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TMI Blog2018 (6) TMI 1688X X X X Extracts X X X X X X X X Extracts X X X X ..... ICING ISSUES 2. Assessment and reference to Transfer Pricing Officer are bad in law 2.1 The Ld. AO has erred in law in making a reference to the learned Deputy Commissioner of Income Tax (Transfer Pricing) 2(2)(2) ['Ld. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 3. The Ld. TPO has erred in justifying the motive of shifting of profits 3.1 On the facts and in the circumstances of the case and in law, the Ld. TPO / AO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a prerequisite condition to make any adjustment under the provision of Chapter X of the Act. 4. Comparability Analysis and Determination of Arm's Length Price Grounds of Appeal for rejection of comparables selected by the Ld. TPO in the order issued u/s 92CA of the Act 4.1 The Ld. AO/ TPO grossly erred on facts in benchmarking the transactions of the captive information technology services ('IT services') of the Appellant with companies operating as full-fled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected by the Appellant as comparable in its transfer pricing study, despite the said company being functionally comparable and qualifying all the filters applied by the Ld. TPO in the order u/s 92CA of the Act. The Honorable Dispute Resolution Panel ('Honorable DRP') further erred in rejecting Akshay Software Technologies Limited in the absence of segmental information whereas the said company is engaged in rendering software development services and earns majority of its revenue from rendering such services. 4.7 The Ld. TPO erred on facts in rejecting Helios and Matheson Information Technology Limited and R Systems international Ltd., selected by the Appellant as comparable in its transfer pricing study, despite the said companies being functionally comparable. Ld. AO/ TPO erred in computing a negative working capital adjustment on the margins of the comparable companies 4.8 The Ld. TPO/ AC) erred on facts and in law. and the Honorable DRP further erred in upholding / confirming the action of the Ld. TPO/ AO in computing a negative working capital adjustment on the margins of the comparable companies wherein the IT services segment of the Appellant operates as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability. 5.7 The Ld. AO/ TPO erred on facts and in law in considering a set of 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. 5.8 The Ld. AO/TPO also erred on facts and in law in accepting comparable companies without considering the turnover and size of the Appellant and the comparable companies. GROUNDS OF APPEAL ON CORPORATE TAX ISSUES 6. Disallowance of commission expense on account of nondeduction of tax at source 6.1 On the facts and circumstances of the case and in law, the Ld. AO erred in disallowing the export commission expense amounting to Rs. 4,34,72,134 paid to non-resident parties under section 40(a)(i) of the Act without appreciating that such payments were not taxable in India and the Honorable DRP erred in confirming the same. 7. Non grant of set off of Minimum Alternate Tax ('MAT') credit 7.1 On the facts and circumstances of the case and in law, the Ld. AO erred in not granting s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ERMISSIBLE 2. The Appellant submits that the learned TPO erred in making a negative working capital adjustment to artificially increase the margins of the comparables for the following reasons. (a) The Appellant does not have any borrowings at all. It thus does not incur any expenditure whatsoever in the maintenance of its working capital. (b) 99.83% of the Appellant's share capital is held by Lifetree Cyberworks Pvt. Ltd., the Appellant's holding company and TecnotreeOyj, Finland, the Appellants ultimate holding company. Thus. the Appellant does not have any working capital risk at all. 3. A substantial portion of the Appellants working capital arises out of transactions with its related parties. For instance, out of the total trade receivables of Rs. 163,35,09.966 as at 31.03.2013, more than 77%. i.e., Rs. 126,40,42,576 is receivable from its holding and subsidiary companies. This reinforces the proposition that the Appellant bears no working capital risk. 4. The following orders of co-ordinate benches of this Tribunal have held that where the Appellant bears no working capital risk and incurs no expenditure on working capital, the Revenue cannot make a neg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn to be attributed to additional risk) of the return of full-fledged entrepreneurs over the return of captive service providers such as the Appellant would be the difference between the bank rate and the Prime Lending Rate (PLR). The bank rate is considered the risk-free rate of return while the PLR is considered the normal risk-bearing rate. For the relevant previous year, this risk premium would be 2.94% (i.e., 294 basis points) (being 10.25% (PLR notified by RBI during the year ended 31.03.2013) - 7.31% (bank rate notified by RBI for that period). 