TMI Blog2016 (3) TMI 1201X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Act. Where the section itself provides that no deduction under section 10A of the Act is to be allowed on any transfer pricing adjustment, then corollary to the same is that transfer pricing adjustment can be made in the case of concerns which are claiming deduction under sections 10A and 10B of the Act - ITA No.1425/PN/2010 - - - Dated:- 16-3-2016 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For The Appellant : Shri Farooq V. Irani For The Respondent : Shri A.K. Modi, CIT ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of DCIT, Circle 1(1), Pune dated 27.09.2010 relating to assessment year 2006-07 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short the Act ). 2. The assessee has raised the following grounds of appeal:- On the facts and in the circumstances of the case and in law, the Hon ble DRP and consequently the learned AO have: 1. General ground challenging the transfer pricing adjustment of ₹ 123,984,018 consequential to non consideration/acceptance of comparability analysis as documented in the transfer pricing study report Erred in making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment services and provision of sales support services. 8. Rejection of Goldstone Technologies Limited (hereinafter referred to as 'GTL') on the ground that it does not have significant foreign exchange earnings Erred in rejecting GTL as comparable to BMC India's international transaction pertaining to provision of software development services, on the basis that the foreign exchange earnings of GTL is insufficient (ie less than 25 per cent of total earnings), without appreciating the fact that the entire earnings of GTL is from exports and hence, the foreign exchange earnings of GTL exceeds 25 per cent of its total earnings. 9. Accepting certain companies as comparable for FY 2005-06 in relation to provision of software development services Erred in considering ICSA (India) Ltd, Aztecsoft Ltd and Helios and Matheson Information technology Ltd as companies comparable to the Appellant's activity pertaining to provision of software development services. 10. Rejection of 3 years weighted average margin approach used for computation of operating margin of the Appellant for provision of software development services Erred in rejecting 3 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent that the addition is computed based on the updated financial data for the comparable companies. 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 decide this appeal according to law. 3. The issue raised in the present appeal is with regard to various aspects of transfer pricing adjustment made in the hands of assessee. 4. The learned Authorized Representative for the assessee pointed out that though various issues have been raised in relation to transfer pricing adjustment to be made on account of international transactions conducted by the assessee. However, the results shown by the assessee would be within + / - 5% range of arithmetic mean of the margins of comparables, in case, some of the concerns are included and some of the concerns picked up by the Transfer Pricing Officer (TPO) / Assessing Officer are excluded. Further, the assessee stressed that adjustment had to be made on account of accelerated depreciation and risks. 5. Both the Authorized Representatives made the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresent analysis following TNMM method, therefore, fresh search was carried out by the TPO and thereafter, three more concerns were selected whose average margin was worked out to 24.97% and the assessee was asked as to why the aforesaid set of comparables should not be taken for the purpose of benchmarking international transactions pertaining to provision of software development services. Similar exercise of selection of concerns was also carried out by the TPO in respect of international transactions of sales support services provided by the assessee to its associate enterprises. The objections of the assessee with regard to concerns picked up by the TPO and those rejected by the TPO are reproduced in the order of TPO under para 7.1. In the final analysis, the TPO rejecting the explanation of assessee, worked out arithmetic mean of final set of four comparables, which works out to 24.68%, whereas the operating profit / total cost of the assessee company was at 5.89%, hence, an adjustment of ₹ 12,31,04,464/- was proposed by the TPO in respect of international transactions of providing software development services by the assessee to its associate enterprises. In respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% NA 0.15% 8 Orient Information Technologies Limited 14.52% 14.90% NA 14.76% 9 Quintegra Solution Limited NA 6.93% 10.73% 8.59% 10 R S Software (India) Limited -2.69% 7.92% 15.34% 7.65% 11 Sonata Software Limited (Consolidated - Segmental) 15.31% NC NC 15.31% 12 Subex Systems Limited (Consolidated - Segmental) 6.39% NC 6.39% Arithmetic mean 5.40% 9. The TPO rejecting the aforesaid companies and only accepting R S Software (India) Limited i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id company should be excluded. 12. The learned Authorized Representative for the assessee pointed out that the issue raised by the learned Departmental Representative for the Revenue was not raised by the TPO and hence, merits not to be applied. He further pointed out that the assessee ruled out the cost plus entity and hence, the chances of losses were Nil, but merely because the company was not doing well, could not be the basis for rejection of the said concern as comparable. Since the TPO period and again allows the adjustment for risk management. Similarly, adjustment for depreciation should be allowed. 