TMI Blog2016 (7) TMI 1281X X X X Extracts X X X X X X X X Extracts X X X X ..... orking capital adjustment abnormal expenditure and non-allowance of capacity utilisation, we find that it is the first year of the assessee’s manufacturing activity then the issue of capacity utilisation adjustment is required to be examined by considering the level of capacity utilisation of the assessee as well as the comparable. Accordingly, we set aside this matter of TP Adjustment in manufacturing segment to the record of the TPO to consider the adjustment on account of capacity under-utilisation as well as excluding the abnormal expenditure. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue afresh. Comparability selection - Held that:- As assessee is into international transactions in software development services the companies functionally dissimilar with that of assessee need to deleted from final list of comparability. Considering the Arm’s Length Price (‘ALP’) of Royalty at Nil - Held that:- As the assessee has produced the relevant evidence including the license agreement under which the Royalty has been paid to AE therefore, in the facts and circumstances of the case, we set aside this issue to the record of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2- Non grant of working capital adjustment The learned TPO and the learned AO have erred in facts and in law, by not making suitable adjustments to account for differences in the working capital employed by the comparable companies despite the mandatory directions given by Honourable DRP to allow the same and thus erred in violating provisions of section 144C of the Act. Ground No. 3- Abnormal expenditure considered as operating in nature Erred, in law and in facts, by considering certain abnormal expenditure as part of operating costs for computation of margins of the Appellant; Ground No. 4- Non-allowance of capacity utilisation adjustment Erred in facts and in law, by not allowing an adjustment to account for differences in the capacity utilized by the Appellant in view of its initial year of the manufacturing operations and the capacity utilized by the comparable companies; Ground No. 5- Arm s length price of royalty and service charges considered as NIL. Erred, in law and in facts of the case, by considering the ALP of the royalty and service charges as NIL; Ground No. 6- Double disallowance of royalty and service charges On a witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d depreciation of earlier years; C . Other grounds of appeal Ground No. 15 Transfer pricing adjustment without giving benefit of +/- 5 per cent as available under proviso to section 92C(2) of the Act. Erred in computing the arm s length price of the international transactions, without taking into account the benefit of +/- 5 per cent variation from the mean where it is within the range, which is permitted and opted for by the Appellant under the provisions of section 92C(2) of the Act; The Appellant prays that, while computing adjustment/relief, benefit of +/-5% should be provided as per section 92C(2) of the Act. Ground No. 16- Non consideration of multiple year data available at the time of preparing Transfer pricing study Erred in not allowing use of multiple year data for determining the arm s length price for international transactions pertaining to manufacturing segment and the design engineering support services, available at the time of preparing the transfer pricing study. Ground No. 17 - Penalty proceedings Erred in initiating penalty proceeding under section 271(1)(c) of the Act and levying interest under sections 234A, 234B and 234 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, we direct the A.O./TPO to compute the operating margins of the assessee as well as comparable companies by including the gain/loss if any due to foreign exchange fluctuation in respect of the sale proceeds. 5. The assessee was incorporated as a subsidiary of R V Meritor Le Australia Pte Ltd. The assessee is engaged in providing design service relating to Light Vehicle System. During the year under consideration the assessee also commenced the activity of manufacturing from its new unit located in Pune. The Bangalore unit is involved in providing design engineering support service to its Associated Enterprise ( AE ). The Bangalore unit is a contract engineering support service provider. The assessee has reported its financial results as well as international transactions for the year under consideration which are reproduced by the TPO in paras 2.1 and 2.2 as under : Financial Results for the F.Y. 2009-10 Description Manufacturing (Rs.) Design Engineering Support Services (Rs.) Operating Revenues 44,61,73,339 14,97,96,555 Operating Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Having heard the objection, on perusal of the order of the TPO, we do not find any abnormality in the Working Capital Adjustment allowed by the TPO. However, we are of the view that the working capital adjustment needs to be computed in respect of comparables retained without putting any restrictions. Accordingly, the TPO is directed to compute mean of working capital adjustment in respect of comparables retained, after giving effect to the directions contained in this order. Since the TPO has not complied with the directions given by the DRP therefore, we set aside this issue to the record of the TPO/A.O. for giving the proper working capital adjustment without any restriction as held by the co-ordinate bench of this Tribunal in the case of Citrix R D India Pvt. Ltd. in IT(TP)A No.1289/Bang/2014 wherein it was held that the TPO cannot restrict the working capital adjustment artificially from the actual computation. 11. Ground No.3 is regarding abnormal expenditure considered as operating in nature. 12. Ground No.4 is non-allowance of capacity utilisation adjustment. 13. The assessee has bench marked its international transactions in manufacturing segment by co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 SIP Technologies and Exports LTd. - 31.47 13 Softsol India Ltd. 16.89 14 Thinksoft Global Services Ltd. 19.20 15 TVS Infotech Ltd. - 9.48 Arithmetic Mean 9.30 The TPO rejected 11 companies selected by the assessee and accepted 4 which are given at S.Nos.1, 8, 11 14 of the above list. The assessee requested for inclusion of more comparable companies from the list as proposed by the assessee. The TPO accepted two more companies as requested by the assessee and accordingly the TPO included 6 companies from the list of the assessee. The TPO then added 4 more companies into the set of comparables and thereby considering the 10 comparable companies for determining the ALP as under : Sl.No. Name of the Company Margin % 1 Acropetal Technologies Ltd. (Seg.) 22.27 2 Evoke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the original TP order, which actually amounts to setting aside of the draft order, which is beyond the mandate given to DRP vide provisions by Section 144C(8). 