ITO, Bangalore V. M/s Sabre Travel Technologies Private Limited, Bangalore

ITA 403/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7202 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-08-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 09-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN BENGALURU
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Depreciation; Transfer pricing; International transaction; Revenue expenditure; Capital expenditure
• Section: 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT (TP) A NO S. 4 03/BANG/201 6 ASSESSMENT YEAR : 2010 - 11 THE INCOME TAX OFFICER, WARD 6(1)(1), BENGALURU. VS. M/S. SABRE TRAVEL TECHNOLOGIES PVT. LTD., UNIT 1 & 2, LEVEL 2, NAVIGATOR BUILDING, ITPB, WHITEFIELD MAIN ROAD, BANGALORE 560 066. PAN: AAICS 5777P APPELLANT RESPONDENT IT (TP) A NO . 698/BANG/2016 ASSESSMENT YEAR : 2010 - 11 M/S. SABRE TRAVEL TECHNOLOGIES PVT. LTD., BANGALORE 560 066. PAN: AAICS 5777P VS. THE INCOME TAX OFFICER, WARD 6(1)(1), BENGALURU. APPELLANT RESPONDENT REVENUE BY : SHRI MUZAFFAR HUSSAIN, CIT(DR)(ITAT), BENGALURU. ASSESSEE BY : SHRI K.R. VA SUDEVAN, ADVOCATE DATE OF HEARING : 01. 0 9 .2020 DATE OF PRONOUNCEMENT : 04 .0 9 .2020 IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 2 OF 17 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT IT(TP)APPEAL NO.403/BANG/2016 IS AN APPEAL BY THE REVENUE WHILE IT(TP)A.NO.698/BANG/2016 IS AN APPEAL BY THE ASSESS EE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 28.01. 2016 OF ITO, WARD- 6(1)(1), BANGALORE (HEREINAFTER REFERRED TO AS THE ASSESSING OFFICER, AO IN SHORT) PASSED U/S.143(3) READ WITH SECTION 144C(13) OF THE INCOME TAX ACT, 1961 (ACT) IN RELATION TO ASSESSMENT YEAR 2011 -12. 2. THE ASSESSEE IN ENGAGED IN THE BUSINESS OF PRO VISION OF SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES), TO ITS WHOLLY OWNED HOLDING COMPANY. IN TERMS OF THE PROVISIONS OF SEC.92-A OF THE ACT, THE ASSESSEE AND ITS WHOLLY OWNED HOLDING COMPANY WERE ASSOCIATE D ENTERPRISES ('AES'). IN TERMS OF SEC.92B(1) OF THE ACT, THE TRA NSACTION OF PROVIDING SWD SERVICES WAS AN INTERNATIONAL TRANSACTION I.E ., A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR B ORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGR EEMENT OR ARRANGEMENT BETWEEN TWO OR MORE AES FOR THE ALLOCATION OR APPOR TIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. IN TERMS OF SEC.92(1) OF THE ACT, THE ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. IN THIS APPEAL BY THE ASSES SEE, THE DISPUTE IS WITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE (ALP ) IN RESPECT OF THE AFORESAID TWO INTERNATIONAL TRANSACTION OF (I) RE NDERING SWD SERVICES TO IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 3 OF 17 THE AE AND (II) RENDERING OF MSS TO THE AE. WE SHA LL DEAL EACH OF THE INTERNATIONAL TRANSACTIONS SEPARATELY. 3. AS FAR AS THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES ARE CONCERNED, THE ASSESSEE FILED A TRANSFER PRICING ST UDY (TP STUDY) TO JUSTIFY THE PRICE PAID IN THE INTERNATIONAL TRANSACTION AS AT ALP BY ADOPTING THE TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST AP PROPRIATE METHOD (MAM) OF DETERMINING ALP. THE ASSESSEE SELECTED OPE RATING PROFIT/OPERATING COST (OP/OC) AS THE PROFIT LEVEL I NDICATOR (PLI) FOR THE PURPOSE OF COMPARISON. THE ASSESSEE CHOSE COMPANIE S WHO ARE ENGAGED IN PROVIDING SIMILAR SERVICES SUCH AS THE ASSESSEE FROM THE PROWESS AND CAPITALINE PLUS DATA BASE. THE ASSESSEE IDENTIFIED 13 COMPANIES WHOSE AVERAGE ARITHMETIC MEAN OF PROFIT MARGIN WAS 13.71% WHICH WAS LESS THAN AND COMPARABLE TO THE OPERATING MARGIN OF THE ASSES SEE. THE ASSESSEE THEREFORE CLAIMED THAT THE PRICE IT CHARGED IN THE INTERNATIONAL TRANSACTION SHOULD BE CONSIDERED AS AT ARMS LENGTH. 