w w w . L a w y e r S e r v i c e s . i n



Deputy Commissioner of Income-tax, Circle 1(1), Pune v/s BMC Software India (P.) Ltd.


Company & Directors' Information:- R S SOFTWARE (INDIA) LTD. [Active] CIN = L72200WB1987PLC043375

Company & Directors' Information:- C K SOFTWARE PRIVATE LIMITED [Active] CIN = U72501DL2000PTC106184

Company & Directors' Information:- K K SOFTWARE PRIVATE LIMITED [Active] CIN = U72900DL2009PTC193030

Company & Directors' Information:- A K C SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2004PTC128462

Company & Directors' Information:- THE INDIA COMPANY PRIVATE LIMITED [Active] CIN = U74999TN1919PTC000911

Company & Directors' Information:- P AND P SOFTWARE PRIVATE LIMITED [Active] CIN = U74899DL1994PTC057212

Company & Directors' Information:- SOFTWARE INDIA PRIVATE LIMITED [Active] CIN = U72200GJ1995PTC025791

Company & Directors' Information:- N. D. SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200TG1998PTC029778

Company & Directors' Information:- T AND H SOFTWARE PRIVATE LIMITED [Active] CIN = U72200UP2000PTC025638

Company & Directors' Information:- M S SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2005PTC133997

Company & Directors' Information:- G A S SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2004PTC127546

Company & Directors' Information:- B B SOFTWARE LTD [Strike Off] CIN = L30009WB1995PLC072361

Company & Directors' Information:- INDIA CORPORATION PRIVATE LIMITED [Active] CIN = U65990MH1941PTC003461

Company & Directors' Information:- H K SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200WB2001PTC093967

Company & Directors' Information:- J SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200TZ2000PTC009229

Company & Directors' Information:- K S M SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2004PTC128463

Company & Directors' Information:- R B SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2005PTC140322

Company & Directors' Information:- SOFTWARE INDIA PRIVATE LIMITED [Active] CIN = U72200RJ1995PTC010577

Company & Directors' Information:- R J SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2005PTC133815

Company & Directors' Information:- BMC SOFTWARE INDIA PRIVATE LIMITED [Active] CIN = U72200PN2001PTC016290

Company & Directors' Information:- I & I SOFTWARE INDIA PRIVATE LIMITED [Strike Off] CIN = U72200TN2005PTC056262

Company & Directors' Information:- D F SOFTWARE INDIA PRIVATE LIMITED [Strike Off] CIN = U72200TZ2003PTC010629

Company & Directors' Information:- E. C. SOFTWARE INDIA PRIVATE LIMITED [Active] CIN = U72900TN2007PTC063486

Company & Directors' Information:- Q 3 INDIA SOFTWARE PRIVATE LIMITED [Active] CIN = U72900TN2007PTC065786

Company & Directors' Information:- K Y SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200DL2005PTC136072

Company & Directors' Information:- T M I SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200KA2005PTC036299

Company & Directors' Information:- B C L SOFTWARE (INDIA) PRIVATE LIMITED [Strike Off] CIN = U30007MH1999PTC117922

Company & Directors' Information:- M I S SOFTWARE PRIVATE LIMITED [Active] CIN = U72200TN2008PTC068694

Company & Directors' Information:- A. T. SOFTWARE PRIVATE LIMITED [Active] CIN = U72200TG1996PTC023841

Company & Directors' Information:- J A K SOFTWARE PVT LTD [Active] CIN = U72200DL2001PTC111929

Company & Directors' Information:- R R SOFTWARE PVT LTD [Under Process of Striking Off] CIN = U72200KL1991PTC006051

Company & Directors' Information:- A M H SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200DL2005PTC132410

Company & Directors' Information:- P D A SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72900DL2003PTC123465

Company & Directors' Information:- K C SOFTWARE PRIVATE LIMITED [Active] CIN = U74899DL1989PTC036923

Company & Directors' Information:- I SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72300MH2012PTC225903

Company & Directors' Information:- V M SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72900PN2010PTC136847

Company & Directors' Information:- H M SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200HP2011PTC031756

Company & Directors' Information:- S N R SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72900DL2012PTC243073

Company & Directors' Information:- C M S SOFTWARE PRIVATE LIMITED [Active] CIN = U74899DL2005PTC142352