13. The learned Departmental Representative for the Revenue in reply, strongly opposed the proposition raised by the learned Authorized Representative for the assessee and pointed out that where he was supporting the case of Revenue on the basis of material supplied by the assessee and where no fresh ground of appeal was raised by him and eventually, there is no enhancement in the hands of assessee, where the Assessing Officer has missed something, then the duty of the Tribunal as assisted by learned Departmental Representative for the Revenue and the learned Authorized R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer / TPO in rejecting the said concern i.e. Goldstone Technologies Limited . Accordingly, we direct the Assessing Officer / TPO to include Goldstone Technologies Limited in the final set of comparables to work out the arithmetic mean of comparables selected for benchmarking the international transactions of the assessee. 19. The next concern which was selected by the assessee and rejected by the TPO was Quintegra Solution Limited. The TPO after taking note of the Annual Report of the said company, wherein it was reported that it was delivering integrated set of IT services in industries like financial services, manufacturing, education, healthcare and high technology and it was also reported by the Director that the said concern was delivering full range of service offerings covering the software services, spectrum of application development and maintenance, product services, testing and professional services, held it to dissimilar. The TPO held that the said company was undertaking significantly different functions compared to the assessee. Further, the concern had prepared its accounts for a period of 15 months ending on 30th September, 2005 as against the financial yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Pvt. Ltd. Vs. DDIT (supra), wherein, similar proposition was laid down. Merely because DRP has accepted this concern as comparable in assessment year 2008-09 cannot be basis for its selection in this year because of different accounting period. 23. Another issue raised by the assessee was with regard to exclusion of Maars Software International Limited. The TPO held the said company not to be functionally similar as in the Directors Report, the company was stated to be software product company and not engaged in software development services. The explanation of the assessee in this regard was that it was engaged in both the areas i.e. product and services, which has been mentioned in the Directors Report. The company as per the assessee was engaged in the business of software development. 24. The learned Departmental Representative for the Revenue pointed out that the said concern was engaged in on-site development. The said concern was on-site developer, which is different from off-site developer. Our attention was drawn to the financials of the said concern especially at pages 61.27 and 61.28, wherein both the foreign exchange earnings and expenditure in foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch enquiry to be completed. The relevant observations of the Hon ble Delhi High Court are as under:- 35. Assessment proceedings under the Income Tax Act are not a game of hide and seek. The inquiry in the sake of a notice under Section 148 is not an empty formality. It must be effective and with a sense of purpose. There is an elaborate procedure set out which requires scrupulous adherence and followed up on. In the hierarchy of the authorities, the AO is placed at the bottom rung. The two layers of appeals, before the matter engages the appellate jurisdiction of this court, are authorities vested with the jurisdiction, power and obligation to reach appropriate findings on facts. Noticeably, it is only the appeal to the High Court, under Section 260-A, which is restricted to consideration of substantial question of law , if any arising. As would be seen from the discussion that follows, the obligation to make proper inquiry and reach finding on facts does not end with the AO. This obligation moves upwards to CIT(Appeals), and also ITAT, should it come to their notice that there has been default in such respect on the part of the AO. In such event, it is they who are duty bou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises and is off-site developer, which admittedly, is different from on-site developer. On the other hand, the concern Maars Software International Limited has total receipts from on-site overseas development i.e. on account of training and products and hence, the said concern is not functionally comparable to the assessee. We find similar issue of exclusion of Maars Software International Limited from the final set of comparables arose before the Tribunal in TIBCO Software India Pvt. Ltd. Vs. DCIT (supra), wherein the Tribunal considered the segmental reporting of the said concern in assessment year 2008-09 and noted that there was no segmental details relating to software development services though the nomenclature stated in Profit Loss Account was software development, training and product. After considering the financials of the said concern, the Tribunal held that the said concern