TMI Blog2018 (2) TMI 1783X X X X Extracts X X X X X X X X Extracts X X X X ..... issued. On verification of compliance with these two conditions, learned AO will allow this expense. Ground allowed for statistical purposes. Allocation of common expenses to the unit claiming benefit u/s 10A - Held that:- AO to verify whether the recomputation of the deductible amount is properly done, in the light of the submission that the deduction of the amount allocated to the STP unit’s net profit is incorrect and instead of the same the learned AO should have deducted the same from the assessee’s operating income. For this purpose, we remand issue to the learned AO for verification. Grounds allowed for statistical purposes. Disallowance u/s 40A(i) - assessee had incurred expenditure in foreign currency under the head ‘royalty’ - Held that:- We are satisfied that the disallowance under section 40(a)(i) of the Act is revenue neutral and the learned AO is directed to allow the corresponding deduction to the assessee u/s 10A of the Act. Expenditure represents the purchase of spares from foreign affiliates - TDS liability - PE in India - Held that:- Inasmuch as the payees are not identifiable, it would not be possible for the assessee to deposit any TDS even in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition to that effect. Besides this, learned AO made the following additions also: Disallowance of claim of exemption u/s 10AA to the extent of Rs.15,93,92,715/- Disallowance of excess depreciation claimed on UPS Rs.1,44,75,008 Disallowance of employees contribution to Provident Fund Rs.19,25,243/- Disallowance of TDS recoverable written off Rs.2,83,86,834/- Disallowance of penalty expenses Rs.4000/- Disallowance u/s 40(a)(i) Rs.6,91,99,702/- 3. Assessee carried the matter before the learned DRP. In respect of transfer pricing adjustment, learned DRP excluded one M/s Cybermet Infotech Ltd. from the set of comparables due to which the transfer pricing adjustment had come down to ₹ 31,77,69,775/-. In respect of additions on account of corporate issues, learned DRP sustained the addition to the tune of ₹ 13,06,80,262/-. Learned AO completed the assessment by making an addition of ₹ 31,77,79,775/- on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eported in BSES Yamuna [2013] 358 ITR 47 (Delhi); Nokia India (P.) Ltd. vs. ACIT [2012] 22 taxmann.com 109 (Delhi - Trib.) [2012] 20 taxmann.com 810 (Delhi); ACIT vs. Timex Watches Ltd [2016] 71 taxmann.com 177 (Delhi - Trib.); GE Capital Business Process Management Services (P.) Ltd. vs. ACIT [2015] 64 taxmann.com 156 (Delhi - Trib.) in support of his contentions. 7. In BSES Yamuna (supra) the Hon ble jurisdictional High Court has held as under:- 6. We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent. 8. In the case of Nokia India (P.) Ltd. (supra), wherein a co-ordinate bench of this Tribunal has held as under: - 13.1 This issue pertains to claim of depreciation @ 60% on UPS, LAN/WAN equipment, switches, network equipment and visual studio etc.13.2 We find that this issue is squarely covered by the decision of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Record reveals that the assessee claimed before the learned AO that the expense on account of this written off bad debts has to be allowed or in the alternative, the same may be allowed to the assessee as a business loss. However, learned AO was of the view that the unclaimed TDS does not form part of the P L account and the assessee has the right to recover the same. In first appellate proceedings, assessee claimed to have produced the party wise and year-wise break up of TDS recoverable written off supported by the undertakings of one of the directors of the company stating that the income corresponding to the TDS written off was duly offered to tax. Learned DRP stated that there was no evidence of the fact that originally the income was offered to tax by way of entries in the books of accounts. 13. Learned AR placed reliance on the decision of the Hon ble Apex court in TRF Ltd. vs CIT in Civil Appeal No.5293 5294 of 2003 and also a circular No.12 of 2016 issued by the CBDT pursuant to the order in M/s TRF Ltd., clarifying that the claim for bad debts shall be admissible for taxes, if the said sum is written off as irrecoverable in the books of accounts and the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos.3 and 3.1 are allowed for statistical purposes. 15. Grounds No. 4 to 4.2 are in respect of the allocation of common expenses to the unit claiming benefit u/s 10A. It is the argument of the learned AR that vide para 5.2, learned AO observed that in the absence of details provided by the assessee, travelling expenses of the directors and legal and professional expenses incurred by the company, 5% of the total travelling expenses which may be relatable to the director s travelling needs to be apportioned amongst 10A and non 10A units in the proportion of their turnover. It is the argument of the assessee before the learned DRP that the support functions were separately maintained for STP unit, as such, all direct costs pertaining to STP units were directly charged to the P L account of the STP unit. It was further stated that the common cost have already been apportioned on the basis of turnover and the managerial remuneration was incurred on directors of telecom division and the said directors have nothing to do with the STP unit, as such, the question of allocation does not arise. The DRP did not agree with the assessee. 