9. Option 3: The third option is based on the decision of a coordinate bench of this Honourable Tribunal in Motorola's case. This provides for the use of the Capital Asset Pricing Model (CAPM) along with the WACC (Weighted Average Cost of Capital) mechanism. First, the cost of equity is determined using the CAPM. Second, the cost of debt is determined on actual basis. The WACC is then computed applying the equity and debt mix as the weight to the cost of equity and the cost of debt. The riskadjustment is computed as the portion of the WACC that represents return attributable solely to risk This risk adjustment. as a percentage. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .-Trib.). 14. The learned TPO relied on SAP Labs' casel°. Meritor LVS' case and Symantec's case. In both SAP Labs and Symantec's cases, the risk adjustment was denied as it was either brought up before the tribunal for the first time or that computations of the adjustment were not furnished before the lower authorities. Both these are not true in the present case. Additionally, the learned DRP relied on the decisions in Zyme Solutions", CDC Software', Stryker Global, and Aptara Technologies. In Zyme Solutions, the attending circumstances were that the DRP had directed the TPO to grant a risk adjustment of 1% without considering any of the material. In the Appellant's case, it is plainly evident that the learned DRP has denied the risk adjustment on non-existent grounds. In Aptara's case. the Tribunal held that where no Arm's Length Price adjustment was being made at all by virtue of the margin provided for in the second proviso to section 920(2), the ground relating to the risk adjustment was infructuous. The learned DRP has misrepresented this as meaning that the 5% ipso facto implied that no risk adjustment could be made. All the precedents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems' financial year ended 31.12.2013. The Appellant has thus considered 9/12th of R Systems' segmental figures from its year ended 31.12.2012 and 3/12th of its figures from its year ended 31.12.2013. It is submitted that this method, being a reasonable method of extrapolation ought to be accepted and thus, the rejection of the comparable on the ground of its different financial year deserves to be set aside in accordance with the binding precedents. 19. The PLI of R Systems, so computed, is 15.95%. This computation is as follows. Particulars Amount (in Rs.) FYE 31.12.2012(A) B=A*9/12 FYE 31.12.2013 D=C*3/12 FYE 31.03.2013 Segment Revenue (A) Less: Segment Result 1,99,04,50,611 26,75,09,209 1,49,28,37,958 20,06,31,906 2,35,64,00,658 49,03,89,126 58,91,00,164 12,25,97,282 2,08,19,38,123 32,32,29,188 Segment Expenditure 1,72,29,41,402 1,29,22,06,052 1,86,60,11,532 46,65,02,883 1,75,87,08,935 Add:Apportioned Operating Expenditure 3,47,04,136 2,60,28,102 4,34,24,035 1,08,56,009 3,68,84,111 Total Segment Operating Expenditure (B) 1,75,76,45,538 1,31,82,34,154 1,90,94,35,567 47,73,58,892 1,79,55,93,046 SEGMEN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the funds by making inquiries with the relevant entity but has omitted to do so. (b) Provision for doubtful debts: The learned TPO/AO has excluded provisions for doubtful debt on the ground that it is nonoperating in its character. This runs against settled precedent, arising from the following precedents, that provisions for doubtful debts are in fact operating in their character. i) Outsource Partners International Pvt. Ltd. v. DCIT [2017] 79 taxmann.com 74 (Bangalore-Trib.) ii) Techbooks International (P.) Ltd. v. Dy CIT [2015] 63 taxmann.com 114 (Delhi-Trib.). iii) Rolls Royce India Pvt. Ltd v. DCIT [2016] 69 taxmann.com 209 (Delhi-Trib.) iv) Vestergaard Asia Pvt. Ltd. v. DCIT [2017] 88 taxmann.com 313 (Delhi-Trib.) v) ITO v. Intoto Software (India) Pvt. Ltd. [2017] 78 taxmann.com 260 (Hyderabad-Trib.) vi) Kenexa Technologies Pvt Ltd. v. [2014] 51 taxmann.com 282 (Hyderabad-Trib.) vii) Sum Total Systems India Pvt. Ltd. v DCIT [2016] 74 taxmann.com 247 (Hyderabad-Trib.) It is thus prayed that, following binding precedent, this Tribunal hold hat provisions for doubtful debts is operating in character and that the same be considered as an expense i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered. Firstly, there is no doubt that the 15% filter is being regularly applied by various benches of the Tribunal. Secondly, on the very question of how to choose between the 25% and the 15% filters, a co-ordinate Bengaluru Bench has held in Dell's case that the question turns on the availability of comparables. It has further held that since there is no dearth of comparables in the software development sector, the stricter 15% filter can be applied. Further, in Siemens BPO's case, a co-ordinate Bengaluru Bench has held that, under normal circumstances, the tolerance level must be 15%. Accordingly, it is submitted that the 15% filter must be applied. In whatever manner the RFT computations are made, ICRA fails the 15% filter. 