TMI Blog2017 (3) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange gain/loss as non-operating in nature by relying upon Notification of CBDT issued on 18.09.2013, which is a notification on ‘Safe Harbour Rules’. As it is apparent from the date of Notification of the Rule relied upon by the ld. DRP dated 18.09.2013, the same is not applicable to the case of the assessee which is qua Assessment Year 2009-10. So, in view of the matter, order passed by TPO/DRP in not considering the foreign exchange gain / loss as operating in nature is not tenable in the eyes of law, hence hereby set aside. Ld. TPO is directed to treat the foreign exchange gain / loss as operating in nature in calculating the operating margin of the assessee as well as final comparable companies Selection of comparable - Held that:- The assessee being a hardware designer, a captive service provider involved at the design and development stage only with a limited scope of work and is not involved in the process of conceptualization of any products or works and works only on the specification provided by the STE Group for the implementation of IC design, its maintenance, verification and software development. So, the role of STE is that of a contract captive design centre an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer Pricing-II (2},New Delhi ( the TPO ), draft and final assessment order passed by Additional Commissioner of Income Tax, Range - 9, New Delhi ( the AO ) pursuant to the directions of the Hon'ble Dispute Resolution Panel - III ( the DRP ), are in bad in law and void ad-initio. 2. The AO following the order of the TPO and DRP has erred in law and on the facts of the case in determining the total income of the Appellant at ₹ 213,195,622/- as against returned income of ₹ 122,498,921/- and thereby made an upward adjustment of INR 90,696,701/-. Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRP/ TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the international transaction pertaining to IC design and software development services ( impugned transaction ). 4. That on facts of the case and in law, the DRP erred and vitiated the principle of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies which are earning super normal profits as comparable to the Appellant. 11. That on facts and in law, the DRP and TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-a-vis the alleged comparables and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence. 12. That on facts and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 13. That on facts of the case and in law, the DRP/TPO/AO have erred in using single year data for financial year ( FY ) 2008-09 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 14. That on facts and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.No. Type of international transaction Method selected Total value of transaction (Rs.) MAM PLI 1. Provision of IC design and Software Development TNMM OP/OC 625,272,668 4. Assessee by adopting Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit / Operating Cost (OP/OC) as PLI benchmarked its international transaction relating to software development services by selecting 20 comparables with the average working capital adjusted PLI of 3.11% and risk adjusted margin of (-) 9.06% as against the operating profit margin of the assessee company of 11.17% and held its transaction at arms length. 5. TPO, on the basis of TP study put forth by the assessee and after applying filters, finally selected 17 comparables having the average OP/TC of 25.40%, out of which 10 comparables were out of assessee s 20 comparables and 7 were identified by the TPO himself. On the basis of 17 comparables identified by the ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% as under:- Particulars Amount in INR Operating Cot 579,337,908 Arm s length OP/TC margin (%) 22.90% Arm s length margin (Rs.) 132,668,381 Arm s length price 712,006,289 Price charged by the assessee 625,272,668 105% of Price charged in international transaction 656,536,301 Adjustment to be made 86,733,621 7. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 2 9. Grounds No.1 2 are general and academic in nature, hence need no specific adjudication. Ground No.7 is not pressed. GROUND NO.5 10. Ld. AR for the assessee contended that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back to its suppliers, which reduces the interest cost and increases profits. In order to neutralize differences on account of inventory, trade payables and trade receivables, it becomes essential to allow working capital adjustment for bringing the case of the assessee at par with other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment. 14. Keeping in view the facts and circumstances of the case and the fact that the identical issue has already been dealt with by the coordinate Bench, we are of the considered view that the working capital adjustment is required to be provided for bringing the comparables and the assessee at par for benchmarking the international transactions otherwise rationale behind the comparability for the purpose of benchmarking would get frustrated. However, in