Asst. CIT, Circle-6, Pune V. Starent Networks India Pvt. Ltd., Pune

ITA 812/PUN/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1904 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 03-03-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 05-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MINI VERMA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Working capital adjustments

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , ! , # $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.812/PN/2013 #& & / ASSESSMENT YEAR : 2005-06 ACIT, CIRCLE-6, PUNE . / APPELLANT V/S STARENT NETWORKS INDIA PVT. LTD., P-17, RAJIV GANDHI INFOTECH PARK, PHASE-1, HINJEWADI, PUNE 411057 PAN NO.AAACN5937G . / RESPONDENT / ASSESSEE BY : SHRI RAJENDRA AGIWAL / REVENUE BY : SMT. MINI VERMA / ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 03-01-2013 OF THE CIT(A)-IT/TP, PUNE RELATIN G TO ASSESSMENT YEAR 2005-06. 2. GROUNDS OF APPEAL NO. 1, 7 AND 8 BEING GENERAL IN NATUR E ARE DISMISSED. 3. GROUNDS OF APPEAL NO. 2,3, AND 4 BY THE REVENUE READ AS UNDER : / DATE OF HEARING :25.04.2016 / DATE OF PRONOUNCEMENT:27.04.2016 2 ITA NO.812/PN/2013 2. THE CIT(A) ERRED ON FACTS AND IN LAW IN OBSERVING THAT THE TPOS ACTION OF CHANGING THE TURNOVER FILTER WAS WITH OUT ANY BASIS. 3. THE CIT(A) ERRED ON FACTS AND IN LAW, IN ACCEPTIN G THE ASSESSEES CONTENTION THAT, THE TPO, BEFORE CONCLUDING W ITH HIS OWN SET OF COMPARABLES BASED ON A CERTAIN TURNOVER CRITER IA, ERRED IN LAW IN NOT AFFORDING AN OPPORTUNITY OF BEING HEARD TO T HE APPELLANT, WHEN THE FACTS AS REPORTED IN TPO ORDER LOCATE THE CONTRAR Y. 4. THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT APPRE CIATING THAT OUT OF THE SET OF 42 COMPARABLES IDENTIFIED BY THE ASSE SSEE, ONLY THOSE COMPARABLES ARE TO BE REJECTED BY APPLYING CRITERIA WHOSE TURNOVER WAS LESS THAN RS. 1 CR. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE COM PANY IS A SUBSIDIARY OF STARENT NETWORKS CORPORATION (SNC), USA A ND EXPORTS SOFTWARE SERVICES TO ITS HOLDING COMPANY STARENT NETWORKS CORPORATION, USA. IT OWNS 2 SEPARATE UNDERTAKINGS ENGA GED INTO SOFTWARE DEVELOPMENT AND EXPORT ACTIVITY. BOTH THE UNITS ARE ESTABLISHED AS 100% EOU. THE ASSESSEE FILED ITS RETURN OF INCOME ON 31-10-2006 SHOWING TOTAL INCOME OF RS.18,42,018/-. 5. THE AO MADE A REFERENCE TO THE TPO U/S.92CA(1) OF THE I.T. ACT FOR DETERMINING THE ALP WITH REFERENCE TO THE INTERNA TIONAL TRANSACTIONS REPORTED IN FORM 3CEB. THE TPO NOTED THAT THE ASSESSEE, DURING THE IMPUGNED ASSESSMENT YEAR, HAS ENTE RED INTO WITH ITS AE THE FOLLOWING INTERNATIONAL TRANSACTIONS : ASSOCIATED ENTERPRISE INTERNATIONAL TRANSACTION AMOUNT (IN RUPEES) STARENT NETWORKS CORPORATION, USA SOFTWARE DEVELOPMENT SERVICES 7,70,17,274/ - STARENT NETWORKS CORPORATION, USA IMPORT OF EQUIPMENTS 7,20,918/ - 6. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE TH E TPO NOTED THAT THE ASSESSEE, FOR BENCHMARKING ITS INTERNATION AL TRANSACTIONS PERTAINING TO SOFTWARE DEVELOPMENT SERVICES, HAS ADOPTED THE COST PLUS METHOD AS THE MOST APPROPRIATE METHOD. 3 ITA NO.812/PN/2013 THE ASSESSEE HAS BEEN IN AGREEMENT WITH ITS AE WHEREIN THE PARTIES HAVE AGREED FOR COST PLUS +10% TO BE CHARGED T O THE USA COMPANY. THE ASSESSEE IN ITS CONCLUDING REMARK IN THE TP STUDY REPORT HAS STATED THAT CONSIDERING THE RISKS INVOLVED, FU NDS DEPLOYED AND CONSIDERING THE STRATEGIC COMMITMENTS, MARGIN OF 10% IS DEEMED AS A FAIR MARGIN ON A CPM BASIS. THE ASSE SSEE HAS IDENTIFIED 42 COMPANIES AS COMPARABLE COMPANIES. AVERA GE NET MARGIN OF THESE COMPANIES WAS ARRIVED AT 9.66%. ACCORDINGLY , THE ASSESSEE CONCLUDED THAT ITS INTERNATIONAL TRANSACTION S PERTAINING TO SOFTWARE DEVELOPMENT SERVICES IS AT ALP. 7. AFTER CONSIDERING THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE THE TPO WAS NOT SATISFIED WITH THE TP STUDY RE PORT AS NOT SATISFACTORY. HE THEREFORE ISSUED A SHOW CAUSE NOTICE U NDER PROVISO TO SECTION 92C(3) OF THE ACT ASKING THE ASSESSEE TO SUBSTANTIATE THE ALP DETERMINED BY THE ASSESSEE. THE TPO NOTED THAT THE ASSESSEE IN ITS TP STUDY REPORT HAS APPLIED TH E FOLLOWING ELIMINATION CRITERIA : 1. SALES < 1 CRORE AND SALES >100 CRORES 2. REASONABLE SIZEABLE PRODUCT BASED REVENUE (MORE THA N25% OF TOTAL REVENUE) 3. MATERIALLY DIFFERENT LINE OF ACTIVITY 4. VERY HIGH/LOW SALES AND PROFITS AS COMPARED WITH YOU R COMPANY 8. AFTER SCRUTINIZING THE COMPARABLE COMPANIES AND KEEPING IN MIND THE ELIMINATION CRITERIA APPLIED BY THE ASSESSEE THE TP O APPLIED THE TURNOVER FILTER OF RS. 1 CRORE TO RS.20 CRORES AND PROPOSED THE FOLLOWING COMPANIES FOR THE PURPOSE OF COMPARISON : 1. VJIL CONSULTING LTD. 2. INDUS NETWORKS LTD. 3. NETWORK PROGRAMS (INDIA) LTD. 4. TUTIS TECHNOLOGIES LTD. 5. KEDIA INFOTECH LTD. 6. E STAR INFOTECH LTD., 4 ITA NO.812/PN/2013 7. STERLING INTERNATIONAL ENTERPRISES LTD. 9. THE TPO AGAIN SCRUTINIZED THE ABOVE MENTIONED COMPA NIES BY APPLYING THE ELIMINATION FILTER IN THE SHOW CAUSE NOTICE AND APPLIED THE FOLLOWING FILTERS : 1. SALES < 1 CRORES AND SALES > 20 CRORES 2. REASONABLE SIZEABLE PRODUCT BASED REVENUE (MORE THAN 2 5% OF TOTAL REVENUE) 3. MATERIALLY DIFFERENT LINE OF ACTIVITY 4. VERY HIGH/LOW SALES AND PROFITS AS COMPARED WITH YO UR COMPANY 5. COMPANIES THAT HAD SUBSTANTIAL (EXCESS OF 25 PER CENT) TRANSACTIONS WITH RELATED PARTIES 6. COMPANIES FOR WHICH FINANCIAL DATA FOR F.Y.2004-05 I S NOT AVAILABLE 10. THE TPO REJECTED 4 OUT OF