27. Without prejudice, the Appellant submits that the question of the method of computing the RPT filter was considered at length by a co-ordinate bench of this Tribunal in Nokia s case. The Tribunal held that the percentage of numerator to denominator can be calculated only when the contents of a part of representing the RPT of a particular nature is seen with reference to the contents of whole of that nature. Accordingly, it is submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement services etc., to our customers." (b) Substantial Research & Development (page 34): Paragraph C in the annexures to the Director's Report deals with "Technology and Innovation" and brings out the substantive and substantial nature of the company's R&D. There are two categories of laboratories set up by it, PES and ESP labs. (c) Substantial Intellectual Property (page 35): In paragraph C(c) of the said annexures, there is a long list of patents which Mindtree holds. This makes it clear that the operations of Mindtree extend much beyond just software development. (d) Wide Range of Operations page 57) and Lack of Information from Segment Reporting (page 58): i) The learned TPO has taken figures from the "IT services" segment of Mindtree. Page 58 of the Annual Report shows two segments "IT services" and 'Product Engineering Servies (PES)''. ii) The graphs on page 57 of the annual report show the distribution of Mindtree's revenue across service lines. iii) On this graph, development represents only 25% of Mindtree's revenue. It is not clear whether this 'development" includes product development (i.e., development of products for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10 and 28. 31. The above averments as regards the classification of Mindtree's segments also evidences that the information available from Mindtree's annual report as regards its software development operations (if any) is scanty and incomplete. This itself vitiates its reliability as a comparable. PERSISTENT SYSTEMS 32. This comparable has been selected by the learned TPO and upheld by the learned DRP. The Appellant submits that this comparable ought to be rejected on the grounds that: (a) The comparable is functionally different from the Appellant; and (b) The comparable fails the related party transaction (RPT) filter set by the Appellant. 33. RPT Filter The Appellant submits that it fails the 15% RPT filter. By the TPO's own computation, the RPTs of Persistent is 19.62%, thus failing the filter. It has already been submitted above that a co-ordinate Bengaluru Bench of this Honourable Tribunal has held that in the software sector, since there is no dearth of comparables, the stricter 15% RPT filter is to be applied in preference to the more lenient 25% filter. It has also been shown above that various coordinate benches have shown a preference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com 200 (Bangalore - Trib) (c) Balmer Lawrie and Co. Limited vs. ITO [2016] 68 Taman.com 384 (Kolkata Trib) (d) DCIT vs. SRM Agro Foods [2016] 75 Taxman.com 210 (MumbaiTrib) 40. The learned AO erred it not giving the Appellant credit for set off of taxes paid by the Appellant in foreign jurisdiction amounting to Rs. 1,18,23,711." 5. In the course of hearing before us, the ld. AR of assessee has submitted a big chart containing assessee's arguments in respect of assessee's claim regarding inclusion / exclusion of some comparables and it was submitted by ld. AR of assessee that appeal of the assessee may be decided on the basis of synopsis of the assessee's arguments and the big chart in respect of inclusion / exclusion of various comparables. The ld. DR of revenue supported the final assessment order and the order of DRP. 6. We have considered the rival submissions. We find that as per the synopsis of arguments filed by ld. AR of assessee and reproduced above, in transfer pricing issues, one matter to be decided is regarding negative working capital adjustment done by the AO and the second TP issue is regarding the assessee's claim for risk and other adjustments. In add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : "14. Ground