Apigee Technologies (India) Pvt. Ltd., V. JCIT,

ITA 870/BANG/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1508 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 08-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 03-06-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P K SRIHARI
• Assessee Lawyers: PRAVIN KISHORE PRASAD
• Keywords: Transfer pricing; International transaction; Capital expenditure
• Section: 143(3); 142(1); 234B; 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT(TP)A NO.870/BANG/2013 ASSESSMENT YEAR : 2008-09 APIGEE TECHNOLOGIES (INDIA) PVT. LTD., [FORMERLY SONOA NETWORKS (INDIA) PVT. LTD.] NO.17/2, 2 ND B CROSS, 7 TH MAIN, 3 RD FLOOR, 3 RD BLOCK KORAMANGALA, BANGALORE 560 034. PAN: AAICS 9117R VS. THE JOINT COMMISSIONER OF INCOME TAX (OSD), CIRCLE 12(3), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PRAVIN KISHORE PRASAD, CA RESPONDENT BY : SHRI P.K. SRIHARI, ADDL. CIT(DR) DATE OF HEARING : 08.09.2015 DATE OF PRONOUNCEMENT : 23.09.2015 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER D ATED 22.3.2013 OF THE CIT(APPEALS)-III, BANGALORE FOR THE ASSESSMENT YEAR 2008-09. ITA NO. 870/BANG/2013 PAGE 2 OF 16 2. THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIA RY OF APIGEE CORPORATION, USA (APIGEE CORP OR APIGEE) [FORME RLY KNOWN AS SONOA SYSTEMS INC. (SONOA MC)]. THE ASSESSEE IS A CAPTI VE OFFSHORE DEVELOPMENT CENTRE OF APIGEE CORP, WHICH IS A DEVEL OPMENT CENTRE PROVIDING SERVICES TO APIGEE CORP IN BUILDING PRODU CTS IN THE TECHNOLOGY THAT APIGEE IS INTO. IT FILED THE RETURN OF INCOM E ON 01.102008 DECLARING TOTAL INCOME OF NIL AFTER CLAIMING THE DEDUCTION U/ S. 10A OF RS.1,69,53,978. 3. THE RETURN WAS SELECTED FOR SCRUTINY AND NOTICE S US/. 142(1) AND 143(2) WERE ISSUED. THE ASSESSING OFFICER CALLED FO R THE VARIOUS DETAILS AND REFERRED THE CASE TO THE TRANSFER PRICING OFFIC ER [TPO] U/S. 92CA OF THE INCOME-TAX ACT, 1961 [THE ACT] FOR THE DETERMINA TION OF THE ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTION S ENTERED INTO BY THE ASSESSEE. 4. THE TPO IN HER TRANSFER PRICING ORDER DATED 31. 10.2011 PASSED U/S. 92CA OF THE ACT, MADE A TRANSFER PRICING ADJUSTMENT OF RS. 21,131,649 TO THE ALP ADOPTED BY THE ASSESSEE. THE AO SUBSEQUENT LY PASSED THE FINAL ASSESSMENT ORDER DATED 30.01.2012 U/S. 143(3) R.W.S 144C(3) R.W.S. 144C(4) OF THE ACT ASSESSING THE TOTAL INCOME AT RS . 2,11,31,649 AFTER ALLOWING DEDUCTION OF RS.1,80,54,350 U/S. 10A OF TH E ACT, RESULTING IN A . DEMAND OF RS.86,55,052. ITA NO. 870/BANG/2013 PAGE 3 OF 16 5. DURING THE RELEVANT FINANCIAL YEAR 2007-08, INTE RNATIONAL TRANSACTIONS THAT TOOK PLACE BETWEEN THE ASSESSEE AND ITS ASSOCI ATED ENTERPRISES (AES) WAS PROVISION OF SWD SERVICES TO THEM AT A PRICE OF RS. 170,844,091, FOR WHICH A TP ADJUSTMENT WAS MADE BY THE TPO TO AN EXT ENT OF RS.21,131,649. 