TMI Blog2019 (2) TMI 1754X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 (in short the Act ) vide order dated 31.12.2015, pursuant to the directions issued by the Dispute Resolution Panel 2, Bangalore (DRP) u/s 144C (5) of the Act dated 19.11.2015. 2. Briefly stated, the facts of the case are as under: 2.1 The assessee, an Indian company, is the subsidiary of Telsima Inc., USA and is primarily engaged in the provision of software development services to its Associated Enterprises (AE) for the products developed by the Telsima Group. The assessee has classified its international transactions as software development services. 2.2 For Assessment Year 2011-12, the assessee filed its return of income on 28.11.2011 declaring NIL income. The case was taken up for scrutiny by issue of notice u/s 143(2) of the Act and subsequently a reference was made by the Assessing Officer (AO) u/s 92CA of the Act to the Transfer Pricing Officer (TPO) for determination of the arms length price (ALP) of the international transactions entered into by the assessee with its AEs. The TPO passed an order u/s 92CA of the Act dated 29.10.2015 proposing an adjustment of ₹ 73,13,781/- to the international transactions pertaining to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta of the comparable companies while determining the ALP. 5. The learned AO/learned TPO/Hon'ble DRP erred in using data available at the time of assessment proceedings, instead of the data available at the time of preparing the TP documentation for comparable companies while determining ALP. 6. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrower comparable set. 7. The learned AO/learned TPO/Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies. 8. The learned AO/learned TPO/Hon'ble DRP erred in not considering the provision for bad and doubtful debts as extraordinary in nature. 9. The Hon'ble DRP has erred in not adjudicating upon the comparability of certain TPO's proposed companies which have been objected by the Appellant. 10.The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting the following companies as comparables: Acropetal Technologies Ltd E Zest Solutions E-infochips Ltd ICRA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.The learned AO/learned TPO/Hon'ble DRP has erred in making the following errors in the computation of working capital adjustment: a.in restricted the working capital adjustment without giving any cogent reason. b.in insisting the Appellant to maintain a fixed level for debtors, inventory and creditors, on the basis of average cost of capital of the industry as a whole, before providing the adjustments for working capital. c. in considering the wrong SBI PLR while computing the working capital adjustment 18.The learned AO/learned TPO erred in not allowing appropriate adjustment towards the risk differential between the Appellant vis- vis comparable companies. The Hon'ble DRP jr4ered--' in not adjudicating upon the same. II. Corporate Tax 19. Research and Development Expenses -₹ 3,54,424 a. The learned DRP/AO has erred in disallowing ₹ 3,54,424 towards research and development expenditure by treating the same as capital in nature. b. The learned DRP/AO ought to have appreciated that the research and development expenditure typically includes the cost of developing prototypes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure treated as capital in nature by the DRP/AO irrespective of the directions of the learned DRP. j.The learned AO erred in disallowing research and development cost amounting to ₹ 3,54,424 relying on the order of the previous assessment year, ignoring that each assessment year is distinct and separate from the previous assessment years. 20. Internet access charges- ₹ 7,40,542 a. The Learned DRP/AO erred in disallowing internet charges paid by the assessee of ₹ 7,40,542 under section 40(a)(ia) of the Act on account of non-deduction of tax at source. b. The Learned DRP/AO erred in disallowing internet charges amounting to ₹ 7,40,542 on ground of non-deduction of tax at source ignoring that the lease line services availed by the assessee being standard facilities and not any technical or managerial services, payment made towards the same does not fall within the ambit of section 194J and hence tax at source is not deductible on the same. c. Notwithstanding anything and without prejudice to our above contentions, the learned AO/DRP ought to have appreciated that the assessee having already paid the internet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned AR of the assessee submitted that the assessee wishes to press only the following 4 grounds in this appeal: (i) Ground No. 10 relating to the exclusion of certain companies from the list of comparables. (ii) Ground No. 16 relating to the inclusion of certain companies into the list of comparables. (iii) Ground No. 19 relating to the disallowance of research and development expenses. (iv) Ground No. 20 related to disallowance of internet access charges u/s 40(a)(ia) of the Act for non-deduction of tax at source. 4.2 In view of the above, the learned AR submitted that the assessee is not pressing / urging ground Nos. 1 to 9, 11 to 15, 17, 18 and 21 and additional ground No. 17.1. These grounds (supra) are therefore rendered infructuous and are accordingly dismissed as not pressed. Transfer Pricing Issues 55.1 Before proceeding to adjudicate on the issue of exclusion and / or inclusion of comparable companies in the final set of comparables, the brief facts relating to TP issues is summarized hereunder. 5.2 For the year under consideration, the assessee had reported various international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (v) Persistent Systems and Solutions Ltd., 6.2 Out of the 13 companies selected by the TPO as comparables, the DRP has excluded 6 companies by applying the turnover filter of more than ₹ 200 Crores, thereby leaving 7 companies in the set of comparables. Out of these, the assessee challenges the inclusion of the above 5 companies on grounds of functional dis-similarity and has put forth submissions on each of the above 5 companies, which are discussed later in this order. 6.3 Per contra, the learned DR submitted that the DRP has not rendered any specific direction on the functional comparability of any of the above 5 companies and on the same grounds of the DRP order / directions being cryptic, the matter was remanded back by the Tribunal to the file of the DRP in the assessee s own case for Assessment Year 2006-07 in IT(TP)A No.1178/Bang/2010 dated 17.11.2017. 7. Acropetal Technologies Ltd., ( Acropetal ) 7.1 According to the assessee s submissions, this company, Acropetal , needs to be excluded on the following grounds: A. Functionally different It is submitted that Acropetal (i) is engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has raised certain grounds before us for the first time and also the fact that the DRP has not rendered a finding on the issues raised by the assessee before it, we deem it necessary to remand the issue of comparability of this company back to the file of the TPO, for examining the issue afresh and adjudication on all the issues raised by the assessee in respect of the comparability of this company, Acropetal Technologies Ltd. Needless to add, the TPO is directed to afford the assessee adequate opportunity of being heard and to file details/submissions required, which shall be considered before deciding on the comparability of this company. We hold and dirct accordingly. 