTANDING THE MEANING OF TH E TOTAL TURNOVER, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. I F WHAT IS EXCLUDED IN COMPUTING THE EXPORT TURNOVER IS INCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPO NENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE. IF THAT WERE THE INTENTIO N OF THE LEGISLATURE, THEY WOULD HAVE EXPRESSLY STATED SO. IF THEY HAVE N OT CHOSEN TO EXPRESSLY DEFINE WHAT THE TOTAL TURNOVER MEANS, THE N, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE MEANING ASSI GNED BY THE LEGISLATURE TO THE EXPORT TURNOVER IS TO BE RESPECT ED AND GIVEN EFFECT TO, WHILE INTERPRETING THE TOTAL TURNOVER WHICH IS INCLUSIVE OF THE EXPORT TURNOVER. THEREFORE, THE FORMULA FOR COMPUTA TION OF THE DEDUCTION UNDER SECTION 10-A, WOULD BE AS UNDER: PROFITS OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURN OVER (EXPORT TURNOVER + DOMESTIC TURN OVER) TOTAL TURN OVER IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 7 OF 12 11. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY ERROR COMMITTED BY THE TRIBUNAL IN FOLLOWING THE JUDGMENT S RENDERED IN THE CONTEXT OF SECTION 80HHC IN INTERPRETING SECTIO N 10-A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE A ND THE SAME. THEREFORE, WE DO NOT SEE ANY MERIT IN THESE APPEALS . THE SUBSTANTIAL QUESTION OF LAW FRAMED IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 6. FOLLOWING THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI LTD. (SUPRA) , WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF THE CIT(A), QUA THIS ISSUE. 7. GROUND NO.4 IS REGARDING DIRECTION OF THE CIT(AP PEALS) TO PROVIDE RISK ADJUSTMENT. 8. THE TPO WHILE DETERMINING THE ARM'S LENGTH PRICE (ALP) HAS CONSIDERED A NEGATIVE WORKING CAPITAL ADJUSTMENT AN D CONSEQUENTLY INCREASED THE PLI OF THE COMPARABLES . ON APPEAL , THE CIT(APPEALS) HELD THAT ONCE THE TPO HAS GRANTED WORKING CAPITAL ADJUS TMENT WHICH IS NEGATIVE ADJUSTMENT MADE BY THE TPO , THEN THE TPO SHALL LOOK INTO THIS MATTER AND TAKE RECTIFICATORY ACTION . IN CASE IF THE TPO FINDS THAT WORKING CAPITAL ADJUSTMENT REMAINS NEGATIVE , THEN SHE WAS DIRECTED TO GRANT RISK ADJUSTMENT IN THAT CASE. THUS , THE CIT(A) HAS PASSED THE DIRECTIONS SUBJECT TO THE RECONSIDERATION OF THE WORKING CAPIT AL ADJUSTMENT AND HELD THAT IF THE WORKING ADJUSTMENT IS STILL FOUND TO BE NEGATIVE , THEN THE RISK ADJUSTMENT SHOULD BE GRANTED . IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 8 OF 12 9. BEFORE US , THE ID. OR HAS SUBMITTED THAT WHEN THE TPO HAS GRAN TED THE WORKING CAPITAL ADJUSTMENT AND ASSESSEE HAS NOT GIVEN THE WORKING OF RISK ADJUSTMENT, THEN THE CIT(A) IS NOT JUSTIFIED I N DIRECTING THE TPO TO GRANT RISK ADJUSTMENT . 10. ON THE OTHER HAND , THE ID. AR HAS SUBMITTED THAT ONCE THE ASSESSEE HAS CLAIMED RISK ADJUSTMENT AND THE TPO HAS EXAMINE D THE WORKING CAPITAL ADJUSTMENT , THEN THE CLAIM OF THE ASSESSEE OF RISK ADJUSTMENT W AS REQUIRED TO BE EXAMINED AND GRANTED BY THE TPO . 