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 5. The appellant craves leave to add, alter, amend and I or delete any of the grounds mentioned above. Thus it is clear that the assessee as well as revenue are seeking inclusion of R S Software India Ltd. and M/s. LGS Global Limited. The only effective issue raised by the assessee is regarding the rejection of certain companies selected by the assessee and wrong computation of operating margin of the assessee as well as working capital adjustment. At the time of hearing, the learned Authorised Representative has submitted that the assessee does not press Ground No.13 and the same may be dismissed as not pressed. Accordingly, the Ground No.13, regarding risk adjustment is dismissed being not pressed. 16. As regards the working capital adjustment, we have already directed the TPO/A.O to grant the suitable adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the assessee was granted license as per the terms of the license agreement. The learned Authorised Representative has further submitted that for the Assessment Year 2012-13, the TPO has accepted the royalty payment of ₹ 2,76,87,745 to AE as it was bench marked under external CUP method. He has also relied upon various decisions of this Tribunal wherein it has been held that the TPO has no power to outrightly reject the claim of royalty payment but he can determine the ALP by deciding the transaction with comparable price. Accordingly, the learned Authorised Representative has submitted that the order of the authorities below in determining the ALP at Nil be set aside. 19. On the other hand, the learned Departmental Representative has objected to the additional evidence sought to be filed by the assessee at this stage and submitted that the assessee failed to produce the supporting evidence before the TPO as well as DRP then without assigning satisfactory reason for not producing such an evidence before the authorities below, the assessee cannot be allowed to produce the evidence. 20. We have considered the rival submissions as well as the relevant material on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced the relevant evidence including the license agreement under which the Royalty has been paid to AE therefore, in the facts and circumstances of the case, we set aside this issue to the record of the TPO / TPO to re-examine the issue as per the provisions of transfer pricing and in the light of the evidence produced by the assessee as well as the T.P. order passed under Section 92CA for the Assessment Year 2012-13. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue. 21. Ground Nos.7 8 are regarding incorrect computation of operating margin of the assessee and proportionate T.P. Adjustment. The learned Authorised Representative has submitted that the TPO has excluded sub lease income from the operating margins however the corresponding lease expenses has not been excluded from the operating cost. Thus the learned Authorised Representative has contended that if the sub-lease income is excluded from the operating margin then the corresponding expenditure shall also be excluded from the operating cost for the purpose of computing the operating margin. Further the TPO has made adjustment on the entire manufacturing segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned that the export income from Dubai accounted for 90% of total income. The learned Authorised Representative has submitted that the export income from Dubai is stated as income from operations of Dubai office. Thus the learned Authorised Representative has submitted that this company is functionally comparable with the assessee and shall be included in the set of comparables. 27. On the other hand, the learned Departmental Representative has submitted that these facts were not specifically pointed out before the DRP and therefore the DRP has not given finding on these facts. 28. Having considered the rival submissions and careful perusal of the record, we note that the TPO has rejected this company on the ground that it has 90% of its income from Dubai operations in comparison to the assessee's 100% income from the Indian operations. It appears that the TPO has considered the export income from Dubai clients of the company as income from Dubai operations. Accordingly, we set aside the issue of comparability of this company to the record of the A.O./TPO for readjudication of the same after considering the correct and proper facts and details of the company. 29. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is a leader in the industry and enjoyed a huge brand value and owns intellectual property. By considering all these facts, the co-ordinate bench of this Tribunal in assessee's own case (IT(TP)A No.1534/Bang/2012 vide order Dt.11.04.2014 for the Assessment Year 2008-09 has held in paras 11.2 to 11.4 as under : 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. Accordingly, when no substantial difference in the business activity of the company for the year under consideration we do not find any error or illegality in the directions of the DRP for exclusion of this company. (ii) KALS Information Systems Ltd. 31.1 We have heard the learned D.R. as well as Authorised Representative and considered the relevant material on record. At the outset, we note that the comparability of this company has been considered and decided by this Tribunal in assessee's own case for the Assessment Year 2008-09 in para 12.4 as under : 12.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation, the TPO included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 32.2 Before us, the learned Departmental Representative has submitted that the TPO has examined the relevant facts and information obtained under Section 133(6) of the Act and found that this company is functionally comparable with the assessee. He has relied upon the order of TPO. 32.3 On the other hand, the learned Authorised Representative of the assessee has objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in Outsourced Software Product Development Services for independent software vendor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and (c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 33.4 We have heard both parties and carefully considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. The Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of that order is extracted and reproduced below ..... X X X X Extracts X X X X X X X X Extracts X X X X
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