4. THE TPO TO WHOM THE DETERMINATION OF ALP WAS REF ERRED TO BY THE AO, ACCEPTED TNMM AS THE MAM AND ALSO USED THE SAME PLI FOR COMPARISON I.E., OP/OC. HE ALSO SELECTED COMPARABL E COMPANIES FROM THE SAME DATABASE FROM WHICH THE ASSESSEE HAD CHOSEN CO MPARABLE COMPANIES, VIZ., PROWESS AND CAPITALINE PLUS. THE TPO REJECTED MANY OF THE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE AS COMPARABLE COMPANIES. THE TPO ON HIS OWN IDENTIFIED SOME COMP ANIES AS COMPARABLE WITH THE ASSESSEE COMPANY AND WORKED OUT THE AVERAGE ARITHMETIC MEAN OF THEIR PROFIT MARGINS AS FOLLOWS: - IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 4 OF 17 5. THE TPO COMPUTED THE ADDITION TO TOTAL INCOME O N ACCOUNT OF ADJUSTMENT TO ALP AS FOLLOWS:- COMPUTATION OF ARM'S LENGTH PRICE BY TPO AND THE AD JUSTMENT MADE ARM'S LENGTH MEAN MARGIN ON COST 24.82% LESS: WORKING CAPITAL ADJUSTMENT -1.52% ADJUSTED MEAN MARGIN OF THE COMPARABLES 26.34% OPERATING COST RS. 107,84,88,123/- ARM'S LENGTH PRICE (126.34% OF OPERATING COST) RS. 1 36,25,61,895/- PRICE RECEIVED RS.128,03,26,675/ - SHORT FALL BEING ADJUSTMENT U/S. 92CA RS.8,22,35,220/- THUS A SUM OF RS.8,22,35,220/- WAS ADDED TO THE TOT AL INCOME OF THE ASSESSEE ON ACCOUNT OF DETERMINATION OF ALP FOR PRO VISION OF SWD SERVICES BY THE ASSESSEE TO ITS AE. 6. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE S RESOLUTION PANEL (DRP) AGAINST THE DRAFT ASSESSMENT ORDER PASSED BY THE AO WHEREIN THE IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 5 OF 17 ADDITION SUGGESTED BY THE TPO AS ADJUSTMENT TO ALP WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY THE AO. THE DRP EX CLUDED 6 COMPARABLE COMPANIES VIZ.,(I) INFOSYS LTD., (II) LARSEN & TOUB RO LTD., (III) MINDTREE LTD., (IV) PERSISTENT SYSTEMS LTD., (V) SASKEN COMMUNICAT ION TECHNOLOGIES LTD., AND (VI) TATA ELXSI LTD., ON THE APPLICATION OF TUR NOVER FILTER OF MORE THAN RS.200 CRORES. THE DRP DID NOT AGREE TO PLEA OF TH E ASSESSEE FOR EXCLUSION OF ACROPETAL TECHNOLOGIES LTD., E-INFOCHI PS LTD., ICRA TECHNO ANALYTICS LTD., PERSISTENT SYSTEMS & SOLUTIONS LTD. , AND E-ZEST SOLUTIONS LTD., TO THE EXTENT THE ASSESSEE DID NOT GET RELI EF FROM THE DRP, THE ASSESSEE HAS PREFERRED APPEAL BEFORE THE TRIBUNAL. THE SPECIFIC GROUNDS OF CHALLENGE ARE CONTAINED IN GRD.NO.10 OF THE GROU NDS OF APPEAL FILED BEFORE THE TRIBUNAL. THE GROUNDS RELATING TO SWD S ERVICES SEGMENT THAT WERE PRESSED FOR ADJUDICATION WERE GROUND NO. 10 IN WHICH THE ASSESSEE HAS PROJECTED GRIEVANCE WITH REGARD TO NON-EXCLUSIO N OF THE FOLLOWING FIVE COMPANIES BY THE DRP VIZ., OF ACROPETAL TECHNOLOGIE S LTD., E-INFOCHIPS LTD., ICRA TECHNO ANALYTICS LTD., AND E-ZEST SOLUTI ONS LTD. IN GR.NO.12 THE ASSESSEE HAS PROJECTED ITS GRIEVANCE REGARDING THE ACTION OF THE DRP IN NOT GIVING PROPER DIRECTIONS REGARDING WORKING CAPI TAL ADJUSTMENT. THE GROUND OF APPEAL OF THE ASSESSEE IN THIS REGARD REA DS AS FOLLOWS: 12. THE LEARNED AO/LEARNED TPO/HON'BLE DRP HAS ERR ED IN MAKING THE FOLLOWING ERRORS IN THE COMPUTATION OF W ORKING CAPITAL ADJUSTMENT: A. BY NOT CONSIDERING THE FACT THAT THE APPELLANT D OES NOT HAVE ANY WORKING CAPITAL RISK, THEREFORE, NO NEGATI VE WORKING CAPITAL ADJUSTMENT SHOULD BE ALLOWED. B. IN PROPOSING A RESTRICTION TO THE WORKING CAPITA L ADJUSTMENT WITHOUT GIVING ANY COGENT REASON. C. IN CONSIDERING THE WRONG SBI PLR WHILE COMPUTING THE WORKING CAPITAL ADJUSTMENT. IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 6 OF 17 7. AS FAR AS THE APPEAL BY THE REVENUE IS CONCERNE D, GR.NO.1, 4 AND 5 ARE GENERAL AND NEED NO SPECIFIC ADJUDICATION. THE GROUND OF APPEAL OF THE REVENUE IN RELATION TO TRANSFER PRICING ISSUE IS PR OJECTED IN GR.NO.2 WHICH READS AS FOLLOWS:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE DISPUTE RESOLUTION PANEL ERRED IN GRANTING 1% RISK ADJUSTMENT ARBITRARILY WITHOUT APPRECIATING THE FACTS OF THE C ASE AND ITS COMPARABLES. 