Lam Research (India) Pvt. Ltd. Vs DCIT (ITAT Bangalore)
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 Tavant US. Therefore, requirement for adjustment of negative working capital does not arise.
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.
FULL TEXT OF THE ITAT JUDGEMENT
Present appeal has been filed by assessee against final assessment order dated 22/09/2017 passed by Ld.DCIT Circle 4 (1) (1), Bangalore for assessment year 2013-14 on following grounds of appeal:
“Based on the facts and circumstances of the case and in law, Lam Research (India) Private Limited (hereinafter referred to as Appellant’), respectfully craves leave to prefer an appeal against the assessment order passed by the learned Assessing Officer [hereinafter referred to as the learned AO] under section 143(3) read with section 1440 of the Income-tax Act., 1961 (the Act’) on the following grounds:
1. The learned AO/Transfer Pricing Officer (‘TPO’) and the learned DRP have erred, in law and in facts, by making an addition of Rs 1,36,50,206 to the total income of the Appellant on account of adjustment to the arm’s length price of the software development services transaction entered into by the Appellant with its associated enterprise;
2. The learned AO / TPO and the learned DRP have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (‘Rules’), conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction, and holding that the Appellant’s international transaction is not at arm’s length;
3. The learned AO / TPO have erred, in law and in facts, by exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes;
4. The learned AO / TPO and the learned DRP have erred, in law and in facts, by determining the arm’s length margin/ price using data pertaining only to FY 2012-13 which was not available to the Appellant at the time of complying with the transfer pricing documentation requirement;
5. The learned AO/TPO and the learned DRP have erred, in law and facts by rejecting certain comparable companies considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters:
i. The learned AO I TPO and the learned DRP have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months);
ii. The learned AO I TPO and the learned DRP have erred, by rejecting certain comparable companies identified by the Appellant using employee cost greater than 25% of the total revenues as a comparability criterion;
iii. The learned AO / TPO and the learned DRP have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using export earnings greater than 75% of the sales as a comparability criterion;
iv. The learned AO I TPO and the learned DRP have erred, in law and in facts, in applying only the lower cap on the turnover filter of Rs.1 crore and not applying any upper cap for the comparability criterion;
6. The learned AO/ TPO and the learned DRP have erred, in law and in facts, by accepting rejecting companies based on unreasonable comparability criteria;
7. The learned AO / TFO and the learned DRP have erred, in law and in facts, by providing an adverse working capital adjustment without appreciating the fact that the Appellant is a captive service provider;
8. The learned AO / TPO and the learned DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparable companies;
9. The learned AO has erred, in law and facts, by not considering the Self-Assessment Tax amounting to Rs.4,78,1 11 paid by the Appellant;
10. The learned AO has erred, in law and facts, in imposing interest under section 234B and section 2340 of the Act;
11. The learned AO has erred, in law and in facts, by initiating penalty proceedings u/s 271(1)(c) of the Act.
The Appellant submits that each of the above grounds is independent and without prejudice to one another.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at anytime before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.”
Brief facts of the case are as under:
2. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of section 92A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises (“AEs”). In terms of sec.92B(1) of the Act, the transaction of providing SWD Services and ITeS were “international transaction” i.e., a transaction between assessee and the associated enterprise, the details of which are as under:
