TMI Blog2017 (7) TMI 1079X X X X Extracts X X X X X X X X Extracts X X X X ..... g services. The company is engaged in providing engineering services and IT enabled services for off shore facilitates. It filed its return of income on 27.09.2010 declaring income of ₹ 24,73,754/- which included service income at ₹ 10,07,334/- and other income at ₹ 13,07,334/-. The AO referred the matter to the TPO for determination of the ALP u/s 92CA(3) in respect of the international transactions entered into by the assessee during the financial year 2009-10. In response to notice u/s 92CA(2) and 92D(3) of the Income Tax Act, the assessee filed various details from time to time. The TPO, during the assessment proceedings, noted that the assessee company has entered into the following international transaction with its AE s during the year : Sl. No. Nature of Transaction Name of the AE Method used by assessee Amount 1. Provision of Engineering, Design and Related Services Samsung Heavy Industries Ltd. Korea. TNMM 24,77,91,193/- 2. Reimbursement of expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess of benchmarking followed by the assessee for the ITES segment and after examining the FAR analysis, the TPO was of the opinion that the comparables required to be further examined on quantitative and qualitative filters such as use of current year data, companies whose service income turnover is less than 5 crores, companies whose export sales are less than 75% of the total sales, companies having related party transactions in excess of 25% of sales, companies that are affected by some peculiar economic circumstances, where employee cost is more than 25% and ratio of service income to total income is at least 75%. Accordingly, the TPO was of the opinion that only Akshay Software Technologies Ltd. and Tata Elxi Limited are good comparables which are to be accepted and other three companies selected by the assessee was rejected by the TPO. The TPO thereafter following the various filters adopted by the assessee included certain comparables and accordingly selected the final comparables, the details of which are as under : Sl. No. Company Name OP/OC 1. Akshay Software Technologies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged by the assessee from its AEs. The AO accordingly made an upward adjustment of ₹ 2,08,33,999/- to the total income of the assessee. 8. Before DRP the assessee submitted that the economic analysis undertaken by the assessee is based on the data available in public domain at the time of undertaking the study which is reliable and correct and is in accordance with the provisions of the Act and rules. However, the TPO did not give cogent reasons for rejecting the TP analysis of the assessee. It was argued that the application of filter of 75% export revenue as adopted by the AO is not correct. The TPO has not demonstrated as to how and why material differences in prices, cost or profits are existent at less than 75% export revenue and further which are not capable of being reasonably adjusted. It was submitted that net margins are more tolerant to functional difference between controlled and uncontrolled transactions. The assessee also submitted that employee cost is not necessarily a true indicator of comparability of companies or their profitability. It was submitted that since the assessee has used TNMM, there is no need to arbitrarily reduce the number of comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer, Noida ( Ld. TPO). 1.1. That the assessment order passed by the Ld. AO is bad in law in as much as the same was passed in complete disregard to the scheme of the Act which mandates the AO to incorporate the directions of the DRP in the final order 2.The Ld. AO / Ld. TPO and the Hon ble DRP erred in ignoring the fact that the reference made by the Ld.AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which it was concluded that it was necessary or expedient to refer the matter to the Ld. TPO for computation of the Arm s Length Price ( ALP ), as is required under section 92CA(I) of the Act. 3.The Ld. AO / Ld. TPO and the Hon ble DRP erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 4.The Ld. AO/Ld. TPO and the Hon ble DRP erred on facts and in law in partially confirming the adjustment of ₹ 20,618,055 in the assessment order passed under section 143(3) of the Income- tax Act, 1961 ( the Act ), by holding that the international related party transaction of the Appellant with respect to the provision of engineering desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby disregarding the law, international guidance and judicial precedents in this regard; 4.8 by ignoring the business/ commercial reality that since the Appellant (vis-avis its e services) is remunerated on an arm s length cost plus basis, undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; and 4.9 by disregarding judicial pronouncements in India while computing an adjustment to the transfer price of the international transaction entered into by the Appellant. 4.10 The Ld. AO has erred by not limiting the amount of adjustment to the lower end of the arithmetic mean as envisaged under second proviso to section 92C sub section 2 of the Act. 5. That the learned AO, on the facts and in the circumstances of the case and in law, has erred in levying an interest u/s 234A, B C D of the Act. 6. That given the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in confirming the action of the Ld. AO of initiating penalty proceedings under section 271(i)(c) of the Act. The above grounds and sub-grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Accentia Technology Ltd. is engaged into development of software products for healthcare and also engaged into diversified activities such as KPO, Legal Process Outsourcing (LPO), Data Process Outsourcing (DTO) and high end software services etc. Further i t has under gone restructuring during the year. Accordingly Accentia Technology was directed to be excluded as a comparable company. 