8. AS FAR AS GR.NO.2 OF THE REVENUES APPEAL IS CON CERNED, THE SAME IS IN RELATION TO THE ACTION OF THE DRP IN ALLOWING CL AIM OF THE ASSESSEE FOR ALLOWING RISK ADJUSTMENT WHILE DETERMINING ALP. A PERUSAL OF THE ORDER OF THE DRP IN THIS REGARD SHOWS THAT THE DRP HAS NOT D IRECTED THE AO TO ALLOW RISK ADJUSTMENT @ 1%, BUT HAS ONLY DIRECTED THE AO TO DECIDE THE PERCENTAGE OF RISK ADJUSTMENT TO BE CALCULATED AND TO TAKE GUIDANCE FROM THE DECISION OF THE ITAT BANGALORE IN THE CASE OF HELLOSOFT PVT. LTD. [2013] 32 TAXMANN.COM 101 ITAT HYD. NEVERTHELESS THERE IS NO BASIS OR DISCUSSION ON WHAT ARE THE RISKS AND ITS QUANTIFICA TION. HENCE, WE ARE OF THE VIEW THAT THE SAID DIRECTION IS NOT IN ACCORDAN CE WITH LAW AND HENCE GR.NO.2 RAISED BY THE REVENUE IS ALLOWED, IN THE FA CTS AND CIRCUMSTANCES OF THE PRESENT CASE. 9. AS FAR AS GR.NO.10 RAISED BY THE ASSESSEE IS CON CERNED, THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE DECI SION OF BANGALORE ITAT IN THE CASE OF M/S.LG SOFT INDIA PVT. LTD. VS. DCIT IT(TP)A O.52/BANG/2016 FOR AY 2011-12 ORDER DATED 5.8.2020 . IN THE AFORESAID DECISION, THE ASSESSEE WAS ALSO A SWD SERVICE PROVI DER AND THE VERY SAME COMPARABLE COMPANIES WERE CHOSEN AS COMPARABLE COMPANIES IN THAT CASE. THE TRIBUNAL RULED ON THE COMPARABILITY OF 7 COMPANIES WITH A SWD SERVICE PROVIDER SUCH AS THE ASSESSEE IN WHICH THE AFORESAID 5 COMPANIES SOUGHT TO BE EXCLUDED IN THIS APPEAL BY T HE ASSESSEE WAS ALSO IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 7 OF 17 A PART. THE FOLLOWING WERE THE RELEVANT OBSERVATIO NS OF THE TRIBUNAL FOR EXCLUDING THE AFORESAID 5 COMPANIES LISTED IN PARAG RAPH-6 ABOVE :- 10. WITH REGARD TO THE OTHER 7 COMPARABLE COMPANI ES, WHOSE EXCLUSION IS CHALLENGED BY THE REVENUE IN GROUND NO .2 OF ITS APPEAL, WE FIND THAT EXCLUSION OF THESE COMPARABLES FROM THE LIST OF COMPANIES SELECTED BY THE TPO HAD COME UP FOR CO NSIDERATION BEFORE THE BANGALORE ITAT IN THE CASE OF ELECTRONIC FOR IMAGING (I) PVT. LTD. V. DCIT [2017] 85 TAXMANN.COM 124 [B ANG. TRIB]. ; SYMANTECH SOFTWARE & SERVICES (I) PVT. LTD. V. DCIT , ITA NO.614/MDS/2016; DCIT V. IKANOS COMMUNICATION PVT. LTD. IN ITA 137/BANG/2015; NESS TECHNOLOGIES (I) PVT. LTD. V. DCIT IN ITA NO.696/MUM/2016 WHICH ARE ALSO DECISIONS RENDERED IN RELATION TO AY 2011-12 IN THE CASE OF A COMPANIES P ROVIDING SWD SERVICES SUCH AS THE ASSESSEE IN THE PRESENT AP PEAL. IT IS ALSO RELEVANT TO POINT OUT THAT THE VERY SAME COMPA RABLE COMPANIES CHOSEN BY THE TPO IN THE PRESENT APPEAL H AD BEEN CHOSEN BY THE TPO AS COMPARABLE COMPANIES IN THE CA SE OF ELECTRONIC FOR IMAGING (I) PVT. LTD. (SUPRA) . THE TRIBUNAL IN ITS ORDER DATED 14.7.2017 IN THE AFORESAID CASE DEALT W ITH THE COMPARABILITY OF THESE COMPANIES. 