order to provide the working capital adjustment to the assessee vis- -vis comparables, assessee shall provide the complete audit pertaining to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law, hence hereby set aside. Ld. TPO is directed to treat the foreign exchange gain / loss as operating in nature in calculating the operating margin of the assessee as well as final comparable companies. So, ground no.6 is determined in favour of the assessee. GROUNDS NO.3, 4, 8, 9, 10, 11, 12, 13 14 18. First of all, assessee challenged the filters applied by TPO/DRP in choosing the comparable companies inter alia that :- (i) Turnover filter of ₹ 5 crores (ii) RPT filter of 25% of sales (iii) Employees cost 25% of total cost 19. We would like to discuss the objections raised by assessee for applying the aforesaid filters by the TPO/DRP specifically while discussing the inclusion and exclusion of the comparables from the final list of comparable adopted by the TPO for benchmarking the international transactions. 20. The ld. DR for the Revenue, at the very outset, contended that before going into the selection or rejection of the comparables for benchmarking the international transaction by TPO, first of all the issue that since the TPO has not benchmarked the international transaction with proper FAR analysis, the matter is required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Toyo Engineering India Limited (supra), the Hon ble Apex Court has held that in case, plea is not raised before adjudicating authority and the first appellate authority, such new plea cannot be taken before the Appellate Tribunal. So, when undisputedly this plea has not been taken by the Revenue before the First Appellate Authority, the same cannot be allowed to raise before the Tribunal. 27. Furthermore, coordinate Bench of the Tribunal in Case of ACIT vs. Techbooks Electronics Pvt. Ltd. - (2016) 65 TAXMAN 241 (Del) also examined the identical issue and arrived at the conclusion that even Rule 27 of ITAT Rules does not come to the rescue of the ld. DR for challenging the correctness of the order of AO/TPO in appeal before the Tribunal because, in such case, when Revenue is otherwise debarred from filing cross appeal or cross objection on a particular point and in case, no right to file appeal or cross objection is available to the Respondent on a particular point then the Revenue cannot be allowed to take shelter under Rule 27 indirectly. 28. Identical issue has also been dealt with by the Hon ble Delhi High Court in case of CIT, Central II vs. Divine Infracon Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsultancy Services Limited, Tata Elexi Limited and Thirdware Solutions and sought their exclusion from the final list of comparables. COMPARABLES SOUGHT TO BE EXCLUDED : CAT TECHNOLOGIES 33. Assessee sought the exclusion of this company for want of functionally comparability, it being engaged in providing integrating solution in the domain area of HR BPO. Assessee also challenged its exclusion as comparable on the ground that the company admits 1 transaction with 5 of its subsidiaries/associates but does not quantify it and in the absence of quantitative details, it cannot be said that it passes the RPT filter. 34. TPO, however, retained this company as comparable on the ground that substantive income is from the software development and consulting and income from training and medical transcription (BPO) is minimal, which fact is quite apparent from Schedule IX forming part of the profit loss account, available at page 770 of the Paper Book Vol.-II. However, TPO has computed at entity level. 35. However, during the course of argument, the ld. AR for the assessee stated that this company may be retained as a comparable after disposing of the objection as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Infrastructure Services, Business Process Outsourcing, IT enables services, engineering and industrial services (Pg 22 / AR) Contract based Software Development Services to AEs. 7. Ownership of branded/proprietary products Developes / own proprietary products Finacle , Infosys Active Desk , Infosys I Prow e, Infosys mConnect Owns Contract rights, IPR, Distribution rights The Company does not won any branded / proprietary products. 8. Onsite Services Typically, onsite services command higher billable rates and consequently it would not be appropriate to compare the appellant which earns its entire income from offshore services with Infosys which earns more than half of its service, income from onsite services . (Pg 47 of AR) Onsite Revenue 51 percent (Pg 76 / AR) The company provides only offshore services (i.e. remotely from India) 9. Expenditure on Research Development Rs.267 crores (Pg 20 of AR) 42.31 crores (Pg 139 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing observations :- 3. Before the TPO, the respondent-assessee was asked to re-work the list of comparables and the same was reduced to 20. TPO also directed inclusion of Infosys Technologies Ltd. in the said list. The TPO in the final analysis has taken the comparables as under:- S.No. Name OP/TC(%) 1. Satyam Computer Service Ltd. 30.07 2. L T Infotech Ltd.. 11.11 3. Infosys Technologies Ltd. 40.08 4. Arithmetic mean 27.08 4. One of the companies which was included by the TPO was Satyam Computer Services Ltd. Dispute Resolution Panel excluded the said company from the comparables for obvious reasons. 