Company & Directors' Information:- S M I T SOFTWARE COMPANY PRIVATE LIMITED [Strike Off] CIN = U74899DL2006PTC144816

Company & Directors' Information:- A D SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200KA2002PTC030722

Company & Directors' Information:- H. A. N. R. E. J SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200TG2008PTC062044

    IT Appeal Nos. 596 & 1067 (PN) of 2013

    Decided On, 16 June 2015

    At, Income Tax Appellate Tribunal Pune

    By, THE HONOURABLE MS. SUSHMA CHOWLA
    By, JUDICIAL MEMBER & THE HONOURABLE MR. R.K. PANDA
    By, ACCOUNTANT MEMBER

    For the Appellant: A.K. Modi, Advocate. For the Respondent: Deepa Khare, Advocate.



Judgment Text

Sushma Chowla, Judicial Member

1. The cross appeals filed by the Revenue and assessee are against the order of CIT(A)-IT/TP, Pune dated 15.10.2012 relating to assessment year 2005-06 passed under section 143(3) of the Income Tax Act, 1961.

2.The cross appeals filed by the Revenue and assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.3. The Revenue in ITA No.596/PN/2013 has raised the following grounds of appeal:-

"1. The order of the learned Commissioner of Income-tax(Appeals) is contrary to law and to the facts and circumstances of the case.

2. The learned Commissioner of Income-tax(Appeals) grossly erred in directing to exclude one of the comparables, namely, M/s. Mascon Global Ltd., on the ground that the related party transactions of this company were 26.36%, whereas the same were 23.93% which is less than 25%.

3. The learned Commissioner of Income-tax(Appeals) erred in directing the Assessing Officer to provide working capital adjustment even though the onus was on the assessee to demonstrate the material effect of the differences on the prices charged, which it failed to discharge.

4. For these and such other grounds as may be urged at the time of the hearing, the order of the Ld. Commissioner of Income-tax (Appeals) may be vacated and that of the Assessing Officer be restored.

5. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of the appellate proceedings before the Hon'ble Tribunal. "

4. The assessee in ITA No.1067/PN/2013 has raised the following grounds of appeal:-

"Based on the facts and circumstances of the case, BMC Software India Private Limited (hereinafter referred to as 'the Appellant') respectfully craves leave to prefer an appeal under section 253(1)(a) of the Income-tax Act, 1961 (hereinafter referred to as 'Act'), against the order dated 15 October 2012 passed by the Commissioner of Income-Tax (Appeals) - ITITP - Pune (hereinafter referred to as 'CIT (A)'), on the following grounds:

On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) has:

1. General ground challenging the transfer pricing adjustment of Rs.93,386,880 consequential to non consideration/acceptance of comparability analysis as documented in the transfer pricing study report

Erred in making transfer pricing adjustment to its international transactions in the nature of provision of software development services and sales support services and not considering/accepting the comparability analysis documented in the Transfer Pricing study report for benchmarking analysis.

2. Non applicability of transfer pricing provisions to software development unit of the Appellant which is enjoying tax holiday under section 10A of the Act

Transfer pricing provisions to software development unit (i.e. provision of software development services) of the Appellant which enjoys tax holiday under section 10A of the Act.

3. Use of contemporaneous data

Erred in conducting arm's length analysis based on information of comparable companies available at the time of transfer pricing assessment but not available at the time of compliance with the transfer pricing regulations by the Appellant.

4. Use of multiple year data Erred in not considering multiple year data (i.e. data for Financial Year 2004-05 and two prior years) in respect of comparable companies for determining the arm's length price of international transactions pertaining to provision of software development services and sales support services.

5. Rejection of loss making companies

Erred in rejecting certain comparable companies from the comparable set identified by the Appellant, on the basis that such companies are loss making companies and the Appellant cannot incur losses as it is a cost protected entity.

6. Rejection of certain comparable companies identified by the Appellant in the transfer pricing study report

Erred in rejecting certain comparable companies from the comparable set identified by the Appellant in respect of international transactions pertaining to provision of software development services and sales support services.

