M/s GXS India Technology Centre Pvt Ltd , Bangalore V. Income Tax Officer Ward-11(2), Bangalore

ITA 2029/BANG/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 9649 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 20-10-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; International transaction
• Section: 133(6); 195; 192; 13; 22; 92CA; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER ITA NO. 2029 /BANG/20 17 ASSESSMENT YEAR : 20 07 - 08 M/S GXS INDIA TECHNOLOGY CENTRE PVT. LTD., NO.436, INFINITY, GROUND 1 ST , 3 RD & 4 TH FLOORS, OFF. KORAMANGALA, INDIRANAGAR, INTERMEDIATE RING ROAD, CHALLAGHATTA-DOMLUR, BANGALORE-560 071. PAN: AABCG 7972P VS. THE INCOME TAX OFFICER, WARD 11(2), BANGALORE. APPELLANT RESPONDENT IT(TP)A NO.2142/BA NG/2017 ASSESSMENT YEAR : 2010 - 11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(2), BANGALORE. VS. M/S GXS INDIA TECHNOLOGY CENTRE PVT.LTD. BANGALORE. PAN: AABCG 7972P APPELLANT RESPONDENT ASSESSEE BY : SHRI K . R . VASUDEVAN , ADVOCATE RE VEN UE BY : SHRI PRIYADARSHI MISHRA, JCIT (DR)(ITAT) , BANGALORE . DATE OF HEARING : 08 . 1 2 . 2020 DATE OF PRONOUNCEMENT : 04 . 0 1 . 202 1 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT ITA NO.2029/BANG/2017 IS AN APPEAL BY THE ASSESSE E, WHILE ITA NO.2142/BANG/2017 IS AN APPEAL BY THE REVENUE. BOT H THESE APPEALS ARE ITA NO. 2029 & 2142/BANG/2017 PAGE 2 OF 20 DIRECTED AGAINST THE ORDER DATED 18.8.2017 OF THE C IT(APPEALS)-IV, BANGALORE RELATING TO ASSESSMENT YEAR 2007-08. 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION APPEAL BY THE ASSESSEE. AT THE TIME OF HEARING, LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT EXCEPT GROUND NOS.9 AND 11 RAISED BY THE ASSESSEE IN THE G ROUNDS OF APPEAL, NONE OF THE OTHER GROUNDS ARE PRESSED FOR ADJUDICAT ION. 3. GROUND NOS.9 AND 11 RAISED BY THE ASSESSEE READS AS FOLLOWS:- 9. THE LEARNED AO/LEARNED TPO/HON'BLE CIT(A) HAS G ROSSLY ERRED IN NOT REJECTING THE FOLLOWING COMPANIES FROM THE LIST OF COMPARABLE COMPANIES: INFOSYS LTD. WIPRO LTD. MEGASOFT LTD. FLEXTRONICS SOFTWARE SYSTEMS LTD. KALS INFORMATION LTD. ISHIR INFOTECH LTD. AVANI CIMCON TECHNOLOGIES LTD. LUCID SOFTWARE LTD. E-ZEST SOLUTIONS LTD. PERSISTENT SYSTEMS LTD. R SYSTEMS INTERNATIONAL LTD. CELESTIAL LABS LTD. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 11. THE HONBLE CIT(A) HAS ERRED DISALLOWING THE W ORKING CAPITAL ADJUSTMENT ALLOWED BY THE LD. TPO. 4. IT WILL BE APPROPRIATE TO DEAL WITH GROUND NOS.4 TO 6 RAISED BY THE REVENUE IN ITS APPEAL ALSO TOGETHER WITH GROUND NO. 9 RAISED BY THE REVENUE AS THE SAME IS INTERLINKED WITH GROUND NO.9 RAISED BY THE ASSESSEE. 5. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF SOFTWARE DEVELOPMENT. IT RENDERED SOFTWARE DEVELOPMENT SER VICES TO ITS ASSOCIATED ENTERPRISE (AE). THE ISSUES THAT ARISE FOR CONSIDE RATION IN GROUNDS OF ITA NO. 2029 & 2142/BANG/2017 PAGE 3 OF 20 APPEAL SET OUT ABOVE ARE WITH REGARD TO DETERMINATI ON OF ARMS LENGTH PRICE [ALP] IN RESPECT OF INTERNATIONAL TRANSACTION OF RE NDERING SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS AE AS I S REQUIRED UNDER THE PROVISIONS OF SECTION 92 OF THE INCOME-TAX ACT, 196 1 [THE ACT]. 6. THE ASSESSEE IN RESPECT OF ITS CLAIM THAT THE P RICE RECEIVED IN THE INTERNATIONAL TRANSACTION IS AT ARMS LENGTH FILED A TRANSFER PRICING ANALYSIS. THE MOST APPROPRIATE METHOD CHOSEN FOR THE PURPOSE OF COMPARISON OF THE ASSESSEES PROFIT MARGIN WITH THAT OF THE COMPARABL E COMPANIES WAS TRANSACTIONAL NET MARGIN METHOD (TNMM). THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR THE PURPOSE OF COMPARISON WAS OPERATING PROFIT TO OPERATING COST (OP/OC). THE OP/OC OF THE ASSESSEE WAS AS FOL LOWS:- PARTICULARS IT (IN R) OPERATING REVENUE 27,03,85,879 LESS: OPERATING EXPENSES 24,45,93,369 OPERATING PROFIT 2,57,92,510 RETURN ON OPERATING COST 10.54% 7. THE ASSESSEE HAD CHOSEN CERTAIN COMPARABLE COMPA NIES WHOSE AVERAGE ARITHMETIC PROFIT MARGIN WAS COMPARABLE WIT H THAT OF THE ASSESSEE AND HENCE THE ASSESSEE CLAIMED THAT THE PRICE RECEI VED IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. 8. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE Q UESTION OF DETERMINATION OF ALP WAS REFERRED BY THE AO, DID NO T ACCEPT THE CLAIM OF ASSESSEE AND HE ON HIS OWN IDENTIFIED 26 COMPARABLE COMPANIES AND ADOPTING THE AVERAGE ARITHMETIC MEAN OF THOSE COMPA NIES DETERMINED THE ALP AS FOLLOWS:- ITA NO. 2029 & 2142/BANG/2017 PAGE 4 OF 20 S.NO. COMPANY NAME UNADJUSTED MARGINS FY 2006-07 1 ACCEL TRANSMATICS LTD 21.11% 2 AVANI CIMCON TECHNOLOGIES LTD 52.59% 3 CELESTIAL LABS LTD 58.35% 4 E ZEST SOLUTIONS LTD 36.12% 5 FLEXTRONICS SOFTWARE SYSTEMS LTD 25.31% 6 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 36.63% 7 (GATE GLOBAL SOLUTIONS LTD 7.49% 8 INFOSYS TECHNOLOGIES LTD 40.30% 9 ISHIR INFOTECH LTD 30.12% 10 KALS INFORMATION SYSTEMS LTD 30.55% 11 LUCID SOFTWARE LTD 19.37% 12 MEGASOFT LTD 60.23% 13 MINDTREE LTD 16.90% 14 PERSISTENT SYSTEMS LTD 24.52% 15 R SYSTEMS INTERNATIONAL LTD 15.07% 16 TATA ELXSI LTD 26.51% 17 THIRDWARE SOLUTIONS LTD 25.12% 18 WIPRO LTD. 33.65% 19 DATAMATICS LTD 1.38% 20 GEOMETRIC LIMITED (SEG) 10.71% 21 LGS GLOBAL LTD 15.75% 22 MEDIASOFT SOLUTIONS LTD 3.66% 23 QUINTEGRA SOLUTIONS LTD 12.56% 24 R S SOFTWARE (INDIA) LTD 13.47% 25 SASKEN COMMUNICATIONS TECHNOLOGIES LTD 22.17% 26 SIP TECHNOLOGIES & EXPORTS LTD 13.90% ARITHMETIC MEAN 25.14% COMPUTATION OF ARM'S LENGTH PRICE PARTICULARS AMOUNT INR ARITHMETIC MEAN PLI 25.14% LESS: WORKING CAPITAL ADJUSTMENT 0.50% ADJUSTED ARITHMETIC MEAN PLI 2 4 .64% ARM'S LENGTH PRICE PARTICULARS AMOUNT INR OPERATING COST 24,45,93,369 ARM'S LENGTH MARGIN 24.64% OF T THE OPERATING COST ARM'S LENGTH PRICE (ALP) @ 124.64% OF OPERATING COS T 30,48,61,175 ITA NO. 2029 & 2142/BANG/2017 PAGE 5 OF 20 PRICE RECEIVED VIS-A-VIS THE ARM'S LENGTH PRICE PARTI CULARS AMOUNT INR ARM'S LENGTH PRICE @ 124.64% OF OPERATING COST 30,48,61,175 PRICE RECEIVED 27 03 85 879 SHORTFALL BEING ADJUSTMENT U/S 92CA 3,44,75,296 9. THE ADDITION SUGGESTED BY THE TPO WAS INCORPORAT ED IN THE DRAFT ASSESSMENT ORDER OF THE AO. THE ASSESSEE DID NOT F ILE ANY OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST T HE DRAFT ASSESSMENT ORDER AND THEREFORE THE FINAL ASSESSMENT ORDER WAS PASSED BY THE AO. THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(APPEALS) A GAINST THE FINAL ASSESSMENT ORDER. THE CIT(APPEALS) EXCLUDED TATA E LXSI LTD. FROM THE LIST OF COMPARABLE COMPANIES AND ALSO DIRECTED THAT ONLY SEGMENTAL MARGIN PERTAINING TO SOFTWARE DEVELOPMENT SEGMENT OF COMPA RABLE COMPANY, MEGASOFT LTD., SHOULD BE CONSIDERED. THE CIT(A) ALS O DISALLOWED THE CLAIM OF ASSESSEE FOR ALLOWING WORKING CAPITAL ADJUSTMENT . 10. AGGRIEVED BY THE RELIEF ALLOWED BY THE CIT(A), THE REVENUE HAS PREFERRED GROUNDS 4 TO 6 AND AGGRIEVED BY THE ORDER OF CIT(A) IN NOT EXCLUDING CERTAIN COMPARABLE COMPANIES AND NOT ALLO WING WORKING CAPITAL ADJUSTMENT, THE ASSESSEE HAS RAISED GROUND NOS. 9 T O 11 BEFORE THE TRIBUNAL. 11. AS FAR AS THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPEAL, THE ASSESSEE SEEKS EXCLUSION OF 13 COMPARABLE COMPANIES OUT OF 25 COMPARABLE COMPANIES THAT REMAIN AFTER THE ORDER OF CIT(A). THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE A DE CISION OF THE ITAT BANGALORE BENCH IN THE CASE OF SONUS NETWORKS INDIA PVT. LTD. V. DCIT , IT(TP)A NO.1365/BANG/2001, ORDER DATED 28.6.2019 FO R AY 2007-08. THIS WAS ALSO A CASE OF A COMPANY RENDERING SOFTWARE DEV ELOPMENT SERVICES SUCH AS THE ASSESSEE. THE TPO IN THE AFORESAID CAS E HAD ALSO SELECTED ITA NO. 2029 & 2142/BANG/2017 PAGE 6 OF 20 THE VERY SAME 26 COMPARABLE COMPANIES AS WAS CHOSEN BY THE TPO IN THE CASE OF ASSESSEE IN THIS APPEAL. THE VERY SAME 13 COMPARABLE COMPANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE WAS CONSIDERED BY THE TRIBUNAL IN THE AFORESAID DECISION AND THE TRIBUNAL EXCLUDED 10 OUT OF 13 COMPARABLE COMPANIES FROM THE LIST OF COMPARABLE COMPANIES WIT H THE FOLLOWING FINDINGS:- (I) AVANI CIMCON TECHNOLOGIES LTD. AS FAR AS THIS COMPANY IS CONCERNED, THE MUMBAI BEN CH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACI T - ITA NO.7821/MUM/2011 ACCEPTED THE ASSESSEE'S CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CINCOM CANNOT BE CONSIDERED AS COMPA RABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELOPMENT SERVICES ONL Y. IN VIEW OF THE AFORESAID DECISION, THE TRIBUNAL ACCEPTED THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. (II) CELESTIAL LABS LTD. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF T HE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVELOPMENT COMPANY. IT WAS SUBMITTED THAT THE ACCEPTANCE OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SOFTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D ACTIVITIES IS BAD IN LAW. FURTHER REFERENCE WAS ALSO MADE TO THE DECI SION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT - ITA NO. 6623/MUM/2011 (FOR AY 2007-08) IN WHICH THE COM PARABILITY OF THIS COMPANY FOR CLINICAL TRIAL RESEARCH SEGMENT WAS CON SIDERED. IT WAS THEREFORE SUBMITTED THAT THIS COMPANY IS NOT A PURE SOFTWARE SERVICE PROVIDER SUCH AS THE ASSESSEE. THE TRIBUNAL ACCEPTED THE PLEA OF TH E ASSESSEE AND HELD THAT ITA NO. 2029 & 2142/BANG/2017 PAGE 7 OF 20 THIS COMPANY OUGHT NOT TO HAVE BEEN CONSIDERED AS C OMPARABLE TO A SWD SERVICE PROVIDER SUCH AS THE ASSESSEE. (III) E-ZEST SOLUTIONS LTD. THE TRIBUNAL HELD IN THE DECISION CITED THAT THE TP O HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARBALES ONLY ON THE BASI S OF THE STATEMENT MADE BY THE COMPANY IN ITS REPLY TO THE NOTICE UNDER SEC TION 133(6) OF THE ACT WITHOUT EXAMINING WHETHER THE SERVICES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVICES PERFORMED BY THIS COMP ANY ARE SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSE SSEE. FROM THE DETAILS ON RECORD, THE TRIBUNAL FOUND THAT WHILE THE ASSESS EE IS INTO SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E-ZEST SOLU TIONS LTD., WAS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVICES. THE TRIBUNAL FO LLOWED CO-ORDINATE BENCH ORDER OF TRIBUNAL IN THE CASE OF CAPITAL I-Q INFORMATION SYSTEMS (INDIA) (P.) LTD. (SUPRA) WHEREIN IT WAS HELD THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF T HE CO-ORDINATE BENCH OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, THE T RIBUNAL HELD THAT THIS COMPANY, I.E. E-ZEST SOLUTIONS LTD. BE OMITTED FROM THE SET OF COMPARABLES. (IV) HELIOS & MATHESON INFORMATION TECHNOLOGY LTD : AS FAR AS THIS COMPANY IS CONCERNED, THE TRIBUNAL H ELD THAT THIS COMPANY WAS ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUI TE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVI CES SEGMENT. ITA NO. 2029 & 2142/BANG/2017 PAGE 8 OF 20 (V) INFOSYS TECHNOLOGIES LTD. AS FAR AS THIS COMPANY IS CONCERNED, THE TRIBUNAL E XCLUDED THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT WA S ALSO HELD THAT THE BREAK-UP OF REVENUE FROM SOFTWARE SERVICES AND SOFT WARE PRODUCTS IS NOT AVAILABLE. (VI) KALS INFORMATION SYSTEMS LTD. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE D EVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO P OINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS AL SO SUBMITTED THAT AS PER THE ANNUAL REPORT, THE SALARY COST DEBITED UNDER TH E SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS TH AN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNAL'S DEC ISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED V. DCI, ITA NO. ITA NO 1386/PN/10 WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 200 6-07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOF TWARE COMPANIES. ACCEPTING THE AFORESAID CONTENTIONS, THE TRIBUNAL H ELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAIN LY SOFTWARE DEVELOPMENT SERVICE PROVIDER AND ACCEPTED THE PLEA OF THE ASSES SEE THAT THIS COMPANY IS NOT COMPARABLE. (VII) PERSISTENT SYSTEMS LTD. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY AS A COMPARABLE FOR THE REASONS THAT THIS COMPANY BEING ENGAGED IN SOFT WARE PRODUCT DESIGNING ITA NO. 2029 & 2142/BANG/2017 PAGE 9 OF 20 AND ANALYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. THE TRIBUNAL FOUND THAT FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHILE THE A SSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDER AND THAT THE SEGMENTA L DETAILS ARE NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUN CIATED IN THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS/INFORMATI ON A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANAL YSIS, THE TRIBUNAL HELD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGH T TO BE OMITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION . (VIII) WIPRO LIMITED AS FAR AS THIS COMPANY IS CONCERNED, THE TRIBUNAL H ELD THAT THIS COMPANY IS ENGAGED BOTH IN SOFTWARE DEVELOPMENT AND PRODUCT DE VELOPMENT SERVICES. THERE IS NO INFORMATION ON THE SEGMENTAL BIFURCATIO N OF REVENUE FROM SALE OF PRODUCT AND SOFTWARE SERVICES. THE TRIBUNAL FOLLOWE D THE ORDER OF THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO. 227/BANG/2010) WHEREIN IT WAS HELD THAT THIS COMPAN Y WAS OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIV E SERVICE PROVIDER WHO DOES NOT OWN ANY SUCH INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. (IX) FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG), WAS EXCLUDED FOR THE REASON THAT CREDIBLE INFORMATION WAS NOT AVAILABLE ABOUT THE COMPANY. THE TPO; OBTAINED INFORMATION FROM THIS COMPANY US/133(6) OF THE ACT BUT THERE WAS A COMPLETE CONTRADICTION BETWEEN THE INFORMATION OBTA INED U/S 133(6) AND ITA NO. 2029 & 2142/BANG/2017 PAGE 10 OF 20 ANNUAL REPORT AND THEREFORE THE SAID INFORMATION CA NNOT BE SUBSTITUTED FOR THE INFORMATION CONTAINED IN ANNUAL REPORT. (X) ISHIR INFOTECH LTD., WAS EXCLUDED AS A COMPARAB LE COMPANY ON THE GROUND THAT THIS COMPANY DOES NOT SATISFY THE 25% EMPLOYEE COST TO THE TOTAL COST FILTER TO BE REGARDED AS A SERVICE INDUSTRY BY FOLL OWING THE DECISION OF THE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. VS. DCI T IT(TP) A.NO.1086/BANG/2011 FOR AY 07-08 . 12. THE AFORESAID DECISION TAKES CARE OF 10 COMPARA BLE COMPANIES OUT OF 13 COMPARABLE COMPANIES THAT ARE SOUGHT TO BE EX CLUDED IN GROUND NO.9. THE OTHER COMPANIES WHICH ASSESSEE SEEKS TO EXCLUDE ARE MEGASOFT LTD. WHICH HAS BEEN DIRECTED TO BE EXCLUDE D BY THE TRIBUNAL IN SONUS NETWORKS INDIA PVT. LTD. ( SUPRA ). ALSO THE TRIBUNAL DIRECTED SEGMENTAL RESULTS OF THIS COMPANY TO BE TAKEN AND H ENCE THE GRIEVANCE OF ASSESSEE IN THIS REGARD IS NOT ACCEPTED. 13. THE NEXT COMPANY THE ASSESSEE SEEKS EXCLUSION I S FLEXTRONICS SYSTEMS LTD. WHICH HAS BEEN DIRECTED TO BE EXCLUDED IN THE CASE OF SONUS NETWORKS INDIA PVT. LTD. (SUPRA) ON THE GROUND THAT THERE WAS A VARIATION IN THE FINANCIAL RESULTS AS AVAILABLE IN THE PUBLIC DO MAIN AND AS OBTAINED BY THE TPO BY ISSUE OF NOTICE U/S. 133(6) OF THE ACT. HENCE WE DIRECT THE EXCLUSION OF THIS COMPANY. 14. THE OTHER COMPANY WHICH REMAINS TO BE EXCLUDED IS R SYSTEMS INTERNATIONAL LTD. AS FAR AS THIS COMPANY IS CONCE RNED, IN THE VERY SAME DECISION IN THE CASE OF SONUS NETWORKS INDIA PVT. LTD. (SUPRA), THE COMPARABILITY OF THIS COMPANY WAS REMANDED TO THE T PO WITH A DIRECTION TO CULL OUT THE FINANCIAL RESULTS OF THIS COMPANY IN T HE RELEVANT PREVIOUS YEAR RELEVANT TO AY 2007-08 AND THEREAFTER COMPARE THE S EGMENTAL PROFIT MARGIN OF THIS COMPANY FROM SWD SERVICES SEGMENT. ITA NO. 2029 & 2142/BANG/2017 PAGE 11 OF 20 15. THE TPO IS DIRECTED TO COMPUTE THE ALP AS PER T HE DIRECTIONS CONTAINED IN THIS ORDER REGARDING EXCLUSION OF COMP ARABLE COMPANIES. 16. AS FAR AS GROUNDS 4 & 5 RAISED BY THE REVENUE I S CONCERNED, THE GRIEVANCE IS THAT THE CIT(A) OUGHT NOT TO HAVE DIRE CTED COMPUTATION OF MARGINS OF THIS COMPANY ON A SEGMENTAL BASIS. AS F AR AS THIS OBJECTION IS CONCERNED, WE FIND THAT THE CIT(A) WHILE GIVING THE AFORESAID DIRECTION HAS TAKEN NOTE OF THE FACT THAT THE FINANCIALS IN PUBLI C DOMAIN DID NOT REFLECT THE SEGMENTAL DETAILS. THE AO OBTAINED SEGMENTAL DETAI LS BY ISSUE OF NOTICE U/S. 133(6) OF THE ACT. THE CIT(A) DIRECTED THAT O NLY SEGMENTAL PROFIT MARGINS RELATABLE TO SOFTWARE DEVELOPMENT SERVICES SEGMENT SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. THE PLEA OF R EVENUE IS THAT THE PROFIT MARGIN AT THE ENTITY LEVEL SHOULD BE TAKEN, WHICH I N OUR VIEW, CANNOT BE ACCEPTED. IN THE TNMM, WHAT IS TO BE COMPARED IS O NLY THE TRANSACTION AND MARGIN FROM THE TRANSACTION. THE TRANSACTION F OR WHICH THE ALP IS SOUGHT TO BE DETERMINED IS RENDERING OF SOFTWARE DE VELOPMENT SERVICES AND THEREFORE THE PLEA OF REVENUE TO TAKE THE ENTERPRIS E LEVEL PROFIT MARGIN IS DEVOID OF ANY MERIT. 