M/s IDS Software Solutions India Pvt Ltd, Bangalore V. Assistant Commissioner of Income-Tax, Bangalore

ITA 84/BANG/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 1892 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 11-03-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 13-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; Wholly owned subsidiary
• Section: 144C; 13

Judgement Text

IT(TP)A NO.84/BANG/2017 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., BENGAL URU IN THE INCOME TAX APPELLATE TRIBUNAL CBENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.84/BANG/2017 ASSESSMENT YEAR : 2012-13 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD. SALARPURIA ASCENT, GROUND FLOOR NO.77, KORAMANGALA INDUSTRIAL LAYOUT, JYOTHI NIVAS COLLEGE ROAD BENGALURU 560 095 PAN NO :AABCI2430G VS. ACIT CIRCLE-3(1)(1) BENGALURU APPELLANT RESPONDENT A PPELLANT BY : SHRI K.R. VASUDEVAN, A.R. RESPONDENT BY : SHRI PRADEEP KUMAR, D.R. DATE OF HEARING : 11.03.2021 DATE OF PRONOUNCEMENT : 11.03.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 21.11.2016 PASSED BY THE A.O. U/S 143(3 ) R.W.S. 144C OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] IN PURSUANCE OF DIRECTIONS GIVEN BY LD. DISPUTE RESOLUTION PANEL (D RP). AT THE TIME OF HEARING, THE LD. A.R. SUBMITTED THAT THE ASSESSE E IS PRESSING GROUND NO.12 RELATING TO EXCLUSION OF 2 COMPARABLE COMPANIES AND GROUND NO.13 RELATING TO NEGATIVE WORKING CAPITAL A DJUSTMENT MADE BY THE TPO. ALL OTHER GROUNDS WERE NOT PRESSED BY LD. A.R. THE LD A.R FURTHER SUBMITTED THAT THE ADDITIONAL GROUNDS D O NOT REQUIRE IT(TP)A NO.84/BANG/2017 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., BENGAL URU PAGE 2 OF 7 ADJUDICATION, IF THE ASSESSEE GETS RELIEF IN RESPEC T OF ABOVE SAID TWO ISSUES. 2. THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF IDS I NC. AND IT IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVEL OPMENT SERVICES IN THE FIELD OF LEASING, LOAN ACCOUNTING AND PORTFO LIO MANAGEMENT SOLUTIONS. IT HAS ENTERED INTO AGREEMENT FOR PROVI SION OF SOFTWARE DEVELOPMENT SERVICES TO ITS A.ES, VIZ., IDS INC. & IDS U.K. THE ASSESSEE SELECTED TNM METHOD AS MOST APPROPRIATE ME THOD AND PROFIT LEVEL INDICTOR AS OP/OC. THE TPO REJECTED T RANSFER PRICING STUDY OF THE ASSESSEE. THE TPO SELECTED FOLLOWING 10 COMPANIES AS COMPARABLE COMPANIES, WHICH GAVE AVERAGE MARGIN OF 22.63%:- SL.NO. NAME OF THE TAXPAYER OP/OC 1 DATAMATICS GLOBAL SERVICES LTD. 14.57% 2 GENESYS INTERNATIONAL CORPN. LTD. 30.09% 3 ICRA TECHNO ANALYTICS LTD. 17.24% 4 INFOSYS LTD. 43.10% 5 LARSEN & TOUBRO INFOTECH LTD. 25.47% 6 MINDTREE LTD. 15.01% 7 PERSISTENT SYSTEMS LTD. 27.20% 8 R.S. SOFTWARE (INDIA) LTD. 15.34% 9 SASKEN COMMUNICATION TECHNOLOGIES LTD. 12.15% 10 SPRY RESOURCES INDIA PVT. LTD. 26.18% AVERAGE 22.63% 3. AFTER ADDING NEGATIVE WORKING CAPITAL OF 2.35%, THE TPO ARRIVED AT THE ADJUSTED MARGIN OF 24.98%. ACCORDIN GLY, HE MADE TRANSFER PRICING ADJUSTMENT OF RS.1.43 CRORES. 