16. It is argued by the learned AR that direct c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed AO satisfied with the explanation of the assessee except in relation to two expenses. One is ₹ 72,74,728/- classified under the head Repairs and ₹ 1,83,43,136/- under the head accruals in respect of projects . Therefore, the dispute under this ground revolves around the deduction of ₹ 4,35,81,838/- claimed in respect of 10A of the Act, ₹ 72,74,728/- in respect of repairs and ₹ 1,83,43,136/- in respect of accruals in respect of projects. 20. In respect of the deduction of ₹ 4,35,81,838/- claimed in respect of 10A of the Act, it was the submission of the assessee that the TDS in respect of the expenditure incurred by 10A units of the assessee was duly complied and even otherwise inasmuch as 10A unit is entitled to 100% deduction u/s 10A of the Act, any disallowance u/s 40(a) of the Act will not impact the tax liability of such unit. The prayer of the learned AR is that if the disallowance is not deleted, the learned AO may be directed to increase the corresponding deduction also. 21. In this regard reliance is placed on the order passed by the Gujarat High Court in case of ITO vs. Keval Constructions 354 ITR 013 (guj.) wherein wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with right now is a limited aspect of the matter having impact on computation of taxable income, and while dealing with this limited aspect of the matter, we must not bother about the considerations which are not germane to this context. As for the present context, the issue raised in the appeal, given the settled legal position, is wholly academic and revenue neutral, and, in the light of the CBDT instructions which bind all the field authorities under section 119 of the Act, cannot be pursued by the appellant. We, therefore, see no need to even deal with the matter on merits in the context of the present proceedings, even as we take on record learned counsel's submission that, even on merits, the issue is now covered in favour of the assessee and that the assessee did not have any obligations to deduct tax at source at all. That aspect of the matter is wholly academic. In view of these discussions, and bearing in mind entirety of the case, we uphold the preliminary objection of the assessee and dismiss this ground of appeal as not maintainable. 23. In this set of facts and circumstances, we are satisfied that the disallowance under section 40(a)(i) of the Act is revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccruals in respect of projects have not been furnished and therefore, it cannot be claimed that these are not for technical services. It is the argument of the learned AR that these are the amounts on an estimate basis where the parties in respect of various ongoing projects were not identified and the invoices in respect of concerned supplies/expenses were not received. He further submits that wherever required tax withholding made immediately on receipt of invoice from identifiable parties and the credit of the same was made in the books of accounts. 28. In this regard, reliance was placed by the Assessee on the decision of this Tribunal in the case of Apollo Tyres Ltd. vs. Deputy Commissioner of Income Tax (78 taxmann.com 195) wherein it has been held as under:- 12. At the time of hearing before us, learned DR has referred to the above section so as to buttress his argument that tax is to be deducted even if there is provision of the amount payable. The ITAT, Cochin Bench in the case of Abad Builders (P) Ltd. (supra), after considering the above provision, has held that tax is to be deducted even in respect of provision for expenses. However, the ITAT, Chennai Bench i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. We are, therefore, deem it just and proper to direct the learned AO has to verify from the evidence to be produced by the assessee relating to the creation of provisions for project accruals and the year end reversal of such provisions, and accordingly to delete the disallowance. This ground is set aside to the file of learned AO for verification. 31. Insofar as the Transfer Pricing issues are concerned, during the scrutiny, learned AO observed that the assessee entered into the following international transactions: S. No. International Transactions Segment Amount (INR) 1 Purchase of Raw-materials components and Telecommunication Segment 428,172,674 2 Export of finished goods 18,711,838 3 Payment of Royalty 42,506,831 4 Availing of services 70,176,029 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y order wherein Cybermate Infotek Limited was excluded from the final set of comparables and made final TP adjustment at INR 31,77,69,775 in respect of international transaction related to provision of software development services. 