17. AS FAR AS GROUND NO.6 RAISED BY THE REVENUE IS CONCERNED, IT IS THE PLEA OF ASSESSEE THAT TATA ELXSI LTD. WHICH WAS EXC LUDED FROM THE LIST OF COMPARABLE COMPANIES SATISFIES ALL THE FILTERS AND THEREFORE SHOULD BE RETAINED AS A COMPARABLE. ON THIS ASPECT, WE FIND THAT THE CIT(A) HAS GIVEN A FINDING THAT TATA ELXSI LTD. PERFORMS DIFFE RENT FUNCTIONS AND S PREDOMINANTLY ENGAGED IN PRODUCT DESIGN SERVICES AN D NOT A FULLY SWD SERVICES PROVIDER AND THEREFORE IN OUR VIEW, THIS C OMPANY AS RIGHTLY EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. TH E DECISION CITED BY THE LD. AR IN RESPECT OF GROUND NO.9 OF THE ASSESSEES APPEAL CONSIDERS TATA ELXSI LTD. AS A COMPARABLE AND HAS ALSO REJECTED TH E SAME AS NOT COMPARABLE. IN VIEW OF THE ABOVE, WE FIND NO MERIT IN GROUND 6 RAISED BY THE REVENUE. ITA NO. 2029 & 2142/BANG/2017 PAGE 12 OF 20 18. AS FAR AS GROUND NO.11 RAISED BY THE ASSESSEE I S CONCERNED, THE ISSUE IS WITH REGARD TO THE QUESTION WHETHER WORKIN G CAPITAL ADJUSTMENT SHOULD BE GIVEN OR NOT. IN THIS REGARD, WE FIND TH AT THE REASONS GIVEN BY THE CIT(A) FOR NOT ALLOWING WORKING CAPITAL ADJUSTMENT ARE NOT THE SAME REASONS AS WAS GIVEN IN THE CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD. V. JCIT [2019] 101 TAXMANN.COM 313 (BANG. TRIB.) . IN THE AFORESAID DECISION ON AN IDENTICAL ISSUE, THE TRIBUNAL HELD THAT WORKI NG CAPITAL ADJUSTMENT HAS TO BE GIVEN. THE FOLLOWING ARE THE RELEVANT OBSERV ATIONS OF THE TRIBUNAL :- 10. THE NEXT GRIEVANCE PROJECTED BY THE ASSESSEE I N ITS APPEAL IS WITH REGARD TO THE ACTION OF THE CIT (A) IN NOT ALL OWING ANY ADJUSTMENT TOWARDS WORKING CAPITAL DIFFERENCES. ON THIS ISSUE WE HAVE HEARD THE RIVAL SUBMISSIONS. THE RELEVANT PROV ISIONS OF THE ACT IN SO FAR AS COMPARABILITY OF INTERNATIONAL TRANSAC TION WITH A TRANSACTION OF SIMILAR NATURE ENTERED INTO BETWEEN UNRELATED PARTIES, PROVIDES AS FOLLOWS: DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SEC TION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIO NAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] S HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING T HE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY ; (A) TO (B)** ** ** (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPU TED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGAR D TO ANY OTHER RELEVANT BASE; ITA NO. 2029 & 2142/BANG/2017 PAGE 13 OF 20 (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROL LED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTI C TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSA CTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II I); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTI C TRANSACTION); (F) ** ** ** (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WI TH REFERENCE TO THE FOLLOWING, NAMELY:- (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RES PECTIVE PARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERM S ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN E XPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TR ANSACTIONS; ITA NO. 2029 & 2142/BANG/2017 PAGE 14 OF 20 (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (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 TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 11. A READING OF RULE 10B(L)(E)(III) OF THE RULES R EAD WITH SEC.92CA OF THE ACT, WOULD CLEARLY SHOWS THAT THE NET PROFIT MARGIN ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS HAS TO BE ADJU STED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. 