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE AS SESSEE HAS NOT GIVEN THE WORKING OF RISK ADJUSTMENT BEFORE THE TPO . THEREFORE, THE TPO DID NOT WORK OUT ANY RISK ADJUSTMENT . ON APPEAL , THE CIT(APPEALS) HAS DIRECTED THE TPO TO CONSIDER THE CASE OF RISK ADJUSTMENT IF THE WORKING CAPITAL ADJUSTMENT IS FOUND TO BE NEGATIVE . WE FIND THAT WHEN THE TPO HAS WORKED OUT THE WORKING CAPITAL ADJUSTMENT ON HER OW N AND NOT ACCEPTED THE CLAIM OF THE ASSESSEE , THEN BY APPLYING THE PRINCIPLE OF CONSISTENCY , THE RISK ADJUSTMENT OF THE ASSESSEE WAS ALSO REQUIRED T O BE CONSIDERED BY THE TPO, THOUGH THE ASSESSEE MIGHT HAVE BEEN ASKED TO F URNISH THE RELEVANT DETAILS AND WORKING . SINCE IN THIS CASE , THE TPO HERSELF HAS WORKED OUT THE WORKING CAPITAL ADJUSTMENT , THEREFORE , WE DIRECT THE TPO TO CONSIDER THE CLAIM OF RISK ADJUSTMENT SUBJECT TO FILING OF DETAI LS BY THE ASSESSEE. ACCORDINGLY, WE MODIFY THE FINDING OF THE CIT(APPEA LS), QUA THE DECISION . IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 9 OF 12 12. IN THE CROSS OBJECTION , THE ASSESSEE HAS RAISED VARIOUS GROUNDS , HOWEVER , AT THE TIME OF HEARING , THE ID . AR OF ASSESSEE HAS SUBMITTED THAT THE ONLY EFFECTIVE GROUNDS WHICH ARE PRAYED BY THE ASSESSEE ARE GROUND NOS . 5 & 6 IN RESPECT OF THE DIRECTIONS GIVEN BY THE CIT(APP EALS) FOR RECONSIDERATION OF WORKING CAPITAL ADJUSTMENT , EVEN IF IT FOUND NEGATIVE . 13. WE HAVE HEARD THE ID . AR AND THE ID. DR AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD . THE ID . AR OF THE ASSESSEE HAS SUBMITTED THAT WHEN THE ASSESSEE HAS NOT CLAIMED ANY WORKING CAPIT AL ADJUSTMENT, THEN THE TPO CANNOT MAKE A NEGATIVE ADJUSTMENT ON ACCOUN T OF WORKING CAPITAL . HE HAS FURTHER CONTENDED THAT WHEN THE ASSESSEE HAS NOT USED ANY BORROWED FUNDS FOR WORKING CAPITAL PURPOSE , THEN THE TPO IS NOT JUSTIFIED IN MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT . IN SUPPORT OF THIS CONTENTION , HE HAS RELIED UPON THE DECISION OF THE HYDERABAD BE NCH OF THE TRIBUNAL DATED 25 . 3 . 2015 IN THE CASE OF ADAPTEC (INDIA) P . LTD. V. ACIT , ITA NO . 206/HYD/2014 AND SUBMITTED THAT THE TRIBUNAL HAS HELD THAT WHEN THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER RUNNING ITS BUSINESS WITHOUT ANY WORKING CAPITAL RISK, THEN THERE IS NO NEED FOR MAK ING ANY NEGATIVE WORKING CAPITAL ADJUSTMENT . 14. ON THE OTHER HAND , THE ID . DR HAS RELIED UPON THE ORDER OF THE TPO. 15. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND ON CAREFUL PERUSAL OF THE RECORD , WE FIND THAT THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 10 OF 12 ADAPTEC (INDIA) P . LTD . (SUPRA) HAS CONSIDERED IDENTICAL ISSUE IN PARAS 10 & 11 AS UNDER:- ' 10. GROUND NO.8 P E RTAIN S TO THE ISSUE O F NEGATI V E W ORKIN G CAPITAL. AS BRIEFL Y STATED ABO V E , AFTER ARRI V ING A T THE ARITHMETIC MEAN OF ALL COMPARABLES AT 22.03 %, THE A . O. W ORKED OU T NEGATI V E WORKING CAPITAL ADJU S TMENT O F 3.22 % THEREB Y, MAKIN G ARMS LENGTH PRICE AT 25 . 