7. Acceptance of certain selective companies as comparables which have related party transactions in excess of 25 per cent

The Hon'ble CIT (A) has erred in selectively including following companies which have related party transactions in excess of 25 per cent. In case updated data for FY 2004-05 is to be used, the Appellant prays that such companies be excluded from the set of comparables.

8. Accepting Satyam Computer Services Limited as comparable for FY 2004-05 in relation to provision of software development services

The Hon'ble CIT (A) has erred in accepting Satyam Computer Services Limited as comparable to the Appellant's activity pertaining to software development services even though the financials of the company are not reliable due to manipulations.

9. Adjustment for differences on account of functional and risk profile of comparable companiesvis-a-vis the Appellant

Erred in denying adjustments on account of differences between the functional and risk profile of comparable companies vis-a-vis the risk profile of the Appellant.

10. Applicability of +/-5% range Erred in denying the benefit of the option available to the Appellant under proviso to section 92C(2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price.

11. Erroneous levy of interest under section 234B of the Act

Without prejudice to the above grounds, even if the transfer pricing adjustment is sustained, the Hon'ble CIT(A) erred in levying interest under section 234B of the Act to the extent that the addition is computed based on the updated financial data for the comparable companies.

The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Income Tax Appellate Tribunal to decide this appeal according to law. "

5. The appeal filed by the assessee is after delay of 142 days. The due date for filing the appeal before the Tribunal was 22.12.2012 against the order of the CIT(A) received by the assessee on 23rd October, 2012. The assessee claims that it had filed a letter requesting appeal effect before the Assessing Officer on receipt of the order of the CIT(A) on 29th October, 2012. Further, another letter was filed before the TPO providing working of operating margins of comparable companies and computation of working capital adjustment on 11th February, 2013. The assessee further pointed out that the TPO sent communication to the Assessing Officer determining the Transfer Pricing adjustment of Rs.3,90,55,957/- on 12th February, 2013 and 07th March, 2013 which were received on 28th March, 2013. Another communication was sent by TPO to the Assessing Officer and also to the assessee determining the Transfer Pricing adjustment of Rs.3.73 crores on 1st April, 2013 which was received by the assessee on 10th March, 2013. After the above said, the assessee filed an appeal before the Tribunal on 13th May, 2013. The Assessing Officer had given effect to the order of the CIT(A) dated 15th October, 2012 on 09th April, 2013 which was received by the assessee on 25th June, 2013.

6. The contention of the assessee in this regard was that where the CIT(A) had granted relief on account of working capital adjustment to the assessee, the assessee moved a letter to the Assessing Officer for the same along with necessary workings. Based on the said workings, the operating margins of the assessee was within +/- 5% range from the working capital adjusted to operating margins of comparable companies. Hence as per the understanding of the assessee resultantly there would be NIL Transfer Pricing adjustment in relation to the provisions of software development services. The assessee was of the view that after giving effect to the order of the CIT(A), there would not be any resultant Transfer Pricing adjustment and hence no appeal was filed before the Tribunal. Since the Assessing Officer/TPO due to difference in the working capital adjustment had worked out adjustments to be made on account of margins, there was necessity to file an appeal before the Tribunal and hence the delay. In view thereof, the assessee pleaded that the delay of 142 days may be condoned. The Ld. Authorized Representative for the assessee furnished an affidavit of the Director of the assessee company which reads as under :-

"AFFIDAVIT BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL, PUNE BENCH, PUNE ['TRIBUNAL'] FOR EXPLAINING THE SUFFICIENT CAUSE FOR CONDONING THE DELAY IN FILING THE APPEAL

IN THE MATTER OF BMC SOFTWARE INDIA PRIVATE LIMITED ('BMC INDIA')

ASSESSMENT YEAR 2005-06

I, Tarun Sharma, Director, BMC Software India Private Limited ('BMC India') state on solemn affirmation as under:

That BMC India had received the Appellate Order from the learned Commissioner of Income Tax (Appeals) ['CIT (A)'] for AY 2005-06 on 23 October 2012 and an appeal to the Hon'ble Tribunal against such Appellate Order ought to have been filed by BMC India on or before 22 December 2012. However, BMC India has filed an appeal with the Hon'ble Tribunal on 13 May 2013. There is therefore a delay of 142 days in filing the said appeal. It is submitted that there was sufficient cause for the above delay in view of what is stated herein below:

1. The learned Transfer Pricing Officer ('TPO') had denied adjustment on account of differences in working capital of BMC India and comparable companies. BMC India had raised this ground of appeal before the learned CIT (A) who granted the relief on account of working capital adjustment to BMC India and directed the learned Assessing Officer ('AO') to provide working capital adjustment (Refer para 3.5.3 on page 27 of the Order).