was not functionally similar to a concern which was engaged in providing software development services to its associate enterprises. The relevant finding of the Tribunal in paras 34 to 36, which read as under:- 34. The next plea of the assessee was that the lower authorities have unjustly exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Profit Loss Account i.e. software development, training and product and product, and infer that the concern is in the software development also, yet there is no segmental detail relating to software development services, leave alone the details showing the actual activities of software development. Therefore, in our view, the TPO justifiably excluded the said concern because it is only the information available in public domain, which can be the basis to effectuate comparable analysis. The assertions in the Directors report, which do not find any contradiction in the other financial statements accompanying such Directors report, have to be relied upon. Thus, on this point itself, we find no merit in the plea of the assessee for including the said concern in the final set of comparables. Without going into the other grounds taken by the TPO to reject the said concern, on the aforesaid aspect itself, we affirm the stand of the TPO to exclude M/s. Maars Software International Limited from the final set of comparables. Thus, on this aspect, assessee has to fail. 28. Similarly, M/s. Akshay Software Technologies Limited was providing onsite services and were held to be not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern and hence not comparable to the functions of assessee before us. Another objection of the learned Authorized Representative for the assessee was that it was an exceptional year, considering its growth i.e. the rate of growth in respect of PBT was 302.70% for the year. The TPO however, noted that the said concern was in the business of software and embedded system development activity in the power and power related sectors. Since the embedded solution consisted of combination of hardware and software solutions, thus, the type of services were similar to what was provided by the assessee company and hence, the said company was comparable to the assessee company. 31. The learned Authorized Representative for the assessee pointed out that the TPO had failed to consider the nature of operations and the objections raised by the assessee in this regard. With regard to the Directors Report, it was pointed out that it only talks of increase in turnover. The learned Authorize d Representative for the assessee stressed that because of exceptional growth of said concern during the year, the same was not comparable. Another issue raised by the learned Authorized Representative for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al set of comparables on the said basis of R D expenditure being more than 3% of revenue. However, we find that the Tribunal in Bindview India Pvt. Ltd. Vs. DCIT (supra) and thereafter, in PTC Software (India) Pvt. Ltd Vs. ACIT (supra), have laid down the proposition that where the R D filter is more than 3% as against the assessee who has not incurred any R D expenditure, then the said concern is not to be taken in the final list of comparables. The relevant finding of the Tribunal in PTC Software (India) Pvt. Ltd Vs. ACIT (supra) relating to assessment year 2007-08, wherein the information of assessment year 2006-07 was also considered is as under:- 21. The assessee has assailed the inclusion of ICSA India Ltd., appearing at item (2) in the Tabulation in para 10 as a comparable by the TPO. In this context, the relevant discussion by the TPO is contained in para 6.3.23 of the order and the Annual Financial Statements of the said concern have also been placed in the Paper Book at pages 246 to 327 of the Paper book. The TPO noticed that in the transfer pricing study undertaken by the assessee the said concern was excluded/rejected by applying the quantitative filter of Research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded services segment, and secondly, it is wrongly compared with total turnover which included the turnover of products and projects related to power sector segment whereas the TPO has only adopted the software services/embedded services segment for the purposes of comparability analysis. Factually speaking, we find no reasons to disagree with the plea set up by the assessee. Evidently, the TPO has not disputed the adoption of quantitative filter of 3% of R D expenses. However, the TPO computed the R D expenditure at 2.02% of the total sales which is ostensibly incorrect in as much as the expenditure in question has been incurred only for the software services/embedded services segment (which has been adopted as comparable segment) and it cannot be compared vis- -vis the total turnover which includes the products and projects related to power sector segment, when factually no R D expenses have been incurred for the latter segment. Therefore, without going into the merits of the assessee s other plea that the said concern is functionally dissimilar, we do not find any justification for inclusion of the said concern considering that R D expenses are above the filter of 3% adopted for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars Software International Limited. 38. The learned Departmental Representative for the Revenue pointed out that the said concern was engaged in on-site development. 