25 %. E VEN THOUGH , DRP REFUSED TO INTERFERE WITH THE OBJECTIONS OF THE ASSESSEE IN IT S ORDER , WE WER E INFORMED THAT DRP HA S DIRECTED THE TPO I A.O. NOT TO MAKE AN Y 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: '14. GROUND NO.11 : NEGATI V E WORKING CAPITAL ADJUSTMENT - MAKING A NEGATI V E WORKING CAPITAL ADJUSTMENT WITHOUT APPRECIATING THE FACT THAT THE COMPANY DOES NOT BEA R AN Y WORKING CAPITAL RISKS . ON THIS ISSUE , THE ASSESSEE SUBMITTED AS UNDER: ' THE LEARNED TPO DETERMINED THE ALP FOR THE INTERNATIONAL TRANSACTIONS W ITH A.ES B Y MAKING A NEGATI V E W ORKING CAPITAL ADJUSTMENT FOR THE DIFFERENCES IN W ORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPANIES CONSIDERED AS COMPARABLES. THE ASSESSEE DOES NOT AG REE WITH THE LEARNED TPO AS : 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 FRO M THE DATE OF INCORPORATION NOR HAS INCURRED ANY EXPE NSE 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 ACCE DED SUCH A PLEA IN SOME OTHER CASE. ON EXAMINATION , WE FIND THAT THE DRP, H Y DERABAD IN THE CASE OF CORD Y S SOFTWARE INDIA P. LTD., FOR A.Y. 2008 - 09 IN ITS DIRECTIONS DATED 308.2012 HAS GI V EN A FINDING AS UNDER: IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 11 OF 12 '7.7 .4 THU S, W O R KIN G CAPI T A L ADJU S T MENT IS MA D E FOR THE TIME VA LU E OF MONEY LOS T W H E N CRE D IT T IME IS PROVIDED TO THE CUS TO MERS . THE APPLICANT IS NOT AN ENTREPRENEUR BUT A CAPTIVE SERVICE PROVIDER. I T S EN T IRE FUNDING NEEDS ARE PROVIDED BY THE A.E. THIS BEING SO, T HE APPLICANT DOES NOT STAND TO LOSE ANYTHING AS IT IS COMPENSATED ON A TO TAL COST PLUS BASIS. THE TPO PROBABLY WAS CARRIED AWAY BY TH E LARGE AMOUNT OF RECEIVABLES APPEARING IN THE BOOKS OF THE A P PLICANT. B UT THE APPL I CANT IS RUNNING ITS BUSINESS WITHOUT ANY WORKING CAPITAL RISK WHILE COMPARABLE COMPANIES HAVE SUCH A RISK FOR THEM. IF AT ALL ANY WORKING CAPITAL ADJUS T MENT IS TO BE MADE TO T HIS SITUATION, ONLY A POSITIVE ADJUS T MENT HAS T O BE MADE T O THE COMPARAB L ES SO THAT THEY ARE BROUGHT ON PAR WI T H THE APPLICANT. IN VIEW OF THE SAME, T HE PANEL DIRECTS THAT NEGATIVE WORKING CAPITAL A D J U S TM E NT TO THE ARITHMET I C MEAN MARGIN OF THE COM P A RABL ES SHA L L NOT BE MA D E.' IN VIEW OF TH E A B OVE, T HE PANEL DIREC T S THA T NEGA T IVE WORKING CAP I TAL ADJUSTMEN T T O T H E ARITHME T IC MEAN MARGIN O F THE COMPARABLES SHA L L 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 C ARRY ANY WORKING CAPITAL RISK. IN FACT , TPO SHOULD HAVE DONE NECESSARY WORKING CAPITAL ADJUSTMENT TO THE PROFITS OF THE SE LECTED COMPARABLES SO AS TO MAKE THEM COMPARABLE TO THE AS SESSEE . IN VIEW OF THIS , WE DIRECT THE TPO NOT TO MAKE NEGATIVE WORKING CAPITAL ADJUSTMENT. ' 16. THERE IS NO ALLEGATION IN THE CASE OF THE ASSES SEE THAT THE ASSESSEE HAS USED ANY BORROWED FUND FOR WORKING CAPITAL OR T HERE IS ANY RISK OF MONEY LOST IN CREDIT TIME PROVIDED TO THE CUSTOMERS . ACCORDINGLY, FOLLOWING THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL C ITED ABOVE, WE HOLD THAT NEGATIVE WORKING CAPITAL ADJUSTMENT IS NOT JUSTIFIE D IN THE CASE OF THE ASSESSEE. IT(TP)A NO.1628/BANG/2012 & CO NO.72/BANG/2015 PAGE 12 OF 12 17. IN THE RESULT, THE APPEAL AND THE CROSS OBJECTI ON ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MARCH, 2016. SD/- SD/- ( ABRAHAM P. GEORGE ) (VIJA Y PAL RAO ) ACCOUNTANT MEMBER J UDICIAL MEMBER BANGALORE, DATED, THE 31 ST MARCH, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.