6. IT IS STATED THAT ASSESSEE WAS NOT IN RECEIPT O F NOTICE FOR HEARING ISSUED BY THE LD. CIT(APPEALS), ON ACCOUNT OF CHAN GE IN ITS REGISTERED OFFICE ADDRESS. THE LD. CIT(A) PASSED AN EX-PARTE O RDER. 7. THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACT ION BY PROVIDING SOFTWARE DEVELOPMENT SERVICES AMOUNTING TO RS.170,8 44,091 AND TOWARDS PURCHASE OF CAPITAL GOODS, INSTRUMENT ETC. AMOUNTIN G TO RS.61,935. THE MARGIN (OP/TC) WAS AT 10.04% ON SOFTWARE DEVELOPMEN T SERVICES SEGMENT. THE ASSESSEE SELECTED THE FOLLOWING COMPA RABLES:- ITA NO. 870/BANG/2013 PAGE 4 OF 16 8. THE TPO SELECTED THE FOLLOWING COMPARABLES:- 9. THE ARITHMETIC MEAN OF THE COMPARABLES SELECTED BY THE ASSESSEE WAS AT 9.01%, WHEREAS THAT OF THE TPO WAS AT 23.65% . THE LD. COUNSEL FOR THE ASSESSEE BEFORE US OBJECTED TO THE FOLLOWIN G COMPARABLES SELECTED BY THE TPO ON THE GROUND OF FUNCTIONAL DISSIMILARIT Y:- 1. AVANI CIMCON TECHNOLOGIES LTD. 2. CELESTIAL BIOLABS LTD. 3. E-ZEST SOLUTIONS LTD. 4. INFOSYS TECHNOLOGIES LTD. 5. KALS INFO SYSTEMS LTD. (SEG) 6. PERSISTENT SYSTEMS LTD. 7. QUINTEGRA SOLUTIONS LTD. 8. TATA ELXSI LTD. 9. THIRDWARE SOLUTIONS LTD. 10. WIPRO LTD. (SEG) 11. LUCID SOFTWARE LTD. ITA NO. 870/BANG/2013 PAGE 5 OF 16 IN SHORT, OUT OF THE 20 COMPARABLES SELECTED BY THE TPO, THE ASSESSEE OBJECTED TO 11 COMPARABLES LISTED ABOVE AS FUNCTION ALLY DISSIMILAR AND NOT TO BE INCLUDED IN THE TP STUDY. 10. WITH RESPECT AVANI CIMCON TECHNOLOGIES LTD., IT WAS THE ASSESSEES SUBMISSION THAT THE ASSESSEE OFFERS DIVERSIFIED OPE RATIONS SUCH AS SOFTWARE SOLUTIONS, SOFTWARE DEVELOPMENT, CONSULTING AND INF ORMATION TECHNOLOGY SERVICES TO VARIOUS CLIENTS. THE ASSESSEE WAS ALSO A PRODUCTS DEVELOPMENT COMPANY AND HAS DEVELOPED INNOVATIVE PR ODUCT LINES SUCH AS DXCHANGE, CARMA ETC. RELIANCE WAS PLACED ON THE D ECISION OF 3DPLM SOFTWARE SOLUTIONS LTD. IN IT(TP)A NO.1303/BANG/2012 FOR AY 2008-09 AND TRILOGY E-BUSINESS SOFTWARE INDIA (P) LTD. IN ITA NO.1054/BANG/2011 FOR AY 2007-08. 11. WE FIND THAT THERE IS MERIT IN THE OBJECTION OF THE LD. COUNSEL FOR THE ASSESSEE AND HENCE WE DIRECT THAT AVANI CIMCON TECH NOLOGIES LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES SELECTED BY T HE TPO. 12. WITH REGARD TO THE OTHER 8 COMPARABLES SELECTED BY THE TPO, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE COMPA NIES WERE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE FOR THE FOLLOWING REASO NS:- 1. CELESTIAL BIOLABS LTD. THE COMPANY IS INTO BIO-INFORMATICS SOFTWARE PRODUCT/SERVICES AND IN THE DEVELOPMENT OF PRODUCTS IN THE FIELD OF BIO-TECHNOLOGY AND PHARMACEUTICALS. 2. E-ZEST SOLUTIONS LTD. THE COMPANY RENDERED PRODUCT DEVELOPMENT SERVICES AND HIGH-END TECHNICAL SERVICES WHICH CAME UNDER THE CATEGORY OF KPO SERVICES. ITA NO. 870/BANG/2013 PAGE 6 OF 16 3. KALS INFO SYSTEMS LTD. IT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUC TS AND PROVIDING RELATED SERVICES. AS PER THE WEBSITE OF KALS, IT IS EVIDENT THAT THE COMPANY IS A FULL-FLED GED SOFTWARE PRODUCT DEVELOPMENT COMPANY AND ALSO PROVIDES IMPLEMENTATION AND MAINTENANCE OF SOFTWARE PRODUCTS. IT ALSO HAS A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWARE PROFESSIONALS FOR ONLINE PROJECTS. 