12. CHAPTERS I AND III OF THE OECD TRANSFER PRICIN G GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS ( HEREAFTER THE 'TPG') CONTAIN EXTENSIVE GUIDANCE ON COMPARABILITY ANALYSES FOR TRANSFER PRICING PURPOSES. GUIDANCE ON COMPARABILIT Y ADJUSTMENTS IS FOUND IN PARAGRAPHS 3.47-3.54 AND IN THE ANNEX TO C HAPTER III OF THE TPG. A REVISED VERSION OF THIS GUIDANCE WAS APPROVE D BY THE COUNCIL OF THE OECD ON 22 JULY 2010. IN PARAGRAPH 2 OF THES E GUIDELINES IT HAS BEEN EXPLAINED AS TO WHAT IS COMPARABILITY ADJU STMENT. THE GUIDELINE EXPLAINS THAT WHEN APPLYING THE ARM'S LEN GTH PRINCIPLE, THE CONDITIONS OF A CONTROLLED TRANSACTION (I.E. A TRAN SACTION BETWEEN A TAXPAYER AND AN ASSOCIATED ENTERPRISE) ARE GENERALL Y COMPARED TO THE CONDITIONS OF COMPARABLE UNCONTROLLED TRANSACTIONS. IN THIS CONTEXT, TO BE COMPARABLE MEANS THAT: ITA NO. 2029 & 2142/BANG/2017 PAGE 15 OF 20 NONE OF THE DIFFERENCES (IF ANY) BETWEEN THE SITUA TIONS BEING COMPARED COULD MATERIALLY AFFECT THE CONDITION BEIN G EXAMINED IN THE METHODOLOGY (E.G. PRICE OR MARGIN), OR REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELI MINATE THE EFFECT OF ANY SUCH DIFFERENCES. THESE ARE CALLED 'C OMPARABILITY ADJUSTMENTS. 13. IN PARAGRAPHS 13 TO 16 OF THE AFORESAID OECD GU IDELINES, NEED FOR WORKING CAPITAL ADJUSTMENT HAS BEEN EXPLAINED A S FOLLOWS: '13. IN A COMPETITIVE ENVIRONMENT, MONEY HAS A TIME VALUE. IF A COMPANY PROVIDED, SAY, 60 DAYS TRADE TERMS FOR PAYM ENT OF ACCOUNTS, THE PRICE OF THE GOODS SHOULD EQUATE TO T HE PRICE FOR IMMEDIATE PAYMENT PLUS 60 DAYS OF INTEREST ON THE I MMEDIATE PAYMENT PRICE. BY CARRYING HIGH ACCOUNTS RECEIVABLE A COMPANY IS ALLOWING ITS CUSTOMERS A RELATIVELY LONG PERIOD TO PAY THEIR ACCOUNTS. IT WOULD NEED TO BORROW MONEY TO FUND THE CREDIT TERMS AND/OR SUFFER A REDUCTION IN THE AMOUNT OF CASH SUR PLUS WHICH IT WOULD OTHERWISE HAVE AVAILABLE TO INVEST. IN A COMP ETITIVE ENVIRONMENT, THE PRICE SHOULD THEREFORE INCLUDE AN ELEMENT TO REFLECT THESE PAYMENT TERMS AND COMPENSATE FOR THE TIMING EFFECT. 14. THE OPPOSITE APPLIES TO HIGHER LEVELS OF ACCOUN TS PAYABLE. BY CARRYING HIGH ACCOUNTS PAYABLE, A COMPANY IS BENEFI TTING FROM A RELATIVELY LONG PERIOD TO PAY ITS SUPPLIERS. IT WOU LD NEED TO BORROW LESS MONEY TO FUND ITS PURCHASES AND/OR BENE FIT FROM AN INCREASE IN THE AMOUNT OF CASH SURPLUS AVAILABLE TO INVEST. IN A COMPETITIVE ENVIRONMENT, THE COST OF GOODS SOLD SHO ULD INCLUDE AN ELEMENT TO REFLECT THESE PAYMENT TERMS AND COMPE NSATE FOR THE TIMING EFFECT. 15. A COMPANY WITH HIGH LEVELS OF INVENTORY WOULD S IMILARLY NEED TO EITHER BORROW TO FUND THE PURCHASE, OR REDU CE THE AMOUNT OF CASH SURPLUS WHICH IT IS ABLE TO INVEST. NOTE TH AT THE INTEREST RATE JULY 2010 PAGE 6 MIGHT BE AFFECTED BY THE FUND ING STRUCTURE (E.G. WHERE THE PURCHASE OF INVENTORY IS PARTLY FUN DED BY EQUITY) OR BY THE RISK ASSOCIATED WITH HOLDING SPECIFIC TYP ES OF INVENTORY) 16. MAKING A WORKING CAPITAL ADJUSTMENT IS AN ATTEM PT TO ADJUST FOR THE DIFFERENCES IN TIME VALUE OF MONEY BETWEEN THE TESTED PARTY AND POTENTIAL COMPARABLES, WITH AN ASSUMPTION THAT THE ITA NO. 2029 & 2142/BANG/2017 PAGE 16 OF 20 DIFFERENCE SHOULD BE REFLECTED IN PROFITS. THE UNDE RLYING REASONING IS THAT: A COMPANY WILL NEED FUNDING TO COVER THE TIME GAP BETWEEN THE TIME IT INVESTS MONEY (I.E. PAYS MONEY TO SUPPLIER) AND THE TIME IT COLLECTS THE INVESTMENT ( I.E. COLLECTS MONEY FROM CUSTOMERS) THIS TIME GAP IS CALCULATED AS: THE PERIOD NEEDED TO SELL INVENTORIES TO CUSTOMERS + (PLUS) THE PERIOD NEEDED TO COLLECT MONEY FROM CUSTOMERS - (LESS) THE PERIOD GRANTED TO PAY DEBTS TO SUPPLIERS.' 14. EXAMPLES OF HOW TO WORK OUT ADJUSTMENT ON ACCOU NT OF WORKING CAPITAL ADJUSTMENT IS ALSO GIVEN IN THE SAID GUIDEL INES. THE GUIDELINE ALSO EXPRESSES THE DIFFICULTY IN MAKING WORKING CAP ITAL ADJUSTMENT BY CONCLUDING THAT THE FOLLOWING FACTORS HAVE TO BE KE PT IN MIND (I) THE POINT IN TIME AT WHICH THE RECEIVABLES, INVENTORY A ND PAYABLES SHOULD BE COMPARED BETWEEN THE TESTED PARTY AND THE COMPARABLES, WHETHER IT SHOULD BE THE FIGURES OF RECEIVABLES, IN VENTORY 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 R EFERENCE TO THE RATE(S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTE RPRISE OPERATING IN THE SAME MARKET AS THE TESTED PARTY. THE GUIDELINES CONCLUDE BY OBSERVING THAT THE PURPOSE OF WORKING CAPITAL ADJUS TMENTS IS TO IMPROVE THE RELIABILITY OF THE COMPARABLES. 