4. THE LD. DRP EXCLUDED 6 COMPARABLES AND RETAINED 4 COMPARABLES, VIZ., LARSEN & TOUBRO INFOTECH LTD., P ERSISTENT SYSTEMS LTD., MIND TREE LTD. & R.S. SOFTWARE. 5. IN THIS APPEAL, THE ASSESSEE SEEKS EXCLUSION OF LARSEN & TOUBRO INFOTECH LTD. AND PERSISTENT SYSTEMS LTD. T HE LD. A.R. IT(TP)A NO.84/BANG/2017 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., BENGAL URU PAGE 3 OF 7 SUBMITTED THAT BOTH THE ABOVE SAID COMPANIES HAVE B EEN EXCLUDED BY THE COORDINATE BENCH IN THE CASE OF EMC SOFTWARE & SERVICES (INDIA) PVT. LTD. (107 TAXMANN.COM 367). 6. WE HEARD LD. D.R. ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT THE COORDINATE BENCH, IN THE CASE OF EM C SOFTWARE & SERVICES (INDIA)PVT. LTD. (SUPRA) HAS EXCLUDED THE ABOVE SAID COMPANIES BY FOLLOWING THE DECISION RENDERED BY THE DELHI BENCH OF TRIBUNAL IN THE CASE OF AGILIS INFORMATION TECHNOLO GIES (INDIA) PVT. LTD. (2018) 89 TAXMANN.COM 440. THE DISCUSSION MAD E IN RESPECT OF THESE TWO COMPANIES IN THE CASE OF AGILIS INFORM ATION TECHNOLOGIES (INDIA) PVT. LTD. ARE EXTRACTED BELOW: - (B) LARSEN & TOUBRO INFOTECH LTD., WAS EXCLUDED FR OM THE LIST OF COMPARABLE COMPANIES BY RELYING ON THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF SAXO INDIA (P) LTD. V. ACIT (2016) 67 TAXMANN.COM 155 (DEL-TRI). THE DISCUSSION IS CONTA INED IN PARAGRAPHS 4.8 TO 4.10 OF THE TRIBUNALS ORDER. TH E TRIBUNAL HELD THAT L&T INFOTECH LTD., WAS A SOFTWARE PRODUCT COMP ANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAIL ABLE. THE TRIBUNAL ALSO NOTICED THAT THE APPEAL FILED BY THE REVENUE AGAINST THE TRIBUNALS ORDER WAS DISMISSED BY THE HONBLE D ELHI HIGH COURT IN ITA NO.682/2016. (C) PERSISTENT SYSTEMS LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPAN Y WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL IN COMING TO THE ABOVE CONCLUSION REFERRED TO THE DECISION RENDERED BY ITA T DELHI BENCH IN THE CASE OF CASH EDGE INDIA PVT. LTD. V. ITO ITA NO.64/DEL/2015 ORDER DATED 23.9.2015 AND THE DECISI ON OF HONBLE DELHI HIGH COURT IN THE CASE OF SAXO INDIA PVT. LTD . (SUPRA). THE FINDINGS IN THIS REGARD ARE CONTAINED IN PARAGRAPHS 4.14 TO 4.16 OF ITS ORDER. FOLLOWING THE DECISION RENDERED BY THE COORDINATE B ENCHES, WE DIRECT EXCLUSION OF LARSEN & TOUBRO INFOTECH LTD. A ND PERSISTENT SYSTEMS LTD. FROM THE LIST OF COMPARABLE COMPANIES. 7. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO CONSIDERATION OF NEGATIVE WORKING CAPITAL WHILE MAKING TRANSFER PRIC ING ADJUSTMENT. IT(TP)A NO.84/BANG/2017 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., BENGAL URU PAGE 4 OF 7 IT IS THE PLEA OF THE ASSESSEE THAT THE NEGATIVE WO RKING CAPITAL SHOULD BE IGNORED. WE NOTICE THAT THE ISSUE RELATI NG TO NEGATIVE WORKING CAPITAL HAS BEEN EXAMINED BY THE CO-ORDINAT E BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. M/S E4E BUSINESS S OLUTIONS INDIA P LTD (ITA NO.2900/BANG/2018) AND IT WAS HELD THAT NE GATIVE WORKING CAPITAL ADJUSTMENT IS NOT REQUIRED IN THE C ASE OF A CAPTIVE SERVICE PROVIDER, SINCE IT IS