36. Assessing Officer ( learned AO ) framed assessment and passed final assessment order under section 143(3) of the Income Tax Act, 1961 on 30.11.2011. Assessee is aggrieved by the inclusion of 18 companies which the assessee objected, exclusion of three companies which are desired by the assessee to be included and non grant of the working capital adjustment. COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE ASSESSEE FOR BENCHMARKING OF ITS INTERNATIONAL TRANSACTION 37. Assessee is disputing the inclusion of the following 18 out of 24 comparables finally selected by the Ld. TPO. 1. Bodhtree Consulting Limited 2. Cat Technologies Limited 3. E-Infochips Bangalore Limited 4. E-Infochips Limited 5. FCS Software Solutions Limited 6. Goldstone Technologies Limited 7. Helios Matheson Information Technology Limited 8. I Gate Global Solutions Limited 9. Infosys Limited 10. Kals Information Systems Limited (Segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptance or rejection by any of the parties. Consent does not make an otherwise functionally dissimilar entity, a better comparable. We, therefore, find it difficult to reject the objections of the assessee in respect of these comparables. Bodhtree Consulting Limited: 42. Assessee objects this company on the ground of functional difference and non-availability of segmental information. According to the Assessee the company is engaged in diversified set of services and segmental data is not available. Ld. TPO rejected assessee s contention on the ground that it is engaged in software development segment and that this company was accepted by the TPO for AY 2007-08, but as a matter of fact this comparable was never considered by the TPO in the previous year. Ld. DRP dismissed the objections of the assessee. 43. From Page No 12 of the Paper book containing Annexure II to the Directors' report, a part of the annual report of the company, we find that this company is engaged in only one segment which comprises of income from software development, open and end to end web solutions, software consultancy designs and software products; whereas the Assessee is engaged in rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot of difference in the revenue and recognition models of the assessee was well as Bodhtree Consulting Ltd. This factor, in addition to the functional dissimilarity as discussed above, makes this company noncomparable with the assessee company. We, therefore, order to exclude it from the list of comparables. 46. There is no dispute that the Aircom is also into the business of software development and providing related services to its AE. We are, therefore, of the considered opinion that being a software solutions company which is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies, Bodhtree company cannot be compared to the assessee which is a captive software developer for its AE s. Cat Technologies Limited: 47. This company was objected by the assessee on the ground that it is engaged in diversified set of services and also that the segmental data is not available, but the Ld. that TPO included this company in the set of comparables. 48. From page No. 94 of the paper book where the segmental reporting is mentioned, we found that the company is dealing in Medical Transcriptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the situation that no segmental data is available in respect of the software development and the IT enabled services separately, we do not consider this company as a right comparable. E Infochips Limited: 53. Assessee s objection for an inclusion of this company in the set of comparables on the ground of diversified set of services and non-availability of the segmental data was rejected by the Ld. TPO on the ground that as per the annual report the company was only deriving income from software development services. 54. However from a reading of the note 13 of the notes on account found at page No. 146 of the paper book, we find that the company is primarily engaged in software development and IT enabled services but profit and loss account of this company incorporated at page No. 134 of the paper book with a schedule 7 forming part of profit and loss account at page No. 141 thereof do not show any separate segmental data in respect of these two segments. 55. It is also submitted on behalf of the assessee that this company is also engaged in product engineering services and semiconductor design services as evident from the financial statements. Note No. 16 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable. 58. In the light of above, we are satisfied that E-Infochips Limited is functionally dissimilar to the Assessee and accordingly it is to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. FCS Software Solutions Limited: 59. Much against the objections of the assessee, Ld. TPO selected this company as a comparable on the ground that it passed all the filters. Ld. DRP confirmed the same. 60. However from page No. 222 of the paper book, we find that this company is dealing in IT consulting services, e-learning and digital consulting, application support 24/7, and infrastructure management services. However, the profit and loss account incorporated at page Nos. 236 and 253 of the paper book show that the revenues from all the services are bundled into software development and