5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent - assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted. 40. So following the decision rendered by Hon ble jurisdictional High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra) wherein on the basis of high risk profile, nature of services, number of employees, ownership of branded products and giant status of the company, Infosys Technologies Ltd. was excluded from the list of comparables and as such, in the instant case, this is not a valid comparable. 41. Moreover, ld. DRP-II, Delhi for AY 2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r benchmarking the international transaction. So, we order to exclude this company as a comparable. TATA ELXSI LIMITED 45. Assessee raised objection before the TPO/DRP that this company is not a valid comparable as this is an IT enabled and software product company. TPO/DRP overruled this objection by observing that it can easily be included in the list of comparable as it is providing software services and only verticals are different. 46. From the annual report of this company, available at page 1465 to 1540 of the Paper Book, we can easily make out that this company is into software development services, product design services, innovation design engineering services, system integration and support services. But the TPO has taken software development services only for the purpose of comparability with the assessee. However, perusal of the detail segment goes to prove that design and development of hardware is also included in the software services. In other words, Tata Elexi Ltd. is into software produce as is evident from the annual report and as such, cannot be taken as a valid comparable. So, we order to exclude this company from the final list of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under :- Particulars Amount (pg. 1456 / Vol.III) Sales 1,24,87,209 Forex Gain 5,59,446 Operating Revenue 1,30,46,655 Salaries Allowances 63,00,740 Administrative Other expenses 1,21,18,448 Loss in value of investments written off 1,10,74,943 Depreciation 20,25,692 Total Cost 3,15,19,823 Less : Loss in value of investments written off 1,10,74,943 Donation 6,000 Loss on sale of fixed assets 1,49,097 Loss on sale of current investments 38,16,711 Operating Cost 1,64,73,072 Operating Profit -34,26,417 OP / OC -20.80% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrasoft Ltd. (2013) 39 taxmann.com 88 (Delhi) . However, on the other hand, ld. DR for the revenue by relying upon the order passed by AO/DRP contended that since 60% depreciation has already been given to the assessee, the contention of the assessee is not sustainable. 57. Assessee has brought on record that assessee has incurred an amount of ₹ 3,84,651/- for running the licence only and annual maintenance charges for operating, trouble shooting of the software and not for purchase/acquisition of the software and the period for running of these licences / AMC was mostly one year or less than one year. 58. In the given circumstances, when the aforesaid fixed licences were rented for a limited period only which is less than one year, no enduring benefit accrues to the assessee nor any ownership right vests in the assessee. Issue in controversy has already been dealt with by the Hon ble jurisdictional High Court in Director of Income-tax vs. Infrasoft Ltd. (supra), the ratio of which is that :- what is transferred is neither the copyright in the software nor the use of the copyright in software, but what is transferred is the right to use the copyrighted m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions rendered by Hon ble Supreme Court in Goetze (India) Ltd. (2006) 284 ITR 323 (SC) rejected the claim of the assessee on the ground that assessee did not claim such depreciation on goodwill in its return of income. However, it has not been disputed by both the ld. Representatives of the parties that the judgment cited as Goetze (India) Ltd. as relied upon by DRP is not applicable to the facts and circumstances of the case and when the issue has been raised during assessment proceedings, though no depreciation was claimed in the return of income, AO was duty bound to decide this issue. So, we hereby restore this ground to the AO to decide afresh after providing an opportunity of being heard to the assessee. Accordingly, this ground is determined in favour of the assessee. GROUND NO.17 66. Ground no.17 needs no adjudication as the same is consequential in nature. GROUND NO.18 67. Ground No.18 is premature, hence needs no adjudication. 68. In view of what has been discussed above, the present appeal filed by the assessee is allowed for statistical purposes. Order pronounced in open court on this 22nd day of February, 2017. - - TaxTMI - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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