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2016 (7) TMI 1281 - ITAT BANGALORE

2016 (7) TMI 1281 - ITAT BANGALORE - TMI - Transfer pricing adjustment - working capital adjustment by TPO - Held that:- 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. [2016 (2) TMI 1050 - ITAT BANGALORE] wherein it was held that the TPO cannot re .....

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O. As regards the issue raised in the manufacturing segment for non-grant of working 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 r .....

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he 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 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 2 .....

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the corresponding lease expenditure from the operating cost. The TPO is also directed to confine the adjustment to the value of international transactions only. - I.T.(T.P) A. No.83/Bang/2015, I.T.(T.P) A. No.136/Bang/2015 - Dated:- 20-7-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri Nageshwar Rao, Advocate. For The Respondent : Shri P. Chandrashekar, CIT (D.R) ORDER Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed .....

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mounting to ₹ 44,06,38,914 Erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules and conducting a fresh economic analysis for the determination of the arm s length price in connection with the international transaction pertaining to provision of design engineering support services and international transaction pertaining to manufacturing segment of Appellant and in respect of royalty and service charges pai .....

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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 c .....

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rm s length price of the same as Nil; Ground No. 7- Incorrect computation of TP adjustment Erred in facts and in circumstances of the case, by reducing the amount of sales price received from the AE and not the operating revenues while computing transfer pricing adjustment; Ground No. 8- Proportionate TP adjustment Erred by making transfer pricing adjustment on the entire manufacturing segment of the Appellant rather than restricting the same to the value of international transactions pertaining .....

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tion criteria s), rejecting and modifying the filters adopted by the Appellant and therefore, inappropriately rejecting certain comparable companies and determining inappropriate companies as comparable to the Appellant; Ground No. 11 - Rejecting certain comparable companies Erred in law and in facts, by rejecting certain companies based on unreasonable comparability criteria; Ground No. 12 - Computation of operating margins Erred in wrongly computing the operating margins of the tested party an .....

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depreciation available for set off, without considering the brought forward losses and unabsorbed 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 per .....

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n 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 234D of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Income Tax Appellate Tribunal to .....

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horised Representative as well as learned Departmental Representative and considered the relevant material on record on admission of the additional ground raised by the assessee. As it is clear that the additional ground raised by the assessee is only in respect of inclusion of foreign exchange fluctuation in the operating margins of the assessee as well as comparable companies. We find that this issue is now settled by various decisions of this Tribunal that if any gain or loss due to the forei .....

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that the additional ground raised by the assessee is not in the form of fresh issue but it is part of the existing issue of the Transfer Pricing Adjustment and based on the principle of consistent treatment of operating margins of the tested party as well as comparables. Hence in the facts and circumstances of the case, we admit the additional ground raised by the assessee for adjudication. 4. As we have already discussed that if the gain/loss is arising due to foreign exchange fluctuation in re .....

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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 para .....

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02,751 Reimbursement of expenses 68,53,925 Pune Unit Sale of automobile components. 40,14,72,387 Purchase of capital goods. 3,36,11,978 Royalty and service charges paid 4,51,95,098 Interest paid on ECB Loan 1,56,43,807 Reimbursement of expenses paid 10,85,34,438 Purchase of samples 23,90,616 6. Ground No.1 is general in nature and does not require any specific adjudication. 7. The next grievance of the assessee (Ground No.2) is against the action of the TPO for not giving suitable adjustment on .....

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mandatory directions of the DRP. 9. On the other hand, the learned Departmental Representative has relied upon the order of the TPO/A.O. 10. Having considered the rival submissions and careful perusal of the record, we note that the DRP in para 3.16 directed the TPO to compute the working capital adjustment in respect of the comparables after giving the effect to the directions as under : 3.16 Objection 18 - Working Capital Adjustment. Having heard the objection, on perusal of the order of the T .....

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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 cap .....

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xpenditure 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 abno .....

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al Technologies Ltd (Seg.) 29.34 2 Akshay Software Technologies Ltd. 14.92 3 Ancent Software International Ltd. - 3.72 4 CG-VAK Software & Exports Ltd. (Seg.) 1.50 5 Goldstone Technologies Ltd. 14.56 6 Indium Software (India) Ltd. - 1.44 7 KLG Systel Ltd. (Seg.) 33.38 8 LGS Global Ltd. 23.88 9 Neilsoft Ltd. 9.62 10 Quintegra Solutions Ltd. 8.55 11 R S Software (India) Ltd. 13.76 12 SIP Technologies and Exports LTd. - 31.47 13 Softsol India Ltd. 16.89 14 Thinksoft Global Services Ltd. 19.20 1 .....

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ereby 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 Technologies Ltd. 18.75 3 e-Zest Solutions Ltd. 16.79 4 Infosys Ltd. 45.01 5 Kals Information Systems Ltd. 38.37 6 LGS Global Ltd. 11.95 7 Persistent Systems Ltd. 30.35 8 R S Softwre (India) Ltd. 10.29 9 Tata Elxsi Ltd. 21.88 10 Thinksoft Global Services Ltd. 17.05 Average PLI 23.71 Thus the TPO has computed the average PLI at 22. .....