2. Post receipt of above Appellate Order, BMC India has filed an application on 29 October 2012 with the learned AO for Order giving effect to the learned CIT(A)'s Order along with necessary workings.

3. The workings provided to the learned AO were provided earlier to the erstwhile learned TPO as well as to the learned CIT(A) during the course of Transfer Pricing assessment proceedings as well as appellate proceedings.

4. Based on the said workings, the operating margin of BMC India was within the lower 5% range from the working capital adjusted ('WCA') operating margins of final comparable companies and hence, it was BMC India's bona fide understanding that there would not be a resultant transfer pricing adjustment in relation to provision of software development services post giving effect to CIT(A)'s order.

5. Ignoring the workings submitted by BMC India, in order to pass the appeal effect order, the learned AO has written to the learned TPO for computation of WCA operating margins of final comparable companies.

6. While computing the WCA operating margins of final comparable companies, the learned TPO has revised the calculation of WCA operating margins of final comparable companies and also made certain errors in the calculations.

7. On noticing various errors, BMC India has filed letter dated 11 February 2013 to the TPO along with the WCA workings (enclosed herewith as Exhibit 1) requesting for considering correct WCA adjusted operating margins of final comparable companies. Based on the working, the operating margin of BMC India was within the lower range of WCA operating margins of final comparably companies.

8. However, while computing the operating margins of comparable companies as well as BMC India, the learned TPO has changed the treatment of foreign exchange loss (i.e. the TPO has reduced the foreign exchange loss from operating cost and operating revenue) and finalized the WCA operating margins of comparable companies as well as BMC India at 17.66% and 11.35% respectively.

9. Further, while computing the WCA operating margins of final comparable companies, the learned TPO not considered the 'Advance Received from Customer' while computing the net working, capital of the Appellant.

10. Based on the revised working, as computed by the TPO, the lower 5% range of WCA operating margins of comparable companies works out to 11.77% which is higher than BMC India's operating margin of 11.35% (as computed by the TPO). The operating margin of BMC India as per Transfer Pricing Study report and transfer pricing order was 11.28%.

11. As apparent from above, the learned TPO while finalizing the WCA operating margins of comparable companies has not accepted the working submitted by BMC India and has revised the workings. This has resulted in transfer pricing adjustment.

12. After the learned CIT(A)'s order BMC India was of the bona fide view that there would not be a resultant transfer pricing adjustment in relation to the provision of software development services and hence had not filed an appeal before the Hon'ble Tribunal on or before 22 December 2012. The question of filing an appeal to the Hon'ble ITAT has arisen at the stage of giving appeal effect which has culminated in the transfer pricing adjustment, due to difference in opinion on computation methodology for computing WCA as stated above.

13. It was only when BMC India received the communication form the learned TPO to the learned AO dated 1 April 2013 (received on 10 April 2013), it has realized that transfer pricing adjustment in relation to provision of software development services would survive and hence there is need to file appeal against the Appellate Order.

14. If the learned TPO accepted the WCA operating margins submitted by BMC India, the resultant transfer pricing adjustment would have reduced to NIL and there would be no need to agitate other issues/grounds before the Hon'ble Tribunal. The Appellant was therefore under good faith and non-filing of the appeal within the due time was because of genuinely underbona fide belief.

15. As the working of WCA margins had not been accepted by the learned TPO it became essential for BMC India to agitate the remaining issues before the Hon'ble Tribunal.

16. Appellant's bona fide belief has further been corroborated by the learned TPO's internal letter to the learned AO dated 25 August 2014 as well as learned AO's OGE letter dated 7 October 2014 (as is evident from page 326 to 331 of the Paper Book II) wherein the transfer pricing adjustment in relation to provision of software development services has been deleted completely.

That in view of the above, there is an unintentional and bona fide delay in filing the appeal before the Tribunal.

In view of this, it is prayed that the delay of 142 days may kindly be condoned in order to render justice.