11. AS FAR AS ACROPETAL TECHNOLOGIES LTD. IS CONCERNED, VIDE PARA 8 OF THE ORDER OF TRIBUNAL IN ELECTRONICS FOR IMAGING (I) PVT. LTD. (SUPRA), EXCLUSION OF ACROPETAL WAS UPHELD ON THE GROUND THAT THIS COMPANY WAS INTO DEVELOPMENT OF COMPUTER PRODUCTS. THE TRIBUNAL ALSO HELD THAT L&T INFOTECH LTD. HAD R PT AT 18.66% AND SINCE THE RPT WAS BEYOND THE THRESHOLD L IMIT OF 15%, THIS COMPANY WAS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE TRIBUNAL FURTHER EXCLUDE D TATA ELXSI LTD. FROM THE LIST OF COMPARABLES ON THE GROUND THAT TH IS COMPANY WAS ENGAGED IN DIVERSIFIED ACTIVITIES AND W AS NOT A PURE SWD SERVICES PROVIDER SUCH AS THE ASSESSEE. IN PA RA 9 OF THE AFORESAID ORDER, THE TRIBUNAL HELD E-INFOCHIPS LTD., WAS EARNING REVENUE BOTH FROM THE SOFTWARE SERVICES AND SOFTWAR E PRODUCTS AND THOUGH THE BREAK-UP OF REVENUE FROM THE TWO SEG MENTS WERE AVAILABLE, BUT THE BREAK-UP OF OPERATING COST AND N ET OPERATING REVENUE AND SEGMENTAL DETAILS WERE NOT AVAILABLE. 12. AS REGARDS E-ZEST SOLUTIONS LTD. , IN THE CASE OF SYMANTECH SOFTWARE & SERVICES (I) PVT. LTD. V. DCIT , ITA IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 8 OF 17 NO.614/MDS/2016, THIS COMPANY WAS HELD TO BE ENGAGED IN KNOWLEDGE PROCESS OUTSOURCING (KPO) AND CANNOT BE R EGARDED AS A SWD SERVICES COMPANY. 13. THE TRIBUNAL IN THE CASE OF DCIT V. IKANOS COMMUNICATION PVT. LTD. IN ITA 137/BANG/2015 EXCLUD ED THE COMPANY, ICRA TECHNO ANALYTICS LTD., ON THE GROUND THAT IT WAS ENGAGED IN ENGINEERING AND CONSULTING SERVICES, BESIDES LICENSING AND SUB-LICENSING AND NO SEGMENTAL INFORM ATION WAS AVAILABLE TO COMPARE THE MARGINS OF SWD SERVICES SE GMENT. 14. THE MUMBAI TRIBUNAL IN THE CASE OF NESS TECHNOLOGIES (I) PVT. LTD. V. DCIT IN ITA NO.696/MUM/2016 HELD INFOSYS LTD. TO BE NOT COMPARABLE FOR THE REASON THAT THIS COMPANY WAS ENGAGED IN MANUFACTURING OF SOFTWARE PRODUCTS AND WAS A GIA NT COMPANY ASSUMING VARIOUS RISKS. AS FAR AS LARSEN & TOUBRO INFOTECH LTD., IS CONCERNED, VIDE PARAGRAPH-8 PAGE-16 OF THE ORDE R IN THE CASE OF ELECTRONICS FOR IMAGING INDIA PVT. LTD., (S UPRA) THIS TRIBUNAL EXCLUDED THIS COMPANY ON THE GROUND OF PRE SENCE OF ONSITE REVENUE OF MORE THAN 50% AND THAT THE RELATE D PARTY TRANSACTION WAS MORE THAN 15% (18.66%). 15. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS , WE UPHOLD THE EXCLUSION OF THE AFORESAID 7 COMPANIES FROM THE LIST OF COMPARABLE COMPANIES AND GROUND NO.2 RAISED BY THE ASSESSEE TO THIS EXTENT IS DISMISSED. WE MAY ADD THAT THE OTHE R GROUNDS RAISED BY THE REVENUE IN ITS APPEAL ARE PURELY SUPP ORTIVE OF GROUND NO.2 AND ARE GENERAL GROUNDS WITH NO SPECIFI C REFERENCE TO INSTANCES OF COMPARABLES EXCLUDED AND HENCE DISM ISSED. 10. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE DIRECT EXCLUSION OF THE AFORESAID 5 COMPARABLE COMPANIES FROM THE LIST OF COMPARABLE COMPANIES. 11. AS FAR AS GR.NO.12 RAISED BY THE ASSESSEE IS CO NCERNED, THE FACTS ARE THAT THE TPO COMPUTED WORKING CAPITAL ADJUSTMEN T AS PER ANNEXURE-C TO THE ORDER OF ASSESSMENT. PERUSAL OF THE SAME SH OWS THAT IN RESPECT OF 13 COMPARABLE COMPANIES CHOSEN BY HIM, HE HAD COMPA RED WORKING CAPITAL REQUIREMENTS VIS--VIS THE ASSESSEE AND ARR IVED AT WORKING CAPITAL IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 9 OF 17 ADJUSTMENT OF (-0.22%) + (-0.63%). IN THE ORDER OF ASSESSMENT HOWEVER HE HAS DISCUSSED ABOUT HIS OPINION THAT WORKING CAPITA L ADJUSTMENT CANNOT EXCEED THE AVERAGE WORKING CAPITAL COMPONENT OF THE COMPARABLES AND HE HAS REFERRED TO A FIGURE OF 1.63% BEING THE UPPER C EILING LIMIT OF WORKING CAPITAL ADJUSTMENT WHICH IS THE AVERAGE WORKING CAP ITAL COMPONENT OF THE COMPARABLES. HE HAS ALSO REFERRED TO THE FACT THAT WHILE COMPUTING WORKING CAPITAL ADJUSTMENT, ADVANCES RECEIVED FROM THE SIST ER COMPANY INCLUDED IN THE DEBTORS SHOULD BE EXCLUDED BECAUSE SUCH ADVANCE S RECEIVED TOWARDS SERVICES TO BE RENDERED USUALLY DOES NOT HAVE ANY C OST. FINALLY THE TPO HAS CONCLUDED AS FOLLOWS: ACCORDINGLY THE WORKING CAPITAL ADJUSTMENT IS RESTRICTED TO 1.63% IN THIS CASE AND THE WORKING CA PITAL ADJUSTMENT IS ARRIVED AT -0.67%. IN THE COMPUTATION OF ARMS LEN GTH, THE TPO HAS ADOPTED A FIGURE OF -1.52%. IT IS NOT CLEAR FROM T HE ORDER OF THE TPO AS TO HOW HE ARRIVED AT A NEGATIVE WORKING CAPITAL ADJUST MENT OF -1.52%. THE FIGURE OF -1.52% ADOPTED BY THE TPO IS CONTRARY TO THE CALCULATION IN ANNEXURE-C TO THE TPOS ORDER WHEREIN THE WORKING CAPITAL ADJUSTMENT HAS BEEN ARRIVED AT (-0.22%) + (-0.63%). 