ITO, Wd. -2(3), Pune, Pune V. M/s. Nevis Network (India) Pvt. Ltd., Pune

ITA 338/PUN/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 85308 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-11-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 17-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Keywords: Transfer pricing; International transaction; Working capital adjustments
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.338/PN/2012 (ASSESSMENT YEAR : 2005-06) INCOME TAX OFFICER, WARD 2(3), PUNE. . APPELLANT VS. M/S NEVIS NETWORK (INDIA) PVT. LTD., C-301, PUNE I T PARK, 34, AUNDH ROAD, PUNE 411 020. PAN : AABCN7163P . RESPONDENT C.O. NO.17/PN/2013 (ARISING OUT OF ITA NO.338/PN/2012) (ASSESSMENT YEAR : 2005-06) M/S NEVIS NETWORK (INDIA) PVT. LTD., VISHWAKALYAN, 3 RD FLOOR, SURVEY NO.149/3, OFF ITI ROAD, AUNDH, PUNE 411 007. PAN : AABCN7163P . CROSS OBJECTOR VS. INCOME TAX OFFICER, WARD 2(3), PUNE. . APPELLANT IN APPEAL DEPARTMENT BY : SHRI A. K. MODI ASSESSEE BY : SHRI NIKHIL PATHAK DATE OF HEARING : 27-10-2014 DATE OF PRONOUNCEMENT : 24-12-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL BY THE REVENUE AND THE CROSS-O BJECTION BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS)-I, PUNE DATED 17.08.2011 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 29.12.2008 PASSED BY THE ASSESSING OFFICER U/ S 143(3) R.W.S. 92CA OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSM ENT YEAR 2005-06. ITA NO.338/PN/2012 C.O.NO.17/PN/2013 2. IN THIS APPEAL, ALTHOUGH REVENUE HAS RAISED MULT IPLE GROUNDS OF APPEAL BUT ESSENTIALLY THE ONLY GRIEVANCE IS AGAINS T THE ORDER OF THE CIT(A) DELETING THE ADDITION OF RS.1,52,21,969/- MADE TO T HE RETURNED INCOME ON ACCOUNT OF DETERMINATION OF ARM'S LENGTH PRICE OF T HE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPR ISES. 3. BRIEFLY PUT, THE RELEVANT FACTS ARE AS FOLLOWS. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE CO MPANIES ACT, 1956 AND FOR THE ASSESSMENT YEAR 2005-06 IT FILED A RETURN O F INCOME DECLARING A TOTAL INCOME OF RS.12,225/-. THE ASSESSING OFFICER NOTED THAT ASSESSEE COMPANY HAD ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE BASED IN USA TOWARDS PROVISION OF SERVIC ES, WHOSE INCOME WAS LIABLE TO BE COMPUTED IN TERMS OF SECTION 92(1) OF THE ACT HAVING REGARD TO THEIR ARM'S LENGTH PRICE. AS A CONSEQUENCE, THE ASSESSIN G OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) U/S 92CA(1) OF THE ACT FOR THE PURPOSE OF COMPUTING THE ARM'S LENGTH PRICE IN RELA TION TO THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOC IATED ENTERPRISE. THE TPO AFTER CONSIDERING THE MATERIAL AND EVIDENCE FURNISH ED BY THE ASSESSEE PASSED AN ORDER U/S 92CA(3) OF THE ACT DATED 21.10.2008 DE TERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION AT A FIGURE HIGHER THAN THE STATED VALUE BY A SUM OF RS.1,52,21,969/-. ON RECEIPT OF THE ORDER OF THE TPO, THE ASSESSING OFFICER PROCEEDED TO COMPUTE THE TOTAL INCOME OF TH E ASSESSEE HAVING REGARD TO THE ARM'S LENGTH PRICE SO DETERMINED BY THE TPO. ACCORDINGLY, IN AN ASSESSMENT FINALIZED U/S 143(3) R.W.S. 144C(11) OF THE ACT DATED 29.12.2008, THE ASSESSING OFFICER DETERMINED THE TOTAL INCOME A T RS.1,52,34,200/- AS AGAINST THE REPORTED INCOME OF RS.12,225/- WHICH, I NTER-ALIA, CONTAINED AN ADDITION OF RS.1,52,21,969/- ON ACCOUNT OF THE TRAN SFER PRICING ADJUSTMENT. THE SAID ADJUSTMENT MADE TO THE TOTAL INCOME WAS A SUBJECT-MATTER OF APPEAL ITA NO.338/PN/2012 C.O.NO.17/PN/2013 BEFORE THE CIT(A), WHO HAS SINCE DELETED THE SAME A ND THEREFORE THE REVENUE IS IN APPEAL BEFORE US. 4. BEFORE WE PROCEED TO CONSIDER THE OBJECTIONS OF THE REVENUE AND THE CONTRA STAND OF THE ASSESSEE, A BRIEF BACKGROUND OF THE DISPUTE CAN BE SUMMARIZED AS FOLLOWS. THE ASSESSEE COMPANY IS A S UBSIDIARY OF M/S NEVIS NETWORK USA. THE PARENT COMPANY I.E. M.S NEVIS NET WORK USA IS IN THE BUSINESS OF DEVELOPING, MANUFACTURING AND MARKETING OF NETWORK SECURITY SYSTEMS. THE ASSESSEE COMPANY IS ENGAGED IN THE AC TIVITY OF DEVELOPMENT OF SOFTWARE AND DESIGN OF APPLICATION SPECIFIC INTEGRA TED CIRCUITS (ASIC) FOR ITS PARENT COMPANY BASED IN USA. THE ASSESSEE IS PROVI DING SERVICES ONLY TO ITS PARENT COMPANY. DURING THE YEAR UNDER CONSIDERATIO N, IT RENDERED SERVICES ON ACCOUNT OF DEVELOPMENT OF SOFTWARE AND DESIGN OF AS IC FOR ITS PARENT COMPANY I.E. ASSOCIATE ENTERPRISE AND RECEIVED A CO NSIDERATION OF RS.17,14,18,568/-. AS PER THE TERMS OF AGREEMENT, ASSESSEE WAS COMPENSATED BY THE PARENT ASSOCIATED ENTERPRISE ON COST PLUS 12% BASIS AND THE ASSESSEE WAS ENTITLED TO RECEIVE THE PAYMENTS E ITHER IN ADVANCE OR WITHIN 30 DAYS OF THE INVOICE. THE ASSESSEE COMPANY IS EN GAGED IN RENDERING SERVICES FROM ITS UNIT, WHICH HAS BEEN APPROVED BY THE SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) AND WAS THUS ELIGIBLE FOR THE BENEFITS OF SECTION 10A OF THE ACT. IN THE TRANSFER PRICING STUDY CARRIED OUT BY THE ASSESSEE, IT CONSIDERED THE TRANSACTIONAL NET MARGIN (TNM) METHOD AS THE MO ST APPROPRIATE METHOD FOR THE PURPOSES OF BENCHMARKING ITS INTERNATIONAL TRANSACTION. THE