Whatever is stated in the above paras is true and correct to the best of my knowledge and belief.

Executed on this 16th day of March 2015, by Tarun Sharma, holder of PAN Card no. CIQPS 1768D.

Deponent"

7. It was the plea of the Ld. Authorized Representative for the assessee before us that the delay in filing the appeal late before the Tribunal was unintentional and if appropriate appeal effect was given, then there was no demand against the assessee and there was no necessity to file an appeal before the Tribunal. Our attention was drawn to the subsequent order passed on 07.10.2014 which is placed at pages 328 - 329 of the Paper Book, wherein NIL adjustment was made on account of Transfer Pricing. The Ld. Authorized Representative for the assessee placed reliance on under-mentioned decisions for the proposition that the delay in filing the appeal late be condoned :-

(i) N. Balakrishnan v. M. Krishnamurthy AIR 1998 SC 3222; and,

(ii) Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC).

8. On the perusal of the affidavit filed by the assessee and the relevant orders passed by the Assessing Officer/TPO giving appeal effect to the order of the CIT(A) and after considering the submissions of the assessee, we are of the view that there is merit in the plea of the assessee for condoning the delay in filing the appeal late by 142 days before the Tribunal. The plea of the assessee before us was that the appeal filed by the assessee becomes academic in view of the relief granted by the CIT(A), against which the Revenue is in appeal. However, since the appeal has been filed by the Revenue against the order of the CIT(A) in allowing working capital adjustment to compute the margins of the comparables vis--vis the margins declared by the tested parties, the assessee desirous of keeping its issue alive by filing the present appeal before the Tribunal.

9. The perusal of the affidavit reflects that there was sufficient cause for not filing the appeal in time before the Tribunal and we condone the said delay of 142 days and proceed to take-up the appeal of the assessee for hearing. We find support from the ratio laid down by the Hon'ble Supreme Court in N. Balakrishnan' s case (supra) and Mst. Katiji's case (supra) in this regard.

10. First, we shall take-up the appeal filed by the Revenue. The Revenue is aggrieved by the order of the CIT(A) in directing to exclude one of comparables i.e. M/s Mascon Global Ltd. on the ground that the related party transactions of this company were 26.36% whereas the RPT with the said company was only 23.93% which was less than 25%. The Revenue is also aggrieved by the order of the CIT(A) in directing the Assessing Officer to provide working capital adjustment though the onus was on the assessee to demonstrate the material effect of the difference on the prices charged, which it had failed to discharge.

11. In the facts of the present case, the assessee was engaged in providing software development services to its associated enterprises. As per the Transfer Pricing Study report, the assessee had adopted TNM Method in order to work out the margins of the comparables and had taken the weighted average of the PLI i.e. operating profit over total cost, for benchmarking international transactions relating to provisions of services. The Transfer Pricing report of the assessee elaborately considered the margin analysis of companies providing software development services which was also considered by the TPO and adjustments were made in the hands of the assessee on account of international transactions with the associated enterprises. The said aspect is the point of dispute raised by the assessee in its appeal which we shall deal with after considering the issue raised by the Revenue against the relief granted by the CIT(A). Another set of adjustments made in the hands of the assessee were on account of the working capital adjustment. The TPO noted that while seeking the adjustment on account of working capital adjustment, the assessee had worked out the average amount of negative working capital of Rs.8,42,12,015/- on account of the fact that it had always received advances from its associated enterprises and it had always utilized an interest free capital to the extent of Rs.8.42 crores. The TPO was of the view that the adjustment, if at all, warranted it had to be as per rule 10B(1)(e) of the Income Tax Rules, 1962. The TPO after analyzing the provisions of the Act, was of the view that the adjustment on account of working capital as asked by the assessee company to its net operating profit was not with the sanction of law and had to be dismissed at the outset. The TPO was of the view that there was no justification for allowing working capital adjustment to the assessee. The TPO, thus, arrived at proposed set of comparables which need to be adopted for the purposes of benchmarking international transactions of the assessee. The TPO computed the arithmetic mean of the PLI of the comparable at 26.75% and further observed that for this reason no adjustment was found to be allowable towards risk/working capital and the adjusted arithmetic mean of the PLI of the set of comparables could remain at 26.75% as against the PLI of the assessee company at 11.28%, an adjustment of an amount corresponding to the difference of the adjustment arithmetic mean of the PLI of the set of comparables, PLI of the assessee company was worked out resulting in adjustment of Rs.10,69,45,953/-. The Assessing Officer passed an order under section 143(3) of the Act by including the said Transfer Pricing adjustment of Rs.10.69 crores and further making an addition of Rs.7,01,310/- on account of sales support services.