4. PERSISTENT SYSTEMS LTD. IT IS A PRODUCT COMPANY. PERSISTENT SYSTEMS PRODU CT LIFECYCLE OFFERING COVERS THE ENTIRE PRODUCT LIFECY CLE FROM PRODUCT CONCEPT TO PRODUCT SUPPORT. 5. QUINTEGRA SOLUTIONS LTD. IT IS INTO NICHE AREA OF INFORMATION TECHNOLOGY. T HE COMPANYS OPERATIONS CONSIST OF CRM, TELECOM, FINANCIAL SERVICES AND OTHER EMERGING VERTICALS. I T IS ENGAGED IN PROVIDING HIGH END IT SOLUTIONS LIKE DEVELOPMENT, TESTING, MAINTENANCE, SAP, PRODUCT ENGINEERING AND INFRASTRUCTURE MANAGEMENT SERVICES, PROPRIETARY SOFTWARE PRODUCTS AND CONSULTANCY SERVICES IN IT ON VARIOUS PLATFORMS AND TECHNOLOGIE S. 6. TATA ELXSI LTD. AS SEEN FROM THE ANNUAL REPORT, IT HAS BUSINESS UNITS DIVIDED INTO EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN SERVICES, ANIMATION AND VISUAL EFFECTS ,SYSTEMS INTEGRATION SERVICES WHICH ARE RELATED TO HIGH-END HARDWARE AND SOFTWARE DEVELOPMENT ACTIVITIES. 7. THIRDWARE SOLUTIONS LTD. AS SEEN FROM THE ANNUAL REPORT, IT EARNS REVENUE BY RENDERING SOFTWARE DEVELOPMENT SERVICES, SALE OF US ER LICENCES FOR SOFTWARE APPLICATIONS AND ALSO FROM SA LE OF INVESTMENTS. 8. LUCID SOFTWARE LTD. IT IS A PRODUCT COMPANY FOCUSIN G ON ADVANCED NON DESTRUCTIVE TESTING (NDT) TECHNOLOGIES. AS PER THE WEBSITE, IT IS ACTIVELY INVOLVED IN R&D ACTIVITIES WITH LEADING SCIENTIFIC AND EDUCATIONAL INSTITUTIONS. 13. THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING D ECISIONS IN SUPPORT OF ITS CONTENTIONS:- - 3DPLM SOFTWARE SOLUTIONS LTD. IT(TP)A NO.1303/BANG/2012 (AY 2008-09) ITA NO. 870/BANG/2013 PAGE 7 OF 16 - TRILOGY E-BUSINESS SOFTWARE INDIA P. LTD. (ITA NO.1054/BANG/2011 (AY 2007-08) - SYSTECH INTEGRATORS INDIA PVT. LTD., ITA NO.1283/ BANG/2012 (AY 2008-09) - TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO.7821/MUM/2011 (AY 2007-08) 14. WITH REGARD TO THE OTHER THREE COMPARABLES, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE COMPANIES ARE ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES SELECTED BY THE TPO FOR THE FOL LOWING REASONS:- 1. AVANI CIMCON TECHNOLOGIES LTD. FUNCTIONALLY DIFFERENT, DIVERSIFIED OPERATIONS : THE COMPANY OFFERS SOFTWARE SOLUTIONS, SOFTWARE DEVELOPMENT CONSULTING AND INFORMATION TECHNOLOGY SERVICES TO VARIOUS CLIENTS. PRODUCT DEVELOPMENT COMPANY THE COMPANY HAS DEVELOPED INNOVATIVE PRODUCT LINES SUCH AS DXCHANGE, CARMA ETC. IT WAS SUBMITTED THAT THE WEBSITE OF THIS COMPANY SUBSTANTIATES THE SAME. 2. INFOSYS TECHNOLOGIES LTD. FULL-FLEDGED RISK ASSUMING ENTREPRENEUR IT IS A GIANT COMPANY IN THE AREA OF SOFTWARE DEVELOPMENT AND ASSUMED ALL RISKS LEADING TO HIGHER PROFITS