TMI Blog2015 (1) TMI 1155X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration as Rolta India Ltd has huge turnover difference, Powersoft Global Solutions Ltd has financial year of the company differs by six months and KLG Systel Ltd is functionally not comparable, thus the matter is restored back to the TPO/AO who shall carry the search of comparables afresh in terms of criteria laid down in Rule 10B(2) of Income Tax Rules 1962 after giving an opportunity of being heard to the assessee. One of the comparables Caliber Point Business Solutions has related party transactions of 30% of Revenue and going by the threshold filter of 25% of the related party transactions the said comparable cannot be said to be uncontrolled comparable and ought to be excluded from the list of comparables. We direct the TPO/AO to exclude the said comparable from the list of comparables taken for the purpose of benchmarking for the said A.Y. 2008-09. - Decided in favor of assessee. - IT Appeal Nos. 1376 (PN) of 2010 and 568, 647 & 648 (PN.) of 2013 - - - Dated:- 30-9-2014 - SHAILENDRA KUMAR YADAV AND G.S.PANNU, JJ. For The Assessee : Shri R.D.Onkar For The Department : Smt. M.S. Verma, CIT ORDER PER SHAILEBDRA KUMAR YADAV, J.M: Two appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment should have been made to the profit margin of comparables and not that of profits of the assessee. 2.3 It was submitted on behalf of the assessee that Dispute Resolution Panel (DRP) has not dealt with this issue in its direction. The stand of the assessee before us has been that the external comparables including the ones selected by the TPO have followed the policy of charging depreciation as per the rates prescribed in Schedule XIV to the Companies Act and it is clear from the Notes to Account in the Audited Annual reports of such comparables. The assessee has claimed that during the relevant previous year it changed its policy of charging depreciation and has adopted higher rates of depreciation than the rates prescribed in Schedule XIV to the Companies Act. Such a change has resulted into excess charge of depreciation of ₹ 12.87 lakhs for the relevant previous year and adversely affected the profit of the assessee company. The assessee therefore asked for adjustment to reduce the impact of said excess depreciation on its profit of the previous year relevant to the A.Y. 2006-07. The TPO has stated that such an adjustment is contemplated to be made to the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected the external comparables mainly on three parameters namely : a) The assessee did not use data of the relevant financial year i.e. 2005-06. b) One of the comparables viz. Ace Software Exports Ltd. not functionally comparable and the remaining comparables had related party transactions. 3.2 The TPO made his own search and selected three external comparables viz. Rolta India Limited, KLG Systel Ltd. and Powersoft Global Solutions Ltd. The TPO thereafter benchmarked the average PLI of Operating Profit to Total Cost of the said three comparables chosen by him and compared the same with the PLI of the assessee company without taking into account adjustment for excess depreciation asked for by the assessee. The TPO accordingly made upward adjustment of ₹ 38,41,754/- to the export price of the services rendered ₹ 1.31 cr. by the assessee to its AE during the previous year relevant to the A.Y. 2006- 07. 3.4 We find that the assessee has adopted Transactional Net Margin Method (TNMM) as the Most Appropriate Method for comparing the profit level indicator (PLI) of Operating Profit to Total Cost with the peer companies selected by it. The assessee is a captive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce skills, technology and last but not the least own intellectual property viz. Technology Research Development. Business model of Rolta is completely different and distinct from that of the assessee. b. KLG and Powersoft are engaged in trading of software packages and the said fact has been clearly borne by the information disclosed in the Audited Financial Statements of the said companies for the relevant F.Y. 2005-06. The said two companies are employing completely different business model and instead of having their own skilled personnel they are buying software licenses and packages and therefore the significant portion of operating costs viz. Manpower cost is very low vis-a-vis the assessee company. In case of KLG Systel the Cost of sales which comprised the cost of bought out software exceeded the manpower cost almost by 9 times for the financial year ended 31st March, 2006 in the audited Profit and Loss Account. Which is placed at page 38 of the Paper Book filled by the assessee. KLG Systel also has inventory disclosed under Current Assets in the Balance Sheet. The Auditors report clearly states that the company has maintained proper records of inventory of software l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice provider. The following are the comparative figures of the parties with that of the assessee. Name of the company Sales Rs. Cr. Capital employed Rs. cr. Rolta India Ltd. 456.73 787.14 KLG Systel Ltd. 51.30 58.70 Powersoft 9.11 6.23 Behr India 1.31 1.00 3.5 It was is that the figures of Capital employed exclude investments. The external comparables chosen by the TPO have been excluded on similar set of facts in the succeeding years A.Y. 2007-08 and 2008-09 by the CIT(A) in the assessee s own case. Material differences exist in terms of functions performed, assets deployed and risks borne. It bears vital notice that Rolta India being one of the three new comparables had not been chosen suo motu by the assessee and the TPO has imosed it on the assessee without having regard to the differences manifest in the functions performed taking into account assets employed and risks assumed (FAR analysis) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le case. Coming to the annual accounts of Tera Software Ltd. for financial year 