TMI Blog2019 (3) TMI 1116X X X X Extracts X X X X X X X X Extracts X X X X ..... the company, the same shall be considered as an item of operating expenditure. Regarding the provision for doubtful debts, we find that it is an item of operating expenditure as held in the case of Sony India Pvt. Ltd [2008 (9) TMI 420 - ITAT DELHI-H]. Regarding provision for advances, we find that the provision for advances cannot be considered in the instant case as an item of operating expenditure, as the assessee could not prove that such advances were not made for purchase of capital asset or for any other non-business purpose. The decisions relied by the assessee do not pertain to the provision for advance. We, therefore, direct the TPO/AO to compute the Operating Profit Margin accordingly. Risk Adjustment - HELD THAT:- We reject the claim of the assessee towards risk adjustment due to lack of appropriate data and quantification of risk adjustment. Payment for License of computed software - revenue or capital expenditure - HELD THAT:- The above expenses are to be regarded as incurred on revenue field as per the test laid down by the Special Bench of Tribunal in the case of Amway India Enterprises[2008 (2) TMI 454 - ITAT DELHI-C] in as much as (i) such computer software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing companies in the final set of comparable companies allegedly holding them to be functionally comparable to the Appellant: (i) Tata Elxsi Limited (ii) Helios Matheson Information Technology Ltd (iii) Sasken Communications Technologies Ltd. (iv) Lanco Global Systems Ltd 2.3 That the DRP/ TPO erred on facts and in law in not appreciating that the aforesaid companies do not satisfy the test of comparability as provided in rule 10B(2) of the income tax rules and therefore are liable to be rejected from the set of comparable companies. 2.4 That the DRP/TPO erred in rejecting comparable companies as selected by the Appellant in its transfer pricing report 2.5 That the DRP/ TPO erred on facts and in law in incorrectly computing the adjustment on account of differences in working capital 2.6 That the assessing officer/TPO erred on facts and in law in not allowing appropriate risk adjustment to account for the differences in the risk profile of the appellant, a low risk captive service provider and the comparable companies selected by the TPO. 2.7 That on the facts and in the circumstances of the case and in law, the TPO erred on facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Aztecsoft Ltd. 17.72 17.26 18.74 18.13 3. Blue Star Infotech Ltd. 13.37 6.49 7.7 9.18 4. BT TechNet Ltd. -1.55 NA NA -1.55 5. C M C Ltd. 11.22 19.68 19.59 16.99 6. Computech International Ltd. 8.77 4.59 NA 6.65 7. Exensys Software Solutions Ltd. 31.55 26.18 19.05 23.10 8. F C S Software Solutions Ltd. 14.23 14.74 21.92 17.34 9. Geometric Software Solutions Co. Ltd. 29.9 18.47 13.18 18.01 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.11 13.24 26. R S Software (India) Ltd. 7.96 15.44 12.92 12.20 27. R Systems International Ltd. 5.16 22.35 7.35 11.28 28. Ramco Systems Ltd. 9.56 -11.48 -19.32 -8.85 29. Saksoft Ltd. 24.98 26.80 40.54 30.20 30. Sasken Communication Technologies Ltd 16.03 13.90 24.81 19.06 31. Shree Tulsi Online.Com Ltd. 1.95 3.32 NA 2.64 32. Sonata Software Ltd 15.59 5.66 19.99 13.63 33. Subex Azure Ltd 7.59 2.75 4.35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 863,907 Arm s Length margin 19.07% Arm s Length Price 341,47,65,554 Operating income of the assessee 317,07,52,021 Transfer Pricing Adjustment 24,40,13,533 The AO/TPO also made disallowance of ₹ 99,18,169/- on account of license fee paid by the assessee by treating the same to be in the nature of capital expenditure. 6. We have heard the submissions of both the sides on the aforesaid additions and have gone through the entire material available on record. 7. The adjustment made by the Transfer Pricing Officer ( TPO ) is challenged vide Ground nos. 2 to 2.7. 7.1 The appellant has challenged the transfer pricing adjustment on the basis that comparables taken by the TPO for benchmarking analysis are inappropriate and do not satisfy the criteria laid down under Rule 10B(2) of the Rules. 7.2 We analyse each of the comparables challenged by the appellant as under: I. Comparable Companies whose inclusion is challenged by the assessee. a) Helios and Matheson Information Technology Ltd. