TMI Blog2016 (1) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... bjections of the assessee, while working out the PLI of the assessee company in the re-assessment proceedings. Exclude the TP adjustment on the non-AE transactions - Held that:- The entire cost was taken by the TPO for making adjustment, thereby invoking the TP proceedings on non-AE transactions as well. Therefore, we direct the Assessing Officer/Transfer Pricing Officer to exclude the TP adjustment on the non-AE transactions and re-work out the costs pertaining to the AE transactions and restrict the adjustment if any, only to the AE transactions. With these directions, this ground is considered as allowed. Non-granting full TDS credit - Dispute Resolution Panel directed the Assessing Officer to examine and give full credit or take suitable action but the Assessing Officer did not give full credit - Held that:- After considering the submissions of the learned counsel and the direction given by the Dispute Resolution Panel, we are of the opinion that the Assessing Officer did not follow the directions of the Dispute Resolution Panel while giving credit, as claimed by the assessee at ₹ 55,70,991. We therefore, reiterate the direction given by the Dispute Resolution Panel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has used earlier years financials also. Further, he objected to certain filters used. He re-determined the filters and made fresh search and arrived at 26 comparables whose Arithmetic Mean PLI was arrived at 24.11%. After making negative working capital adjustment at (-)3.33%, the Arithmetic Mean PLI was determined at 28.47%. Considering the assessee s operating cost of transactions at ₹ 136.00 crores, the Arm s Length Price was determined at ₹ 174.73 cores and after reducing sales with Non-AEs, the short fall was arrived at ₹ 24.83 crores and suggested for transfer pricing adjustment of the above amount. 3. Assessee objected before the Dispute Resolution Panel. After considering various contentions of the assessee, the Dispute Resolution Panel accepted only that two companies, viz. Celestial Labs Ltd. and M/s. Geometric Ltd. cannot be considered as comparables and accordingly directed the Assessing Officer to compute the ALP after excluding the above two companies. The final list of 24 companies taken as comparable by the Assessing Officer/TPO are as under- Sl. No. Company Name OP to Total Cost % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds No.1, 2, part of ground No.3 from (a) to (f), part of 3(g) and (h) to (k) and (m). Therefore, these grounds are treated as withdrawn and consequently, rejected. The surviving grounds, including an additional ground- being 3(n), are as under- 1. 2. . 3. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding/confirming the fresh bench marking analysis undertaken by the learned TPO, which is defective in nature due to following reasons and is liable to be quashed: (g) i. The ld TPO/DRP erred in not undertaking an objective comparative analysis and inter-alia selecting the following companies as comparables to the Appellant for determination of ALP under TNMM i. Accel Transmatic Ltd. (Seg) ii. Avani Cimcon Technologies Ltd. iii. Flextronics Software Systems Ltd.(Seg) iv. Helios and Matheson Information Technology Ltd. v. Infosys Technologies Ltd. vi. Ishir Infotech Ltd. vii. Kals Infosystems Ltd. viii. Lucid Software Ltd. ix. Megasoft Lltd. x. Tata Elxsi Ltd.(Seg) xi. Wipro Ltd.(Seg) ii. (l) The Ld. AO/T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to the above comparables and requested for exclusion of the said companies taken as comparables Relevant portion of the order of this Tribunal dated 24.9.2015 in the case of United Online Software Development India Pvt. Ltd., is as under- 16. We have heard the arguments of both the sides and also perused the relevant material on record, including the paper-books and detailed filed by Assessee. It has been brought to our notice by the learned counsel for Assessee, and not disputed by the Learned Departmental Representative, that in assessee s own case for the assessment year 2006-07, the issue relating to comparable nature of three of the companies named in the original ground, viz. Megasoft Ltd., Infosys Technologies Ltd. and Tata Elxsi Ltd.(Seg)., and two out of the four companies named in the additional ground, viz. Accel Transmatic (Seg) and Kalis Information Systems Ltd. (Seg.) has come up for consideration before the Tribunal in ITA No.1500/Hyd/2010, and this Tribunal. 17. However, we find that the issue relating to comparable nature of nine out of above eleven companies (companies in original grounds as well as additional grounds taken together), viz. other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011 We herefore direct the Assessing Officer/TPO to exclude this while computing ALP. INFOSYS TECHNOLOGIES LTD., : 7.2 Objecting to the aforesaid company being treated as comparable, learned AR submitted that the company cannot be considered to be comparable to a captive service provider like Assessee, not only because of the quantum of revenue earned by them but also on account of various other factors. It was submitted that the company command a premium in the pricing of their products and services due to the goodwill, reputation and brand value. It was submitted that due to scale of operation it not only enjoy economies of scale in the lower cost of infrastructure facilities and employees but also earning profit. It was submitted that the company has diversified activities including products, consultancy and solutions. Company own intangibles and assume considerable risk which results in earning higher profits. In support of such contention the ld. AR relied upon a number of decisions, copies of which are placed in the paper book. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /H/2011) b) M/s. Conexant System India P. Ltd. ITA.1978/H2011 c) M/s. Virtusa (I) P. Ltd. ITA.No.1962/Hyd/2011 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) Triology E-Business Solutions ITA.No.1054/Bang/2011 f) Adaptec (India) P. Ltd. vs. DCIT ITA.No.1801/Hyd/2009 g) Trinity Advanced Software Labs P. Ltd. vs. ACIT ITA.No.1129/Hyd/2005 We therefore direct the Assessing Officer/TPO to exclude this while computing ALP. ISHIR INFOTECH LTD 7.3. So far as this company is concerned, Assessee has sought exclusion of the aforesaid company on the ground that this company fails employee cost filter as its employee cost was only 3.96%. In this context, the learned AR has relied upon the decision of co-ordinate Bench of this Tribunal in case of M/s Virtusa (India) Pvt. Ltd. (supra). On a perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd.((supra)), we find that the co-ordinate bench has held that Ishir Infotech Limited cannot be treated as comparable as it does not qualify the employee cost filter as well as RPT filter. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer/TPO to take only segmental margin of this company for computing ALP. Similar view was also expressed in the following cases : a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.No.1978/Hyd/2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 d) Triology E-Business Solutions ITA.No.1054/Bang/2011 e) Telcordia Technologies India P. Ltd. ITA.No.7821/Mum/2011 f) Bearing Point Business ITA.No.1124/Bang/2011 g) LG Soft India P. Ltd. ITA.1121/Bang/2011 h) Transwitch India P. Ltd. ITA.948/Bang/2011 i) Mercedes Benz Research Development ITA.No.1222/Bang/2011 j) CSR India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Respectfully following the aforesaid orders of co-ordinate benches, we direct the Assessing Officer/TPO to consider only the segmental margin of this company for the relevant assessment year for computing ALP. TATA ELXSI LIMITED : 7.6. Assessee has sought exclusion of the aforesaid company by placing reliance upon the information furnished by said company u/s 133(6) wherein the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 133(6) of the Act has admitted that it cannot be considered as comparable with other assessees, we direct exclusion of the aforesaid company from the list of comparables while determining ALP. WIPRO LIMITED : 7.7. While objecting to the aforesaid company being treated as comparable, the learned AR submitted that the TPO only on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 133(6), has considered it as a comparable. It was submitted that the aforesaid company is a diversified company and discloses segmental information for IT services and products as one segment in its annual report. It was submitted that the TPO has not provided any other documents excepting segmental information obtained from TP report of Wipro, which is unaudited, manually corrected and unverified. It was submitted that Wipro is also considered to be a giant in its field assuming all the risks and cannot be compared to captive service provider like Assessee. To support his contentions with regard to noncomparability of the said company, he relied upon the following decisions : a) Telcordia Technologies India P. ITA.No.7821/Mum/2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP accepted the contention of Assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. Assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system. (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development. (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 7.8.1. On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with Assessee that the company was functionally different from Assessee company as it was engaged in the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. Assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by Assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.2076/Hyd/2011 for the assessment year 2007-08, for the following reasons- 14. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Benches considering the similar facts and arguments raised before us: ........................... 3. High Turnover- functionally dissimilar: 6. FLEXITRONICS SOFTWARE LIMITED : As far as Flexitronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . cited supra, including the decision rendered in assessee s own case for assessment year 2006-07, we allow ground No.7 of Assessee along with additional ground and direct the Assessing Officer to exclude the above eleven companies from the scope of comparability analysis. 6.1 Respectfully following the same, the Assessing Officer/Transfer Pricing Officer is directed to exclude the above companies form the list of comparable companies. Assessing Officer is directed to modify and redetermine the Arm s Length Price accordingly. Ground No.3(g) is accordingly allowed. 7. The next ground to be considered is ground no.3(l), which alleges erroneous adoption of operating margin and arithmetic mean of comparable companies by the learned Transfer Pricing Officer. It was submitted that the TPO did not calculate the PLI of the assessee properly and excluded certain costs from the operating cost. Thereby as against the assessee s margin at 11.72%, TPO determined the margin at 10.21%. Even though learned counsel relied on various case-law, it was fairly admitted that this issue becomes academic, if Ground No.4 is considered favourably. Consequently, we direct the TPO to keep in mind the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly funded by it s A.E. from its inception and has no working capital contingencies. The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement. We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : 7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.E. Assessee also undertakes works for third parties. It was one of the objection that internal TNMM is available as assessee undertakes with third parties also. This aspect need to be kept in mind by A.O. while considering the working capital risk in assessee s functional analysis. With these directions, the ground is restored to the file of TPO/A.O. to do accordingly in the consequential order. In view of the above, Transfer Pricing Officer is directed to keep in mind the above directions/findings and work out the working capital adjustment, if any, required to be done, after giving due opportunity to the assessee, while making comparability analysis consequent to this order. This ground is accordingly considered as allowed. 10. Ground No.4 pertains to the action of the Transfer Pricing Officer in considering the costs incurred for rendering services to third parties also while arriving at the Arm s Length Price of the international transactions of the assessee under TNMM. It was submitted that even though assessee has submitted segmental profits, the Transfer Pricing Officer has considered the total cost incurred by the assessee and enhanced the Arm s Length Price dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustment, thereby invoking the TP proceedings on non-AE transactions as well. Therefore, we direct the Assessing Officer/Transfer Pricing Officer to exclude the TP adjustment on the non-AE transactions and re-work out the costs pertaining to the AE transactions and restrict the adjustment if any, only to the AE transactions. With these directions, this ground is considered as allowed. 12. Ground No5 pertains to the application of provisos to S.92C(2) of the Act. This does not require any direction by us, as the provisions are very clear. The TPO is directed to keep it in mind while making the TP adjustment if any, consequent to this order. 13. Ground No.6 pertains to non-granting full TDS credit as claimed by the assessee in the return of income, resulting in short deduction of TDS amounting to ₹ 31,81,369. It was submitted that the Dispute Resolution Panel directed the Assessing Officer to examine and give full credit or take suitable action. It was submitted that the Assessing Officer did not give full credit. The learned counsel only wanted a direction to be given to the Assessing Officer for giving credit. After considering the submissions of the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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