FULLY INSULATED BY IT S AE AGAINST WORKING CAPITAL RISKS. THE RELEVANT OBSERVATIONS MADE BY T HE CO-ORDINATE BENCH ARE EXTRACTED BELOW:- 12. THE THIRD ISSUE IS WITH REGARD TO GRANT OF NE GATIVE WORKING CAPITAL ADJUSTMENT. WORKING CAPITAL ADJUSTMENT IS MADE FOR THE TIME VALUE OF MONEY LOST WHEN CREDIT PERIOD IS GIVEN TO CUSTOMERS . IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE IN THIS CASE THAT THE ASSESSEE IS A CAPTIVE UNIT WHICH IS ENTIRELY FUNDED BY THE AE. THE ASSESS EE HAS NO BORROWINGS AND IS FULLY COMPENSATED BY THE PARENT ON A TOTAL C OST PLUS. THE ASSESSEE HAS NO WORKING CAPITAL RISK - IN OTHER WORDS, IT IS A RISK-INSULATED SERVICE PROVIDER TO THE PARENT. THE ONLY CUSTOMER OF THE CO MPANY IS ITS PARENT COMPANY. THE LD. COUNSEL FOR THE ASSESSEE HAS RELIE D ON A HOST OF ITAT DECISIONS, THE MAIN DECISION BEING THAT OF M/S. SOF TWARE AG BANGALORE TECHNOLOGIES PVT. LTD.(SUPRA) WHICH IN TURN HAS REL IED ON THE DECISION OF ITAT HYDERABAD IN THE CASE OF ADAPTEC (INDIA) PRIVA TE LIMITED AND CONTENDED THAT NO NEGATIVE WORKING CAPITAL ADJUSTME NT IS CALLED FOR. THE LD.DRS RELIANCE IS ON THE DECISION IN THE CASE OF TECHNOTREE CONVERGENCE P. LTD. (SUPRA) WHEREIN IT WAS HELD THAT NEGATIVE W ORKING CAPITAL ADJUSTMENT HAS TO BE ALLOWED. 13 COMPARABLES CHOSEN OPERATE UNDER VARIED ECONOM IC CONDITIONS. THEREFORE, WHILE COMPARING A COMPANY TO THAT OF SIM ILAR COMPANIES, IT IS NECESSARY TO UNDERTAKE COMPARABILITY ADJUSTMENTS. BALANCE SHEET ADJUSTMENTS ARE INTENDED TO ACCOUNT FOR DIFFERENT L EVELS OF INVENTORIES, RECEIVABLES, PAYABLES, INTEREST RATES ETC. THE MOST COMMON BALANCE SHEET ADJUSTMENTS MADE TO REFLECT DIFFERENT LEVELS OF ACC OUNTS RECEIVABLE, ACCOUNT PAYABLE AND INVENTORY ARE KNOWN AS WORKING CAPITAL IT(TP)A NO.84/BANG/2017 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., BENGAL URU PAGE 5 OF 7 ADJUSTMENTS . AS MENTIONED BY THE OECD, COMPARABILITY ADJUSTMEN TS SHOULD NOT BE PERFORMED ON A ROUTINE OR MANDATORY B ASIS BUT RATHER ON A CASE BY CASE BASIS DEPENDING ON THE FACTS AND CIRCU MSTANCES. ECONOMIC RATIONALE OF WORKING CAPITAL OF A BUSINESS IS THE C APITAL USED IN ITS DAY-TO- DAY TRADING OPERATIONS. WORKING CAPITAL IS AFFECTED BY NUMEROUS BUSINESS INCIDENCES. IT IS VERY COMMON FOR TESTED PARTY AND EACH OF THE POTENTIAL COMPARABLES TO DIFFER MATERIALLY IN THE AMOUNT OF W ORKING CAPITAL (INVENTORY, ACCOUNTS RECEIVABLES AND PAYABLE). SUCH DIFFERENCES ARE MAINLY CAUSED DUE TO DIFFERENCES IN THE TERMS OF PU RCHASE AND SALE, LEVELS OF INVENTORY ETC. FOR EXAMPLE: IF THE BUSINESS ADVA NCES A TRADE CREDIT OF (SAY) 60 DAYS, ITS CASH GETS LOCKED UP FOR 60 DAYS AND REDUCES THE WORKING CAPITAL. IT WILL HAVE TO BORROW FROM OPEN MARKET TO MEET ITS WORKING CAPITAL REQUIREMENT, AND HENCE INCUR EXPENSES. SIMI LARLY, IF IT AVAILS OF TRADE CREDIT OF 60 DAYS, IT HAS SURPLUS CASH AT ITS DISPOSAL. IT WILL NEED TO BORROW LESS MONEY TO FUND OPERATIONAL REQUIREMENTS. HENCE, WORKING CAPITAL POSITION AFFECTS THE ADDITIONAL COST INCURR ED BY A