12. The CIT(A) considered the issue of Transfer Pricing adjustment and also the objections of the assessee with regard to the selection or rejection of certain companies. The CIT(A) further considered the companies which were selected by the TPO and the plea of the assessee that the same could not be considered on application of RPT filter applied by the TPO himself. The CIT(A) vide para 3.4.11.1 to 3.4.11.5 directed the Assessing Officer to exclude Helios and Matheson Information Technology Limited, Software Technology Group International Limited and Mascon Global Limited from the list of comparable.

13. The Revenue is in appeal against the exclusion of Mascon Global Limited from the list of comparables. Further, the CIT(A) also considered another plea of the assessee of adjustment to operating margins of comparables on account of working capital adjustment. The CIT(A) following the ratio laid down by the Delhi Bench of the Tribunal in Vedaris Technologies (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 316 and the OECD's guidelines on the issue, observed that the margins are affected by extending credit and holding inventory and hence such working capital adjustment was required for computing the profit margins of transaction. The CIT(A) directed the Assessing Officer to grant working capital adjustment to the assessee on the basis of average credit/debit period for the year and commercial rate of interest. The Revenue is aggrieved by the said direction of the CIT(A) and hence the grounds of appeal raised in this regard.

14. The Ld. Departmental Representative for the Revenue fairly pointed out that where RPT transactions are more than 25%, then such comparable is not to be included, however, in case of Mascon Global Limited both the CIT(A) and TPO in second round, had held that the RPT was more that 25% but fairly as per the working of the Assessing Officer was only 23.93% and reliance was placed on the order of the Assessing Officer in this regard. The Ld. Departmental Representative for the Revenue in respect of the second aspect of allowability of working capital adjustment stated that where the assessee had failed to discharge the onus cast upon it, such adjustment, could not be allowed in the hands of the assessee.

15. The Ld. Authorized Representative for the assessee pointed out that the calculation itself shows that the company having RPT filter more than 25% was excluded. Our attention was drawn to the order of the CIT(A) at page 22 wherein the CIT(A) had excluded such companies having RPT filter in excess of 25%. The Ld. Authorized Representative for the assessee further pointed out that though the TPO had the filter 25% in respect of RPT transaction but there was no reasoning of the TPO in this regard. Our attention was drawn to the conclusion of the CIT(A) in this regard. The Ld. Authorized Representative for the assessee pointed out that in assessment year 2006-07, the TPO himself allowed the working capital adjustment. Similarly in assessment years 2007-08 and 2008-09, though the TPO denied such adjustment but DRP was allowed the working capital adjustment. Similarly in 2009-10, where the TPO allowed such adjustment, the DRP sent back the issue to the Assessing Officer. However, in assessment year 2010-11, TPO accepts in-principle that working capital adjustment is to be allowed but in the absence of any details, no such adjustment was allowed, against which the DRP directed the Assessing Officer to allow working capital adjustment. Our attention was drawn to the assessment orders, order of the DRP placed in the Paper Book in this regard. The Ld. Authorized Representative for the assessee pointed out that against the computation of working capital there was communication between the TPO and the Assessing Officer, copy of which is placed at pages 330 - 331 of the Paper Book, in which it was recommended that where the CIT(A) has allowed the grounds of appeal, no second appeal is recommended on this issue. Our attention was further drawn to the grounds of appeal before the CIT(A) in the appeal filed against the order passed under section 143(3) r.w.s. 250 of the Act, where the working capital adjustment had been accepted and in the absence of any appeal filed by the Revenue against the said order of the CIT(A), it was submitted that there was no merit in the contention of the Ld. Departmental Representative for the Revenue. The Ld. Authorized Representative for the assessee also referred to the appeal filed by the Revenue against the order of DRP in ITA No.209/PN/2015 and no ground regarding working capital adjustment has been raised.