AND IS THEREFORE NOT COMPARABLE WITH TO THE ASSESSEE WHICH IS A CAPTIVE UNIT OF THE PARENT COMPANY AND ASSUMES ONLY LIMITED RISKS. HOLDS TECHNOLOGY AND MARKETING INTANGIBLE IT IS ACTIVELY ENGAGED IN RESEARCH & DEVELOPMENT ACTIVITIES AND ALSO OWNS INTELLECTUAL PROPERTY. IT ALSO PARTAKES IN ACTIVITIES AND ADVERTISING FOR BRAND BUILDING. INFOSYS WAS RANKED AS THE TOP IT SERVICE S COMPANY IN THAT YEAR AND THEREFORE HAS SIGNIFICANT BRAND VALUE. FUNCTIONALLY DIFFERENT IT PROVIDES END-TO-END SOLUTIONS ENCOMPASSING ITA NO. 870/BANG/2013 PAGE 8 OF 16 TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, RE- ENGINEERING, MAINTENANCE, SYSTEMS INTEGRATION AND IMPLEMENTATION. 3. WIPRO LTD. (SEG) FUNCTIONALLY DIFFERENT IT IS A PRODUCT DEVELOPMENT COMPANY. THE ANNUAL REPORT FOR FY 2007-08 SHOWS THAT IT HAS INCOME FROM BOTH SALE OF SOFTWARE PRODUCTS AND SOFTWARE DEVELOPMENT SERVICES. FULL-FLEDGED RISK ASSUMING ENTREPRENEUR IT IS A GIANT COMPANY AND ASSUMED ALL RISKS LEADING TO HIGHER PROFITS AND IS THEREFORE NOT COMPARABLE TO T HE ASSESSEE COMPANY WHICH IS A CAPTIVE UNIT OF THE PARENT COMPANY AND ASSUMES ONLY LIMITED RISKS. HOLDS TECHNOLOGY AND MARKETING INTANGIBLE IT IS ACTIVELY ENGAGED IN RESEARCH & DEVELOPMENT ACTIVITIES AND ALSO OWNS INTELLECTUAL PROPERTY. 15. IN SUPPORT OF HIS CONTENTIONS, THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS:- - 3DPLM SOFTWARE SOLUTIONS LTD. IT(TP)A NO.1303/BANG/2012 (AY 2008-09) - TRILOGY E-BUSINESS SOFTWARE INDIA P. LTD. (ITA NO.1054/BANG/2011 (AY 2007-08) - SYSTECH INTEGRATORS INDIA PVT. LTD., ITA NO.1283/ BANG/2012 (AY 2008-09) - TELCORDIA TECHNOLOGIES INDIA PVT. LTD., ITA NO.7821/MUM/2011 (AY 2007-08) - ADAPTEC (INDIA) PVT. LTD., ITA 1758/HYD/2012 (AY 2008-09) - APP LABS TECHNOLOGIES PVT. LTD., ITA NO.94/HYD/2 013 (AY 2008-09) - CIT V. AGNITY INDIA TECHNOLOGIES PVT. LTD., ITA NO.1204/2011, DELHI HIGH COURT. ITA NO. 870/BANG/2013 PAGE 9 OF 16 16. THE ASSESSEES RELIANCE ON 3DPLM SOFTWARE SOLUT IONS LTD. IT(TP)A NO.1303/BANG/2012 (AY 2008-09) IS WELL TAKEN AND HE NCE THE 11 COMPANIES IDENTIFIED BY THE ASSESSEE REFERRED TO IN PARAS 12 AND 14 HEREINABOVE ARE FUNCTIONALLY DIFFERENT. WE THEREFO RE DIRECT THE TPO TO EXCLUDE THE AFOREMENTIONED 11 COMPARABLES FROM THE LIST OF COMPARABLES FOR THE TP STUDY. 17. THE NEXT GROUND RAISED BY THE ASSESSEE IS ON TH E WORKING CAPITAL ADJUSTMENT. IT WAS CONTENDED BY THE ASSESSEE BEFOR E THE AO THAT WORKING CAPITAL ADJUSTMENT HAS TO BE PROVIDED IN ACCORDANCE WITH RULE 10B(1) ON ACCOUNT OF RISK PROFILE OF THE ASSESSEE. THE LD. C OUNSEL FOR THE ASSESSEE SUBMITTED AS FOLLOWS:- III. WORKING CAPITAL ADJUSTMENT IS ESSENTIALLY AN ADJUSTMENT FOR THE OPPORTUNITY COST OF MAKING INVESTMENTS IN W ORKING CAPITAL (I.E., INVENTORIES, ACCOUNTS RECEIVABLE/DEBTORS AND ACCOUNTS PAYABLE/CREDITORS) WHICH REQUIRE CAPITAL AND OPERAT ING ASSETS. AT ARMS LENGTH, AN UNCONTROLLED