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2017 (7) TMI 768

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..... ion. Accordingly we set aside the order of A.O. in this regard and restore the matter to the A.O./T.P.O. to readjudicate the issue in terms indicated above. Accordingly the appeal is disposed of. - ITA No: 6357/Del/2014 - - - Dated:- 9-2-2017 - SHRI S.K. YADAV, JUDICIAL MEMBER AND SHRI L.P.SAHU, ACCOUNTANT MEMBER For The Appellant : Sh. Nageswar Rao, Adv. For The Respondent : Shri T.M. Shivakumar, CIT, D.R. ORDER PER S . K . YADAV, JUDICIAL MEMBER This appeal is preferred by the assessee against the order of the Assessing Officer passed consequent to the order of the Ld.DRP-III, New Delhi pertaining to the Assessment Year (A.Y.) 2010-11, inter alia on the following grounds. On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income - tax, Circle - 1, Noida ( AO ) has erred in passing the assessment order under Section 143 ( 3 ) of the Income - tax Act, 1961 ( the Act ) after considering the adjustments proposed by the Additional Director of Income - tax, Transfer Pricing, Noida ( TPO ) in his order passed under Section 92CA ( 3 ) of the Act and subseq .....

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..... over less than INR 1 Crores as a comparability criterion . 9 . The learned AO / TPO / DRP have erred by rejecting certain comparable companies identified by the assessee on account of showing diminishing revenues trend . 10 . The learned AO / TPO / DRP have erred in rejecting certain comparable companies identified by the Appellant using Export earnings less than 75 percent of operating revenues as a comparability criterion for software development segment . 11 . The learned AO / TPO / DRP have erred in rejecting certain companies which are comparable to the Appellant and adding certain functionally dissimilar companies to the final set of comparable companies . 12 . The learned AO / TPO have erred by not making suitable adjustments to account for differences in the working capital employed by the Appellant vis - a - vis the comparable companies even after principally accepting the same in the order . 13 . The learned AO / TPO / DRP have erred by not making suitable adjustments to account for differences in the risk profile and working capital employed by the Appellant vis - a - vis the comparable .....

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..... d during the course of hearing. 5. The T.P.O. has taken the following 21 comparables in order to determine the ALP with regard to international transactions. i. E-Infochips Bangalore Ltd. ii. Infinite Data Systems Pvt.Ltd. iii. Thirdware Solution Limited iv. Sonata Software v. Wipro Technologies Services Ltd. vi. Akshay Software Tech Ltd. vii. CAT Technologies Ltd. viii. Evoke Tech. ix. Goldstone Technologies Ltd. x. L T Infotech Ltd. xi. LGS Global Ltd. xii. Maveric Systems Ltd. xiii. MindTree Ltd. (Segment) xiv. Persistent System Solutions Ltd. xv. Persistent System Ltd. xvi. RS Software (India) Ltd. xvii. Sasken Communicjation Tech. Ltd. xviii. Saven Technologies Ltd. (Consolidated) xix. Tata Elxsi Ltd. xx. Thinksoft Global Services Ltd. xxi. Zylog Systems Ltd. 5.1. Out of these comparables the Ld.Counsel for the assessee has sought the exclusion of E-Infochips Bangalore Ltd., Infinite Data Systems Pvt.Ltd., Thirdware Solution Ltd. on the ground that these comparables are functionally different, therefore, they cannot be called to be good comparables to compute the ALP. It was further submitted that the profi .....

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..... further submitted that this company was not selected by TPO either in earlier year or in later years . The ld . AR submitted that segmental information was not available in respect of this comparable . The counsel has relied on the order passed by the TPO for assessment year 2009 - 10 . 10 . 2 . Ld . DR, however, refer to the extracts made by the ld . TPO in the order to submit that E - Infochips Bangalore Ltd is a comparable company with that of assessee . 10 . 3 . After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis, because it is engaged in both software development as well as ITeS . Assessee being characterised as a routine service provider, the above company cannot be considered as comparable on functional basis . 10 . 4 . As this company is functionally different from assessee and in absence of segmental information we direct the AO / TPO to exclude this company from the final list of comparables . Infinite Data Systems private limited 10 . 6 . This company was selected by ld . TP .....

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..... ompany is functionally different as during the said year the company was engaged in providing software product development implementation and consulting based on ERP and business intelligences . 10 . 11 . Ld . DR, however, refer to the extracts made by the ld . TPO in the order to submit that Thirdware Solutions Ltd is a comparable company with that of assessee . 10 . 12 . After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis . Here it is pertinent to mention that this company was considered by the ld . TPO as a comparable in the immediately preceding year in ITA No . 1489 / del / 2014 for assessment year 2009 - 10 as well . The Tribunal by aforenoted order has held it to be incomparable . Since no distinguishing features of the functional profile of this company and the assessee for the current year vis - a - vis the preceding year have been brought out to our notice, following the preceding, we direct the TPO / AO for removal of this company from the list of comparables . 5.4. Since the Tribunal has .....

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..... ion . It was further submitted that this company's transaction includes, receivables, living allowances payables, travelling expenses, assets purchase and others with related party, which has been ignored, by TPO and DRP both . He submitted a detailed chart extracted from the balance sheet of this company to substantiate his claim . According to working given before us and before DRP the RTP by sales percentage in this company is 59 . 35 % as compared to 11 . 93 % computed by TPO . He further submitted that this company has volatile margin of profit and to cement his argument he submitted the Op / TC margins of the company showing 4 . 80 % in one year swinging up to 37 % in a comparison chart for four years . Therefore this comparable should be excluded as per his submission . b . Ld . DR relied on the order of TPO and DRP . He further submitted that RPT percentage as submitted by the assessee were not raised before the TPO / DRP and therefore for correctness of this figures the issue relating to this comparable should be set aside to the file of TPO for verification . c . We have heard both parties, perused materia .....