2001- 02, it is seen that the company has taken three activities of sales, technical services and sales of software. The sales amounted to about ₹ 5.60 crore, technical service receipts stood at about ₹ 3.44 crore and sale of software amounted to ₹ 57.02 lakh. The company had other income of about ₹ 54.94 lakh. It is further seen that the company purchased software of about ₹ 51.34 lakh. The material consumed amounted to about ₹ 5.19 crore and the personnel cost was about ₹ 40.78 lakh. From the narration above, it can be seen that this company is also trading in software and it is not a software development company. From the Directors report, it is seen that the company is mainly engaged in the business of providing integrated solutions and also undertakes the man-power supply. Therefore, the sales of about ₹ 5.59 crore appear to be in respect of providing integrated solutions, which may be in the nature of project development rather than software development. The technical services receipts are in respect of the man-power supply. Thus, this company is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity of being heard to the assessee. 4. In non Transfer Pricing issue in A.Y. 2006-07 Assessee s Appeal No. 1376/PN/10, the assessee has raised the second ground as under: The learned AO erred in confirming disallowance of revenue expenses incurred wholly and exclusively by the appellant on Product Development Expenditure ₹ 2,20,03,000/- in the ordinary course and for the purpose of its business during the relevant previous year and in holding the said expenditure as capital expenditure. a. In respect of Product Development Expenses ₹ 2,20,03,000/- the DRP has given the finding at Para 6.3 Page 19 that perusal of the details shows that the expenses relate to quality testing and validation, soft tooling for testing, proto samples. The DRP and the A.O. have disallowed the expenditure on the premise that it is of enduring nature. The stand of the assessee has been that in respect of disallowance of Product Development Expenses it was submitted that identical issue had come up before the ITAT, Pune in assessee s own case for the A.Y. 2001-02, A.Y. 2004-05 and A.Y. 2005-06, wherein the Tribunal has held that prima facie the expenditure is towards testing of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of the expenditure in accordance with law. Needless to mention, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard in support of its claim of treating the amount of expenditure represented by ₹ 42,21,665/- as a revenue expenditure. The Assessing Officer shall consider the submissions and material that may be put-forth by the assessee and then adjudicate the matter in accordance with law. We hold so . 4.1 Nothing contrary has been brought to our knowledge on behalf of the Revenue. Facts being similar, so following the same reasoning, we remit the issue back to the Assessing Officer with direction to decide the issue as per fact and law after providing an opportunity of being heard to the assessee. 5. Revenue for the A.Y. 2007-08 and A.Y. 2008-09 in ITA Nos.647 648/PN/2013 regarding transfer pricing issue that the three external comparables chosen by the TPO viz. Rolta India Limited, KLG Systel Ltd. and Powersoft Global Solutions Ltd. should be retained for benchmarking the PLI of the assessee. The TPO rejected the external comparables mainly on following parameters: a. The assessee did not use data of the relevant finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns Limited from the set of independent comparables as the said company is having related party transactions of 30% of its Gross operating revenue for the impugned A.Y. 2008-09 as referred in pages 39 and 67 of the Paper Book filed by the assessee. At the time of furnishing the updated PLI the assessee inadvertently did not apply the said filter of RPT in the case of Caliber Point Business Solutions Ltd. and the said company was taken as comparable by the TPO. The said ground was not taken before the CIT Appeals due to inadvertence. However it is submitted that relevant facts are on record as evident from Para 7(6) page 4 of TPO`s order and in terms of TP regulations as well as OECD Guidelines such RPT cannot be considered as uncontrolled transaction and inclusion of comparable having RPT of more than 25% of gross revenue would be an error. In this regard, the assessee has submitted that he may be allowed to point out the error. In this regard, the assessee has placed reliance on the decision of Special Bench of Chandigarh Tribunal in the case of Quark Systems P. Ltd. Reported in 132 TTJ 1, wherein, the Tribunal held as under: Appeal (Tribunal) - Additional ground - Admissibility - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not involving profit element should not be construed as transaction, is taken to a logical conclusion, it would mean that all such dealing will cease to be transaction for the purpose of chapter X. Once these dealings are not considered as transaction , these will also cease to be international transactions, going out of the purview of section 92 itself. Such view point is contrary to the clear intention and the language of the relevant provision. A pure reimbursement of expenses by one AE to another AE is very much a transaction as per section 92F(v) And, consequently, is equally in international transaction as per section 92B requiring consideration as per section 9. The revenue could not demonstrate the fact that such reimbursement of expenses was without any mark-up. D is liable to be excluded from the final list of comparables as it involves related party transactions at a much higher level as against the filter adopted by the TPO himself, being companies with less than 25 per cent related party transactions . In the light of the facts and the decisions of the co ordinate benches cited before us we find that one of the comparables Caliber Point Business Solutions ha ..... 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