TMI Blog2016 (4) TMI 1223X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain errors pointed out. As the submission made by the assessee is not possible for verification at this stage therefore we set aside this issue to the file of ld AO for verification of the claim made by the assessee and correct the figures accordingly and then grant working capital adjustment to the assessee. Selection to the comparable of Goldstone Technology Ltd - Held that:- Markets in the IS and the India were fundamentally different and, that the results of the Indian segment of the US operations of Goldstone Technologies constituted an inappropriate a comparable cannot be said to be perverse. The basis of allocation of costs and, therefore, the working of the profits was also not clear, is another aspect on which the court is unable to hold that the conclusion is perverse. Disallowance u/s 14A read with Rule 8D (2) - Held that:- Recording of satisfaction on the correctness of claim of the assessee on disallowance u/s 14A before invoking rule 8 D of the Income tax rules 1962 is mandatory. The language of section 14A provides that AO must record a satisfaction if he was unsatisfied with any incorrect claim of the assessee including non-disallowance. If he failed to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer Value of transaction 1. Provision of software development TNMM OP/OC 652368738 2. services Payment of outsourcing costs TNMM OP/OC 188540410 3. Availing of management services BNR NA 8463788 4. Payment of lease rent BNR NA 5103182 5. Purchase of fixed assets CUP NA 267189 6. Reimbursement of expenses to AEs BNR NA 7256398 7. Payment of royalty for using brand name CUP NA 772629 3. Vide order dated 18.01.2013 ld. TPO computed Arm's length price with respect to software development services of ₹ 651522156/- at ₹ 736907605/- and proposed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Japan and the Appellant which clearly states that all the functions to be performed and associated risks are the responsibility of HCL Japan only. 3.4 That the TPO/ DRP erred on facts and in law by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules'1962 ( IT Rules ), and conducting a fresh economic analysis for the determination of the arm's length price ( ALP ) of the Appellant's international transactions and holding that the international transactions are not at arm's length. 3.5 That the TPO/ DRP erred on facts and in law by arbitrarily applying turnover filter of ₹ 5 crores for selecting / rejecting the comparable companies. 3.6 That the TPO / DRP erred on facts and in law in adopting additional filter of export sales lessthan 75% of total sales without demonstrating the difference in profits earned by the/Com parable companies operating in Japan vis-a-vis other geographies. 3.7 That the DRP has failed to provide reasons for concluding that use of diminishing revenue trend as a rejection criterion by the TPO is appropriate, thereby ignoring the detailed s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. Maars Software International Limited 3.16 That the TPO / DRP erred on facts and in law by disregarding thefunctional profile of the comparable companies and resorting to cherry picking of the comparable companies in the final set of comparablecompanies and resorting to selection of companies which are functionally different to the Appellant. 3.17 That the TPO / DRP have erred by selecting certain companies which are earning super normal profits as comparable to the Appellant. 3.18 That the TPO / DRP erred on facts and in law in not considering foreign exchange gains or loss as part of the operating income or expense for computation of operating profit margin for undertaking benchmarking analysis applying TNMM. 3.19 That the TPO / DRP erred on facts and in law in arbitrarily considering- incorrect profit margin of certain comparable companiesas well as the Appellant. Name of the company Margin considered by TPO Actual margin Sasken Communication Technologies 51.44 27.74 Thirdware Solution 37.27 28.33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciating that preconditions for applying the said rule as prescribed in subsections (2)/ (3) of section 14A of the Act were not satisfied. 4.2 That the Assessing Officer erred on facts and in law in not appreciating those investments in mutual funds were made out of surplus funds and there was no nexus between any expenditure incurred and exempt dividend income. 5. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234c of the Act. The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal. 5. Ground Nos.1 and 2 are general in nature and therefore they are dismissed. 6. Ground No.3 to 3.24 are related to transfer pricing issue with respect to adjustment of ₹ 60772255/-. 