8. e-Zest Solutions Ltd., ( e-Zest ) 8.1 The assessee contends that this company, e-Zest needs to be excluded from the set of comparables as it is functionally different from the assessee; being engaged in the business of software development services and product engineering and that segmental details are not available. It was also submitted that this company owns inventories, indicating that it is into software products and also it has R D. In support of the assessee s plea for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aging India Pvt. Ltd., (supra). 9.2 Per contra, the learned DR supported the orders of the authorities below. 9.3.1 We have considered the rival contentions / submissions and perused the material on record. We find from an appraisal of the record before us, that the assessee has raised the objection before the TPO that this company E-infochips , is functionally dissimilar to the assessee and that the revenue from software development services is less than 75%. The TPO, however, rejected the assessee s contention on the ground that the revenue from software development services is 88% and hence it satisfies the filter. However, the TPO has not rendered any finding on the issue of functional dissimilarity of E-infochips vis- -vis the assessee in the case on hand. It is also seen that before the DRP, the assessee has raised objections on the inclusion of this company as a comparable on various issues, but the DRP has not rendered any findings on the same. 9.3.2 We find tha thte Co-ordinate Bench of this Tribunal in the decision of Finastra Software Solutions (I) Ltd., (supra) cited by the assessee (supra) has excluded this company E-infochips from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P, the assessee raised objections to inclusion of this company on grounds of functional difference and that segmental details are not available, but we observe that the DRP has not rendered any findings on the same. We find that the Co-ordinate Bench of this Tribunal in the case of Finastra Software Solutions (India) Pvt. Ltd., (supra), cited by the assessee, in its order, has excluded ICRA from the set of comparables by relying on the decision of another Co-ordinate Bench in the case of Applied Materials (P) Ltd., (IT(TP)A No.17 and 39/Bang/2016 dated 29.09.2016). However, the issue on which this company ICRA has been excluded from the set of comparables is not clear from the judicial pronouncement cited by the assessee. Since the assessee has raised certain issues for seeking exclusion of this company for the first time before us, we deem it appropriate to remand the issue of comparability of ICRA back to the file of the TPO for examination and verification of facts of the matter and adjudication on the issues raised by the assessee. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details / submissions in this regard, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the TPO for examination / verification of the facts and adjudication on the issues / contentions raised by the assessee. Needless to add the TPO shall afford the assessee adequate opportunity of being heard and to file details / submissions, which shall be considered before adjudicating on this issue. It is accordingly ordered. 12. Ground No. 16 Inclusion of comparables sought by assessee 12.1 Even though in this ground (supra), the assessee has sought for inclusion of several companies, in the chart filed; the Notes to arguments submitted vide letter dated 07.08.2018, in the arguments put forth before us, the assessee has urged only for the inclusion of the company Thinksoft Global Services Ltd., ( Thinksoft ) and for none of the other companies. Therefore, we are adjudicating only on the comparability of the company Thinksoft with reference to the assessee s arguments for its inclusion in the set of comparables. 12.2 Before us, it was submitted by the learned AR of the assessee that this company Persistent provides software validation and verification services to banking and financial services industry and is therefore comparable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in nature and incurred in the normal course of business. The assessee s contentions did not find favour with the AO who, by observing that the assessee company is not doing any scientific research, held that the assessee is not eligible for deduction u/s 35 of the Act. The AO also held that the research and development is in the nature of enduring benefit and therefore disallowed the claim of the assessee. Aggrieved, the assessee filed objections before the DRP who upheld the decision of the AO placing reliance on the decision of the ITAT, Mumbai Bench in the case of 3i Infotech Ltd., in ITA No.2831/Mum/2007. 13.2.1 We have considered the rival contentions and submissions and perused the details on record. In the course of proceedings before us, it was submitted that this issue was before the Co-ordinate Bench of this Tribunal, in the assessee s own case for Assessment Year 2006-07 and in its order in IT(TP)A No.1178/Bang/2010 this issue was remanded to the file of the AO for fresh examination and adjudication. At paras 5.5.1 and 5.5.2 of its aforesaid order (supra), the Tribunal held as under: 13.2.2 The reasons for remand by the Tribunal in Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Tribunal order and therefore, we find no infirmity in the order of CIT (A) on this issue. Regarding the judgment of Hon ble Apex Court cited by ld. DR of revenue having been rendered in the case of CIT Vs. Bharti Cellular Ltd. (supra), we find that in that case, the assessee was a cellular service provider and the dispute was regarding interconnect agreement of that assessee with BSNL/MTNL whereas in the present case, the assessee is not a cellular service provider. Moreover in that case, as per the judgment dated 12.08.2010, guidelines were given by Hon ble Apex Court to establish that human intervention takes place in the process of providing telecommunication services and then only such services can be considered as Fee for Technical Services (FTS) and section 194J can be made applicable. The present assessment order has been passed by AO after about 3 years after this judgment of Hon ble Apex Court and this is admitted position that no such expert evidence has been brought on record by AO to establish that there was any human intervention making services received by the assessee as FTS. In our considered opinion, as per this judgment of Hon ble Apex Court, required finding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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