12. BEFORE THE DRP, THE ASSESSEE SUBMITTED THAT THE TPO FAILED TO APPRECIATE THE BASIC PURPOSE OF MAKING THE ADJUSTME NT FOR WORKING CAPITAL POSITION. THE PURPOSE OF WORKING CAPITAL ADJUSTMENT IS TO ADJUST FOR THE DIFFERENCES IN THE TIME VALUE OF MONEY BETWEEN THE ASSESSEE AND THE POTENTIAL COMPARABLE COMPANIES WITH AN ASSUMPTION T HAT THE DIFFERENCES WOULD BE REFLECTED IN THE PROFITS. THE TPO HAD DER IVED THE UPPER CAP FOR ALLOWING THE WORKING CAPITAL ADJUSTMENT WITHOUT PRO VIDING ANY LOGICAL RATIONALE. ANY ADJUSTMENT HAS TO BE MADE TAKING IN TO ACCOUNT THE DIFFERENCE IN THE COMPARABLE COMPANIES AND THE ASSE SSEE'S POSITION. IN THIS REGARD, REFERENCE WAS MADE TO RULE 10C(3) OF I NCOME-TAX RULES. 1962 ('THE RULES'), WHICH IS AS FOLLOWS:- IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 10 OF 17 'AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF : THERE ARE NO DIFFERENCES THAT MATERIALLY AFFECT PRI CE/MARGIN; OR REASONABLY ACCURATE ADJUSTMENTS TO ACCOUNT FOR SUCH DIFFERENCES CAN BE MADE. 13. BASED ON THE ABOVE, IT WAS CONTENDED THAT THE T PO HAS ADOPTED A METHODOLOGY WHEREIN THE ACTUAL WORKING CAPITAL POSI TION OF THE ASSESSEE HAD BEEN COMPLETELY IGNORED AND ARRIVED AT A DERIVE D UPPER CAP LIMIT FOR WORKING CAPITAL ADJUSTMENT. 14. FURTHER, THE ASSESSEE ALSO HIGHLIGHTED THAT THE TPO HAS OBSERVED THAT THE THERE IS NO COST ASSOCIATED WITH ADVANCES RECEIVED FROM HOLDING COMPANIES JUST BECAUSE THERE WERE NO DEBTORS OR INV ENTORY AND THEREFORE CONCLUDED THAT THE COST OF WORKING CAPITAL TOWARDS SUCH ADVANCES IS ZERO. ACCORDINGLY, SUCH ADVANCES ARE NOT CONSIDERED IN CO MPUTATION OF WORKING CAPITAL ADJUSTMENT. 15. IT WAS SUBMITTED THAT SIMILAR RESTRICTION ON WO RKING CAPITAL ADJUSTMENT WAS IMPOSED BY THE TPO IN THE EARLIER AY 2009-10 WH ICH WAS ULTIMATELY REJECTED BY THE DRP ON THE GROUND THAT THE TPO HAS NO DOMAIN TO FORCE THE ASSESSEE IN FUNDING ITS WORKING CAPITAL REQUIRE MENT IN A SPECIFIC WAY. BASED ON THE ABOVE, THE ASSESSEE SUBMITTED BEFORE T HE DRP THAT THE ADJUSTMENT TOWARDS THE WORKING CAPITAL IS TO BE CAR RIED OUT AS PER THE APPROACH SUGGESTED IN THE INTERNATIONAL GUIDELINES AND ALSO SUBMITTED AS FOLLOWS:- THE ADVANCES RECEIVED FROM AES TO BE INCLUDED IN CO MPUTATION OF WORKING CAPITAL ADJUSTMENT IRRESPECTIVE OF VALUE OF DEBTORS OR INVENTORY; AND IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 11 OF 17 THE ASSESSEE TO BE ENTITLED FOR ACTUAL WORKING CAPI TAL ADJUSTMENT WITHOUT ANY UPPER CAP. 16. THE DRP HOWEVER HELD AS FOLLOWS: THE OBJECTION AS ABOVE HAS BEEN CONSIDERED BUT IS FOUND TO LACK MERIT. THE TPO'S METHODOLOGY FOR COMPUTING THE NET WORKING CAPITAL WAS AS UNDER : NET WORKING CAPITAL = DEBTORS + INVENTORY - CREDITO RS SINCE THE TPO HAS CLEARLY OUTLINED THE METHODOLOG Y FOLLOWED FOR COMPUTING WORKING CAPITAL ADJUSTMENT I N WHICH ADVANCES ARE NOT A PART OF THE EQUATION, THERE IS L ITTLE SCOPE FOR THE TAXPAYER TO HAVE SUCH GRIEVANCES. THE TPO'S METHODO LOGY OF CALCULATING WORKING CAPITAL ADJUSTMENT IS A STANDAR D METHOD OF SUCH CALCULATION WHICH IS ALSO THE METHOD SPECIFIED IN THE OECD GUIDELINES OF 1995 WHICH CONSIDERS TRADE RECEIVABLE S, INVENTORY AND TRADE PAYABLES AS THE THREE ACCOUNTS TO CALCULA TE A VALUE FOR DIFFERENCES IN LEVELS OF WORKING CAPITAL