ASSESSEE COMPANY DETERMINED 15 COMPARABLE CASES IN TERMS OF A SEARCH ANALYSIS WHICH ACCORDING TO IT WERE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. THE AVERAGE NET MARGIN OF SUCH COMPARABLES WAS DETERMIN ED AT 5.20% AND AFTER COMPARING THE SAME WITH ASSESSEES NET MARGIN OF 12 .03%, ASSESSEE ASSERTED THAT THE INTERNATIONAL TRANSACTIONS CARRIE D OUT BY IT WITH ITS ASSOCIATED ENTERPRISE WAS AT AN ARM'S LENGTH PRICE. NOTABLY, IN THE COMPARABILITY ANALYSIS, ITA NO.338/PN/2012 C.O.NO.17/PN/2013 ASSESSEE USED THE PROFIT LEVEL INDICATOR (PLI) OF N ET OPERATING PROFIT/TOTAL COST (OP/TC). THE TPO ACCEPTED THE SELECTION OF TN M METHOD AS THE MOST APPROPRIATE METHOD FOR THE PURPOSES OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOC IATED ENTERPRISE. HOWEVER, THE TPO HAS DIFFERED WITH THE ASSESSEE ON THE ADOPT ION OF THE COMPARABLES. THE TPO CONSIDERED THE FOLLOWING FINAL SET OF COMPA RABLES WHOSE ARITHMETIC MEAN OF THE MARGINS WAS DETERMINED AT 20.91%. THE SAME IS DETAILED AS UNDER :- SR.NO. NAME OF THE COMPANY PLI (OPERATING PROFIT/TO TAL COST) 1 COMPUCOM SOFTWARE LTD. (SEG) 28.63% 2 SASKEN NETWORK SYSTEMS LTD. 14.15% 3 SANKHYA INFOTECH LTD. 19.94% ARITHMETIC MEAN 20.91% 5. SINCE THE ARITHMETIC MEAN OF THE MARGIN OF THE C OMPARABLES WAS HIGHER THAN THE MARGIN OF THE ASSESSEE, THE TPO WORKED OUT AN AMOUNT OF RS.1,52,21,969/- THAT WAS REQUIRED TO BE ADDED TO T HE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS SO AS TO DETERMINE ITS A RM'S LENGTH PRICE. THE ASSESSEE CHALLENGED THE AFORESAID ADDITION MADE TO ITS RETURNED OF INCOME BEFORE THE CIT(A). 6. IN APPEAL BEFORE THE CIT(A), ASSESSEE RAISED VAR IOUS GROUNDS IN ORDER TO ASSAIL THE ADDITION MADE BY THE ASSESSING OFFICE R. THE CIT(A) NOTED THAT A PERTINENT GROUND WAS RAISED BY THE ASSESSEE TO THE EFFECT THAT IF ADJUSTMENT FOR WORKING CAPITAL WAS GRANTED, THE OTHER GROUNDS RAISED BY THE ASSESSEE WOULD BECOME ACADEMIC IN NATURE, BECAUSE BY GRANT O F SUCH ADJUSTMENT STATED VALUE OF THE TRANSACTIONS WOULD BE AT AN ARM 'S LENGTH PRICE. IN THIS CONTEXT, THE CIT(A) DETERMINED THE ISSUE AS TO WHET HER ASSESSEE WAS ENTITLED TO WORKING CAPITAL ADJUSTMENT WHILE CARRYING OUT TH E COMPARABILITY ANALYSIS VIS- ITA NO.338/PN/2012 C.O.NO.17/PN/2013 -VIS THE COMPARABLES SELECTED BY THE TPO. THE FIN DINGS OF THE CIT(A) IN THIS REGARD ARE CONTAINED IN PARA 3.3.2 OF HIS ORDER, WH ICH READ AS UNDER :- 3.3.2. THE APPELLANT DURING THE COURSE OF APPE AL HAS EXPLAINED THIS ISSUE IN PARA 2.6 OF HIS SUBMISSIONS. IT HAS BEEN C LAIMED THAT THE APPELLANT HAS