THE 7 COMPANIES ABOVE A ND HELD THAT THE FOLLOWING 3 COMPANIES ARE COMPARABLE : SR.NO. NAME OF THE COMPANY PBIT/OPERATING COST 1 KEDIA INFOTECH LTD., 22.54% 2 E STAR INFOTECH LTD. 22.87% 3 STERLING INTERNATIONAL ENTERPRISES LTD. 33.84% 11. AFTER CONSIDERING THE VARIOUS OBJECTIONS BY THE ASSE SSEE THE TPO INCORPORATED CERTAIN NEW COMPARABLES SUGGESTED BY THE ASSESSEE AND TOOK THE FINAL SET OF COMPARABLES AS UNDER : SR.NO. NAME OF THE COMPANY PBIT/OPERATING COST 1 CHAKKILAM INFOTECH LTD. 12.69% 2 E STAR INFOTECH LIMITED 22.87% 3 EXENSYS SOFTWARE SOLUTIONS LTD. 32.25% 4 KEDIA INFOTECH LTD. 22.54% 5 LANCO GLOBAL SYSTEMS LIMITED 10.69% 6 NETWORK PROGRAMS (INDIA) LTD. 12.91% 7 SPACE COMPUTER & SYSTEMS LTD. 44.58% 8 STERLING INTERNATIONAL ENTERPRISES LTD. 33.84% 9 TVS INFOTECH LTD. 13.31% ARITHMETIC MEAN 22.85% 5 ITA NO.812/PN/2013 12. THE ARITHMETIC MEAN OF THE FINAL SET OF COMPARABLES COM ES TO 22.85% AS AGAINST THE OPERATING PROFIT ON TOTAL COST O F THE ASSESSEE AT 7.98%. THE AO ACCORDINGLY MADE AN ADJUSTM ENT OF RS.1,14,52,469/- TO THE ALP OF THE ASSESSEE. 13. BEFORE CIT(A) IT WAS SUBMITTED THAT ITS TURNOVER DURIN G THE YEAR IS RS.7.70 CRORES FOR WHICH THE ASSESSEE HAD APPLIED TURNOVER FILTER OF RS.1 CRORE TO RS.100 CR. TO SELECT THE COMPARABLE COMPANIES. HOWEVER, THE TPO WITHOUT ANY BASIS AND WITHO UT PROVIDING ANY REASON HAS CHANGED THE FILTER TO RS.1 CROR E TO RS.20 CRORES WHICH IS INCORRECT. THE TPO HAD NOT PROVIDED ANY RATIONALE AND OPPORTUNITY TO THE ASSESSEE. IT WAS FURTHER ARGUE D THAT IN SUBSEQUENT ASSESSMENT YEAR, I.E. 2006-07 THE ASSESSEE H AD APPLIED TURNOVER FILTER OF RS.1 CRORE TO RS.100 CRORES ON A TURNOVER OF RS.17.47 CRORES WHICH WAS ACCEPTED BY THE TPO AND TH E DRP. RELYING ON THE FOLLOWING DECISIONS IT WAS ARGUED THAT THE A CTION OF THE TPO IN APPLYING THE TURNOVER FILTER OF RS.1 CRORE TO R S.20 CRORES IS INCORRECT : 1. BRINTONS CARPET ASIA PVT. LTD. VS. DCIT 2. ACIT VS. FIAT INDIA PVT. LTD. (2010-TII-30-ITAT- MUM-TP) 3. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. VS. DCI T (ITA NO.1231/BAN/2010) 14. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER: 2.2.3 I HAVE GONE THROUGH THE ORDER PASSED BY THE L EARNED TPO. I DID NOT FIND ANY DISCUSSION IN THE ORDER AS TO WHY TURNOVER FILTER WAS CHANGED AND THE BASIS OF THE LOWER TURNOVER FILTER ADOPTED BY THE LEARNED TPO. IN ABSENCE OF ANY DISCUSSION, ACCO RDING TO ME, THE JUDGEMENT OF THE HONOURABLE TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) LIMITED WOULD BE APPLICAB LE HERE. THE HONOURABLE TRIBUNAL APPROVED THE TURNOVER FILTER OF RS.1 CRORE TO RS.200 CR. IN THE CASE OF GENISYS , WHEN ITS TURNOVER W AS RS.9 CR. THE FACTS IN THE APPELLANTS CASE ARE SIMILAR WITH THAT