other services. P.1.20 of the notes on account at page No. 266 of the paper book shows that the financials are on the lines of geographical segments like India and the USA, but not on the lines of the functional segments. Further, P.2.4 at page No. 268 of the paper book reads that the company is engaged in the softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified fields and deriving revenues from different sources, the functional segmental information in respect of revenue and cost is not available, and the information relating to the geographical segmentation is not at all helpful for comparison of this company with the assessee, we find that FCS Software Solutions Limited is functionally dissimilar to the Assessee and accordingly it is to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. Goldstone Technologies Limited: 63. According to the assessee this company is functionally dissimilar to that of the Assessee as it is engaged into application services, product enhancement and support services, enterprise application integration, java migration and infrastructure management services which nowhere can be said to be comparable to the software services rendered by the Assessee to its AE. Further, the financial statements lack in providing the segmental results as well. On a perusal of the annual report of this company from page numbers 89 and 290 of the paper book, we find this statement to be true. Further the business segment information provided a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Accordingly, we direct the Assessing Officer to exclude Goldstone Technologies Ltd. 67. In view of the functional dissimilarity coupled with the fact that there were extraordinary events during the year, we find that this company has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. Helios Matheson Information Technology Limited: 68. Assessee objected the inclusion of this company on the ground that it is functionally different. However, Ld. TPO included it on the ground that the diversified services pointed out by the assessee were part of the software development segment and it could not be said that this company was functionally dissimilar to the assessee. 69. The business and results of operations to be found on page numbers 376 and 377 of the paper book clearly show that this company is engaged into providing end-to-end services in the healthcare sector and also into the sale of software which is quite different from the software services rendered by the assessee to its AEs. 70. Revenue from operations shown under schedule 1 at page No. 415 of the paper book show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable to ITS rendered by the assessee. The ld. Counsel submitted that in assessee's own case in assessment year 2007-08 the Tribunal has excluded Helios Matheson Information Technology Ltd. from the list of comparables. 16. On the other hand the ld. DR vehemently defended the findings of TPO in including Helios Matheson Information Technology Ltd. in the final set of comparables. 17. Both sides heard. Orders of the authorities below perused. We find that the Co-ordinate Bench of the Tribunal in assessee's own case in assessment year 2007-08 have excluded Helios Matheson Information Technology Ltd. from the final list of comparables for the reasons similar to exclude Kals Information Systems Ltd. The relevant extract of the findings of the order of Tribunal has already been reproduced in para 7 here-in- above. For the sake of brevity and to avoid repetitiveness we are not extracting the same reasons here again. The Hon'ble High Court has confirmed the findings of Tribunal in hold Helios Matheson Information Technology Ltd. as not comparable on account of functional differences. The ld. DR has not been able to place on record any material to show any change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any has an exceptional event of operations, makes this company excludable from the final set of comparable companies for the present year under consideration. Infosys Technologies Limited: 78. This company is undoubtedly a corporate giant with its large scale of operations vis- -vis the Assessee company; that it had a brand impact to determine the premium pricing; that it has a different model of revenue recognition. It is submitted on behalf of the assessee that this comparable has been rejected in Assessee s own case in immediately preceding year, i.e. AY 200708 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:- 17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncludes revenues from software and training, whereas the assessee company is not engaged in imparting any training or selling its software products to attract revenue. On this premise, this Tribunal held that the finances of this company are not comparable with the assessee company and on that ground this company is not a valid comparable. 83. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the ground that this company consisting of STP unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects and not a good comparable. The coordinate bench has rejected this comparable by making following observations:- 18.3. After considering the rival submissions and perusing the relevant material on record, we find that the entire premise of the TPO s inclusion of this company in the list of comparables is that the software products and training constitute only 4.24% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: the use of readymade object laboratories is only to the tune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee offered this company as a comparable, but the assessee claims to have found that this company is not a comparable and wrongly included in the final list of comparable companies. Inasmuch as the key determinative factor as far as the inclusion/exclusion of any company from the list of comparables is the functionality of an entity, we are of the considered opinion that this company has to be considered on the parameters of functionality and assessee cannot be prevented from challenging the same. 86. Page No. 26 of the 9th annual report 2007-08 of this company can be found at page No. 935 of the paper book clearly establishes that this company is engaged in a multifarious activities including an end to end service provider and offers variety of services. It is involved in product evaluation, design development etc. of the products. Further, it also renders BPO services in the field of Human Resources, Life Sciences, Legal Services, Supply Chain Management, Sales, and Customer Support etc. Further, the financial statements lacks in providing the segmental results as well. 87. Further reading of the notes forming part of the accounts vide schedule 14 incorporated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o two business units that focus on software development R D services, and IT services. It also offers IT Strategic Consulting, Application Development, Data Warehousing and Business Intelligence, Application Maintenance, Package Implementation, Product Architecture, Design and Engineering, Embedded Software, Technical Support, Testing and Infrastructure Management Service. 92. Further at page No. 27 of the annual report incorporated at page No. 1027 of the paper book it is mentioned that on 17/12/2007 the company acquired hundred percent of the outstanding equity shares of TES PV and Projects Solutions Private Limited which was subsequently renamed as Mindtree Technologies Private Limited at a total consideration of ₹ 259.7 million equivalent to USD 6.55 million. It is further stated that as a consequence of this, the revenues of this company as on 31st March 2008 of ₹ 64.80 millions has been included in the above revenues for that year. 93. Needless to say the vast functional dissimilarity coupled with the extraordinary event of acquisition of equity shares stated above suggests that this company is not a good comparable with the assessee and consequently is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the revenue from software development services at ₹ 4829.57 millions. Though this company is more engaged in software development services, but, at the same time is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total revenue of the company on entity level also, inter alia, includes revenue from product licences. There is no information available from the Annual report of this company or the data collected by the TPO u/s 133(6) of the Act to divulge the amount of revenue from software development services alone to the exclusion of revenue from product licences. In such circumstances, it is not possible to ascertain the impact of such revenue on the total revenue of this company. As the assessee is not engaged in the sale of any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. Vs. ACIT (ITA No.5645/Del/2011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into software development services. The assessee objected to the same by contending that it had certain peculiar economic circumstances. Not convinced with the assessee s submissions and considering the information obtained from this company u/s 133(6) of the Act, the TPO treated it as comparable. The assessee is aggrieved. 20.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it has Copyrights included in its Schedule of fixed assets with the closing written down value at ₹ 2.71 crore. This company has its own Software with the closing balance of ₹ 2.70 crore. Such software are also appearing in the Schedule of fixed assets of this company on standalone basis. This shows that this company is utilizing its software for rendering software development services. In contrast, the assessee in question is not having any software to be used in rendering software development services. It is, therefore, held that this company cannot be considered as comparable not only because of using its own software, but also having copyrights worth ₹ 2.71 crore to be used in its business. These c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is a deriving income only from software exports. Even the Note 15 of the Notes on Account reads that there are no separate reportable segments. We do not find any material from the record that this company has actually been engaged in the activities like a) business of Software Products b) Software Development c) Training Services; and d) manufacture of vide range of products or that it provides end to end business solutions. 