EXCLUDED OTHER INCOME FOR CALCULATING THE NET O PERATING PROFIT. IT HAS BEEN FURTHER STATED THAT THE APPELLANT COMPANY HAS NOT I NCURRED ANY INTEREST COST AND THEREFORE, ITS PBT AND PBIT ARE THE SAME. IN TH E CLAIM IT HAS BEEN STATED THAT THE COMPARATIVE ANALYSIS HAS BEEN MADE BY BRIN GING THE FIGURES OF COMPARABLES TO THE SAME LEVEL AND THE ASSESSING OFF ICER ERRED IN NOT GRANTING THE SAME AND IN SAYING THAT THE PBT ANALYSIS MITIGA TES THE OBJECTION AND MAKE THE FIELD LEVEL PLAYING. IN THE COMPUTATION GI VEN IN PAGE 102 TO 103 OF THE PAPER BOOK THE APPELLANT HAS DEMONSTRATED THAT THE ARITHMETIC MEAN OF NET MARGIN OF THE COMPARABLES SELECTED BY THE TPO C OMES TO 23.70% AS AGAINST THE FIGURE OF 12.03% SHOWN BY THE APPELLANT . IN THIS RESPECT IT HAS BEEN FURTHER CLAIMED THAT THE APPELLANT ERRED IN CO MPUTING ITS NET MARGIN AT 12.03% BY EXCLUDING THE EXCHANGE GAIN EARNED IN THI S ASSESSMENT YEAR. WITH EXCHANGE GAIN, IT WAS CLAIMED THAT THE NET MARGIN C OMES TO 13.10%. THE WORKING CAPITAL ADJUSTMENT REQUIRED TO BE MADE FOR THE COMPARABLES ADOPTED BY THE ASSESSING OFFICER HAS BEEN DETERMINED AT 5.9 0% AND IF THIS ADJUSTMENT IS MADE TO THE NET MARGIN OF THE C OMPARABLES, IT HAS BEEN CLAIMED THAT THE NET MARGIN WILL COME TO 17.80% WHI CH WOULD BE WITHIN THE ACCEPTABLE RANGE OF +/- 5% OF THE APPELLANT'S MARGI N OF 13.10%. IT HAS BEEN CLAIMED THAT THE WORKING CAPITAL REQUIRED BY THE AP PELLANT IS VERY MINIMAL AS THE PAYMENTS ARE RECEIVED EITHER IN ADVANCE OR WITH IN 30 DAYS OF THE INVOICE. THE APPELLANT HAS FURTHER SUBMITTED THAT THE ASSESS ING OFFICER/ TPO IN THE A.Y. 2006-07 HAS ACCEPTED THE AFORESAID ARGUMENTS A ND HAS NOT MADE ANY ADJUSTMENTS IN SIMILAR FACTS AND CIRCUMSTANCES OF T HE CASE. THE COPIES OF THE NOTICES ISSUED BY THE TPO AND REPLY SUBMITTED BY TH E APPELLANT ALONG WITH THE ORDER OF THE TPO PASSED IN THE CASE OF THE APPELLAN T FOR A.Y. 2006-07 WAS PLACED ON RECORD TO ESTABLISH THE ABOVE CONTENTION. ON CAREFUL CONSIDERATION OF THE FACTS AND THE ARGUMENTS MADE BY THE APPELLAN T, IT IS AN ADMITTED FACT THAT THE WORKING CAPITAL ADJUSTMENT HAS TO BE GRANT ED TO THE APPELLANT VIS-A-VIS THE RESULT OF THE COMPARABLES ADOPTED BY THE ASSESS ING OFFICER. THE FACTS VERY CLEARLY SHOW THAT THE REQUIREMENT OF THE WORKI NG CAPITAL IS MUCH DIFFERENT IN THE CASE OF THE APPELLANT AS COMPARED TO THE COM PARABLES ADOPTED BY THE TPO. THE DENIAL OF THIS ADJUSTMENT BY THE TPO WAS NOT CORRECT AND WAS BASED ON FACTS WHICH WERE NOT PROPERLY APPRECIATED. FROM THE COMPUTATION SUBMITTED BY THE APPELLANT, IT