ITO, BANGALORE vs. M/S CORE ONE TECHNOLOGIES PVT. LTD.,, BANGALORE

These cross appeals are directed against the order passed by the A.O. for assessment year 2010-11 u/s 143(3) r.w.s. 144C (13) of the Act in pursuance of directions issued by Ld Dispute Resolution Panel (DRP) .

The grounds urged in appeals of both parties relate to the transfer pricing adjustment made by AO/TPO.

The assessee is engaged in the business of software designing, programming, development, testing and related services.

At the outset, both the parties submitted that the tax effect involved in the grounds urged by the revenue in its appeal is less than Rs.50.00 lakhs. Accordingly it was submitted that, as per the CBDT circular No.17/2019 dated 8.8.2019, the revenue is precluded from pursuing the present appeal. In view of the above submissions, we dismiss the appeal of the revenue in limini.

In the appeal filed by the assessee, various grounds relating to transfer pricing adjustment have been raised. The assessee has also raised additional grounds, inter alia, challenging the negative working capital adjustment made by the TPO.

The Ld. A.R. submitted that the assessee’s international transaction would be at arms length, if IT(TP)A Nos.257 & 556/Bang/2015 M/s. Core One Technologies Pvt. Ltd., Bengaluru negative working capital adjustment made by the TPO is deleted. The Ld. A.R. submitted that the assessee’s plea is supported by the decision rendered by the Bangalore Bench of Tribunal in the case of IZMO Ltd. (formerly Logis Microsystems Ltd.) Vs. DCIT (IT(TP)A No.453/Bang./2015 and IT(TP)A No.186/Bang/2016 dated 29.1.2020).

The Ld. A.R. submitted that, prima facie, the adjudication of remaining grounds may not be required. However, the assessee may be given liberty to move appropriate petition to urge the remaining grounds, in case even after deletion of negative working capital, any part of addition is sustained.

We heard the parties on this issue and perused the record. We notice that the issue of negative working capital has been examined by the Bangalore bench of Tribunal in the case of IZMO ltd. (supra) and it was held that the negative working capital adjustment ought not to have been made by the TPO. In this regard, the Tribunal has placed its reliance on the decision rendered by another coordinate bench in the case of FNF India Pvt. Ltd. (IT (TP)A No.195/Bang/2016 and 459./Bang/2017 dated 3.7.2019). For the sake of convenience, we extract below the relevant observations made in the case of IZMO Ltd.(supra).

Respectfully following the aforesaid decision of the Tribunal, we hold that the action of the revenue authorities in making negative working capital adjustment and thereby increasing the average arithmetic profit margin of comparable companies is not sustainable in the facts and circumstances of the present case, which is identical to the case decided by the Tribunal in the case of FNF India Pvt. Ltd. (supra). Accordingly, this ground of the appeal is allowed.

Since the assessee has stated that the adjudication of other grounds may not be necessary, if ground relating to negative working capital adjustment is decided in its favour, we decline to adjudicate other grounds urged by the assessee. However, as requested, we give liberty to the assessee to move appropriate petition in accordance with law for adjudication of other grounds, if it is so warranted. 11. In the result, the appeal of the revenue is dismissed and the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 24.07.2020.