107. We therefore find it difficult that this company is functionally different from the assessee or that it is not a good comparable for want of any segmental information or related party information. We, therefore, find that this company has to be retained as a good comparable in the final list of comparables. Tata Elxsi Limited (Segmental) 108. At the outset it is brought to our notice that in assessee s own case for the assessment year 2007-08, a coordinate bench of this Tribunal considered the functional similarity of this comparable with the assessee and found that this company is not a suitable comparable in view of its different functions. 109. On a perusal of the order dated 18/05/2016 in ITA No. 5837/Delhi/2011 in assessee s own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not dispute the functional similarity of this company with the assessee, rejected the same on the ground that this company did not satisfy the employee cost filter of 25% and that its expenditure on employees was only 4.41% of the total cost. Ld. DRP did not entertain the argument advanced on behalf of the assessee that the ld. TPO has erred in not including the cost of services which represented the expenditure on salary and owing to this error the employee cost has come down to 4.41%. 113. On this aspect, assessee placed reliance on the order of a co-ordinate bench passed in the case of SAIC India (P.) Ltd. vs. DCIT [2016] 71 taxmann.com 237 (Delhi - Trib.) wherein while dealing with the said comparable for AY 2008-09 it has been held as under:- 49. Ld. TPO rejected this company as a comparable on the ground that it fails employee cost filter; that employees cost should be more that 25% of the total cost whereas assessee for benchmarking international transaction applied the filter of employees cost more than 25% of the total sales. However, assessee company proved on record that employees cost (cost of service) as percentage of the total revenue of the company is 75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing expenses etc. Ld. DRP observed that employee cost is always shown as a different line item in the profit and loss account. 24. Ld. counsel submitted that this comparable has been accepted in the case of Kenexa Technologies Pvt. Ltd. (page 254 of the PB). Ld. counsel submitted that this comparable passes the employee cost filter of more than 25% as adopted by ld. TPO. He submitted that the employee cost is 46% of the total cost. In this regard ld. Counsel referred to pages 56 57 of the PB, wherein the objections raised before ld. DRP are contained in which it was pointed out that ld. TPO nowhere cited any instances of functional dissimilarity of this company vis-a-vis the assessee. Further, at per page 21 of the annual report of this company, schedule 15 to accounts, cost of services has been shown as under: Cost of services Amount (Rs.) Cost of services- Overseas 2,46,69,456 Cost of services- domestic 1,78,34,926 Transcription charges 11,63,991 Web designing charges 97,333 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interfere with the findings of the Ld. TPO. 117. It is submitted by the Ld. AR that this company was accepted as functionally comparable to the assessee by the Department as well as by a Coordinate Bench of this Tribunal in assessee s own case for the previous assessment year of 2007 08. It is argued by the Ld. AR that the diminishing revenue filter is invalid for the simple reason that revenue is not a true indicator of the performance of company as during its business life cycle owing to changing economic conditions, a company could have variation in its revenue pattern over a period of time. For example a company with increasing revenues over a period of time does not necessarily reflect that it is performing better as the corresponding increase in expenses could be higher than revenues and the company might still incur losses. Similarly, a company with diminishing revenues over a period of time need not imply that the performance of the company is deteriorating as it might still have good profit margin on account of cost efficiency i.e. minimizing/ reducing its expenses. Therefore, the net operating margin of the company with increasing revenues over a period of ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally, which is not appropriate. However, the companies having persistent losses, obviously, cannot be compared with the assessee because it has earned positive income not only in this year, but, in the preceding year as well. We, therefore, hold that the companies having diminishing revenue should not be excluded, but, only the companies having persistent losses should be expelled from the final tally of comparables. 119. While following the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. this view has further been affirmed by another co-ordinate bench of this ITAT in case of Vestergaard Asia (P.) Ltd. vs. DCIT [2017] 88 taxmann.com 313 (Delhi-Trib.) wherein the court has observed that :- 28. This comparable sought to be included by the assessee was rejected by the TPO on the ground that its revenue is continuously diminishing over the years. 