OF GENISYS AS FAR AS THE QUANTUM OF TURNOVER IS CONCERNED AS THE APPELLANT S TURNOVER DURING THE YEAR IS OF RS.7.70 CR. ACCORDINGLY, FOLL OWING THE DECISION OF 6 ITA NO.812/PN/2013 GENISYS, I DIRECT THE LEARNED AO TO APPLY THE TURNOVE R FILTER OF RS.1 CR. TO RS.100 CR. 2.2.4 IT WAS SUBMITTED THAT IF TURNOVER FILTER OF RS.1 CR. TO RS.100 CR IS ADOPTED, THE ADJUSTMENT MADE BY THE LEARNED TPO WO ULD STAND DELETED AS AVERAGE OF ARITHMETICAL MEAN OF THE COMPA RABLE COMPANIES WOULD FALL WITHIN THE SAFE HARBOUR LIMIT OF +/-5%. 2.2.5 AS THIS GROUND IS DECIDED IN FAVOUR OF THE APPEL LANT GIVING FINDINGS ON GROUND 2 AND 3 WOULD BE ACADEMIC, HENCE, I DO NOT CONSIDER IT NECESSARY TO GIVE MY FINDINGS ON GROUND 2 AND 3 RAISED BY THE APPELLANT. 15. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 16. THE LD. DEPARTMENTAL REPRESENTATIVE HEAVILY RELIED ON THE ORDER OF THE TPO AND THE GROUNDS RAISED BY THE REVENUE. 17. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND SUBMITTED THAT THE ASSESSEE IN ITS TP STUDY REPORT HAS EARLIER APPLIED THE TURNOVER FILTER OF RS.10 LAKHS TO RS.10 CRORES. HOWEVER, DURING THE ASSESSMENT PROCEEDINGS BEFORE THE T PO THE SAME WAS MODIFIED TO RS.1 CRORE TO RS.100 CRORES ON THE GROUND THAT THERE WAS A MISTAKE. THE TPO INSTEAD OF ACCEPTING THE SAME APPLIED THE TURNOVER FILTER OF RS.1 CRORE TO RS.20 CRORES. HE SUBMITTED THAT IN SUBSEQUENT YEARS THE TPO AND DRP HA VE ACCEPTED THE TURNOVER FILTER OF RS.1 CRORE TO RS.100 CROR ES. FURTHER, THE LD.CIT(A) FOLLOWING THE DECISION OF M/S. GENESYS INTEGRATING SYSTEMS INDIA PVT. LTD. (SUPRA) HAS DIRECTED T HE AO TO APPLY THE TURNOVER FILTER OF RS.1 CRORE TO RS.100 CRORES IN THE CASE OF THE ASSESSEE. HE ACCORDINGLY SUBMITTED THAT UNDER T HESE CIRCUMSTANCES THE ORDER OF THE CIT(A) SHOULD BY UPHELD A ND THE GROUNDS RAISED BY THE REVENUE SHOULD BE DISMISSED. 7 ITA NO.812/PN/2013 18. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDER OF THE AO/TPO AND THE CIT(A) AN D THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS RELIED ON BY BOTH THE SID ES. WE FIND THE ASSESSEE IN THE INSTANT CASE HAS ADOPTED THE T URNOVER FILTER OF RS.0.10 CRORE TO RS.10 CRORES WHICH WAS REVISED TO RS.1 CRORE TO RS.100 CRORES DURING THE TP ASSESSMENT PROCE EDINGS. WE FIND THE TPO APPLIED THE TURNOVER FILTER OF RS.1 CRORE TO RS .20 CRORES AS REASONABLE UNDER THE FACT AND CIRCUMSTANCES OF THE CASE. THE RELEVANT OBSERVATION OF THE TPO AT PARA 7.3 IN PAGE 20 OF THE ORDER FOR ADOPTING SUCH FILTER IS AS UNDER : 7.3 THE NEXT ISSUE IS OF ADMITTING THE EXTRA COMPARAB LES. THIS IS BECAUSE THE MISTAKE FROM THE ASSESSEE SIDE FOR REJECTING T HE COMPARABLES ABOVE RS.10 CRORE. IT IS SEEN THAT EARLIER THE ASSESSEE HAS CONSIDERED