BETWEEN TH E TESTED PARTY AND THE COMPARABLE TO REFLECT THE TIME VALUE OF MON EY. THE ITEMS REQUESTED FOR BEING FACTORED IN ADDITIONALLY BY THE TAX PAYER ARE NOT PART OF THE OECD'S STANDARD METHOD OF DETERMINI NG WORKING CAPITAL ADJUSTMENT. IN FACT SOME OF THESE ITEMS SUC H AS UNBILLED REVENUE ARE, IN FACT, PREMATURE IN THIS MATTER SINC E THE ENFORCEABLE LIABILITY ITSELF HAS NOT ARISEN IN RESP ECT OF THESE AMOUNTS. THE TAX PAYER'S CONTENTIONS ARE, THEREFORE , FOUND TO BE UNACCEPTABLE. SINCE THE TAXPAYER IS A CAPTIVE UNIT REMUNERATED ON COST PLUS BASIS THE TPO UNDERSTANDING THAT THE COST OF WORKIN G CAPITAL TOWARDS ADVANCES RECEIVED FROM THE AE IS NIL MAKES GOOD SENSE. THE UPPER CAP BASED ON THE AVERAGE COST OF CAPITAL OF THE COMPARABLES IS ALSO CONSIDERED REASONABLE AND IN TH E INTEREST OF PROTECTING STRICT COMPARABILITY IN ALL FACETS WHICH AFFECT PRICES AND PROFITABILITY. THE OBJECTIONS RAISED ARE, THERE FORE, FOUND TO BE UNACCEPTABLE. THE OBJECTIONS OF THE TAXPAYER REGARDING RESTRICTIO N HAVE DULY BEEN CONSIDERED. THE REASON FOR RESTRICTION OF THE WORKING CAPITAL ADJUSTMENT HAS BEEN GIVEN IN THE TPO'S ORDER. THE T PO HAS ALSO GIVEN REASONS FOR THE NON-INCLUSION OF ADVANCES FRO M AE'S. BOTH IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 12 OF 17 THE REASONS GIVEN BY THE TPO ARE FOUND TO BE APPROP RIATE FOR PURPOSES OF TP ANALYSIS WHICH REQUIRES THAT THE ATT EMPT SHOULD BE TO ENSURE THE MAXIMUM EXTENT OF COMPARABILITY BETWE EN THE TESTED ENTITY AND THE UNCONTROLLED COMPARABLES. THE TPO'S APPROACH ENSURES THIS. HENCE, THE OBJECTION RAISED BY THE TAXPAYER IN THIS REGARD CANNOT BE ACCEPTED. 17. AFTER HEARING THE RIVAL SUBMISSIONS ON THIS ISS UE, WE ARE OF THE VIEW THAT THERE IS NO CLARITY ON THE SEVERAL CONTRADICTI ONS IN THE ORDER OF THE TPO, WHICH WE HAVE POINTED OUT IN THE EARLIER PARAGRAPHS . THERE APPEARS TO BE THREE GRIEVANCES ON THE METHODOLOGY OF COMPUTING WO RKING CAPITAL ADJUSTMENT. THE FIRST GRIEVANCE IS THAT WHEN THE W ORKING CAPITAL ADJUSTMENT IS POSITIVE, IT SHOULD BE ALLOWED ON ACTUAL WITHOUT PUTTING A CAP ON THE WORKING CAPITAL ADJUSTMENT I.E., WITHOUT RESTRICTIN G THE WORKING CAPITAL ADJUSTMENT TO THE AVERAGE WORKING CAPITAL COMPONENT OF THE COMPARABLES. THE SECOND GRIEVANCE IS THAT WHEN THE WORKING CAPIT AL ADJUSTMENT IS NEGATIVE THEN THERE SHOULD BE NO ADJUSTMENT ON ACCO UNT OF WORKING CAPITAL. THIRD GRIEVANCE IS THAT ADVANCES RECEIVED FROM AE S HOULD ALSO BE CONSIDERED AS PART OF PAYABLES IN COMPUTING WORKING CAPITAL OF THE ASSESSEE. ALL THE AFORESAID THREE GRIEVANCES PROJE CTED BY THE ASSESSEE ARE WELL FOUNDED AND ARE SUPPORTED BY DECISIONS REN DERED BY TRIBUNALS. THE GRIEVANCE OF THE ASSESSEE IS WITH REGARD TO NEG ATIVE WORKING CAPITAL ADJUSTMENT CARRIED OUT BY THE TPO WHICH WAS CONFIRM ED BY THE DRP IS THAT WORKING CAPITAL ADJUSTMENT IS MADE FOR THE TIME VAL UE OF MONEY LOST WHEN CREDIT TIME IS GIVEN TO THE CUSTOMERS. THE ASSESSEE HOWEVER DOES NOT BEAR ANY RISK AND HAS NO WORKING CAPITAL CONTINGENCIES. THE ASSESSEE HAS NOT INCURRED ANY EXPENSES FOR MEETING THE WORKING CAPIT AL REQUIREMENT. THE ASSESSEE IS RUNNING THE BUSINESS WITHOUT ANY WORKIN G CAPITAL RISK AS COMPARED TO THE COMPARABLES. THE ASSESSEE DOES NOT BEAR ANY MARKET RISK AS THE SERVICES ARE PROVIDED ONLY TO TAVANT US . THEREFORE, REQUIREMENT FOR ADJUSTMENT OF NEGATIVE WORKING CAPITAL DOES NOT ARISE. IN THE CASE OF TIVO TECH PRIVATE LIMITED V. DCIT (ORDER DATED 12.06.2020 IN IT(TP)A NO. IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 13 OF 17 1619/BANG/2017), LAM RESEARCH INDIA PVT LTD V. DCIT (ORDER DATED 30.04.2015 IN ITA NO. 1473 & 1385/2014) AND