BUSINESS BY WAY OF INTEREST ON BORROWING FROM THE OPEN MARKET. WORK ING CAPITAL ADJUSTMENTS SEEKS TO ADJUST FOR THE DIFFERENCES IN TIME VALUE OF MONEY BETWEEN TESTED PARTIES AND POTENTIAL COMPARABLES WI TH AN ASSUMPTION THAT DIFFERENCES SHOULD BE REFLECTED IN PROFITS WORKING CAPITAL ADJUSTMENT HAS A STRONG RATIONALE IN ECONOMIC THEORY. IT FACILITATES TO INCREASE THE COMPARABILITY BETWEEN THE TESTED PARTY AND COMPARAB LES WORKING IN AN INDUSTRY WHICH IS COMPETITIVE. WORKING CAPITAL ADJU STMENT CAN WORK OUT TO BE POSITIVE OR NEGATIVE. A POSITIVE WORKING CAPITAL ADJUSTMENT (WCA) WILL TEND TO REDUCE THE ARMS LENGTH PLI WHILE A NEGATIV E WCA WILL TEND TO INCREASE THE ARMS LENGTH PLI. 14. WE FIND THAT THE FACTS OF THE ASSESSEES CASE ARE SIMILAR TO THAT OF THE CASE OF THE BANGALORE ITAT IN THE CASE OF M/S.SOFTW ARE AG BANGALORE TECHNOLOGIES PVT.LTD. AND THEREFORE WE ARE INCLINED TO DELETE THE NEGATIVE WORKING CAPITAL ADJUSTMENT. IN DETERMINING ALP UNDE R TNMM, THE CORRECT APPROACH WOULD BE TO LOOK AT THE COSTS INCURRED BY THE ASSESSEE ONLY AND SHOULD NOT IMPUTE ANY ADDITIONAL COST AS DONE BY TP O, WHICH INDIRECTLY IT(TP)A NO.84/BANG/2017 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., BENGAL URU PAGE 6 OF 7 ENHANCES THE ALP ARTIFICIALLY. THE CONTRARY VIEW E XPRESSED IN DECISION CITED BY THE LEARNED DR TAKES THE VIEW THAT WORKING CAPITAL ADJUSTMENT IS REQUIRED IN ALL CASES AS ANY CREDIT EXTENDED TO CUS TOMERS WILL RESULT IN CASH LOCKED UP AND WILL RESULT IN THE ASSESSEE BORROWING MONEY FROM THE BANKS AND INCUR ADDITIONAL COST TOWARDS INTEREST ON THESE BORROWINGS WHICH COST WILL HAVE EFFECT ON THE PRICE CHARGED. IT IS THE RE ASONING IN THESE DECISIONS THAT UNDER TNM METHOD THAT EVERY INGREDIENT OF PROF IT MARGINS OF COMPARABLE COMPANIES ARE ANALYSED, WHETHER IT IS PO SITIVE OR NEGATIVE. THE DECISION PROCEEDS ON THE BASIS OF EFFECT ON PRI CE OWING TO WORKING CAPITAL REQUIREMENT. WE ARE OF THE VIEW THAT WORKI NG CAPITAL ADJUSTMENT ITSELF IS COMPUTED ON THE BASIS OF OUTSTANDING CURR ENT ASSETS AND LIABILITIES AT THE YEAR END. IT MEANS THAT OTHER THINGS BEING EQUAL, AN ENTITY HAVING HIGHER WORKING CAPITAL WILL INCUR MORE INTEREST COS T WHICH WILL REDUCE PROFITABILITY. HENCE NO IMPORTANCE SHALL BE GIVEN TO PRICING ASPECT. SINCE THE ASSESSEE DOES NOT HAVE ANY WORKING CAPITAL RISK , THE QUESTION OF NEGATIVE WORKING CAPITAL DOES NOT ARISE. FOLLOWING THE ABOVE SAID DECISION, WE DIRECT THE AO /TPO NOT TO MAKE NEGATIVE WORKING CAPITAL ADJUSTMENT. 8. SINCE WE HAVE ALLOWED RELIEF TO THE ASSESSE E IN RESPECT OF BOTH THE ISSUES DISCUSSED ABOVE, AS MENTIONED BY LD A.R, WE ARE NOT ADJUDICATING THE ADDITIONAL GROUNDS URGED BY THE AS SESSEE. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH MAR, 2021 SD/- (GEORGE GEORGE K.) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 11 TH MAR, 2021. VG/SPS IT(TP)A NO.84/BANG/2017 M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., BENGAL URU PAGE 7 OF 7 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.