THE COMPARABLE COMPANIES HAVING A TURNO VER MORE THAN RS.10 LAKHS AND LESS THAN RS.10 CRORE. THE TURNOVE R OF THE ASSESSEE DURING THE YEAR IS RS.7.8 CRORE. THE TPO HAS REJ ECTED THE COMPANIES HAVING TURNOVER BELOW RS.1 CRORE. THEREFOR E, THE COMPANIES WHICH WERE CONSIDERED FOR THE FINAL ANALYSIS WERE HAVING TURNOVER IN THE RANGE OF RS.1 CRORE TO RS.10 CRORE. THIS RANGE OF TURNOVER LOOKS APPROPRIATE CONSIDERING THE TURNOVER O F THE ASSESSEE. HOWEVER, AS THE ASSESSEE HAS ADMITTED THAT IT WAS BY ITS OW N MISTAKE. IT HAS NOT CONSIDERED THE COMPANIES HAVING TURNOVER A BOVE RS.10 CRORE, THE OPPORTUNITY SHOULD NOT BE DENIED TO IT CO MPLETELY. HENCE, CONSIDERING THE ASSESSEES SUBMISSION AND CONSIDERING THE TUR NOVER OF THE COMPANY WHICH IS RS.7.8 CRORE, THOSE COMPANIES H AVING A TURNOVER UPTO RS.20 CRORE ARE NOW ADMITTED FOR FRESH ANALYSIS. ALL OTHER COMPANIES HAVING TURNOVER MORE THAN RS.20 CRORE ARE HEREBY REJECTED. 19. FROM THE ABOVE, IT IS CLEAR THAT THE TPO WITHOUT AS SIGNING ANY VALID REASON APPLIED THE TURNOVER FILTER OF RS.1 CRORE T O RS.20 CRORES AS REASONABLE. 20. WE FIND THE BANGALORE BENCH OF THE TRIBUNAL IN THE CAS E OF M/S. GENESIS INTEGRATING SYSTEMS INDIA PVT. LTD.(SUPRA) AT PARA 9 OF THE ORDER HAS OBSERVED AS UNDER : 8 ITA NO.812/PN/2013 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDER ED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDENTS ON THE ISSU E, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE M AKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE A RE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMI T ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDER ED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE A SSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A PO SITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREF ORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN . THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN CO MPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN TH E SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURP OSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR T URNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. D UN & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFIC ATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN V IEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORT ANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CORE TO 200 CR ORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN T HAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH A LSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAK EN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 21. WE FIND FOLLOWING THE ABOVE DECISION THE