TMI Blog2016 (7) TMI 1445X X X X Extracts X X X X X X X X Extracts X X X X ..... SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER Assessee by :Shri M.P. Lohia a/w Shri Pranay Gandhi Revenue by :Shri N.K. Chand ORDER PER SAKTIJIT DEY, J.M. Aforesaid appeal at the instance of the assessee is directed against the assessment order dated 30th October 2012, passed under section 143(3) r/w 144C(13) of the Income Tax Act, 1961 (for short the Act ) in pursuance of the direction of the Dispute Resolution Panel (DRP) for the assessment year 2008 09. 2. Assessee in total has raised 15 grounds, which are reproduced below: Based on the facts and circumstances of the case, UCB India Private Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Additional Commissioner of Income Tax, Range 7(3), Mumbai [hereinafter referred to as the 'learned AO] under section 144C(13) read with section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel (hereinafter referred to as the 'Hon'ble DRP'). On the facts and in the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in not considering the working capital adjustment which is required to be undertaken in the Appellant's case to account for the difference in the working capital levels between comparable companies (as identified by the learned TPO) and the Appellant; Disallowance of e-connectivity expenses 13. erred in making an addition of ₹ 31,76,461 by considering e- connectivity charges as incurred for acquiring software, which resulted in benefit of enduring nature and thereby classifying the expenses as Capital in nature; Double addition on account of depreciation 14. erred in adding the depreciation amount of ₹ 20,89,955 instead of deducting the same, while computing the assessed income resulting into double addition of the depreciation amount; Interest under section 234A 15. erred in considering incorrect taxable income for computing interest under section 234A of the Act. 3. Ground no.1 being general in nature, no specific adjudication is required. 4. At the instructions of the assessee, learned Authorised Representative did not press grounds no.14 and 15. Hence, these grounds are dismissed as not pressed . 5. Out of rest of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed that certain comparables selected by the assessee did not represent the I.T. industry in true sense as the assessee has not applied appropriate filters. Though, in the course of proceedings before the Transfer Pricing Officer the assessee also submitted the updated single year margin of the comparable companies selected by it whose arithmetic mean worked out to 14.24% but the Transfer Pricing Officer did not accept the same. He was of the view that the transfer pricing study furnished by the assessee is not acceptable as it is not in accordance with rule 10B(4) as the comparable companies were not selected on the basis of data relating to current financial year. He also observed that most of the comparables do not stand scrutiny of FAR analysis. Accordingly, he proceeded to reject the transfer pricing study of the assessee and proceeded to determine arm's length price independently. Though, the Transfer Pricing Officer accepted TNMM as most appropriate method with OP/OC as PLI, however, by applying some fresh set of filters, he searched data bases to select comparables. The search in data bases conducted by the Transfer Pricing Officer yielded 23 companies as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2013] 36 Taxmann.com 289 (Del.) as well as number of other decisions of the Tribunal for excluding companies with reasonably high turnover. Without prejudice to the aforesaid argument, as alternative contentions, learned Authorised Representative also objected to selection of certain comparables on functional dissimilarity which are as under: Infosys Technologies Limited 10. Learned Authorised Representative referring to the annual report of the company for the year under consideration submitted, the company is engaged in diversified activity and it provides solutions to the entire software life cycle encompassing technical consulting, design, development, re engineering, maintenance, systems, integration, package evolution and implementation, distinguishing and infrastructure management services. He submitted, this company is also engaged in development of products. In this context, he referred to the Profit Loss account of the company. Further referring to the Balance Sheet of the company learned Authorised Representative submitted, the company has shown brand value as its intangible asset. The company has significant R D activity leading to creation of intellectual pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment expenditure. He, therefore, submitted the company cannot be treated as comparable to the assessee. He further submitted, the turnover of the company being more than ₹ 20 crore, it should not be treated as comparable. In support of his contention, he relied upon the following decisions: i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014; E ZEST SOLUTIONS LIMITED 13. Objecting to the selection of this company, learned Authorised Representative submitted that as the company is engaged in development of product, it cannot be treated as a comparable. In this context, he referred to the information contained in website of the company a copy of which is at page 473 of the paper book. In support of his contention, he relied upon the following decisions: i) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) Net Cracker Technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215; WIPRO LIMITED 16. Arguing for removal of this company, learned Authorised Representative submitted, it cannot be treated as comparable as it is into diversified activities including development of products and no segmental information is available. In this context, he referred to the Profit Loss account of the company as on 31st March 2008. Besides, the learned Authorised Representative submitted, the turnover of this company being ₹ 11,276 crore it cannot be a comparable to the assessee. In support of his contention, the learned Authorised Representative relied upon the following decisions: i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015; iv) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215; v) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014; vi) Adaptec India P. Ltd. v/s ACIT, ITA no.1758/Hyd./2012, dated 21.3.214 17. Learned Departmental Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken a search process and proposed certain fresh comparables which also included Infosys Technologies Ltd. In this context, he referred to Para 5.1 of the Transfer Pricing Officer s order. As far as the objection of the learned Departmental Representative that assessee had not specifically raised the issue of comparability of Infosys Technologies Ltd. before the DRP or before the Tribunal, learned Authorised Representative submitted, assessee has raised specific ground not only before the DRP but before the Tribunal with regard to wrong application of turnover filter by the Transfer Pricing Officer. He, therefore, submitted, learned Departmental Representative s submissions are unfounded. As far as allegation of the learned Departmental Representative in relation to the website information submitted in paper book, learned Authorised Representative submitted, not only they are available in public domain and must have been in the records of the Transfer Pricing Officer but the Transfer Pricing Officer also collected information under section 133(6) from these companies which were never confronted to the assessee. He further submitted, the information obtained from the website of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raordinarily high turnover cannot be treated as comparable. 21. Thus, in our view, companies which are having more than 20 times the turnover of the assessee from software development services segment, in our view, cannot be treated as comparables. This view of ours is supported by various decisions of the Tribunal as well as the Hon'ble Jurisdictional High Court in Pentair Water India Pvt. Ltd. (supra). In the aforesaid view of the matter, we direct the Transfer Pricing Officer to exclude companies having turnover of more than ₹ 20 crore from software development services segment from the list of comparables. As far as the objection of the learned Departmental Representative with regard to assessee s objection against Infosys Technologies Ltd., we may observe, no doubt, the assessee in the transfer pricing study and even in the course of proceedings before the Transfer Pricing Officer has selected Infosys Technologies Ltd. as a comparable. However, fact remains the transfer pricing study report as well as the updated margin submitted by the assessee in the course of proceedings before the Transfer Pricing Officer were rejected. It is further evident, after rejecting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny cannot be treated as comparable. Celestial Biolabs Limited 24. On a perusal of the Profit Loss account of this company, a copy of which is at Page 213 of the paper book, we have noted that the company is engaged in sale of products. Further, the annual report of the company as well as Schedule VII of the Balance Sheet indicates that this company is into product development. Thus, on the basis of information contained in the annual report of the company for the financial year 2007 08 it emerges that the company is involved in sale of products and segmental details are not available. We have also noted that the Tribunal, Bangalore Bench, in IBM India Pvt. Ltd. (supra), following another decision of the same bench in Logica Pvt. Ltd. in ITA no.1129/B./2011, had rejected this company as a comparable as it is engaged in the clinical research and manufacture of bio products and other products. The same view was again reiterated by the Tribunal, Bangalore Bench, in DPLM Software Solutions Ltd. (supra). As these decisions pertain to the very same assessment year respectfully following the same, we hold that Celestial Biolabs Ltd. cannot be treated as a comparable. Kals Infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant financial year as against the turnover of ₹ 87,39,095 of the assessee. Therefore, respectfully following the decisions of the co ordinate bench of the Tribunal referred to above which are for the very same assessment year, we exclude this company as comparable. Wipro Limited 28. On a perusal of the annual report of the company which has been placed in the paper book, it is noticed that it has diversified activities, however, segmental details have not been provided in the audited financial account. That besides the turnover of this company during the relevant financial year was ₹ 11,276 crore, as against paltry turnover of ₹ 87,39,095 of the assessee. For the aforesaid reasons, different benches of the Tribunal have consistently held that Wipro Ltd., cannot be comparable to a purely captive software development services provider. In this context, we refer to the following decisions: i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015; iv) Net Crack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again reiterated by the Tribunal, Hyderabad Bench, in Net Cracker Technologies Solutions India Pvt. Ltd. (supra). As these decisions pertained to the very same assessment year 2008 09, respectfully following the ratio laid down in these decisions, we exclude E Zest Solutions Ltd. (supra) from the list of comparables. Accordingly, we direct the Assessing Officer / Transfer Pricing Officer to compute the arm's length price in terms with our directions contained in this order. 32. In ground no.13, assessee has challenged the addition made of ₹ 31,76,461 on account of disallowance of e connectivity charges. 33. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of ₹ 79,41,152 to the Profit Loss account towards e connectivity charges. When called upon to justify the deduction claimed and why it should not be treated as capital expenditure as it resulted in providing enduring benefit, it was submitted by the assessee that the expenditure incurred was not capital in nature as it was not for acquiring software. It was submitted by the assessee that the expenditure incurred was for facilita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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