DCIT V. SOFTWARE AG BANGALORE TECHNOLOGIES PVT LTD (ORDER DATED 31.03.2016 IN ITA NO. 1628/2014) PASSED BY THIS HONBLE TRIBUNAL, IT HAS BEEN HELD T HAT NEGATIVE WORKING CAPITAL ADJUSTMENT SHALL NOT BE MADE. SIMIL ARLY WHEN WORKING CAPITAL ADJUSTMENT IS POSITIVE IT SHOULD BE ALLOWED ON ACTUAL WITHOUT RESTRICTING THE SAME TO THE ARITHMETIC MEAN MARGIN OF WORKING CAPITAL OF THE COMPARABLE COMPANIES. THE GRIEVANCE THAT ADVANCES RECEIVED FROM AE SHOULD BE CONSIDERED AS PART OF PAYABLES FOR COMPUT ING WORKING CAPITAL REQUIREMENT IS ALSO A SETTLED PROPOSITION. SINCE T HE ISSUE HAS NOT BEEN DEALT WITH IN PROPER PERSPECTIVE AND THERE ARE FACT UAL CONTRADICTIONS, WE DEEM IT FIT AND APPROPRIATE TO REMAND THE ISSUE OF WORKING CAPITAL ADJUSTMENT TO THE TPO/AO FOR A CONSIDERATION AFRESH AFTER OPPORTUNITY TO THE ASSESSEE AND IN THE LIGHT OF THE OBSERVATIONS M ADE IN THIS ORDER ON WORKING CAPITAL ADJUSTMENT. NO OTHER SPECIFIC GROU NDS WITH REGARD TO DETERMINATION OF ALP WERE ARGUED OR PRESSED. 18. AS FAR AS GRD.NO.3 RAISED BY THE REVENUE IS CON CERNED, THE SAME IS WITH REGARD TO EXCLUSION OF TELECOMMUNICATION EXPEN SES, INSURANCE CHARGES AND FOREIGN EXCHANGE LOSS BOTH FROM THE EXP ORT TURNOVER AND TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTIO N U/S. 10A OF THE ACT. IT IS NOT IN DISPUTE BEFORE US THAT THE HONBLE HIGH C OURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) HAS HELD THAT CHARGES/EXPENSES RELATING TO TELECOMMUNICATION , INSURANCE CHARGES AND FOREIGN EXCHANGE LOSS SHOULD BE EXCLUDED BOTH F ROM EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S.10 A OF THE ACT I.E., WHATEVER IS REMOVED FROM THE NUMERATOR SHOULD ALSO BE EXCLUDED FROM THE DENOMINATOR WHILE WORKING TOTAL TURNOVER AND EXPORT TURNOVER FOR ALLOWING DEDUCTION U/S.10A OF THE ACT. THE AFORESAID DECISI ON OF THE JURISDICTIONAL HIGH COURT HAS BEEN UPHELD BY THE HONBLE SUPREME C OURT IN THE CASE OF IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 14 OF 17 CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.848 9-98490 OF 2013 & ORS. DATED 24.04.2018 . IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THE ORDER OF AO CALLS FOR NO INTERFERENCE . 19. ANOTHER CORPORATE TAX ISSUE THAT REMAINS FOR CO NSIDERATION IN ASSESSEES APPEAL IS GR.NO. B 1 WHICH READS AS FOLL OWS:- B. CORPORATE TAX 14. DISALLOWANCE OF LEASE RENTALS CLAIMED AS REVENU E EXPENDITURE RS.14,965,386 A. THE LEARNED AO ERRED IN LAW BY DISALLOWING LEASE RENTALS PAID BY THE APPELLANT DURING FINANCIAL YEAR 2010-11 . B. THE LEARNED AO ERRED IN DISALLOWING THE LEASE RE NTALS WHILE PASSING THE FINAL ORDER WHEN THE SAME WAS NEITHER DISALLOWED IN THE DRAFT ASSESSMENT ORDER NOR BY THE HON'BLE DRP. C. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABO VE, THE LEARNED AO HAS ERRED IN TREATING THE LEASE RENTAL P AYMENTS MADE BY THE APPELLANT AS CAPITAL EXPENDITURE. D. THE LEARNED AO HAS ERRED IN NOT APPRECIATING THE FACT THAT THE APPELLANT HAS PAID LEASE RENTALS TOWARDS FIT-OU TS PROVIDED BY THE LESSOR. E. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABO VE, THE LEARNED AO OUGHT TO HAVE GRANTED CONSEQUENTIAL ALLO WANCE OF DEPRECIATION SHOULD THE CLAIM OF LEASE RENTAL PA YMENTS BE TREATED AS CAPITAL EXPENDITURE. 