ENTITY WILL EXPECT TO EARN A MARKET RATE OF RETURN ON THAT CAPITAL, INDEPENDENT OF ITS OPERATIONS. HOWEVER, THE AMOUNT OF CAPITAL REQUIRED VARIES GREA TLY, BECAUSE THE LEVEL OF INVENTORIES, DEBTORS AND CREDITORS MEA SURED AS A PERCENTAGE OF THE TOTAL COST VARIES. THERE IS AN EF FECT ON PROFITS FROM INVESTING IN DIFFERENT LEVELS OF WORKING CAPIT AL DUE TO DIFFERENCES REFLECTED IN CASH COLLECTION CYCLE. SUC H DIFFERENCES IN COLLECTION CYCLE IMPLY DIFFERENCES IN CREDITS GRANT ED TO CUSTOMERS AND SUCH A CREDIT FUNCTION IS AKIN TO AN ADDITIONAL SERVICE FOR WHICH MARKETS ARE WILLING TO PAY. IV. HIGH LEVELS OF WORKING CAPITAL CREATE COSTS EIT HER IN THE FORM OF INCURRED INTEREST OR IN THE FORM OF OPPORTU NITY COSTS. THEREFORE, NO PROFIT MAXIMIZING/ ENTREPRENEURIAL FI RM WOULD HOLD WORKING CAPITAL WITHOUT A RETURN. ITA NO. 870/BANG/2013 PAGE 10 OF 16 V. A WORKING CAPITAL ADJUSTMENT ANALYSIS SEEKS TO A DJUST THE PROFITABILITY OF EACH COMPARABLE COMPANY BASED ON T HE WORKING CAPITAL POSITION OF THE APPELLANT TO REFLECT THE DI FFERENCES IN WORKING CAPITAL INVESTMENT. THUS, THE ADJUSTMENT TR IES TO ISOLATE THE INTEREST EFFECTS (TAKING INTO ACCOUNT THE TIME VALUE OF MONEY) THAT RESULT FROM THE OPPORTUNITY COSTS OF HOLDING W ORKING CAPITAL. THE INTEREST EFFECTS IN THE COMPARABLE COMPANYS DA TA ARE NOT COMPLETELY ELIMINATED BUT RATHER ADJUSTED TO THE AP PELLANTS LEVEL OF INTEREST EFFECTS. PRIME-LENDING RATE (PLR) IS USED AS THE APPROPRIATE COST OF CAPITAL BECAUSE IT CAN BE DETER MINED WITH REASONABLE ACCURACY AND IS THE BEST AVAILABLE ESTIM ATE OF THE COST OF CAPITAL. FOR THIS PURPOSE, THE PLR IS SECURED FR OM CMIE (I.E. CENTER FOR MONITORING INDIAN ECONOMY) AND RESERVE B ANK OF INDIA PUBLICATIONS. VI. AT THIS POINT, A QUOTE FROM THE OECD DRAFT NOTE S IS RELEVANT, WHICH IS PROVIDED AS BELOW: THE PURPOSE OF WORKING CAPITAL ADJUSTMENT IS TO IMPROVE THE RELIABILITY OF THE COMPARABLES. VII. IT IS ALSO WORTHWHILE TO MENTION THAT WORKING CAPITAL ADJUSTMENT IS NECESSARY AS WELL AS MANDATED AS A CO MPARABILITY ADJUSTMENT UNDER RULE L0B(3) OF THE RULES. IN THIS CONTEXT, EMPHASIS IS ALSO PLACED ON THE MENTOR RULING, PARA 36.3 OF WHICH STATES: THE TRANSACTIONAL NET MARGIN METHOD MAY AFFORD A PRACTICAL SOLUTION TO OTHERWISE INSOLUBLE TRANSFER PRICING PROBLEMS IF IT IS USED SENSIBLY AND WITH APPROPRIAT E ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES OF THE TYPE REFERRED TO ABOVE. VIII. FURTHER, PARA 27 OF THE RULING STATES: THE RISK ASSUMED BY RESPECTIVE PARTIES IS A VERY IMPORTANT CONSIDERATION. DEPENDING ON FACTS OF THE CASE, FINAL SET OF COMPARABLES MAY NEED TO ELIMINATE DIFF ERENCES BY MAKING ADJUSTMENTS FOR THE FOLLOWING: WORKING CAPITAL IX. IN THIS REGARD, THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE DECISION OF THE HONBLE PUNE BENCH OF THE ITAT IN THE E-GAIN RULING, WHICH DISCUSSES AT LENGTH, TH E NECESSITY