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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the order dated 27.12.2017 passed by Ld CIT(A)-5, Bengaluru and it relates to the assessment year 2013-14. All the grounds urged by the assessee relate to the transfer pricing adjustment made in respect of both “Software development Segment” and “ITES Segment”.
IT(TP)A No.978/Bang/2018 Quest Global Engineering Services (P) Ltd., Bangalore
Page 2 of 7 2. The assessee is engaged in the business of providing computer aided engineering analysis services, which is categorised under “software development services”. Besides the above, it also provides business support services which is categorised as “ITES services”. The TPO proposed adjustment of Rs.8,06,21,022/- in Software Development segment and Rs.1,38,98,658/- in ITES segment. The assessee did not object to the same and hence the above said addition was made by the AO. Before Ld CIT(A), the assessee did not get any relief and hence the assessee has filed this appeal.
We shall first take up the issue of transfer pricing adjustment made in respect of software development services. We may mention here that the grounds of appeal urged by the assessee are general in nature. At the time of hearing, the Ld A.R sought relief on following items:- (a) Exclusion of three comparables (b) Deletion of Negative working capital adjustment, as the assessee is a captive service provider. Accordingly, we confine ourselves with regard to the above said two items.
3.1 The Ld A.R submitted that the TPO has selected 7 comparable companies in the TP order. She submitted that the assessee seeks exclusion of following three comparable companies on account of “turnover filter”:- (a) Larsen & Toubro Infotech Ltd - (Turnover - Rs.3609.32 crores) (b) Persistent Systems Ltd - (Turnover – Rs.996.75 crores) (c) Tech Mahindra Ltd (seg.) - (Turnover – Rs.5595.70 crores)
The Ld A.R submitted that the turnover of the assessee for the year under consideration is Rs.107.74 crores and hence falls within the category of less than Rs.200/- crores. She submitted that the above said three companies are having huge turnover and further
IT(TP)A No.978/Bang/2018 Quest Global Engineering Services (P) Ltd., Bangalore
Page 3 of 7 their functions cannot be compared with that of the assessee. Accordingly, she prayed for exclusion of above said three companies. 3.2 We heard Ld D.R on this issue and perused the record. The Ld A.R placed her reliance on the decision rendered by the co-ordinate bench in the case of Fulcrum Fund Services (India) Private Limited (IT(TP)A No.2521/Bang/2017 dated 12.04.2019), wherein the exclusion of comparable companies on the basis of turnover filter was accepted. The relevant observations made by the Tribunal in the above said case are extracted below:- “7.3. We have given a careful consideration to the rival submissions. The Bangalore Bench of the ITAT had an occasion to deal with an identical issue in the case of DCIT Vs. M/s. Northern Operating Services (supra), wherein the Tribunal came to the conclusion that - turnover was relevant criteria in choosing comparable companies and that a company, whose turnover is more than Rs. 200 Crores, cannot be compared with the company, whose turnover is less then Rs. 200 Crores. In Coming to the aforesaid conclusion, the Tribunal relied on the decision rendered by the ITAT, Bangalore Bench in the case of Autodesk India P. Ltd., Vs. DCIT (2018) [96 taxmann.com 263] (Bangalore-Trib) reviewing all the conflicting decisions on the point, and concluding that the application of turnover filter still holds good and has not been in any manner diluted by the decision of Hon'ble Karnataka High Court in the case of M/s. Acusis Software (I) Pvt. Ltd., Vs. ITO in dt. 14-08-2018....” Admittedly, the turnover of above said companies are far higher than that of the assessee company. Further the assessee falls under the category of companies having turnover of less than Rs.200 crores, where as the above said companies are having turnover of more than Rs.200 crores. Accordingly, following the above cited decision of the co-ordinate bench, we direct exclusion of above said three companies.
IT(TP)A No.978/Bang/2018 Quest Global Engineering Services (P) Ltd., Bangalore
Page 4 of 7 4. The next issue urged by the assessee in software development segment relates to negative working capital adjustment made by the TPO. The Ld A.R submitted that the co-ordinate bench in the assessee’s own case relating to AY 2012-13 in IT(TP)A No.189/Bang/2017 dated 24.6.2021 has taken the view that no negative working capital adjustment should be made.