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..... alue of Wipro does help this comparable . Hence, we direct TPO to exclude this comparable, it is ordered accordingly . Ld.D.R. on the other hand placed reliance upon the order of TPO/DRP. 5.6. Having heard the rival submissions and from perusal of record, we find that since both the comparables have been examined by the Tribunal in the aforesaid order, we find no justification to take a contrary view in this appeal. Accordingly following the same we restore the issue to the file of the TPO/AO to reexamine these comparables in terms of the order of the Tribunal in the case of Equant Solutions India Pvt.Ltd. Accordingly the Wipro Technology Services Ltd. is directed to be excluded from the list of comparables and the Sonata Software Ltd. be examined in the light of related party transactions. If it is in excess of 25%, the same may be excluded from the final list of comparables. 5.7. The Ld.Counsel for the assessee further contended that the following comparables be included in the list of comparables. 1. Caliber Point Business Solutions Ltd. 2. 2. R Systems International Limtied 3. Silverline Technologies Ltd. 4. CG VAK software Exports Ltd. .....

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..... he Ld . TPO has also not been able to bring out any instance of functional dissimilarity of this comparable with that of assessee . The Ld . D . R . placed his reliance on the findings of the authorities below . 10 . 36 . We have perused the orders passed by authorities below, and arguments advanced by both the parties . It has been observed that the assessee in its TP study has objected to the adoption of the turnover filter applied by the TPO . It has been submitted that turnover filter could be deployed if the tested party is a risk bearing entrepreneur . However, to the facts of the present case, the assessee does not assume any risk and is remunerated at cost plus basis . Ld . A . R . has placed reliance in the case of Willis Processing Services Pvt . Ltd . in I . T . A . No . 4547 / Mum / 2012 wherein the Co - ordinate bench of this Tribunal has held as under : The turnover is not a criteria as prescribed under the Rule 10B ( 2 ) for selecting the comparables . It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed un .....

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..... sidering the rival submissions and pursuing the relevant material on record we find that the ld . TPO has not pointed out exact difference, the change of accounting year has made to the financial results of the comparable . The ld . TPO has further not pointed out whether it would not be possible to restate those financial results for a different accounting period without significant change in net profit margins or any other parameters considered relevant . Multinational companies generally operate in different geographical regions and different countries follow different accounting or financial years, functionally similar or even identical companies, cannot be held to be incomparable, only owing to differences in the date of ending of the financial year . As most of the business enterprises operate on the going concern concept, which is so fundamental to present the accounting, the PB at concept used in accounting is just an artificial means to reckon the operating results of business operation at a given point in time and nothing would turn up on changing the end of accounting period from 31st March to any other date within a short span of time . Assuming a situa .....

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..... O to consider this company in the final list of comparable . Calibra Point, Business Solutions Ltd, Helios Matheson Information Technology Ltd . 10 . 41 . These comparables have been rejected by the ld . TPO applying the same filter of having different financial year . The ld . TPO has not cited any instance of functional dissimilarity of these comparable companies with that of assessee . The submissions advanced by both the sides are identical with that as raised while dealing with R Systems International Ltd . As we have this filter at length while dealing with R Systems International Ltd, the same are not being repeated . 10 . 42 . We accordingly direct the ld . TPO / AO to consider these companies in the final list of comparables . Back office support and F A support segments R Systems international Ltd 10 . 43 . The ld . TPO has rejected this comparable by using the filter of different financial year ending . We have dealt with this comparable above . It is also observed that the ld . TPO has not cited any instance of functional dissimilarity of this comparable company with that of the assessee under the s .....

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..... gard to Silver Line Technology it was contended by the Ld.Counsel for the assessee that the different financial year filter is inappropriate and immaterial and in this regard he placed reliance upon the judgement of Hon ble Delhi High Court in the case of CIT vs. Mckinsey Knowledge Centre India Pvt.Ltd. in ITA 217/2014 dt. 27.3.2015 in which their Lordships approved the view of the Tribunal that if the comparables are functionally same as that of tested party then the same cannot be excluded/rejected merely on the ground that the details of the entire Financial Year are not available. If from the available data on record, the results for financial year can reasonably be extrapolated, then the comparables cannot be excluded solely on the ground that the comparables have different financial year endings. 6.1. In the light of aforesaid judgements of Jurisdictional High Court we hold that the rejection of Silver Line Technology Ltd. solely on the ground that it has different Financial Year ending, is not proper and we accordingly direct the AO/TPO to examine this comparable and if other data is available and the results of financial year can reasonably be extrapolated then this comp .....

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..... d if any disallowance is made u/s 40A(ia) of the Act it would increase the deductions claimed by the assessee. Therefore, there would not be any tax implication. These aspects were not examined by the A.O. Therefore, in the interest of justice the matter may be restored back to the AO/TPO to readjudicate the issue in the light of the aspect that disallowance if any made, would increase the deductions claimed by the assessee u/s 10A of the Income Tax Act, 1961 (the Act) and there would not be any tax implication. It was also contended that in earlier year no such disallowance was ever made by the Revenue. 8.1. The Ld.D.R. however opposed these contentions. 9. Having carefully examined the order of lower authorities we find that the A.O. has disallowed the payment having treated the same as payment on account of royalty on non deduction of TDS. While adjudicating the issue the AO has not examined the aspect of increase in deduction claimed u./s 10A of the Act on disallowance of payment u/s 40(a)(ia) of the Act and therefore there would be no tax implication. Accordingly we set aside the order of A.O. in this regard and restore the matter to the A.O./T.P.O. to readjudicate the i .....

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