AND ITA NO. 870/BANG/2013 PAGE 11 OF 16 IMPORTANCE OF MAKING ADJUSTMENTS (SUCH AS ON ACCOUN T OF WORKING CAPITAL) FOR A ROBUST COMPARABLE SEARCH ANA LYSIS, WHILE APPLYING THE TNMM. THE E-GAIN RULING HAS DRAWN REFE RENCES FROM THE INDIA TP REGULATIONS AS WELL AS THE US TP PROVISIONS FOR POINTING OUT THE NEED FOR MAKING ADJUSTMENTS. P ARA 35 OF THE E-GAIN RULING QUOTES THE FOLLOWING FROM THE US TP P ROVISIONS: (IV) ADJUSTMENTS FOR THE DIFFERENCES BETWEEN TH E TESTED PARTY AND THE UNCONTROLLED TAXPAYERS. IF THERE ARE DIFFERENCES BETWEEN THE TESTED PARTY AND AN UNCONTR OLLED COMPARABLE THAT WOULD MATERIALLY AFFECT THE PROFITS DETERMINED UNDER THE RELEVANT PROFIT LEVEL INDICATO R, ADJUSTMENTS SHOULD BE MADE ACCORDING TO THE COMPARABILITY PROVISIONS OF 1.482-1(D)(2). IN SOME CASES, THE ASSETS OF AN UNCONTROLLED COMPARABLE MAY NEED T O BE ADJUSTED TO ACHIEVE GREATER COMPARABILITY BETWEEN T HE TESTED PARTY AND THE UNCONTROLLED COMPARABLE. IN SU CH CASES, THE UNCONTROLLED COMPARABLES OPERATING INCO ME ATTRIBUTABLE TO THOSE ASSETS MUST ALSO BE ADJUSTED BEFORE COMPUTING A PROFIT LEVEL INDICATOR IN ORDER TO REFL ECT THE INCOME AND EXPENSE ATTRIBUTABLE TO THE ADJUSTED ASS ETS. IN CERTAIN CASES IT MAY ALSO BE APPROPRIATE TO ADJUST THE OPERATING PROFIT OF THE TESTED PARTY AND COMPARABLE PARTIES. FOR EXAMPLE, WHERE THERE ARE MATERIAL DIFF ERENCES IN ACCOUNTS PAYABLE AMONG THE COMPARABLE PARTIES AN D THE TESTED PARTY, IT WILL GENERALLY BE APPROPRIATE TO ADJUST THE OPERATING PROFIT OF EACH PARTY BY INCREASING IT TO REFLECT AN IMPUTED INTEREST CHARGE ON EACH PARTYS ACCOUNTS PAYABLE. X. MAKING A WORKING CAPITAL ADJUSTMENT IS AN ATTEM PT TO ADJUST FOR THE DIFFERENCES BETWEEN THE TESTED PARTY AND POTENTIAL COMPARABLES WITH AN ASSUMPTION THAT THE DIFFERENCE SHOULD BE REFLECTED IN PROFITS. THE GROUNDS FOR USING THE WO RKING CAPITAL ADJUSTMENT APPROACH IN TP HAVE BEEN PROVIDED IN THE CHAPTER - COMPARABILITY ADJUSTMENTS IN TRANSFER PRICING AUT HORED BY CHARLES R LARSON, MARIOS KARAYANNIS AND JOHN BURGES S IN THE TRANSFER PRICING HANDBOOK BY ROBERT FEINSCHREIBER . XI. IN THIS REGARD, THE APPELLANT WISHES TO HIGHLI GHT THAT IT HAD CARRIED OUT A WORKING CAPITAL ADJUSTMENT IN ITS TP REPORT AND HAD CLAIMED THE BENEFIT OF THE SAME FROM TIME-TO-TIME D URING THE ASSESSMENT PROCEEDINGS. XII. IN THIS REGARD, APPELLANTS ARGUMENTS ARE AS FOLLOWS: ITA NO. 870/BANG/2013 PAGE 12 OF 16 (I) OECD VIEW ON WORKING CAPITAL ADJUSTMENT OECD GUIDELINES UNEQUIVOCALLY EMPHASIZE THE IMPORTA NCE OF APPROPRIATE ADJUSTMENTS INCLUDING WORKING CAPITAL A DJUSTMENT FOR DETERMINING THE ALP. THIS IS EVIDENT FROM THE FOLLO WING EXTRACTS FROM THE OECD GUIDELINES: IN ALL CASES ADJUSTMENTS MUST BE MADE TO ACCOUNT F OR DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED SITUATIONS THAT WOULD SIGNIFICANTLY AFFECT THE PRIC E CHARGED OR RETURN REQUIRED BY INDEPENDENT