7. Brief facts of the case is that in the TP Study report assessee has determined arm's length price of its international transactions applying TNMM method as the most appropriate method and selected 20 comparables adopting operating profit/ cost as the PLI where the arithm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther submitted that in proceedings u/s 154 of the Act ld. TPO has provided the working capital adjustment to the company. Therefore now only grievance remain is that the ld. TPO has taken the figures for working capital adjustment as per the figures available in software 'prowess' and they are not as per the balance sheets of the comparables. Before us he has submitted a chart wherein he has demonstrated that many of the figures taken by the ld. TPO are not according to the balance sheet of the comparable company. Therefore he submitted that working capital adjustment should be allowed based on the balance sheets of the comparables for the relevant period. c. Regarding the comparable of Goldstone Technologies Ltd he submitted that this comparable should be excluded and for this he relied on the order of Hon'ble Delhi High Court dated 28.09.2015 in case of Principal CIT Vs. Pitney Bowes Software India Pvt. Ltd. wherein it has been held that this comparable is to be excluded for the reason that it shows segmental results of its US operation and secondly the basis for allocation of cost and computation of profit of segments are not clear and therefore this comparable is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission made by the assessee is not possible for verification at this stage therefore we set aside this issue to the file of ld AO for verification of the claim made by the assessee and correct the figures accordingly and then grant working capital adjustment to the assessee. 15. The assessee has objected to the selection to the comparable of Goldstone Technology Ltd relying on the decision of Hon'ble Delhi High Court in case of Principal CIT Vs. Pitney Browess Software India ltd. ITA No.681/2015 wherein it has been held with respect to this comparable for the AY 2009-10 that is the same assessment year as under:- 7. Having considered the above submissions and having examined the orders of the TPO the DRP as well as the ITAT, this court is not persuaded that the impugned order of the ITAT suffers from any illegality. The view taken by the ITAT that markets in the IS and the India were fundamentally different and, that the results of the Indian segment of the US operations of Goldstone Technologies constituted an inappropriate a comparable cannot be said to be perverse. The view of the ITAT that basis of allocation of costs and, therefore, the working of the profits w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xman 143 (Delhi)] wherein same viewhasbeen expressed that recording of satisfaction on the correctness of claim of the assessee on disallowance u/s 14A before invoking rule 8 D of the Income tax rules 1962 is mandatory.The language of section 14A provides that AO must record a satisfaction if he was unsatisfied with any incorrect claim of the assessee including non-disallowance. If he failed to record such a finding then it cannot be said that he rightly invoked provision of section 14A of the act for application of rule 8D.In view of above judicial pronouncement of Hon'ble Delhi High court we direct LD AO to delete the disallowance of ₹ 237585/- u/s 14A of the Act. Therefore ground no 4 of the appeal of the assessee is allowed. 22. Ground No 5 of the appeal of the assessee is against the charging of interest u/s 234B and 234C of the act which are consequential in nature and hence this ground of appeal is dismissed. 23. In the result appeal of the assessee in ITA No 926/ Del /2014 is partly allowed. 24. Now we come to the Appeal of the Assessee in ITA No.2776/Del/2015 which is filed against the order u/s 154 of the Income Tax Act dated 20.04.2015. The brief facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.80% 18.05% Tata Elxsi Ltd 20.30% 16.88% Thinksoft Global Services Limited 16.56% 16.27% 2.2 That the TPO/ DRP erred on facts and in law in incorrectly computing the working capital adjusted operating margins of the comparable companies:- Name of the company Margin considered by TPO Actual margin Akshay Software Technologies Ltd 9.23% 9.12% Aztechsoft Ltd 28.59% 25.95% Cat Technologies 35.19% 11.76% Goldstone technologies 11.54% -36.30% Infosys Technologies Ltd 40.61% 39.48% Larsen Toubro Infotech Ltd 22.54% 20.45% LOS Global Ltd 15.10% 13.08% Mindtree Ltd 28.52% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y considered the rival contentions as well as perused the chart of working capital adjustment submitted before us wherein may corrections with respect to each of the comparables have been pointed out by the ld DR. we have also perused the ground No.2.1 as well as ground No.2.2 of the appeal wherein certain errors are pointed out. Surprisingly when passing the order pursuant to order of ld. DRP if it results in to enhancement in adjustment and not reduction therein, Ld. TPO should have granted an opportunity to verify the correctness of the computation as a principle of natural justice. Therefore in the interest of justice we set aside ground No.2 of the appeal on Transfer Pricing issues back to the file of ld. TPO with a direction to verify the computation of margins pointed out by LD AR and then correct them for computation of arms length pricing of the international transaction. Needless to say that proper opportunity of hearing for submission of information with respect to computation of margin and for verification of calculation may be granted to the assessee. 29. In the result Appeal No.2776/Del/2014 is allowed for statistical purposes. Order pronounced in the open court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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