39. We have already considered the issues in the paras hereinabove while directing the TPO to exclude Maars Software International Limited. Since the concern Helios and Matheson Information Technology Ltd. was also engaged in on-site development and its foreign exchange earnings were to the extent of ₹ 101.64 crores as against its foreign outgo of about ₹ 75 crores, the said concern is on-site developer, which is reported by the said concern in its audit report, wherein it is stated that it has strong US presence. Applying the said rationale as while excluding Maars Software International Limited from the final list of companies, we hold that even Helios and Matheson Information technology Ltd. is to be excluded while benchmarking the international transactions of the assessee. We are not excluding the said concern for its turnover but since it is functionally dissimilar. 40. Another set of arguments raised by the assessee were with regard to turnover filter to be applied. As per the assessee, in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded as comparable and in case Aztecsoft Ltd. is so included, then the concern picked up by the assessee in its TP study report i.e. Orient Information Technologies Ltd. is also to be included in the final set of comparables. In view thereof, applying the said turnover filter range of ₹ 25 crores to ₹ 150 crores, we direct the Assessing Officer / TPO to include both the concerns i.e. Aztecsoft Ltd. and Orient Information Technologies Ltd. in the final set of comparables. It may be pointed out that the concern Helios and Matheson Information Technology Ltd ., which was included by the TPO is being excluded being functionally dissimilar and is not being excluded on the basis of turnover. The Assessing Officer / TPO is thus, directed to benchmark international transaction by using the margins of following concerns:- i) R S Software (India) Limited ii) Goldstone Technologies Ltd. iii) Aztecsoft Ltd. iv) Orient Information Technologies Limited 42. Now, coming to the plea of assessee of allowing risk adjustment. It was the case of assessee before us that since it was pricing its services at cost plus mark-up and was making supplies to its associate enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent it would be entitled to. We hold so. The issue raised is thus, allowed for statistical purposes. 45. The next contention of the assessee with regard to the working of profit before depreciation and the allowability of its adjustment. 46. The learned Authorized Representative for the assessee further pointed out to the next proposition of computation of PLI. The plea of the assessee before us was that the profits should be taken before depreciation and similarly, the profits of comparables should be taken before depreciation. In this regard, he pointed out that the margins of assessee company were calculated on the basis of Indian GAAP, but depreciation rates under US laws were highe r and hence, it affected the margins of assessee company as it was adopting Cost Plus Method. In this regard, reliance was placed on the ratio laid down by Mumbai Bench of Tribunal in consolidated order dated 25.01.2012 with lead order in ACIT Vs. M/s. Agility Logistics Pvt. Ltd. in ITA No.2000/Mum/2010, relating to assessment year 2004-05. 47. The learned Departmental Representative for the Revenue on the other hand, submitted that in case each and every expenditure is picked up, then what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13/Mum/2010 and CO No.216/Mum/2010, relating to assessment year 2005-06, order dated 04.11.2015. 51. The learned Departmental Representative for the Revenue on the other hand, pointed out that if there is no question of any TP adjustment, then why the section 10A of the Act itself provides that no such deduction is to be allowed on TP adjustment. The learned Departmental Representative for the Revenue pointed out that the Special Bench in Aztec Software and Technology Services Ltd. Vs. ACIT reported in 294 ITR AT 32 followed by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. in ITA No.393/PN/2007 , relating to assessment year 2003-04, order dated 19.05.2009 has taken a view that the ratio is squarely applicable. 52. After considering contentions of both the learned Authorized Representatives, we find that the issue in the present appeal is decided by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra). A contrary view has been taken by Mumbai Bench of Tribunal in DCIT Vs. M/s. Tata Consultancy Services Ltd. (supra). In view of the ratio laid down by the coordinate Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra), we find no merit in the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of the company Operating profits on operating costs (%) 1 Crisil Limited 17.39% 2 Epic Energy Limited 53.96% 3 ICC International Agencies Ltd. 49.39% 4 IDC (India) Limited 14.59% 5 Priya International Ltd. 28.55% 6 Ratan Glitter Industries Ltd. 115.30% 7 T S R Darashaw Ltd. 11.33% Arithmetic mean 41.50% 56. The learned Authorized Representative for the assessee pointed out that first company Crisil Limited was a credit rating agency and similarly, TSR Darashaw Ltd. was shares registrar. It was claimed by the learned Authorized Representative for the assessee that both these companies were not functionally similar to the assessee and the margins of the said companies should be excluded. The said companies being f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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