ENTERPRISES. THER EFORE, IN NO EVENT CAN UNADJUSTED INDUSTRY AVERAGE RETURNS THEMSELVES ESTABLISH ARMS LENGTH CONDITIONS. (PARA 1.16 OF THE OECD GUIDELINES) ADJUSTMENTS SHOULD BE MADE FOR ANY MATERIAL DIFFER ENCES FROM THE FUNCTIONS UNDERTAKEN BY ANY INDEPENDENT ENTERPRISES WITH WHICH THAT PARTY IS BEING COMPARED . (PARA 1.21 OF THE OECD GUIDELINES) THE TRANSACTIONAL NET MARGIN METHOD MAY AFFORD A PRACTICAL SOLUTION TO OTHERWISE INSOLUBLE TRANSFER PRICING PROBLEMS IF IT IS USED SENSIBLY AND WITH APPROPRIAT E ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES OF THE TYPE REFERRED TO ABOVE. (PARA 3.39 OF THE OECD GUIDELINES) WHERE DIFFERENCES IN THE CHARACTERISTICS OF THE EN TERPRISES BEING COMPARED HAVE A MATERIAL EFFECT ON THE NET MA RGIN BEING USED, IT WOULD NOT BE APPROPRIATE TO APPLY TH E TRANSACTIONAL NET MARGIN METHOD WITHOUT MAKING ADJUSTMENTS FOR SUCH DIFFERENCES (PARA 3.39 OF THE OECD GUIDELINES) (EMPHASIS SUPPLIED) (II) AVAILABILITY OF ACCURATE DATA AND THE ASSUMPTI ON OF PROFIT MAXIMISATION. 18. DECISIONS OF VARIOUS TRIBUNALS RELIED UPON BY T HE ASSESSEE : A. NOKIA INDIA PVT LTD - ITA NO. 551/DEL/2011, AY 2006-07, ITAT DELHI (PAGE 295 TO 299 OF CASE LAW COMPENDIUM, PARA 5 TO 6.1) ITA NO. 870/BANG/2013 PAGE 13 OF 16 B. DEMAG CRANES & COMPONENTS (INDIA) PRIVATE LIMITED ITA NO.120/PN/2O11(AY 2006-07) (PAGE 179-189 OF CASE LAW COMPENDIUM, PARA 18 - 33) C. TNT INDIA PRIVATE LIMITED ITA NO. 1442(BNG)/O 8 (PAGE 281 OF THE CASE LAW COMPENDIUM, PARA 13.2) D. SONY INDIA PRIVATE LIMITED- 1731/DEL/2009 E. MENTOR GRAPHICS (NOIDA) PVT. LTD. VS. DCIT (112 TTJ 408) (ITA NO. 1969/D/2006) (AY: 2002- 03) (PAGE 337 OF CASE LAW COMPENDIUM, PARA 27) F. E-GAIN COMMUNICATIONS (P) LTD. VS. ITO (118 ITD 243) (ITA NO. 1685/PN/2007) (AY: 2004-05) (PAGE 247 - 249 OF CASE LAW COMPENDIUM, PARA 36). 19. WE FIND THAT THE CLAIM OF THE ASSESSEE FOR PROV IDING WORKING CAPITAL ADJUSTMENT IS TO BE UPHELD AND HENCE WE DIRECT THE AO/TPO TO WORK OUT THE SAME. 20. THE LD. COUNSEL FOR THE ASSESSEE ALSO BROUGHT T O OUR NOTICE THE GROUNDS OF APPEAL AT PARAS 5 AND 6 OF THE APPEAL ME MO. PARA 5(A) READS AS FOLLOWS:- THAT THE CIT(A) BASED ON MERE SURMISE AND CONJECTU RE HAD CONCLUDED THAT THE ASSESSEE IS NOT INTERESTED IN PU RSUING THE GROUNDS RAISED IN THE APPEAL AND ACCORDINGLY ERRED IN UPHOLDING THE ORDER OF AO. 21. GROUND NO.5(B) STATES THAT THE AO ERRED IN TREA TING AN AMOUNT OF RS.5,85,777 BEING EXPENDITURE INCURRED ON COMPUTER SPARE PARTS AND CONSUMABLES AS CAPITAL EXPENDITURE. THE LD. COUNSE L FOR THE ASSESSEE CONTENDED THAT IT WAS ONLY RAM OF THE COMPUTER, WHI CH WAS A SPARE PART ITA NO. 870/BANG/2013 PAGE 14 OF 16 WHICH HAD TO BE REPLACED AND IS IN THE REVENUE FIEL D. THE LD. DR OPPOSED THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE AND RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. SHARAVANA SPINNING MILLS, 293 ITR 201. 22. WE HAVE HEARD BOTH THE PARTIES. FIRSTLY, WE ARE OF THE OPINION THAT THE CIT(APPEALS) HAS PASSED AN EX PARTE ORDER AND HAD NO OPPORTUNITY TO GO THROUGH THE COST OF COMPUTER CONSUMABLES DISALLO WED BY THE AO. RELYING ON THE DECISION OF SOUTHERN ROADWAYS, 304 ITR 84 AND APL INDIA V. ACIT, ITA NO.5619/MUM/2009 , WE ARE OF THE OPINION THAT RAM IS A FREQUENTLY REPLACEABLE PART OF THE COMPUTER AND DOE S NOT HAVE ANY ENDURING BENEFIT TO ASSUME THE CHARACTER OF A CAPIT AL EXPENDITURE AND HENCE WE ALLOW THE SAME. 23. AT GROUND 6(B), SIMILAR TO GROUND NO.5(A), THE CIT(A) HAD PASSED AN EX PARTE ORDER MERELY CONCLUDING THAT THE ASSESSEE IS NOT IN TERESTED IN PURSUING THE GROUNDS RAISED IN THE APPEAL AND UPHEL D THE ORDER PASSED BY THE AO WITH RESPECT TO DISALLOWANCE OF PAYMENT MADE TO CLUB CABANA AND GOLDEN PALMS AMOUNTING TO RS.58,925 AND RS.455,670 FOR BUSINESS TRAINING AND CONFERENCE EXPENSES U/S. 40(A)(IA) OF THE ACT. 24. THE LD. COUNSEL FOR THE ASSESSEE PRODUCED CBDT CIRCULAR NO.715 DATED 8.8.1995 WHEREIN CLARIFICATIONS ON VARIOUS PR OVISIONS RELATING TO TAX DEDUCTION AT SOURCE REGARDING CHANGES INTRODUCED TH ROUGH FINANCE ACT, ITA NO. 870/BANG/2013 PAGE 15 OF 16 1995 HAD BEEN LISTED. QUESTION 11 OF THE CIRCULAR I S, WHETHER A CONTRACT FOR CATERING WOULD INCLUDE SERVING FOOD IN A RESTAURANT /SALE OF EATABLES; AND THE ANSWER TO IT IS: TDS IS NOT REQUIRED TO BE MAD E WHEN PAYMENT IS MADE FOR SERVING FOOD IN A RESTAURANT IN THE NORMAL COUR SE OF RUNNING OF THE RESTAURANT/CAF. THE LD. COUNSEL FOR THE ASSESSEE ALSO RELIED ON THE JUDGMENT DATED 6.3.2009 OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF EAST INDIA HOTELS LTD. V. CBDT, WP NO.2014 OF 1994 , WHEREIN IT WAS HELD THAT SERVICES RENDERED BY HOTEL TO ITS CUSTOMERS BY MAKING AVAILABLE CERTAIN FACILITIES/AMENITIES LIKE PROVIDING MULTILINGUAL ST AFF, 24 HOUR SERVICE FOR RECEPTION, TELEPHONES, SELECT RESTAURANTS, BANK COU NTER, BEAUTY SALOON, BARBER SHOP, CAR RENTAL, SHOPPING CENTRE, LAUNDRY/V ALET, HEALTH CLUB, BUSINESS CENTRE SERVICES, ETC. DO NOT INVOLVE CARRY ING OUT ANY WORK WHICH RESULTS INTO PRODUCTION OF THE DESIRED OBJECT AND, THEREFORE, WOULD BE OUTSIDE THE PURVIEW OF SECTION 194C OF THE ACT. 25. WE ARE OF THE OPINION THAT PAYMENT MADE TO CLUB CABANA AND GOLDEN PALMS ARE OUTSIDE THE PURVIEW OF SECTION 194 C OF THE ACT. THE APPEAL ON THIS ISSUE IS ALLOWED. 26. GROUND NOS.7, 8 & 9 WITH RESPECT TO NOT ALLOWIN G CREDIT IN RESPECT OF ADVANCE TAX, CHARGING OF INTEREST U/S. 234A & 234B RESPECTIVELY ARE CONSEQUENTIAL IN NATURE AND THE AO SHALL WORK OUT T HE SAME. ITA NO. 870/BANG/2013 PAGE 16 OF 16 27. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF SEPTEMBER, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) (ASHA VIJAYARAGHAVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 23 RD SEPTEMBER, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.