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support the above contention was placed on the decision of the Hon ble Delhi High Court in the case of Rampgreen Solutions P. Ltd 377 ITR 533 (Del) wherein the Hon ble High Court rejected companies engaged in outsourcing of services to outside vendors as comparable to companies performing such services using their own employees and resources. The aforesaid order was followed by the Hon ble Delhi High Court in the case of Pr. CIT vs New River Software Services Pvt Ltd (ITA No 924/2016). 9. The Ld Departmental Representative relied upon the orders of the lower authorities. He drew our attention to the traveling and conveyance expenditure incurred by the company to the extent of ₹ 2,61,38,162/-. The ld. DR doubted the financial statement submitted by the assessee, inasmuch as, the assessee had shown staff welfare expenses at ₹ 1,86,43,728/- whereas there is no employee cost mentioned in the financial statement. Therefore, the conveyance expenditure to the extent of ₹ 2,61,38,162/- do not invite credence. He, however submitted that the employee cost could have been clubbed by the company under some other head and accordingly the contention of the assessee that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h constitutes more than 3% of the sales of this company. 10.4 It was further submitted that the Company is engaged in R D activities whereas the assessee is a captive service provider and do not undertake any R D activities. The following extract from the annual report of the company was relied upon by the assessee: Research and development of new services, designs, frameworks, and methodologies continue to be important to your company 10.5 Reliance was placed on the decision of the Hon ble Delhi High Court in the case of Pr. CIT vs Oracle (OFSS) BPO Services Pvt Ltd (ITA No 124/2018) wherein the Hon ble Court held that companies having significant brand presence cannot be regarded as appropriate comparable for the purpose of benchmarking the international transactions undertaken by a captive service provider. The said decision of the Hon ble High Court has been upheld by the Hon ble Supreme Court in SLP (CC) No. 32469/2018. 11. We have heard the rival contentions and gone through the annual report of this company. We noted that though the ld. AR did not controvert the contentions raised by ld. DR, but we find ourselves in agreement with the contentions of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (x) Sasken Communications Ltd. 27. Here again, we find that in this year, there were acquisitions and mergers. The Tribunal in the case of Toluna India Pvt. Ltd., has also directed the exclusion of this company on the same basis. Following the same, we direct not to treat this company as comparable . The company has been likewise rejected in the case of Element K India Private Ltd. V.s ITO (ITA No. 431/Del/2012) for AY 2007-08 and Avaya India (P.) Ltd. Vs. ACIT (ITA 5528/Delhi/2011) for AY 2007-08. 12.1 The assessee further submitted that this company owns IPR in the form of numerous patents and has branded products and accordingly, cannot be compared with the appellant, a captive service provider. Reliance was placed on the decision of Delhi Bench of the Tribunal in the case of Motorola Solutions India Private Limited Vs. ACIT (ITA 5637/Del/2011), wherein, the company was rejected on account of significant intangibles in the form of Sasken Branded products and exceptional year of operation, the relevant extract of which is reproduced as under: We have considered the rival submissions and have perused the record of the case. 111. Ld. TPO has completely ignore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in sale of hardware products and therefore cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transaction of provision software services. The Hon ble Delhi Bench of the Tribunal in the case of appellant s sister concern ST Ericsson India Pvt Ltd (ITA No 609/Del/2015) for AY 2010-11 rejected TATA Elxsi as comparable on the basis that it is not functionally comparable to a software service provider. The Hon ble Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT in ITA No. 5645/Del/2011 for AY 2007-08 , too, directed the company to be excluded from the final set of comparable companies on account of functional dissimilarity from the assessee, being a contract software development service provider. Further, the Hon ble Tribunal following the aforesaid order in the case of Toluna India rejected Tata Elxsi as comparable for AY 08-09 (ITA No.6407/Del/2012) also. The appeal of the Revenue against the said exclusion was dismissed by the Hon ble Delhi High Court in ITA No. 393/2016. Reliance is also placed on the decision of Hon ble Delhi Bench of