TMI Blog2018 (5) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... ,90,892/- as the mean arm's length margin of comparables) in respect of software development services representing the alleged difference in Arm's Length Price (ALP) of the international transactions as returned by appellant company. 1.1.The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in enhancing the income of appellant company without providing sufficient opportunity of being heard as provided in sub section (2) of section 251 of the Income tax Act, 1961 which is against the principal of natural justice. 2) The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the action of Ld Transfer Pricing officer in rejecting the quantitative and qualitative filters applied by the appellant company for the purpose of selecting comparables in its Transfer Pricing study and arbitrarily selecting the quantitative and qualitative filter for selecting comparables which were functionally different from the appellant company. 3) The learned commissioner of Income Tax (Appeal) has erred both on facts and in law in not correctly analyzing the characteristic of the functions performed, assets emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acceptance of the variations proposed by the Assessing Officer or file objections, if any, to such variations before the Ld. Dispute Resolution Panel (DRP) and, thus, the Assessing Officer passed final assessment order under section 143(3) read with section 144C of the Act on 21/05/2013 assessing the total income at ₹ 4,28,60,350/-. Aggrieved, the assessee filed appeal before the Ld. CIT(A) who partly allowed the appeal of the assessee. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. In the grounds raised, the assessee has challenged Transfer Pricing Adjustment of ₹ 2,27,84,888/- sustained by the Ld. CIT(A). 3.1 The brief facts leading to the transfer pricing adjustment are that in its transfer pricing study the assessee claimed it to be a captive service provider and provided services of software development and information technology enabled services to its Associated Enterprises (AEs). The assessee reported international transaction as under: S. No. Nature of Transaction Method used by assessee Amount 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The assessee considered a sum of ₹ 17,74,591/- being difference in foreign exchange fluctuation as part of operating income. According to the Ld. TPO, the receipts/expenditure in foreign currency are booked at the time of transaction at prevalent foreign exchange rate, whereas at the time of actual receipt or payment the foreignexchange received/paid is converted into Indian currency, which may result into forex gain/loss due to variation in that exchange rate as compared to the exchange rate on the date of transaction. The Ld. TPO observed that forex loss/gain and cost incurred for hedging the same would depend on the risk management policy of each company and, therefore, it was advisable to exclude forex gain/loss and hedging cost/premium from operating cost/income of the tested party as well as comparables while computing the PLI for the purpose of determination of arm s length price, which would lead to a consistent and reliable basis for comparison, based purely on operational consideration. In view of the observation, the Ld. TPO excluded foreign-exchange fluctuation from the operating income and computed the operating profit margin (OP/TC) of the assessee company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Tirdware Sol 37.27 29.52 3.5 The Ld. TPO, computed adjustment of ₹ 2,21,71, 569/-as under: Operating Cost 13,93,90,892 OP/TC 29.52% Margin 4,11,48,192 Arm s Length Price 18,05,39,084 Price Charged by the assessee 15,83,67,515 ?Difference 2,21,71,569 % of difference with the International Transaction 14.00% 3.6 The Ld. CIT(A) directed the Ld. TPO to exclude M/s Persistent Systems Ltd and M/s Tata Elexi Ltd (seg.) from the final set of comparables and compute the adjustment after reworking the average margin of comparables. 3.7 Before us, the Ld. counsel of the assessee submitted that the comparables M/s Aricent Technologies (holding) Ltd, M/s Bodhtree Consulting Ltd., M/s CAT Technologies Ltd., M/s KPIT Cumins Infosystems Ltd., M/s TechMahindra Ltd. and M/s Thirdware Solutions Ltd. are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amounting to ₹ 127,38,34,261/- and software services of ₹ 11,50,88,79,710/-. Thus, it is evident that company is engaged in the sale of software products as well as sale of software services, but no separate segment result for software services are available and, thus, the company cannot be compared with the assessee at the entity level. In our opinion, the company is liable to be excluded only on this reason alone. Accordingly, we direct the Ld. AO/TPO to exclude this company from set of the comparables. Bodhtree Consulting Ltd. 5. The Ld. counsel submitted that the company was engaged in providing other solutions in addition to the software development and due to those activities, the company was functionally dissimilar. Further, he referred to page 25 of the Annual Report and submitted that revenue recognized from software development is recognized based on software developed and billed to client. Accordingly, the Ld. counsel submitted that profitability results do not properly match expenses with revenue and thus it loses creditability for making logical comparison. The Ld. counsel also referred to the volatility in the profit of the company in earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly after providing due opportunity of being heard to the assessee. CAT Technologies Ltd. 6. The Ld. counsel submitted that the company was engaged in diversified business activities of information technology infrastructure, IT staffing services, 3-D animation, game development, Web development. H also referred to page 112 of the paper book, Volume II, and submitted that company was engaged in software development as well as consulting services and there being no separate segment of software development, the company is liable to be excluded from the set of comparables. He further submitted that company has been excluded by the Tribunal from the set of the comparable in the case of Agilis Information Technologies International (P) Ltd (2007) 88 taxmann.com 6. 6.1 On the other hand, the Ld. DR opposed exclusion of the above company and submitted that primarily the company is engaged in software development only and, thus, it is functionally similar to the assessee. 6.2 We have heard the rival submission and perused the relevant material on record. On perusal of the page 36 of the Annual Report of the company (available on page 108 of the PB II), we find that income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thirdware Solutions Ltd 9. The Ld. counsel referred to page 297 of the paper-book and submitted that the company also sells software products and license along with export of services and, therefore, in absence of any segmental result for software development services, the company cannot be compared with the assessee at entity level. 9.1 The Ld. DR relied on the finding of the lower authorities. 9.2 We have heard the submission of the rival parties and perused relevant material on record. The detail of the sales of the company in the year under consideration are available on page 285 of the Paper Book, Volume II, which are reproduced as under: Schedule 12: Sales As on 31.03.09 As on 31.03.08 Total Sale of Licence 23,237,588 3,916,427 Software Services 89,177,023 76,724,371 Export from SEZ Unit 478,572,420 263,971,033 Export from STPI Unit 162,900,630 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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