HAS BEEN DEMONSTRATE D THAT AFTER THE WORKING CAPITAL ADJUSTMENT OF THE MARGINS OF THE COMPARABLE S, THE MARGINS OF THE APPELLANT COMES WITHIN THE RANGE OF +/- 5% WHICH IS ALLOWABLE AS PER CIRCULAR 12 OF THE CBDT AND EVEN THE ASSESSING OFFICER HAS A DMITTED THIS POSITION IN THE ASSESSMENT ORDER. AS THIS COMPUTATION WAS NO T ANALYZED AND DISCUSSED BY THE TPO, EVEN THOUGH IT WAS CLAIMED THAT THE SAM E WAS MADE AVAILABLE TO HIM, IT IS CONSIDERED RELEVANT AND FAIR TO ALLOW TH E APPEAL IN PRINCIPLE ON THIS ISSUE I.E. GROUND NO.2(F) AND DIRECT THE ASSESSING OFFICER TO VERIFY THE CALCULATION AND COMPUTATION WITH THE RECORDS OF THI S CASE AND IF IT IS FOUND AFTER WORKING CAPITAL ADJUSTMENT THAT THE MARGIN COMES WI THIN +/- 5% OF THE MARGIN OF THE APPELLANT COMPANY, THEN NO ADJUSTMENT WILL B E REQUIRED. IF NOT THEN THE APPROPRIATE ADJUSTMENT WILL BE MADE BY HIM AS PER T HE COMPUTATION MADE AFTER VERIFYING THE RECORDS. THIS GROUND IS THEREFO RE, ALLOWED SUBJECT TO THE ABOVE REMARKS. IN RESPECT OF THE OTHER GROUNDS, IT IS HELD THAT THE SAME HAS BECOME ACADEMIC AS PER THE ARGUMENT OF THE APPELLAN T BECAUSE GROUND ITA NO.338/PN/2012 C.O.NO.17/PN/2013 NO.2(F) HAS BEEN ALLOWED IN PRINCIPLE SUBJECT TO TH E VERIFICATION OF FIGURES AND CALCULATION. THEREFORE, FOR STATISTICAL PURPOSES, G ROUNDS NO.1 AND 2 ARE TREATED AS PARTLY ALLOWED. 7. A PERUSAL OF THE AFORESAID REVEALS THAT AS PER T HE CIT(A), ASSESSEE WAS ENTITLED TO WORKING CAPITAL ADJUSTMENT VIS--VIS TH E RESULTS OF THE COMPARABLES ADOPTED BY THE ASSESSING OFFICER. AS PER THE CIT(A ), THE REQUIREMENTS OF WORKING CAPITAL ARE MUCH DIFFERENT IN THE CASE OF T HE ASSESSEE AS COMPARED TO THE COMPARABLE CONCERNS ADOPTED BY THE TPO. ACCORD INGLY, THE CIT(A) HELD THAT DENIAL OF SUCH ADJUSTMENT BY THE TPO WAS NOT C ORRECT AND IT WAS BASED ON FACTS WHICH WERE NOT PROPERLY APPRECIATED. THE COMPUTATION SUBMITTED BY THE ASSESSEE IN THIS CONTEXT WAS ALSO CONSIDERED BY THE CIT(A). AS PER THE CIT(A), SINCE THE SAID COMPUTATION WAS NOT ANALYZED AND DISCUSSED BY THE TPO EVEN THOUGH IT WAS BEFORE HIM THE CIT(A) WHILE UPHOLDING THE CLAIM OF THE ASSESSEE IN-PRINCIPLE, DIRECTED THE ASSESSING OFFIC ER TO VERIFY THE CALCULATION IN THE COMPUTATION WITH THE RECORDS AND IF THE ADJUSTM ENT REMAINING WAS WITHIN THE TOLERANCE LIMIT OF +/- 5% OF THE MARGINS OF THE ASSESSEE COMPANY THEN NO ADJUSTMENT WOULD BE REQUIRED. IF NOT, THEN THE CIT (A) DIRECTED THAT THE APPROPRIATE ADJUSTMENT SHALL BE MADE TO THE RETURNE D INCOME. AGAINST SUCH A DECISION OF THE CIT(A), REVENUE IS IN APPEAL