16. We have heard the rival contentions and perused the record. The assessee before us is engaged in the business of providing software development services, IT enabled services and sales support services to BMC group entities. The services are being provided only to the group entities by the assessee. During the year under consideration, the assessee had received advances from its group entities for the purpose of services, which in turn, had been adjusted against the amounts due on account of provision of services. The assessee accordingly, had declared the amounts received from group entities as advances from customers and there was Nil closing balance under the head 'Sundry Debtors'. The plea of the assessee before the TPO was that working capital adjustment on this account should be allowed to the assessee while benchmarking its international transaction with its AEs. However, the TPO did not allow the said working capital adjustment since the figure of Sundry Debtors was Nil in the balance sheet. Another aspect of the issue on account of transfer pricing was the adjustment made on account of addition/rejection of the comparables. The assessee is in appeal against the order of CIT(A) in this regard. However, the learned Authorized Representative for the assessee during the course of hearing pointed out that the CIT(A) had directed the TPO to allow working capital adjustment and had also directed the TPO to exclude M/s. Mascon Global Ltd. from the list of comparables, while benchmarking the international transactions in the hands of the assessee. The learned Authorized Representative for the assessee pointed out that in respect of M/s. Mascon Global Ltd., the percentage of RPT to total sales was 26.36% and hence, not comparable, against which the Revenue is in appeal. In respect of other companies which have been accepted or excluded though the assessee has filed an appeal against the order of CIT(A) but in case the adjustment allowed by the CIT(A) is allowed to the assessee, then the margins declared by the assessee were within +/- 5% of margins declared by the comparables and no adjustment would be made in the hands of the assessee.

17. Coming to the first aspect of the working capital adjustment whether the same is to be allowed to the assessee or not. The claim of the assessee before the authorities below was that in view of the peculiarity of its facts wherein, it had received advances from its group entities against the services to be performed, then net working capital of the assessee should be considered after taking into account the amount relating to advances received from the customers. The CIT(A) noted the contention of the assessee vis--vis working capital adjustment to operating margins on operating cost of the comparable companies and directed the Assessing Officer to examine the computation of working capital adjustment worked out by the assessee and adopt correct operating margins of the comparable companies after working capital adjustment. The Assessing Officer was directed to adopt the method of working capital adjustment as provided in Annexure to Chapter III of the OECD Transfer Pricing Guidelines, 2010. The assessee had furnished tabulated details of OP/OC as per the order of TPO and OP/OC as per the assessee's working in case of software development services, IT enabled services and sales support services which are tabulated at pages 83 to 85 of the appellate order before us. In the remand proceedings, the TPO vide order dated 12.02.2013 and dated 17.03.2013 determined the transfer pricing adjustment at Rs.3.90 crores, which was later reduced to Rs.3.73 crores vide order dated 01.04.2013. Simultaneously, the assessee filed an appeal against the order of Assessing Officer giving appeal effect under section 143(3) r.w.s. 250 of dated 09.04.2013. The CIT(A) vide order dated 25.06.2014 accepted the plea of the assessee and observed as under:-

"2.3.3 I have considered the arguments of the Appellant. The Appellant has stated that the learned AO has incorrectly granted working capital adjustment by not considering 'advance receivable' for the Appellant. However, the same was considered for computing working capital adjustment of the comparable companies. I find that this is an inadvertent error on part of the learned TPO. The methodology of the computation of the working capital adjustment should be the same and consistent for the tested party as well as for the comparable companies. Therefore, I direct the learned AO to consider 'advance receivable' for computing net working capital of the Appellant."

18. The copy of the said order is placed at pages 332 to 340 of the Paper Book. Consequent to the order of CIT(A), the AO/TPO passed order giving effect dated 07.10.2014, under which the original adjustment suggested at Rs.3.73 crores was reduced to Nil. The copy of the said order is placed at pages 328 and 329 of the Paper Book. Consequent thereto, there is an internal communication between the TPO and Assessing Officer dated 25.08.2014, pursuant to the order of CIT(A), wherein the TPO has communicated to the Assessing Officer that the transfer pricing adjustment is deleted and further no second appeal is recommended against the said order of CIT(A) in allowing working capital adjustment.