the Tribunal in the case of Steria India Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 130/Bang/2014) (ii) Cypress Semiconductor Technology India Pvt. Ltd. vs. DCIT (ITA No. 1167/Bang/2010) (iii) Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT (ITA No. 25/Bang/2014) (iv) Yahoo Software Development India P. Ltd. vs. DCIT (ITA No. 1129/Bang/2010) (v) Microchip Technology India Pvt. Ltd. vs. DCIT (ITA No. 1429/Bang/2010) In view of the aforesaid, it is respectfully submitted that Tata Elxsi Limited, a company dealing in specialized and niche domain of software products/services, cannot be considered as comparable for the purpose of benchmarking the international transactions of the assessee. (ii) Brand It is submitted that the company being a part of the TATA group enjoys the benefits/returns associated with the TATA brand. The Hon ble Delhi High Court in the case of Pr. CIT vs Oracle (OFSS) BPO Services Pvt Ltd (ITA No 124/2018) held that companies having significant brand presence cannot be regarded as appropriate comparable for the purpose of benchmarking the international transactions undertaken by a captive service provider. The said decision of the Hon ble High Court has been upheld by the Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany on the basis that it has entered into significant related party transactions equivalent to 27.66% of sales. It was submitted by the assessee that the aforesaid finding of the DRP is factually incorrect. It was submitted that the RPT entered into by this company constitutes 22.41% of sales computed as under: Particulars Amount (Rs) Transactions relating to income 14,65,21,342 Transactions relating to cost 1,54,32,175 Reimbursements 2,95,69,090 Total (A) 19,15,22,607 Total Income (B) 85,44,33,616 RPT/Sales (A/B) 22.41% In view of the aforesaid, it was submitted that since the related party transactions entered into by this company constitutes less than 25% of sales, the said company ought to be included in the final set of comparable companies. The LD Departmental Representative submitted that the issue may be restored to the file of TPO for verification of calculation of related party transactions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price. b) R Systems International (seg) It is submitted that while computing the segmental operating margin of R Systems International, the DRP/TPO has considered provision for doubtful debts and provision for doubtful advances as non operating expenses and accordingly excluded the same from the operating cost. It is submitted that provision for bad debts and advances is a routine expenditure linked to the operations of a company and cannot be regarded as non operating in nature (ref. Sony India Pvt Ltd 114 ITD 448 (Del) (@ pg 603-604) and Suessen Asia Pvt Ltd (ITA No 1629/PUN/2011) (@pg 545-548). In view of the aforesaid, it is submitted that expenditure on account of provision for bad debts and advances ought to be considered as operating expenditure and after including the same in the operating cost of this company, the operating margin reduces to 7% as against margin of 15.07% considered by the TPO/DRP (pg 61 of appeal folder): Description Amount (Rs) Seg Operating Revenue 1,12,01,72,651 Seg Direct Expenses 1,00,75,62,812 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantification of risk adjustment. In the following cases the Benches of Tribunal have rejected the risk adjustment claim due to lack of absence of quantification: - Degania Medical Devices Pvt vs DCIT Ltd [1254/Del/2015] - Infac India Pvt Limited vs DCIT (3195/Chny/2017) - ACIT vs Marvell India Pvt Ltd (ITA No 384/Bang/2016) - Swiss Re Shared Services (India) Pvt Ltd(TS-504-ITAT-2017(Bang)-TP) - Mercedes-Benz Research and Development India Private Ltd(TS-503-ITAT- 2017(Bang)-TP) - Obopay Mobile Technology India Private Ltd(TS-493-ITAT-2017(Bang)-TP) Due to the aforesaid reasons and following the judicial precedent, we reject the claim of the assessee towards risk adjustment. 26. Modified ground No. 3 pertains to payment for License of computed software to be allowed as revenue expenditure. The assessee, during the relevant previous year incurred an expenditure of ₹ 2,47,95,422/- on account of payment for software licenses. The assessing officer disallowed the claim towards such expenditure on the basis that the expenditure is capital in nature. 27. We have gone through the material placed on record by the assessee. It was submitted that the above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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