BEFORE US. 8. THE AFORESAID DISCUSSION BY THE CIT(A) REVEALS T HAT THE SOLITARY GROUND ON WHICH ASSESSEE HAS BEEN ALLOWED RELIEF IS THE GR ANT OF WORKING CAPITAL ADJUSTMENT. BEFORE THE TPO, ASSESSEE SUBMITTED THA T WHILE CONSIDERING THE MARGINS OF THE COMPARABLE CASES, AN APPROPRIATE ADJ USTMENT BE ALLOWED ON ACCOUNT OF DIFFERENCES IN THE WORKING CAPITAL POSIT ION. THE CONTENTION OF THE ASSESSEE WAS THAT IT WAS A CAPTIVE SERVICE PROVIDER RENDERING SOFTWARE AND DESIGN SERVICES TO ITS ASSOCIATED ENTERPRISE ONLY. IT WAS ALSO POINTED OUT THAT PAYMENT CYCLE IN THE CASE OF ASSESSEE-COMPANY WAS M UCH SHORTER AS COMPARED TO THE CASE OF THREE COMPARABLE COMPANIES SELECTED BY THE TPO. ITA NO.338/PN/2012 C.O.NO.17/PN/2013 THE ASSESSEE ALSO JUSTIFIED THE ALLOWANCE OF WORKIN G CAPITAL ADJUSTMENT ON THE BASIS OF OECD GUIDELINES. THE TPO HAD REJECTED THE PLEA OF THE ASSESSEE BY NOTICING THAT THE OPERATING PROFIT CONSIDERED BY TH E ASSESSEE FOR COMPUTING ITS PLI WAS AFTER CONSIDERING THE INTEREST EXPENDITURE AND THEREFORE THERE WAS NO QUESTION OF ALLOWING ANY ADJUSTMENT ON ACCOUNT OF W ORKING CAPITAL DIFFERENCES. 9. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE A PPEARING FOR THE REVENUE HAS CONTENDED THAT THE ASSESSEE DID NOT INC UR ANY EXPENDITURE ON ACCOUNT OF INTEREST COST WHICH MEANT THAT NO ADJUST MENT WAS REQUIRED TO BE MADE ON ACCOUNT OF WORKING CAPITAL DIFFERENCES WITH THE COMPARABLE CONCERNS. THE AFORESAID PLEA IS IN LINE WITH STAND OF THE TPO WHICH HAS NOT FOUND FAVOUR WITH THE CIT(A). 10. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE RESPONDENT- ASSESSEE HAS DEFENDED THE ORDER OF THE CIT(A) WHERE IN THE PLEA FOR ALLOWING OF WORKING CAPITAL ADJUSTMENT WITH RESPECT TO THE C OMPARABLE CONCERNS HAS BEEN ACCEPTED. THE LD. REPRESENTATIVE SUBMITTED TH AT THE DIFFERENCES IN THE REQUIREMENTS OF WORKING CAPITAL ARE NOT ONLY TO BE SEEN IN THE CONTEXT OF THE INTEREST COSTS INCURRED BUT ALSO THE PAYMENT CYCLE. IN THE CONTEXT OF THE ASSESSEE, THE PAYMENT CYCLE WITH RESPECT TO THE INV OICES RAISED IS MUCH SHORTER WHEREAS WITH RESPECT TO THE COMPARABLE CONC ERNS THERE WAS A CONSIDERABLE TIME LAG, WHICH WAS DEMONSTRATED BEFOR E THE LOWER AUTHORITIES. THEREFORE, THE EXTRA TIME LAG IN THE RECOVERY OF SA LE PROCEEDS BY THE COMPARABLE CONCERNS WOULD HAVE LEAD TO ENHANCED SAL E PRICES. THE LD. REPRESENTATIVE POINTED OUT THAT AFTER CONSIDERING S UCH A WORKING, THE CIT(A) HAS ALLOWED WORKING CAPITAL ADJUSTMENT @ 5.90% IN T HE OPERATING MARGINS OF THE COMPARABLE CONCERNS. ITA NO.338/PN/2012 