30. The Ld. DR on the other hand argued that the revenue of the company has been reducing over a number of years. This fact indicates that the company is undergoing abnormal/exceptional circumstances and therefore its margins cannot be taken as reflecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Bobst India (P.) Ltd. vs. DCIT [2015] 63 taxmann.com 339 (Pune-Trib.) wherein the bench observed that a company can be rejected as persistent loss maker only if it has incurred losses for more than 3 years. In the present case in the immediate preceding year the comparable company has showed operating profit of 13.90%, thus, as the company has not suffered losses and its functionality has not been challenged by the TPO, it becomes clear that there is no valid ground to exclude this company as comparable. 121. On a careful consideration of the factual and legal position, we find that this company is a valid comparable to the assessee and, therefore, has to be included in the final set of comparables. Indium Software India Ltd. 122. This company was selected as comparable by the assessee in its TP study, but this company was rejected by the Ld. TPO on the ground that this company was engaged in software testing and thus was not functionally comparable to assessee. 123. Ld. AR argued for the inclusion of this company on the ground that Indium Software (India) Limited is an STPI unit registered under the Software Technology Park of India, and is proven leader in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of working capital deployed by the comparables on the first and last day of the accounting period to compute the working capital adjustment. It is quite probable that daily average is substantially difference from the average of the amount of working capital deployed by the comparables on the first and last day of the accounting period. The adjustment for functional differences etc. is to be allowed only if it can be ascertained with reasonable accuracy which is impossible in this case because of unavailability of relevant data. Therefore, this panel endorses the proposal of the AO to disallow the working capital adjustment claimed by the assessee . 127. Revenue does not dispute the submission on behalf of the assessee that the working capital adjustment was given by the TPO in previous assessment year (AY 2007-08). 128. Assessee also relied upon the order of this Tribunal in SAIC India (P.) Ltd. v.Deputy Commissioner of Income-tax, Circle 7(1), New Delhi - [2016] 71 taxmann.com 237 (Delhi - Trib.)/[2016] 181 TTJ 145 (Delhi - Trib.) dealing with the similar issue. It was held as follows: 53. However, ld. AR contended that identical issue has been decided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk and working capital. Ground No.6 7 are thus allowed for statistical purposes. 55. Identical issue has also been dealt with by the ITAT, Delhi Bench 'E', New Delhi in case cited as Nokia India (P.) Ltd. v. Addl. CIT [2012] 51 SOT 286/20 taxmann.com 810 and determined the issue in favour of the assessee by returning the following findings :- '5.1 Thus it is the contention of the ld. counsel of the assessee that the TPO while determining the arm's length price of the subject international transaction during assessment year 2006-07 ignored the fact the assessee has been granted the benefit of the working capital adjustment during A.Y. 2005-06 by himself and the fact the same has also been allowed by his predecessors during the transfer pricing assessment proceeding for A.Y. 2002-03 till A.Y. 2004-05 despite the constraints mentioned in the transfer pricing order. Thus, it is the contention of the assessee that there is no change in the business model of the assessee with respect to the provision of contract software development services of the assessee vis-a-vis A.Y. 2005-06, the benefit of working capital adjustment should be allowed to the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same in the current year.' 56. Keeping in view the fact that the issue in question has been settled in the cases cited as Qualcom India (P.) Ltd. (supra) and Nokia India (P.) Ltd. (supra) and the fact that assessee in this case is engaged in providing software development services to its group companies and to arrive at ALP of the international transactions, the ld. TPO / DRP resorted to comparability by selecting different sets of comparable companies and after applying the various filters, the ld. TPO selected 10 comparable companies as mentioned in para 8.7 of his order, the appropriate transfer pricing adjustment can only to be made qua the international transaction undertaken by the assessee company during the year under assessment on the basis of its comparability vis- -vis comparable companies, by providing working capital adjustment to the assessee in view of the provisions contained under Rule 10B(1)(e) also. So, we are of the considered view that the matter is required to be restored to the TPO to provide the assessee company the benefit of working capital adjustment for transfer pricing adjustment. 129. In view of this legal and factual position , we cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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