LD.CIT(A) DIRECTED THE TPO TO ADOPT THE TURNOVER FILTER OF RS.1 CRORE TO RS .100 CRORES. FURTHER, THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSE E THAT IN THE SUBSEQUENT YEAR THE TURNOVER FILTER CRITERIA OF RS.1 CRORE TO RS.100 CRORES SHOWN BY THE ASSESSEE HAS BEEN ACCEPTE D BY THE TPO AND THE DRP COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. FURTHER, WE DO NOT FIND ANY MERIT IN THE GROUNDS RAISED BY THE REVENUE REGARDING CERTAIN OBSERVATIONS OF THE CIT(A). UNDER THESE CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 22. GROUNDS OF APPEAL NO.5 AND 6 BY THE REVENUE ARE AS UNDER : 5. THE CIT(A) ERRED ON FACTS AND IN LAW IN ALLOWING WORKING CAPITAL ADJUSTMENT TO THE PROFIT LEVEL INDICATOR OF THE COMPARABLES 9 ITA NO.812/PN/2013 WHEN IT HAS NOT BEEN DEMONSTRATED OR PROVED THAT THE PRICING OF THE PRODUCT AND SERVICES IN CASE OF COMPARABLES OR EVEN IN CASE OF THE ASSESSEE COMPANY WAS ACTUALLY DETERMINED ON THE BASIS OF T HE WORKING CAPITAL. 6. THE CIT(A) ERRED ON FACTS AND IN LAW, IN ALLOWING WORKING CAPITAL ADJUSTMENT TO THE PROFIT LEVEL INDICATOR OF THE COMPARABLES WHEN IT ALLOWED THE CLAIM OF THE ASSESSEE IN ROUTINE MA NNER DESPITE THE FACT THAT THE OECD GUIDELINES IN GENERAL DO NOT CONSIDER SUCH ADJUSTMENTS TO BE APPLIED IN AN AUTOMATIC AND ROUTINE MANNER. 23. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE D URING THE COURSE OF HEARING BEFORE THE CIT(A) REQUESTED HIM TO PROV IDE THE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL AND RISK ADJUST MENT. ALTHOUGH SUCH ARGUMENT WAS NEVER RAISED BEFORE THE AO/ TPO, THE LD.CIT(A) ADMITTED SUCH GROUND RAISED BY THE ASSESSEE. IT WAS SUBMITTED BEFORE HIM THAT THE TPO SHOULD HAVE GIVEN WORK ING CAPITAL ADJUSTMENT FOR THE DIFFERENCE IN LEVELS OF ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE IN THE BOOKS OF THE TEST ED PARTY, VIS-A-VIS THE COMPARABLE COMPANIES. IT WAS ARGUED THAT A COMPANY WOULD BE WILLING TO ACCEPT A SLIGHTLY LOWER PRICE FOR ITS SERVICES IF IT WERE TO PROVIDE THE SERVICES ON CASH BASIS, THAN A COMPANY, WHICH ALLOWS A CUSTOMER TO PAY AT A LATER DATE . CONVERSELY IN CASE OF COMPANIES RECEIVING CREDIT, IN FORM OF ACCOUNTS PAYABLE, THEIR COST OF SALES REFLECTS NOT ONLY THE PURCHASE PRICE OF GOODS BUT ALSO TIME VALUE FOR THE CREDIT ALLOWED B Y THE SUPPLIERS. RELYING ON VARIOUS DECISIONS IT WAS ARGUED THAT TO BRING ALL THE COMPANIES TO AN EQUAL FOOTING, AN ADJUSTMENT IS REQUIRED TO BE MADE TO ACCOUNT FOR THE UNDERLYING COST COMPONENT IN THE SALES PRICE OR COST OF SALES. 24. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE REGARDING WORKING CAPITAL ADJUSTMENT BY OBSERVING AS UNDER : 10 ITA NO.812/PN/2013 2.3.5 I HAVE CONSIDERED THE SUBMISSION OF THE APPELLAN T AND THE DATA AVAILABLE ON RECORD. DELHI BENCH OF ITAT IN T HE CASE OF VEDARIS TECHNOLOGIES PVT. LTD. VS. ACIT (2010) 41 DTR 73 (DEL ) AND THE OECD HAS ALSO EXPRESSED THE SAME VIEW ON THE ABOVE ISSUE. IT I S WELL ACCEPTED THAT PROFIT MARGINS ARE AFFECTED BY EXTENDI NG CREDIT AND HOLDING OF INVENTORY. THEREFORE, SUCH WORKING CAPIT AL ADJUSTMENTS ARE REQUIRED FOR COMPUTING PROFIT MARGINS OF TRANSACT IONS. 2.3.6 IN VIEW OF THE ABOVE, THE LEARNED AO IS DIRECT ED TO GRANT WORKING CAPITAL ADJUSTMENT TO THE APPELLANT ON THE B ASIS OF AVERAGE CREDIT/DEBIT PERIOD FOR THE YEAR AND COMMERCIAL RAT E OF INTEREST. 25. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 26. AFTER HEARING BOTH THE SIDES, WE DO NOT FIND ANY INFIRMIT Y IN THE ORDER OF THE CIT(A). ADMITTEDLY, THE ASSESSEE HAS NO T ASKED FOR WORKING CAPITAL ADJUSTMENT BEFORE THE TPO. HOWEVER, B EFORE CIT(A) THE ASSESSEE MADE AN ALTERNATE CLAIM WHICH WAS ALLO WED BY HIM. THIS GROUND BY THE ASSESSEE IN OUR OPINION IS A LEGAL ISSUE. THE COORDINATE BENCHES OF THE TRIBUNAL ARE TAKING CONSISTENT VIEW THAT THE ASSESSEE IS ENTITLED TO WORKING CAPITAL ADJUST MENT FOR COMPUTING PROFIT MARGINS OF TRANSACTIONS. 27. WE FIND THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 20 07- 08 WHILE ALLOWING THE CLAIM OF WORKING CAPITAL ADJUSTMENT HAS RESTORED THE ISSUE TO THE FILE OF THE DRP FOR FRESH ADJUDIC ATION. THE RELEVANT OBSERVATION OF THE TRIBUNAL AT PARA 15 OF TH E ORDER READS AS UNDER : 15. GROUND NO. 9 ADJUSTMENT FOR WORKING CAPITAL ERRED IN NOT GRANTING ANY ADJUSTMENT ON ACCOUNT OF D IFFERENCE IN LEVEL OF WORKING CAPITAL EMPLOYED BY THE APPELLANT AND TH E COMPARABLE COMPANIES. GROUND NO. 10 ADJUSTMENT FOR RISK DIFFERENCE ERRED IN COMPARING FULL-FLEDGED RISK BEARING ENTITI ES WITH THE APPELLANTS CAPTIVE OPERATIONS WITHOUT MAKING ANY RIS K ADJUSTMENT FOR DIFFERENCE BETWEEN THE FUNCTIONAL AND RISK PROFI LE OR COMPARABLE 11 ITA NO.812/PN/2013 COMPANIES CONSIDERED AS COMPARABLE VIS--VIS THE RISK P ROFILE OF THE APPELLANT. WITH RESPECT TO THE ADJUSTMENT OF WORKING CAPITAL AND RISK THE LD. AR SUBMITTED THAT THE ISSUE HAS NOT BEEN PROPERLY APPRECI ATED BY THE DRP. THE ASSESSEE HAD GIVEN THE DETAIL OF WORKING CAPIT AL ADJUSTMENT BEFORE THE DRP. HOWEVER, THE SAME WERE NOT CONSIDERED . SIMILARLY, IN THE CASE OF ADJUSTMENT OF RISK DIFFERENCE THE DRP HAS N OT CONSIDERED AND APPRECIATED THE ISSUE RAISED BEFORE IT. THE LD. A R SUBMITTED THAT THE WORKING CAPITAL ADJUSTMENT HAS TO BE ALLOWED. IN SUPPORT OF HIS SUBMISSIONS, HE PLACED RELIANCE ON THE FOLLOWING DECISIO NS: I. DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS. DCI T (ITA NO. 1683/PN/2011) (A.Y. 2007-08) DECIDED ON 31-12-2012. II. ARISTON