C.O.NO.17/PN/2013 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN-PRINCIPLE, WE ARE IN AGREEMENT WITH THE STAND OF THE ASSESSEE THA T WHILE CARRYING OUT COMPARABILITY ANALYSIS IN THE TNM METHOD, APPROPRIA TE ADJUSTMENT DESERVES TO BE ALLOWED WITH RESPECT TO THE WORKING CAPITAL DIFF ERENCES BETWEEN THE TESTED PARTY AND THE POTENTIALLY COMPARABLE CONCERNS. IN THE PRESENT CASE, THE ASSESSEE HAS NOT INCURRED ANY INTEREST EXPENDITURE AND THEREFORE THE STAND OF THE REVENUE IS THAT NO ADJUSTMENT IS TO BE ALLOWED WITH RESPECT TO THE WORKING CAPITAL DIFFERENCES VIS--VIS THE COMPARABLE CONCER NS. IN OUR CONSIDERED OPINION, THE AFORESAID OBJECTION OF THE REVENUE IS NOT IN A CORRECT PERSPECTIVE AS IT DOES NOT TAKE INTO CONSIDERATION OTHER FACTOR S WHICH HAVE A BEARING ON THE WORKING CAPITAL REQUIREMENTS. NO DOUBT, INCURR ENCE OF INTEREST EXPENDITURE FOR THE FUNDS USED IN BUSINESS IMPACT THE OPERATING MARGINS. SO HOWEVER, THE PERIOD OF CREDIT ALLOWED TO THE CUSTOMERS ALSO IS A FACTOR WHICH WOULD IMPACT THE WORKING CAPITAL REQUIREMENTS AND CONSEQUENTIAL SALE REALIZATIONS. IN THE PRESENT CASE, ASSESSEE HAS WORKED OUT THE WORKING C APITAL DIFFERENCE FOR THE TIME LAG IN RECOVERY OF THE SALE PROCEEDS. IN ASSE SSEES CASE THE SAID TIME LAG IS QUITE SHORT INASMUCH AS IT WAS ALSO POINTED OUT THAT IN SOME CASES ASSESSEE HAS RECEIVED MONIES IN ADVANCE. NEVERTHEL ESS, AT PAGE 102 OF THE PAPER BOOK, ASSESSEE HAS PLACED A WORKING REGARDING THE DIFFERENCE IN TIME LAG IN SALE RECOVERIES IN THE CASE OF THE ASSESSEE AND THAT OF THE THREE COMPARABLES CONCERNS SELECTED BY THE TPO. THE DIFF ERENCE IN SUCH TIME LAG IS APPLIED TO THE PRIME LENDING RATE (PLR) TO COMPU TE THE WORKING CAPITAL ADJUSTMENT. ON THIS BASIS, AN ADJUSTMENT OF 5.90% WAS DETERMINED, WHICH WAS REQUIRED TO BE APPLIED TO THE OPERATING MARGINS OF THE THREE COMPARABLE CONCERNS. THE CIT(A), IN OUR VIEW, MADE NO MISTAKE IN ACCEPTING THE PLEA OF THE ASSESSEE FOR ALLOWING OF SUCH WORKING CAPITAL A DJUSTMENT. THE SAID ACTION OF THE CIT(A), IN OUR VIEW, IS LIABLE TO BE AFFIRME D. WE HOLD SO. ITA NO.338/PN/2012 C.O.NO.17/PN/2013 12. WE MAY ALSO MAKE A MENTION HERE THAT BEFORE THE CIT(A), ASSESSEE POINTED OUT THAT WHILE IT CALCULATED ITS OWN PLI I. E. OPERATING COST/OPERATING PROFIT WITHOUT INCLUDING ANY INTEREST EXPENDITURE A S IT WAS NIL, BUT ADVERTENTLY IN RESPECT OF THE COMPARABLE CONCERNS, WHO HAD INCU RRED INTEREST COSTS, ASSESSEE DID NOT REMOVE SUCH INTEREST COSTS WHILE W ORKING OUT THEIR PLIS. IN THIS MANNER, THE ASSESSEE FURNISHED A REVISED WORKI NG OF