19. Another aspect considered by the CIT(A) while allowing the working capital adjustment was vis--vis treatment of foreign exchange for working out operating margins of the assessee's assessed comparable companies and computation of net working capital. The CIT(A) in the second round vide order dated 25.06.2014 had directed the Assessing Officer to adopt the net working capital as assessed by him in the assessment order and not as assessed by him in the order giving effect of the CIT(A). Against the said directions of the CIT(A) also, no second appeal was recommended by the TPO to the Assessing Officer as per internal communication dated 25.08.2014.

20. Another aspect of the issue is that the DRP in the order relating to assessment year 2007-08 and also assessment year 2008-09 had directed the Assessing Officer/TPO to allow the working capital adjustment to the assessee. The copies of the respective orders are placed in Paper Book starting from pages 294 to 325. The DRP following the ratio laid down by the Delhi Bench of the Tribunal in Vedaris Technologies (P.) Ltd. (supra) had held that OECD's view on the issue and economic rationality that margins are effected by extending credit and holding inventory, then such working capital adjustments are required for computing margins of the transactions. In assessment year 2009-10, the DRP noted that the TPO had granted relief to the assessee on account of difference in working capital employed by the assessee as compared to that of comparable companies, but because of some errors pointed out by the assessee in the computation of working ca

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pital adjusted margins, the matter was set-aside to the file of Assessing Officer to carry out the requisite verification and dispose of the rectification application accordingly. In assessment year 2010-11, the TPO himself had accepted the claim of assessee to allow working capital adjustments in principle. However, in view of certain segmental trade receivables and trade payables details not being available, there were certain adjustments made, against which, the assessee filed objection before the DRP, which in turn, allowed the claim of assessee with directions to the Assessing Officer to examine the computation of working capital adjustment worked out by the assessee and adopt correct operating margins of the comparable companies after working capital adjustment. The learned Authorized Representative for the assessee pointed out that though the Revenue has filed an appeal against the directions of DRP dated 30.10.2014, but no grounds of appeal has been raised against the working capital adjustment, which was directed to be allowed by the DRP. 21. However, in the facts of the present case before us the said exercise of computing the working capital adjustment has been carried out by the TPO while giving effect to the order of CIT(A) dated 25.06.2014, under which vide order dated 07.10.2014 the adjustments have been reduced to Nil. Consequently, we uphold the earlier order of CIT(A), under which it had directed the TPO/Assessing Officer to grant working capital adjustment to the assessee, which in turn, has been given effect while giving effect to the subsequent order passed by the CIT(A) against the order of Assessing Officer passed under section 143(3) r.w.s. 250 of the Act, dated 25.06.2014. Consequently, we uphold the order of CIT(A) in this regard. 22. Now, coming to the second aspect of the exclusion of M/s. Mascon Global Ltd. The filter adopted by the TPO was that the companies with RPT percentage more than 25% have to be excluded from the list of comparables. The case of the assessee before us is that M/s. Mascon Global Ltd. had RPT percentage of 26.36% and hence, the same is to be excluded from the list of comparables while benchmarking international transaction in the hands of assessee. The Assessing Officer on the other hand, had computed the RPT of M/s. Mascon Global Ltd. at 23.93%. The CIT(A) however, in view of the annual report of the said company has given a finding that on total turnover of Rs.205.58 crores, the RPT turnover was Rs.54.19 crores and the percentage of RPT works out to 26.36% as per the annual report of the said companies with relevant pages at page 24 and page 48 of the Paper Book filed before him. In view of the above said details, the CIT(A) held that M/s. Mascon Global Ltd. was not a comparable and the same had to be excluded from the list of comparables. The learned Departmental Representative for the Revenue failed to controvert the above said finding of the CIT(A) and in the absence of same, we find no merit in the grounds of appeal raised by the Revenue in this regard. Upholding the order of CIT(A) on this issue, we dismiss the grounds of appeal raised by the Revenue. 23. In view thereof, where after giving effect to the above said adjustments, the arm's length price in the hands of assessee gets reduced to Nil, and in view of the concession given by the learned Authorized Representative for the assessee, we dismiss the grounds of appeal raised by the assessee as academic. Accordingly, both the appeals of the Revenue and assessee are dismissed. 24. In the result, both the appeals of the Revenue and assessee are dismissed.
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