TMI Blog2019 (5) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 2 of the appeal of the assessee is allowed with above directions. Adjustment on account of the receivables - The assessee has been granted a working capital adjustment by the DRP. When the working capital adjustment has been granted it definitely takes into account the impact of outstanding receivable on the profitability and therefore there is no separate adjustment is warranted on account of overdue outstanding advances. - ITA No. 4191/Del/2018 - - - Dated:- 6-5-2019 - Shri H. S. Sidhu, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Kamal Sahini, Adv, Shri Anshul Sharma, CA For the Revenue : Shri Sandeep Kr. Mishra, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by Agilent (International) Private Limited (Assessee, Appellant) against the order of The Asst Commissioner of Income Tax, Circle I (1), Gurgaon [ the ld AO ] dated 26/4/2018 passed u/s 143 (3) read with section 144C of The Income Tax Act (The Act) in pursuance of the directions of Dispute Resolution Panel 1, New Delhi (The Learned DRP ) u/s 144C (5) of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.4. committing factual/ computational errors while calculating the operating margins of companies selected as comparable in the DRP directions; 2.5. excluding certain comparable companies on arbitrary/ frivolous grounds; 2.6. erroneously including certain functionally dissimilar companies that are full-fledged risk taking entrepreneurs and high profit making companies; 2.7. disregarding comparability adjustments (i.e. risk adjustment) in determining the arm s length profit margin; and 2.8. disregarding judicial pronouncements in India while undertaking the TP adjustment. 3. The Ld. AO/ Ld. TPO erred in enhancing the income of the Assessee by INR 1,384/- by imputing notional interest on outstanding receivables from the AEs on an ad hoc basis. In doing so, the Ld. AO/ Ld. TPO has grossly erred in: 3.1. selecting an ad hoc credit period and interest rate while computing the addition; 3.2. re-characterization of overdue receivable amount as a deemed loan and treating it as a separate international transaction; 3.3. arm s length price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany of the segment was arrived at 14.53 percent and therefore the assessee stated that the about transaction is at arm s-length. 6. With respect to the ITeS services the assessee benchmarked the international transaction by adopting Transactional Net Margin Method and selected 11 comparables whose arithmetic mean of profit level indicator of operating profit to total cost [OP/OC] was 9.42% whereas the appeal of the assessee was arrived at 13.59% and therefore it was stated that the provision of ITeS services is at arm s-length. 7. On examination of the benchmarking methodology adopted by the assessee of software development services, The learned transfer pricing officer stated that transfer pricing study report of the assessee and stated that the search process of the assessee was flawed because of the inappropriate filters and therefore he conducted fresh search. He also adopted several filters, selected various comparable, computed their margin and after affording assessee and opportunity of hearing and objecting to the various aspects of the computation of the LP, finally selected 8 comparable companies who is profit level indicator of operating pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of arm s-length price by the TPO wherein an adjustment of INR 17008093 pertaining to the contract software development activities of the assessee and INR 86059465/ pertaining to the provision of information technologies enable services [ ITes] have been made. 13. Adverting to ground number 2 the learned authorised representative said stated that assessee is challenging only the inclusion of Infosys BPO Ltd and micro-genetic systems Ltd, comparable is in ITeS segment. In software development segment the assessee challenges inclusion of Infosys technologies Ltd, persistent systems Ltd. 14. We first come to the ITeS segment of the assessee. The undisputed functional profile reported by the assessee in the transfer pricing study report of the same is as under:- It is responsible for rendering ITeS according to predetermined terms and condition of Agilent technologies incorporation including maintenance of appropriate documentation relating to the same. The services include knowledge management for engineering design, design chain solutions, part information support, CAD design support, internal financial transaction processing including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the honourable jurisdictional High Court in case of H S software development and knowledge management centre private limited in ITA number 912 2017 wherein it has been held that Infosys BPO Ltd is the corporate entity having a significant brand presence for profits and large corporate size which could not be compared to the assesse s transactions. He further referred to the decision of the coordinate bench which also has held that Infosys BPO Ltd is deriving leveraged from the client of Infosys technologies Ltd for cross selling the BPO services of the company. And further because of the size of comparable company compared with the size of that assessee .i.e. more than 20 times should be excluded. In the end the learned authorised representative also stated that assessee s transaction would be at arm s-length on the exclusion of the aforementioned comparable. Therefore his main contention was that that Infosys BPO Ltd deserves to be excluded on the issue of size and scale and the brand of Infosys which makes it functionally dissimilar to the assessee. 16. The learned departmental representative vehemently supported the order of the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtical solution included financial services and insurance, manufacturing, energy utilities, communication and services, retail, consumer packaged goods, logistics and life sciences. On looking at the horizontal services, which comparable company provides it is apparent that on this ground itself the same is not comparable with the assessee company. On looking at page number 64 of the annual accounts, it is apparent that comparable company has contributed INR 50,000,000 towards brand building and advertisement expenditure. Admittedly the company does not have any goodwill which can impact the profitability of the price of the business of it services because the goodwill is recorded on amalgamation in the nature of purchase only. This is mentioned at page number 51 in para number 1.5 of the annual report and corroborated by page number 58 of the fixed assets schedule in paragraph number 2.6 of the report. Based on the above analysis, it is apparent that Infosys BPO Ltd has a huge brand backing of the Infosys group behind it which can definitely impact the revenue as well as the profitability of the comparable company, therefore in absence of any such assets available to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s responsible for day-to-day project management and deliverable of the model of the software being developed. It has to closely interact with its associated enterprises. The design and development function is undertaken by the assessee pertaining to a particular model based on the specifications provided. It is responsible for the quality of the work undertaken by 8 and 6 to ensure that the work performed complies with the quality standards set by the group. It also undertakes unit testing on the software modules developed by it and prepares test reports which are reviewed by the receiver on a need basis it also perform system testing. 20. The assessee has contested that two compatible companies included by the learned transfer pricing officer and requires to be excluded because of their peculiar functional and the said profile namely Infosys technologies Ltd and persistent systems Ltd. 21. The learned authorised representative submitted that the lower authorities have rejected the argument of the assessee that Infosys is not a comparable company as it is a huge company with very high turnover and it has brand associated with it which impacts the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l list of the comparability analysis the ground of the assessee for the exclusion of this comparable will become academic in nature in respect of software development segment. As we have already directed the learned AO/TPO to exclude the Infosys Ltd from the comparability analysis, we leave the ground of contest of the assessee for exclusion of persistent systems Ltd open. 26. Accordingly ground number 2 of the appeal of the assessee is allowed with above directions. 27. The ground number 3 of the appeal is with respect to the adjustment on account of the receivables. Originally the learned transfer pricing officer has made an adjustment of INR 3681330/ on account of the interest receivable from associated enterprise which has been reduced by the learned dispute resolution panel directing the learned TPO to consider that period of 60 days is to be considered as a reasonable outstanding. In absence of any agreement with the neither associated enterprises nor invoices stating the terms of the payment and the credit period could be adduced by the assessee. Consequently the learned transfer pricing officer proposed an adjustment of only rupees 1384/ on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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