15. IN THE PRESENT CASE THE TPO ALLOWED WORKING CAP ITAL ADJUSTMENT ACCEPTING THE CALCULATION GIVEN BY THE ASSESSEE. TH E 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 COMPAR ABLE COMPANIES FOR THE FOLLOWING REASONS: (I) THE DAILY WORKING CAPITAL LEVELS OF THE TESTED PARTY AND THE COMPARABLES WAS THE ONLY RELIABLE BASIS OF DETERMIN ING ADJUSTMENT TO BE MADE ON ACCOUNT OF WORKING CAPITAL BECAUSE THAT WOULD BE ON THE BASIS OF WORKING CAPITAL DEPLO YED THROUGHOUT THE YEAR. ITA NO. 2029 & 2142/BANG/2017 PAGE 17 OF 20 (II) SEGMENTAL WORKING CAPITAL IS NOT DISCLOSED IN THE ANNUAL REPORTS OF COMPANIES ENGAGED IN DIFFERENT SEGMENTS AND THEREFORE PROPER COMPARISON CANNOT BE MADE. (III) DISCLOSE IN THE BALANCE SHEET DOES NOT CONTAI N BREAK UP OF TRADE AND NON-TRADE DEBTORS AND CREDITORS AND THERE FORE WORKING CAPITAL ADJUSTMENT DONE WITHOUT SUCH BREAK UP WOULD RESULT IN COMPUTATION BEING SKEWED. (IV) COST OF CAPITAL WOULD BE DIFFERENT FOR DIFFERE NT COMPANIES AND THEREFORE WORKING CAPITAL ADJUSTMENT MADE DISRE GARDING THIS DIFFERENT BASED ON BROAD APPROXIMATIONS, ESTIMATION S AND ASSUMPTIONS MAY NOT LEAD TO RELIABLE RESULTS. 16. THE CIT (A) ALSO PLACED RELIANCE ON A DECISION OF CHENNAI ITAT IN THE CASE OF MOBIS INDIA LTD. V. DY. CIT [2013] 3 8 TAXMANN.COM 231/[2014] 61 SOT 40. THAT DECISION WAS BASED ON TH E FACTUAL ASPECT THAT THE ASSESSEE WAS NOT ABLE TO DEMONSTRATE HOW W ORKING CAPITAL ADJUSTMENT WAS ARRIVED AT BY THE ASSESSEE. THEREFOR E NOTHING TURNS ON THE DECISION RELIED UPON BY THE CIT (A) IN THE IMPU GNED ORDER. IN THE MATTER OF DETERMINATION OF ARM'S LENGTH PRICE, IT C ANNOT BE SAID THAT THE BURDEN IS ON THE ASSESSEE OR THE DEPARTMENT TO SHOW WHAT IS THE ARM'S LENGTH PRICE. THE DATA AVAILABLE WITH THE ASS ESSEE AND THE DEPARTMENT WOULD BE THE STARTING POINT AND DEPENDIN G ON THE FACTS AND CIRCUMSTANCES OF A CASE FURTHER DETAILS CAN BE CALLED FOR. AS FAR AS THE ASSESSEE IS CONCERNED, THE FACTS AND FIGURES WI TH REGARD TO HIS BUSINESS HAS TO BE FURNISHED. REGARDING COMPARABLE COMPANIES, ONE HAS TO FALL BACK UPON ONLY ON THE INFORMATION AVAIL ABLE IN THE PUBLIC DOMAIN. IF THAT INFORMATION IS INSUFFICIENT, IT IS BEYOND THE POWER OF THE ASSESSEE TO PRODUCE THE CORRECT INFORMATION ABO UT THE COMPARABLE COMPANIES. THE REVENUE HAS ON THE OTHER HAND POWERS TO COMPEL PRODUCTION OF THE REQUIRED DETAILS FROM THE COMPARA BLE COMPANIES. IF THAT POWER IS NOT EXERCISED TO FIND OUT THE TRUTH T HEN IT IS NO DEFENCE TO SAY THAT THE ASSESSEE HAS NOT FURNISHED THE REQUIRE D DETAILS AND ON THAT SCORE DENY ADJUSTMENT ON ACCOUNT OF WORKING CA PITAL DIFFERENCES. REGARDING APPLYING THE DAILY BALANCES OF INVENTORY, RECEIVABLES AND PAYABLES FOR COMPUTING WORKING CAPITAL ADJUSTMENT, THE DELHI BENCH OF ITAT IN THE CASE OF ITO V. E VALUE SERVE.COM [20 16] 75 TAXMANN.COM 195 (DELHI - TRIB.). HAS HELD THAT INSI STING ON DAILY BALANCES OF WORKING CAPITAL REQUIREMENTS TO COMPUTE WORKING CAPITAL ADJUSTMENT IS NOT PROPER AS IT WILL BE IMPOSSIBLE T O CARRY OUT SUCH EXERCISE AND THAT WORKING CAPITAL ADJUSTMENT HAS TO BE BASED ON THE ITA NO. 2029 & 2142/BANG/2017 PAGE 18 OF 20 OPENING AND CLOSING WORKING CAPITAL DEPLOYED. THE B ENCH HAS ALSO OBSERVED THAT THAT IN TRANSFER PRICING ANALYSIS THE RE IS ALWAYS AN ELEMENT OF ESTIMATION BECAUSE IT IS NOT AN EXACT SC IENCE. ONE HAS TO SEE THAT REASONABLE ADJUSTMENT IS BEING MADE SO AS TO BRING BOTH COMPARABLE AND TEST PARTY ON SAME FOOTING. THEREFOR E 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 ABS ENCE OF SEGMENTAL DETAILS AVAILABLE OF WORKING CAPITAL REQUIREMENTS O F COMPARABLE COMPANIES CHOSEN AND ABSENCE OF DETAILS OF TRADE AN D NON-TRADE DEBTORS OF COMPARABLE COMPANIES AS THESE DETAILS AR E BEYOND THE POWER OF THE ASSESSEE TO OBTAIN, UNLESS THESE DETAI LS ARE AVAILABLE IN PUBLIC DOMAIN. REGARDING ABSENCE OF COST OF WORKING CAPITAL FUNDS, THE OECD GUIDELINES CLEARLY ADVOCATES ADOPTING RATE (S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTERPRISE OPERATING IN THE SAME MARKET AS THE TESTED PARTY. THEREFORE THIS OBJECTION OF THE C IT (A) IS ALSO NOT SUSTAINABLE. 