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remanding 4 viz. Infosys Ltd., Tata Elxsi Ltd., KALS Information Systems Ltd. and Persistent Systems Ltd. from the set of comparables added by the TPO. Thus both the assessee as well as revenue have challenged the exclusion of the comparables by the DRP. 15. The revenue has raised the following grounds : 1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case. 2. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing .....

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effect to without reconsidering 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 .....

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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 adjustment while deciding the issue of TP Adjustment in manufacturing segment. 17. Ground Nos.5 & 6 are regarding considering the Arm s Length Price ( ALP ) of Royalty at Nil. There are two segments viz. manufacturing segment and design engineering support service segment reported by the .....

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further to show the profitability from the future revenue stream before fixing the royalty rate. The TPO has also observed that there is no proof that the group concerns or third party are also charged identical royalty and the assessee has also failed to show that it derived any economic benefit from the know-how received from the AE. Accordingly, the TPO proposed the adjustment of the entire amount of royalty and service charges of ₹ 4,51,95,098. As regards the manufacturing segment, th .....

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has filed an application for admitting the additional evidence supporting the claim of payment of royalty to AE. The assessee has filed the relevant details and description of the agreement under which the royalty has been paid to the AE. Thus the learned Authorised Representative has pleaded that the assessee was granted a license vide license agreement under which the royalty has been paid to the AE. Under the license agreement the technology was transferred to the assessee for carrying out it .....

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e 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 .....

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puted and further the assessee has failed to show that the assessee has derived some benefit from the transfer of technology for which the royalty to be paid to the AE. As far as the justification and deriving the benefit from transfer of technology is concerned this is beyond the scope of the process of determining the ALP by the TPO, therefore we do not agree with the view of the TPO that the assessee was required to establish the benefit derived from the technology transfer by the AE against .....

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y. The jurisdiction and power of the TPO is only to determine the ALP of the royalty in comparison to the comparable price. The TPO has not made any endeavour or took any step to examine the royalty payment by considering with comparable prices. We further note that for the Assessment Year 2012-13, the TPO vide its order dt.12.2.2016 has accepted the royalty and service charges at in para 6 as under : 6. Royalty & Service Charges Paid. The taxpayer had paid royalty amounting to ₹ 2,76, .....

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₹ 129,37,31,949 which is 2.14% on sales. In view of the above, no adverse inference is drawn in respect of the international transaction of royalty payment. 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 the TPO / TPO to re-examine the issue as per the provisions of transfer pricing and in the light of the evidence p .....

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se 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 instead of value of international transactions. 22. The learned D. R. has relied upon the orders of the authorit .....

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se expenditure from the operating cost. The TPO is also directed to confine the adjustment to the value of international transactions only. 24. The next grievance of the assessee in its appeal is regarding exclusion of 3 companies by the authorities below viz. (i) LGC Global Ltd. (ii) Akshay Software Technology Ltd. (iii) R S Software India Ltd. As it is apparent from the grounds raised by the assessee as well as revenue that they are not disputing the comparability of two companies viz. R S Sof .....

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is company has 90% of the revenue earned from Dubai office whereas the assessee has earned 100% revenue from India operations. The learned Authorised Representative has pointed out that this fact has been inappropriately interpreted by the TPO as the Annual Report of the company clearly stated that the company has its offices only in Mumbai and USA and no office at Dubai. He has referred the objections raised before the DRP at pages 156 & 157 of the paper book and submitted that the assessee .....

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thorised 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 .....

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mpanies including R S Software India Ltd. and LGS Global Ltd., which the assessee also sought inclusion and we have restored the same to the list of comparables. The dispute of comparability in the appeal of the revenue is regarding remaining four companies excluded by the DRP viz. Infosys Ltd., KALS Information Ltd., Persistent Systems Ltd. and Tata Elxsi Ltd which we will deal one by one as under : (i) Infosys Ltd. 30.1 The learned Departmental Representative has submitted that the DRP has rej .....

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ces India Pvt. Ltd. Vs. DCIT 57 SOT 339 and submitted that the economies of scales are not available in case of the services providing sector as there is no fixed cost impact on the price. He has further contended that the revenue from the product sale is only less than 5% which is insignificant and further the R & D expenditure is only 2.1% of the sale. Therefore more than 95% of the revenue is from the service segment of this company. 30.2 On the other hand, the learned Authorised Represen .....

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e has relied upon the decision of this Tribunal in assessee's own case for the Assessment Year 2008-09. 30.3 We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is earning its revenue from the on site services provided to the off shore clients. Further this company 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 Tribun .....

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perty 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 .....

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Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company h .....

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le of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dissimilar and different fr .....

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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 .....

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n which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the cases of Triology E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 and 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 have held that this company was developing software products and was .....

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s year i.e. Assessment Year 2008-09 as per decisions of the co-ordinate benches (cited supra) also this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly. We further note that the co-ordinate bench of this Tribunal in the case of Ikanos Communication India Pvt. Ltd. (IT(TP)A No.548/Bang/2015) for the Assessment Year 2 .....

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ices, which is functionally different and further the segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report of the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the information, the TPO included this company i.e. Persistent Systems L .....

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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 .....

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, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 32.4 We have heard the rival submissions and carefully considered the material on recor .....

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formation a company cannot be taken into account for comparability analysis. We hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. Accordingly, we do not find any error or illegality in the directions of the DRP for exclusion of this company. (iv) Tata Elxsi Ltd. 33.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this com .....

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o 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 consid .....

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