4.1 We heard the parties and perused the record. We notice that the co-ordinate bench has directed deletion of negative working capital with the following observations in AY 2012-13 (referred supra). The relevant observations made by the Tribunal are extracted below:- “46. Ground No.15 has been raised by assessee for computing negative working capital adjustment. At the outset is reliance has been placed on coordinate bench of this Tribunal in case of e4e-business solutions India Pvt. Ltd. in by order dated 8.12.2020. Consistently this Tribunal has been taking a view that negative working capital cannot be granted to assessee.
The grievance of the assessee is with regard to negative working capital adjustment carried out by the Ld. TPO which was confirmed by the DRP. It is the plea of the assessee that though the Ld. TPO has observed that the Assessee has a healthy margin, the Ld. TPO has erred in making an adjustment towards working capital and the DRP further erred in upholding the same.
It was submitted that Working capital adjustment is made for the time value 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 capital requirement. The Assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to its group associates. Therefore, requirement for adjustment of negative working capital does not arise.
We draw our support from decision of coordinate bench of this Tribunal in case reported in (2020) 120 com 122 and Lam Research India (P) Ltd. v. Dy. CIT in [IT Appeal Nos.1473 & 1385 (Beng) of 2014,
IT(TP)A No.978/Bang/2018 Quest Global Engineering Services (P) Ltd., Bangalore
Page 5 of 7 dated 30.4.2015], Tivo Tech (P) Ltd. v. Dy. CIT (2020) 117 taxmann.com 259, and Dy. CIT v. Software AG Bangalore Technologies (P) Ltd. [IT Appeal No.1628 of 2014, dated 31.3.2016], where it has been held that negative working capital adjustment shall not be made.
We have considered the rival submissions. We find that in the case of Lam Research India (P) Ltd. (supra) and Software AG Bangalore Technologies (P) Ltd. (supra) passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. We therefore direct Ld. TPO to compute the ALP in accordance with the directions contained in this order after affording assessee opportunity of being heard.”
Following the same, we direct the AO/TPO not to make negative working capital adjustment in the hands of the assessee.
We shall now take up the ITES segment. In this segment, the assessee reported turnover of Rs.27.92 crores. The TPO had selected 9 comparable companies and they were upheld by Ld. CIT(A). In this appeal, the assessee seeks exclusion of 3 companies and deletion of negative working capital adjustment.
The Ld. A.R. has sought exclusion of following 3 companies:- a) Capgemini Business Services (India) Pvt. Ltd. (Turnover Rs.518.19 crores) b) Tech Mahindra Ltd. (Seg) (Turnover Rs.1067.40 crores) c) Infosys BPO Ltd. (Turnover Rs.1,831.36 crores)
6.1 While considering the issue relating to transfer pricing adjustment made in respect of software development segment, we have accepted application of turnover filter. In this regard, we have followed the decision rendered by coordinate bench in the case of Fulcrum Fund Services (India) Pvt. Ltd. (supra). Admittedly, the turnover of the assessee company under ITES segment is Rs.27.92 crores and hence it falls under the category of companies having turnover of less than Rs.200 crores. The above said companies are IT(TP)A No.978/Bang/2018 Quest Global Engineering Services (P) Ltd., Bangalore
Page 6 of 7 having turnover exceeding Rs.200 crores and hence these companies cannot be compared with the assessee company. Accordingly, we direct exclusion above said 3 companies.
6.2 While examining the issue of negative working capital under software segment above, we directed the A.O/TPO not to make negative working capital adjustment. In this regard, we have followed the decision rendered by coordinate bench in the assessee’s own case for A.Y. 2012-13. Following the same, we direct A.O/TPO not to make negative working capital adjustment under ITES segment also.
Accordingly, we restore the issue of transfer pricing adjustment to the file of AO/TPO for reworking the adjustment in the light of discussions made supra.
In the result, the appeal filed by the assessee is treated as allowed. Order pronounced in the open court on 23rd Mar, 2022.