TMI Blog2018 (12) TMI 1071X X X X Extracts X X X X X X X X Extracts X X X X ..... ER BEENA A PILLAI, JUDICIAL MEMBER Present Cross Appeals have been filed by assessee as well as Revenue against final assessment order dated 28/12/15 passed by Income Tax Officer, Ward 17 (4), New Delhi for Assessment Year 2011-12 on following grounds of appeal: ITA No. 1054/Del/2016 1. That on the facts and in the circumstances of the case and in law, the impugned order passed by Ld.AO is bad in law and void-ab-initio. 2. Ld.AO/Ld.TPO erred on facts and in law in making an adjustment to arm s length price of the Appellant s international transactions which resulted in the enhancement of returned income of the Appellant by INR 15,276,175. Transfer Pricing Grounds 3. Ld.TPO/A.O. failed to appreciate and apply the clear directions of Hon ble DRP and grossly erred on facts and in law by not rejecting EInfochips Limited from the final set of comparable companies. 4. Ld.TPO/A.O. failed to appreciate and apply the clear directions of Hon ble DRP and grossly erred on facts and in law by not rejecting Acropetal Technoloiges Ltd. from the final set of comparable companies. 5. Ld.TPO/A.O./DRP erred on facts and in law in making an upward adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs u/s 274 r.w.s.271(1)(c) of the Act for furnishing inaccurate particulars without recording any adequate satisfaction for such initiation. 7. Ld.A.O./DRP erred on facts and in law in charging and computing interest u/s 234B, 234C and 234D of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other. ITA No. 948/Del/2016 1. Whether on the facts and circumstances of the case in law, the Dispute Resolution Panel-It has erred in reducing the Transfer Pricing adjustment from ₹ 1,83,28,563/- to ₹ 1,52,76,175/- 2. Whether on the facts and circumstances of the case and in law, whether the order of the Ld. DRP was right in not appreciating the functional analysis of comparable based on the TP study, submission made by the assessee and information available in public domain. 3. Whether on the facts and circumstances of the case and in law the Ld. DRP was right in rejecting Infosys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intained in terms of section 92D. 2.5. Ld.TPO, in TP documentation observed that, in respect of international transaction for software development services provided to its AE s, assessee applied TNMM as most appropriate method, by using OP/OC as PLI. Assessee computed its PLI at 13.88% on cost, vis-a-vis margin computed in respect of 15 comparables selected by assessee at 11.94%, which are as under: No. Name of the Company OP/OC % 1. Akshay Software Technologies Ltd. 3.63 2. Bells Softech Ltd. 4.94 3. Helios Matheson Information Technologies Ltd. 16.47 4. L G S Global Ltd. 15.40 5. Mindtree Ltd. 20.94 6. Omni Ax S Software Ltd. 1.63 7. Persistent Systems Solutions Ltd. 20.31 8. Quinnox C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Ltd. (ground No. 5.9) Comparable for Inclusion * R Systems International Ltd. (ground No. 5.6 5.8) 8. Before adverting to compatibility of assessee with that of comparables that has been included/rejected by Ld.TPO/DRP, it is sine qua non to analyse functions performed, assets employed and risk assumed by assessee during year under consideration. 8.I. Functions: On perusal of TP study report placed at page 975-1034 of paper book volume 3, it is observed that functions performed by assessee in India includes, provision of contract information technology services in nature of software programming services, monitoring and database management services, database and application maintenance services, customer support services, establishment of data centres, infrastructure management services, services related to servers, network connectivity, security, networking, storage, web and application development, collocation hosting, brand width option, disaster recovery, digital storage systems, electronic software distribution, online customer information, backup, recovery, archive, off-site vault storage for all data on servers, anti-spam, anti-virus, reporting, enh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k, and is not contractually responsible to end customer), low technology risk(since assessee obtains technically updated technologies from its AE), not exposed to research and development risk(as these activities are not undertaken by assessee), zero credit risk(since assessee is protected, as it is compensated by AE, irrespective of collections by AE from ultimate customers), and normal price risk(as its remuneration from AE is not dependent upon final price received by AE from its end customer). Assessee only bears routine foreign exchange risk(as invoices raised by it on its AE are remunerated in US dollars), manpower risk(since it is responsible for maintaining skilled and trained workforce to carry out its activities), normal legal and statutory risk associated with operating in Indian environment. 8.4. Thus from the above, assessee has been characterised as routine contract software/IT service provider working in a risk insulated environment in TP study. 9. Now we shall take up the comparability analysis of assessee with that of comparables objected to for inclusion and exclusion. 10. Comparables for exclusion: E Infochips Ltd. Vide ground No. 3 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company do not satisfy the functionality test to initiate the process of comparability. We draw our support from the decision of Hon ble Delhi High Court in the case of Rampgreen solutions Pvt.Ltd. Versus CIT reported in (2015) 60 taxman.com 355, wherein Hon ble Court has observed that merely because this company is also involved in ITES industry the same cannot be compared to a captive service provider like assessee which provides limited services to its AE and not to end customers. 11.2. We therefore direct ld.TPO to eliminate this company from list of comparables. 12. Wipro Technology Services Ltd.: Vide Ground No. 5.9, assessee is objecting for inclusion of this comparable. Ld.AR submitted that this company is functionally different and segmental information is not available. It has also been urged by Ld.AR that there are significant related party transactions undertaken by this company. Ld.TPO did not accept assessee s contention of related party transactions and proceeded to include it in the final set of comparables. 12.1. On the contrary, Ld.DR submitted that there is no related party transaction during the year under consideration. 13. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable as well as uncontrolled. Uncontrolled transaction has been defined in Rule 10A(a) to mean: a transaction between enterprises other than associated enterprises, whether resident or non-resident. This shows that in order to be called as an uncontrolled transaction, it is necessary that the same should be between enterprises, other than associated enterprises. Section 92B(2) provides that: A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise . On going through sub-section (2) of section 92B, it is clearly borne out that a transaction with non-AE shall be deemed to be a transaction entered into between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE, or the terms of relevant tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar business cycles, market and economic conditions as faced by assessee having financial year from April to March. He thus submitted that in absence of evidence available to the contrary that there has been a significant impact on margins due to change in different reporting/accounting period, it is incorrect to disregard the comparable using this filter. 14.1. Ld.DR, however, referred to extracts made by Ld.TPO in his order to submit that R Systems International Ltd., should not be considered comparable with assessee. 14.2 . We have perused submissions advanced by both sides in light of records placed before us. 14.3. We find that Ld.TPO has not pointed out exact difference, change of accounting year has made to financial results of this company. The Ld.TPO further has not pointed out, whether, it would not be possible to restate those financial results, for different accounting period, without significant change in net profit margins, or any other parameters considered relevant. Multinational companies that are functionally similar or even identical, generally operate in different geographical regions and, different countries follow different accounting or fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule viz., selection of the comparable for determination of arms length price of an international transaction (emphasis supplied) 14.4. In any case Ld.TPO has not cited any instances of functional dissimilarity of this comparable company with that of assessee. We therefore direct Ld.TPO to include this company in final list of comparable. 15. Accordingly on basis of above discussions and foregoing paragraphs grounds raised by assessee stands allowed. 16. In the result appeal filed by assessee stands allowed. 17. ITA No. 948/del/2016 (appeal filed by revenue): Revenue in its appeal is aggrieved with exclusion of Infosys Technologies Ltd., by DRP that was selected by Ld.TPO. 17.1. At the outset Ld.AR submitted a chart wherein the tax effect in the departmental appeal has been computed amounts to ₹ 10,13,927/-, which is below 20 Lakhs. He thus submitted that Circular No. 3/2018, is applicable to this appeal and deserves to be dismissed. 17.2. However, on merits, Ld.AR submitted that, functionally this company is not comparable to that of assessee, which is a captive service provider. He emphasised that this company possesses huge intangibles a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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