THERMO INDIA LIMITED VS. DCIT (ITA NO. 14 55/PN/2010) (A.Y. 2006-07) DECIDED ON 25-06-2013. AND IN SUPPORT OF RISK ADJUSTMENT THE LD. AR PLACED R ELIANCE ON FOLLOWING CASE LAWS: I. INTELLINET TECHNOLOGIES INDIA PVT. LTD. (ITA NO. 1237/BANG/2010)(A.Y. 2006-07) DECIDED ON 30-03-2012 . II. CURAM SOFTWARE INTERNATIONAL PVT. LTD. VS. ITO ( ITA NO. 1280/BANG/2012)(A.Y. 2008-09) DECIDED ON 31-07-2013 . THE LD. DR SUBMITTED THAT THE DRP HAS ADMITTED THAT W ORKING CAPITAL ADJUSTMENT CANNOT BE DENIED. HOWEVER, THE ASSESSEE DID N OT FURNISH THE NECESSARY DOCUMENTS IN SUPPORT OF ITS SUBMISSIONS. SIMIL ARLY, FOR RISK ADJUSTMENT THE ASSESSEE FAILED TO PROVIDE NECESSARY IN FORMATION. A PERUSAL OF DIRECTIONS OF DRP SHOWS THAT THE ISSUE OF WO RKING CAPITAL ADJUSTMENT AND RISK MANAGEMENT HAS BEEN SUMMARILY REJE CTED BY THE DRP. THE LD. AR POINTED THAT WORKING CAPITAL AD JUSTMENT HAS BEEN ALLOWED IN THE SUBSEQUENT ASSESSMENT YEARS I.E. ASSESSMENT YEA RS 2009-10 AND 2010-11. THE LD. AR REFERRED TO THE ORD ER OF TPO DATED 23-01-2013 FOR ASSESSMENT YEAR 2009-10 AT PAGE 1159 TO 1197 OF THE PAPER BOOK AND THE DIRECTIONS OF DRP DATED 23-12-201 4 FOR ASSESSMENT YEAR 2010-11 AT PAGE 1199 TO 1241 OF THE PAP ER BOOK. THE ASSESSEE HAS OSTENSIBLY GIVEN DETAILED WORKING OF WORK ING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT BEFORE THE AUTH ORITIES BELOW. THE DRP HAS REJECTED THE ISSUES RAISED BY THE ASSESSEE IN ME CHANICAL MANNER. IN VIEW OF THE FACT THAT THE ISSUES RAISED IN GROUND NOS. 9 AND 10 OF THE APPEAL HAVE NOT BEEN PROPERLY ADJUDICATED BY THE DRP, THE SAME ARE REMITTED BACK TO THE DRP FOR FRESH ADJUDICAT ION, IN ACCORDANCE WITH LAW. THUS, BOTH THE GROUNDS I.E. GROU ND NOS. 9 AND 10 OF THE APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. 28. SINCE THE CIT(A) HAS DIRECTED THE AO TO GRANT WORKIN G CAPITAL ADJUSTMENT TO THE ASSESSEE ON THE BASIS OF AVE RAGE CREDIT/DEBIT PERIOD FOR THE YEAR AND COMMERCIAL RATE OF INT EREST AND SINCE WORKING CAPITAL ADJUSTMENT HAS BEEN ALLOWED TO THE 12 ITA NO.812/PN/2013 ASSESSEE BY THE TPO IN A.Y. 2009-10 AND 2010-11, THERE FORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) DIRECTING THE TPO TO GRANT WORKING CAPITAL ADJUSTMENT ON THE BASIS O F CERTAIN CALCULATION. GROUNDS RAISED BY THE REVENUE ARE ACCORDING LY DISMISSED. 29. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27-04-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE ; DATED : 27 TH APRIL, 2016. ) *#,! -! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A) - IT/TP , PUNE 4. 5. 6. THE CIT-IT/TP, PUNE $ ''(, (, / DR, ITAT, B PUNE; - / GUARD FILE. / BY ORDER , // TRUE COPY // // TRUE COPY // // $ ' //TRUE /0 ' ( / SR. PRIVATE SECRETARY (, / ITAT, PUNE