20. IN THE EARLIER AY I.E., AY 2010-11, THE ASSESSE E HAD TAKEN A PREMISE ON LEASE AND PAID LEASE RENT OF RS.3,79,39,583 WHIC H WAS DEBITED TO THE P&L ACCOUNT. IN THE COMPUTATION OF TOTAL INCOME, T HE ASSESSEE CLAIMED DEDUCTION OF A SUM OF RS.1,64,45,484 TOWARDS FIT-OU TS WHICH IS PAYABLE IN EMIS OVER A PERIOD OF 5 YEARS WHICH WAS NOT DEBITED TO THE P&L A/C. THE IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 15 OF 17 SAID SUM WAS CAPITALIZED IN THE BOOKS AS LEASE RENT ALS. IN THE PROCEEDINGS BEFORE THE AO FOR AY 2010-11, THE ASSESSEE SUBMITTE D WITH REGARD TO THE AFORESAID DEDUCTION AS FOLLOWS:- I) DEDUCTION ON ACCOUNT OF LEASE RENTALS PAID DURI NG THE YEAR AMOUNTING TO RS.16,445,484 IN THIS REGARD, THE COMPANY WOULD LIKE TO SUBMIT TH AT IT HAS TAKEN OFFICE PREMISES ON RENT FROM INFORMATION TECHNOLOGY PARK LIMITED (ITPL). THE COMPANY HAS ENTERED INTO A LEAS E AGREEMENT WITH ITPL WHEREBY ITPL HAS AGREED TO PROVIDE FIT-OU TS TO THE RENTED PREMISES AS PER THE REQUIREMENTS OF THE COMP ANY. THE LEASE RENTALS FOR SUCH FIT-OUTS SHALL BE PAYABLE IN EQUAL MONTHLY INSTALMENTS FOR A PERIOD OF FIVE YEARS AFTER WHICH THE COMPANY SHALL NOT BE LIABLE TO PAY ANY MONTHLY RENTALS TO I TPL ON ACCOUNT OF FIT-OUT CHARGES. THE LEASE RENTALS PAID TO ITPL TOWARDS SUCH FIT-OUT S HAS NOT BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. ACCORDINGLY . THE COMPANY HAS CLAIMED THE LEASE RENTAL PAID TO ITPL AMOUNTING TO RS. 16,445,484 TOWARDS SUCH FIT-OUT CHARGES AS REVENUE EXPENDITURE IN THE COMPUTATION OF INCOME. THE COPIES OF LEASE RENTAL AGREEMENT ARE ENCLOSED A S ANNEXURE 1. 21. THE AO, HOWEVER, CAME TO THE CONCLUSION THAT TH E PAYMENT WAS CAPITAL IN NATURE AND THEREFORE CANNOT BE ALLOWED A S A DEDUCTION. THE SAME WAS ACCORDINGLY ADDED TO TOTAL INCOME OF THE A SSESSEE. THE DRP ON THIS ISSUE CONCURRED WITH THE VIEW OF THE AO THAT T HE EXPENDITURE IN QUESTION WAS CAPITAL EXPENDITURE BUT HOWEVER HELD T HAT ASSESSEE CAN CLAIM DEPRECIATION ON THE AMOUNT DISALLOWED. ON FURTHER A PPEAL BY THE ASSESSEE, THE TRIBUNAL REMANDED THE ISSUE TO THE AO FOR CONSI DERATION AFRESH OF THE NATURE OF EXPENSES IN THE LIGHT OF DETAILS OF THE E XPENSES TO BE FURNISHED BY THE ASSESSEE. 22. IN AY 2011-12 THAT IS THE ASSESSMENT YEAR WHICH IS SUBJECT MATTER OF THIS APPEAL, THE ASSESSEE CLAIMED DEPRECIATION O N THE WRITTEN DOWN IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 16 OF 17 VALUE [WDV] OF THE LEASE RENTALS CAPITALIZED IN AY 2010-11 IN RESPECT OF WHICH DRP FOR AY 2010-11 DIRECTED THE AO TO ALLOW D EPRECIATION. IT WAS A CONSEQUENTIAL CLAIM BASED ON THE OUTCOME ON THE ISS UE OF LEASE RENTALS FOR AY 2010-11. THE AO IN HIS DRAFT ASSESSMENT ORDER D ATED 30.3.2015 DID NOT DISALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTIO N ON ACCOUNT OF DEPRECIATION. ON OBJECTIONS BY THE ASSESSEE BEFORE DRP, THE DRP DIRECTED THE AO TO GIVE EFFECT TO DIRECTIONS OF DRP FOR AY 2010-11 AND ALLOW DEPRECIATION. THE AO IN HIS FINAL ASSESSMENT ORDER WHICH IS SUBJECT MATTER OF THIS APPEAL DISALLOWED A SUM OF RS.1,49,6 5,386 INSTEAD OF ALLOWING DEPRECIATION ON WDV OF THE SUM OF RS.1,64, 45,484/- AS DIRECTED BY THE DRP. THE SUM OF RS.1,49,65,386 WAS ARRIVED AT BY THE AO BY REDUCING A SUM OF RS.14,80,094 FROM THE OPENING WDV OF LEASE RENTALS OF RS.1,64,45,484/-. THE APPROACH OF THE AO IN THE FI NAL ORDER OF ASSESSMENT IS NOT ACCORDANCE WITH LAW AND IN COMPLIANCE WITH T HE DIRECTIONS OF THE DRP. AS PER DIRECTIONS OF DRP, THE AO SHOULD HAVE ALLOWED DEDUCTION ON ACCOUNT OF DEPRECIATION OF RS.14,80,094. WE HOLD A ND DIRECT ACCORDINGLY AND ALLOW GROUND B 1 RAISED BY THE ASSESSEE. OTHER GROUNDS OF APPEAL ARE EITHER CONSEQUENTIAL OR WERE NOT ARGUED. 23. IN THE RESULT, APPEAL BY THE ASSESSEE AND REVEN UE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF SEPTEMBER, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 4 TH SEPTEMBER, 2020. / DESAI S MURTHY / IT(TP)A NOS. 403 & 698/BANG/2016 PAGE 17 OF 17 COPY TO: 1. REVENUE 2. ASSESSEE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.