THE PLIS OF THE THREE COMPARABLES CONCERNS SELECTED BY THE TPO. ACCORDIN GLY, AS AGAINST THE AVERAGE MARGIN OF 20.91% COMPUTED BY THE TPO, THE R EVISED AVERAGE MARGIN OF THE THREE COMPARABLE CONCERNS WAS COMPUTED AT 23 .70%. THE CIT(A) ACCEPTED THE AFORESAID POSITION AND THEREAFTER HE H AS ACCEPTED ASSESSEES PLEA FOR AN ADJUSTMENT OF WORKING CAPITAL DIFFERENC ES BETWEEN ASSESSEE AND THE THREE COMPARABLE CONCERNS. THE CIT(A) HELD THA T THE DENIAL OF WORKING CAPITAL ADJUSTMENT BY THE TPO WAS NOT CORRECT AND T HAT THOUGH THE COMPUTATION OF THE WORKING CAPITAL ADJUSTMENT WAS B EFORE HIM, IT WAS NOT EXAMINED BY THE TPO. THEREFORE, FOR THE LIMITED PU RPOSE OF VERIFICATION OF SUCH WORKING HE HAS REMANDED THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER. 13. CONSIDERED IN THE LIGHT OF THE AFORESAID DISCUS SION, WE FIND NO REASONS TO INTERFERE WITH THE ULTIMATE CONCLUSION OF THE CI T(A). IN-PRINCIPLE, THE STAND OF THE CIT(A) IN ALLOWING WORKING CAPITAL ADJUSTMENT I S AFFIRMED AND ACCORDINGLY REVENUE FAILS IN ITS APPEAL. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. 15. SO FOR AS THE CROSS-OBJECTION OF THE ASSESSEE I S CONCERNED, THE FOLLOWING CROSS-GROUNDS OF APPEAL HAVE BEEN RAISED :- ITA NO.338/PN/2012 C.O.NO.17/PN/2013 1. THE LEARNED CIT(A) ERRED IN NOT ACCEPTING THE 1 3 COMPANIES CONSIDERED BY THE ASSESSEE AS COMPARABLE ENTITIES A ND THEREBY, NO ADDITION WAS REQUIRED TO BE MADE. 2. THE LEARNED CIT(A) ERRED IN NOT HOLDING THAT COM PUCON SOFTWARE LTD. COULD NOT BE CONSIDERED AS A COMPARAB LE ENTITY AND THE SAME SHOULD HAVE BEEN IGNORED WHILE DETERMINING THE ALP AS PER THE TNM METHOD. 3. THE LEARNED CIT(A) FURTHER ERRED IN NOT ALLOWING VARIOUS ADJUSTMENTS ASKED FOR BY THE ASSESSEE FOR DETERMINI NG THE ALP. 16. SINCE, AFTER DISMISSING THE APPEAL OF THE REVEN UE, THERE DOES NOT REMAIN ANY ADDITION ON ACCOUNT OF THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION, THE AFORESAID CROSS-GROUNDS RAISED BY THE ASSESSEE CHALLENGING THE DETERMINATION OF THE ARM'S LENGTH PRICE BY THE TPO ON OTHER ISSUES BECOME AN ACADEMIC EXERCISE. THEREFORE, THE SAID C ROSS-GROUNDS ARE NOT BEING ADJUDICATED FOR THE PRESENT AND ARE RENDERED INFRUCTUOUS. 17. RESULTANTLY, THE APPEAL OF THE REVENUE AS WELL AS THE CROSS-OBJECTION OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH DECEMBER, 2014. SD/- SD/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 24 TH DECEMBER, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-I, PUNE; 4) THE CIT-I, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE