B.R. Baskaran ORDER
George George K., Member (J)
1. The Tribunal has disposed of the above appeal vide its order dated 28.08.2019. The assessee filed MP No. 59/Bang/2020 for non-adjudication of the following two issues, namely--
(i) Assessee's prayer regarding inclusion of Crystal Voxx Limited in the final list of comparable companies with respect of ITES segment (ground No. 4.7);
(ii) Assessee's submission that negative working capital adjustment should not be allowed (ground No. 4.9).
2. The ITAT vide its order dated 06.08.2020 in MP No. 59/Bang/2020 recalled the order in ITA No. 185/Bang/2018 for the limited purpose of adjudicating the above two issues. Accordingly, this case was heard on 09.08.2021. We shall adjudicate the above issues as under.
Assessee's prayer regarding inclusion of Crystal Voxx Limited in the final list of comparable companies with respect of ITES segment (ground No. 4.7)
3. The learned AR submitted that the issue is covered in favour of the assessee by the order of the Co-ordinate Bench of the Bangalore Tribunal in the case of FNF India Private Limited v. ACIT in IT(TP)A Nos. 195/Bang/2016 & 459/Bang/2017 (order dated 03.07.2019). The learned AR submitted that the list of comparable companies and the assessment year in the case of FNF India Private Limited (supra) and in this case are identical. Therefore, it was prayed that Crystal Voxx Limited be included in the final list of comparable companies in respect of ITES segment.
3.1. The learned Departmental Representative, supported the order of the AO/TPO and the CIT(A).
3.2. We have heard rival submissions and perused the material on record. On identical facts, the Bangalore Bench of the Tribunal in FNF India Private Limited v. ACIT (supra) had held that Crystal Voxx Limited should be included in the final list of comparable companies. We find that the list of comparable companies selected by the TPO in this case and the assessment year are identical to the case of FNF India Private Limited (supra). The relevant finding of the Hon'ble Tribunal in the case of FNF India Private Limited v. ACIT (supra) as regards the inclusion of the company Crystal Voxx Limited in the final list of comparables, reads as follow:-
"24. In ground No. 13, the Assessee has prayed for inclusion of Crystal Voxx Ltd. as a comparable company. This company was not regarded as comparable company with the Assessee by the DRP for the reasons given in Para 2.15 of its order i.e., for the reason that in the financial results, the Auditors have mentioned that this company was predominantly a Business Process Outsourcing (BPO) company and therefore this company cannot be said to be an ITES company. The learned counsel for the Assessee brought to our notice that in the very same note, the auditors have also mentioned that the only reportable segment was BPO. Therefore this company was a BPO company and the results of the BPO which is the only segment ought to have weighed in the mind of the TPO to include this company as a comparable company.
25. We have considered the submission of the learned counsel for the Assessee and are of the view that the plea raised by the Assessee is correct and the TPO ought to have regarded this company as comparable company because the only reportable segment of this company was BPO. We direct the TPO to include this company as a comparable company."
3.3. In view of the above order of the Co-ordinate Bench of Bangalore Tribunal in the case of FNF India Limited, we direct the AO/TPO to include Crystal Voxx Limited as a comparable company. It is ordered accordingly.
3.4. In the result, ground No. 4.7 is allowed.
Assessee's submission that negative working capital adjustment should not be allowed (ground No. 4.9)
4. The learned AR submitted that on identical facts, following judicial pronouncements have held that no negative working capital adjustment is required.
(i) Lam Research India Pvt. Ltd. IT(TP)A No. 1437/Bang/2014.
(ii) Adaptec India Pvt. Ltd. ITA No. 206/Hyd/2014.
(iii) Software AG Bangalore Technologies Pvt. Ltd. ITA No. 495/2016 (Karnataka High Court).
(iv) E4E Business Solutions India Pvt. Ltd. ITA No. 2900/Bang/2018.
4.1. The learned DR supported the order of the AO/TPO and the CIT(A).
4.2. We have heard rival submissions and perused the material on record. Admittedly in this case, the assessee is a capital service provider entirely funded by its AEs. In the following case laws, it has been held that when assessee is a capital service provider, there is no necessity to provide negative working capital adjustment. The relevant finding of the Hon'ble Tribunal in the case of E4E Business Solutions India Pvt. Ltd. (supra) reads as follow:-
"12. The third issue is with regard to grant of negative 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 assessee has no borrowings and is fully compensated by the parent on a total cost 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 company is its parent company. The ld. counsel for the assessee has relied on a host of ITAT decisions, the main decision being that of M/s. Software AG Bangalore Technologies Pvt. Ltd. (supra) which in turn has relied on the decision of ITAT Hyderabad in the case of Adaptec (India) Private Limited and contended that no negative working capital adjustment is called for. The ld. DR's reliance is on the decision in the case of Technotree Convergence P. Ltd. (supra) wherein it was held that negative working capital adjustment has to be allowed.
13. Comparables chosen operate under varied economic conditions. Therefore, while comparing a company to that of similar companies, it is necessary to undertake comparability adjustments. Balance sheet adjustments are intended to account for different levels of inventories, receivables, payables, interest rates etc. The most common balance sheet adjustments made to reflect different levels of accounts receivable, account payable and inventory are known as working capital adjustments. As mentioned by the OECD, comparability adjustments should not be performed on a routine or mandatory basis but rather on a case by case basis depending on the facts and circumstances. Economic rationale of Working capital of a business is the capital 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 working capital (inventory, accounts receivables and payable). Such differences are mainly caused due to differences in the terms of purchase and sale, levels of inventory etc. For example: If the business advances 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. Similarly, 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 incurred by a business by way of interest on borrowing from the open market. Working capital adjustments seeks to adjust for the differences in time value of money between tested parties and potential comparables with 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 comparables working in an industry which is competitive. Working capital adjustment can work out to be positive or negative. A positive working capital adjustment (WCA) will tend to reduce the arm's length PLI while a negative WCA will tend to increase the arm's length PLI.
14. We find that the facts of the Assessee's case are similar to that of the case of the Bangalore ITAT in the case of M/S. Software AG Bangalore Technologies Pvt. Ltd. and therefore we are inclined to delete the negative working capital adjustment. In determining ALP under 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 TPO, which indirectly enhances the ALP artificially. The contrary view expressed in decision cited by the learned DR takes the view that Working capital adjustment is required in all cases as any credit extended to customers 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 reasoning in these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed, whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal, an entity having higher working capital will incur more interest cost 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."
4.3. In view of the aforesaid judicial pronouncements, we hold that since the assessee is a capital service provider, negative working capital adjustment need not be given in the facts of this case. It is ordered accordingly.
4.4. In the result, ground No. 4.9 is allowed.
5. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 09th day of August, 2021.
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