17. Referring to the decision of the Hon ble Delhi High Court in the case of Rampgreen Solutions Private Ltd. vs. CIT vide ITA No. 102/Del /2015 order dated 10 August , 2015. Ld. Counsel for the assessee drew the attention of the bench to page 41 of the order and submit ted that the Hon ble High Court in the said decision has held that it is necessary to establish functional comparability. Referring to the decision of Hon ble Delhi Bench of the Tribunal in the case of Equant Solutions India Pvt. Ltd. vs. DCIT vide ITA no. 1202/Del /2015 order dated 21s t October, 2016 for assessment year 2010-11, he submit ted that Accentia Technology Ltd. was excluded as a comparable due to extraordinary circumstances and also for providing diverse services such as KPO, LPO and DPO besides offering software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs. DCIT vide ITA no. 2536/PN/2012 order dated 11 February, 2015 for assessment year 2008-09, he submitted that the Tribunal in said decision has held that technical services such as software testing, verification and validation of software are software development . Referring to page 324 of the Annual Report Compendium of TCSI Ltd. he submitted that this company has got close connect ion with the TATA group of companies which is demonstrated by the fact that i t makes a contribution towards use of Tata brand of equity amounting to ₹ 4.20 crores. Referring to page 301 of the Annual Report Compendium, he submit ted that TCS e-Serve Ltd. has got high turn over of 1359.41 crores whereas the turnover of the assessee company is only 24 crores. Referring to various decisions he submit ted that on the count of turn over filter itself TCS e-Serve Ltd. has to be excluded from the list of comparables. 22. Referring to the decisions of Equant Solutions India Pvt . Ltd. (Supra), he submit ted that TCS e-Serve Ltd. was excluded as comparable as i t involved in technology services such as software testing, verification and validation i t also owns huge intangibles and Tata brand. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities. 26. The ld. Counsel for the assessee in his rejoinder referring to the decision of the special bench of the Tribunal in the case of Mahindra and Mahindra reported in 122 ITD 2016 submitted that the DR cannot improve the case of the authorities below. 27. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book file on behalf of the assessee. We have also considered the various decisions ci ted before us. We find the assessee in the instant case provides engineering designing and related services for the business of SHI, Korea. The assessee company has a pool of qualified manpower having background and experience in layout design, electrical design, instrumental design, piping design, mechanical design etc. During the impugned assessment year, the assessee has entered into international transact ion of ₹ 24,77,91,193/- with its AE on account of provision of engineering design and related services and has applied TNMM method for comput ing to ALP. We find the TPO, on the basis of the various submissions made by assessee before him from time to time, excluded certain comparables taken by the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of EXCELLENCE DATA RESEARCH PVT. LTD., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No. 159/Hyd/2014 dated 31.7.2014); being relevant in this case, are reproduced below- 19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. MERCER CONSULTING (INDIA) P. LTD. {SUPRA), which indicates that the TPO therein has excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed assets representing brands IPR and goodwi l l. We accordingly direct the AO/TPO to exclude Accentia Technology Ltd. from the l ist of the comparables. 32. So far as E-clerx Services Ltd. is concerned we find the Hyderabad Bench of the Tribunal in the case of Hyundai Motors India Engineering Pvt . Ltd. (supra) whi le upholding the order of the DRP in direct ing the AO to exclude the above company from the list of comparables at para 18 to 18.1 of the order has observed as under : 18. As regards M/s. Accentia Technologies Ltd., is concerned, we find that the DRP has directed to exclude this company by placing reliance upon the order of the ITAT in the assessee s own case for the A.Y. 2009-10 by holding that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy and considering the profit margins of the company and insufficient segmental data, held that this company cannot be selected as a comparable. It was also held by the DRP that on the very same reason of acquisition of various companies, being an extraordinary event, it had an impact on the profit of the company and the said company was directed to be exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Ltd. has diversified business operations and provides technical service apart from having close connect ion with the Tata group of companies, TCS e-serve International Ltd. is also functionally not comparable and has given huge amount as Tata brand equity. We, therefore, are of the opinion that the above two companies are not comparable on account of high turnover filter apart from being non-functional in nature. The various decisions relied on by the Ld. Counsel for the assessee support the case of the assessee on this count. We, therefore, are of the opinion that these two companies cannot be included as comparables. We therefore, direct the AO/TPO to exclude the above two companies from the list of comparables. 35. So far as the working capital adjustment is concerned, the various benches of the Tribunal are directing the AO/TPO to al low working capital adjustment. As stated by the ld. Counsel for the assessee, the AO has allowed working capital adjustment in the subsequent year. We, therefore restore the issue of working capital adjustment to the fi le of the AO/TPO with the direct ion to grant an opportunity to the assessee to substantiate with evidence to the satisfa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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