17. IN THE LIGHT OF THE ABOVE DISCUSSION WE ARE OF THE VIEW THAT THE CIT (A) WAS NOT JUSTIFIED IN DENYING ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT. SINCE, THE CIT (A) HAS NOT FOUND ANY ERROR IN THE TPO'S WORKING OF WORKING CAPITAL ADJUS TMENT, THE WORKING CAPITAL ADJUSTMENT AS WORKED OUT BY THE TPO HAS TO BE ALLOWED. WE MAY ALSO ADD THAT THE COMPLETE WORKING CAPITAL ADJUSTMENT WORKING HAS BEEN GIVEN BY THE ASSESSEE A ND A COPY OF THE SAME IS AT PAGES 173 & 192 OF THE ASSESSEE'S PAPER BOOK. NO DEFECT WHATSOEVER HAS BEEN POINTED OUT IN THESE WORKING BY THE CIT (A). WE MAY ALSO FURTHER ADD THAT IN TERMS OF RULE 10B(1)(E ) (III) OF THE RULES, THE NET PROFIT MARGIN ARISING IN COMPARABLE UNCONTR OLLED TRANSACTIONS SHOULD BE ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERE NCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS WHICH COULD MATERIALLY AF FECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS NOT THE CASE OF THE CIT (A) THAT DIFFERENCES IN WORKING CAPITAL REQUIREMENTS OF THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED COMPARABLE TRANSAC TIONS IS NOT A DIFFERENCE WHICH WILL MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IF FOR REASONS GIVEN BY CIT (A) WORKING CAPITAL ADJUSTMENT CANNOT BE ALLOWED TO THE PROFIT MARGINS, THEN THE COMPARABLE UNCONTROLLED TRANSACTIONS CHOSEN FOR THE PURPOSE OF COMPARISON WILL HAVE TO BE TREATED AS NOT COMPARABL E IN TERMS OF RULE 10B(3) OF THE RULES, WHICH PROVIDES AS FOLLOWS: ITA NO. 2029 & 2142/BANG/2017 PAGE 19 OF 20 '(3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED TO PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ' 18. IN SUCH A SCENARIO THERE WOULD REMAIN NO COMPAR ABLE UNCONTROLLED TRANSACTIONS FOR THE PURPOSE OF COMPAR ISON. THE TRANSFER PRICING EXERCISE WOULD THEREFORE FAIL. THEREFORE IN KEEPING WITH THE OECD GUIDELINES, ENDEAVOR SHOULD BE MADE TO BRING I N COMPARABLE COMPANIES FOR THE PURPOSE OF BROAD COMPARISON. THER EFORE THE WORKING CAPITAL ADJUSTMENT AS CLAIMED BY THE ASSESS EE SHOULD BE ALLOWED. WE HOLD AND DIRECT ACCORDINGLY. 19. THE AFORESAID DECISION CLEARLY LAYS DOWN THE PR OPOSITION THAT WORKING CAPITAL ADJUSTMENT IS TO BE GIVEN EFFECT TO WHILE DETERMINING ALP WHILE ADOPTING TNMM METHOD. RESPECTFULLY FOLLOWING THE SAID DECISION, WE ALLOW GROUND NO.11 OF THE ASSESSEE. 20. THE OTHER ISSUE THAT REMAINS FOR CONSIDERATION IN THE REVENUES APPEAL IS GROUNDS 2 & 3 OF THE REVENUES APPEAL WHI CH READS AS FOLLOWS:- 2. THE LD. CIT(A) ERRED IN HOLDING THE RATIO LAID DOWN BY THE HONBLE HIGH COURT IN THE CASE OF M/S. TATA ELXSI L TD. (ITA NO.70/2009). 3. THE LD. CIT(A) ERRED IN HOLDING THAT THE EXPENSE S REDUCED FROM THE EXPORT TURNOVER MUST ALSO BE REDUCED FROM THE TOTAL TURNOVER SINCE THERE IS NO PROVISION UNDER SEC. 10A FOR EXCLUSION OF SUCH EXPENSES FROM TOTAL TURNOVER. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TAKI NG INTO CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , ITA NO. 2029 & 2142/BANG/2017 PAGE 20 OF 20 WE ARE OF THE VIEW THAT COMMUNICATION CHARGES SHOUL D BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER. WE ARE OF THE VIEW THAT AS OF TODAY, LAW DECLARED BY THE HON'BLE HIGH COURT OF KA RNATAKA WHICH IS THE JURISDICTIONAL HIGH COURT IS BINDING ON US. MOREOV ER, THE ORDER OF THE HONBLE KARNATAKA HIGH COURT HAS BEEN UPHELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.848 9- 98490 OF 2013 & ORS. DATED 24.04.2018 . HENCE THESE GROUNDS ARE REJECTED. 22. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED, WHILE THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF JANUARY, 2021. SD/- SD/- ( CHANDRA POOJARI ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 4 TH JANUARY, 2021. / DESAI S MURTHY / COPY TO: 1. ASSESSEE 2. REVENUE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.