No.11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : * The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. * The company has never taken any loans till d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been fully funded by it's A.E. from its inception and has no working capital contingencies and the company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement. In that case, the DRP has examined the direction of DRP, Hyderabad in some other case i.e. Cordys Software India P. Ltd. for Assessment Year 2008-09 dated 03.08.2012 and the direction in that case are also reproduced and as per the same, it is held by DRP in that case that working capital adjustment is made for the time value of money lost when credit time is provided to the customers. In our considered opinion, this very basis adopted by DRP in those cases that working capital adjustment made is for the time value of money lost when credit time is provided to the customers is incorrect because in TP analysis, comparison is made of operating profit margin i.e. profit before interest and therefore, interest cost has no relevance for TP analysis. In fact, the working capital adjustment is made for this reason that if the sale is made on the terms of cash payment to one customer and to second customer the sale is made with the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... properly represented in front of Hon'ble ITAT. Risk and Value are different concepts. Working Capital Adjustment is given on the time value of working capital. Working capital position affects the pricing of any service in open market.* WCA basically calculates the difference in pricing of comparable and taxpayer. Whether positive or negative does not matter. WCA is done on each comparable, and it will be seen that for some comparables, WCA is positive while for others, WCA is negative. The end impact of WCA is that it increases comparability. The purpose of WCA is not to benefit the assessee, but to increase comparability and be just. Working capital risk is a different concept. It is part of many risks that companies face. For a captive service provider, systematic risk is lower than comparables whereas unsystematic risk is higher than comparables. Working capital risk is one of the many risks. To account for working capital risk, the appropriate adjustment is risk adjustment. It cannot be confused with Working Capital Adjustment. In the present case, net working capital adjustment is negative. WCA has increased comparability, and hence is justifiable." * Emphasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trolled companies engaged in similar services and that such independent comparable uncontrolled companies, who operate under uncontrolled conditions, bear risk during the course of its operations including market risk, research and development risk, technology risk credit risk, currency fluctuation risk, liquidity risk, default risk etc. As a result, the resultant profitability of such comparable uncontrolled companies is directly related to the level of risk borne, which is not so it the case of a captive service provider similar to the Appellant as it assumes minimal risks and being an entity with a fixed mark-up on the cost earn steady return year on year. 14. We heard both parties relying on the following Tribunal judgments, wherein comparability economic adjustments are also mandated by the Tribunal. * Sony India (P.) Ltd v. Dy. CIT [2008] 114 ITD 448 (Delhi) * E-Gain Communication (P) Ltd v. ITO [2009] 118 ITD 243/[2008] 23 SOT 385 (Pune) * Mentor Ruling * Motorola Solutions India (P) Ltd v. Asstt. CIT [2014] 48 taxmann.com 248/[2015] 152 ITD 158 (Delhi - Trib.) 15. Further, in addition to the above rulings, the principle has also been upheld by the recent H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eproduced hereinbelow. "14. Ground No.14 is raised as an additional ground stating that TPO/DRP has erred in making a negative working capital adjustment of (-)0.61% while computing the adjustment u/s. 92CA. It was the submission that negative working capital adjustment was not allowed in various decisions and relied on the decision of Adaptec (India) P. Ltd., Vs. ACIT in ITA No. 206/Hyd/2014, dt. 2503-2015, in the above referred case. "10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : "14. Ground No.11 : Negative Work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the 21 ITA.No.206/Hyd/2014 Adaptec (India) P. Ltd., Hyderabad. assessee. In view of this, we direct the TPO not to make negative working capital adjustment"." 14. From the above Paras reproduced from this Tribunal order, it is seen that in this case also, the decision is on the basis of Tribunal order rendered in the case of Adaptec (India) Pvt. Ltd. vs. ACIT (supra). As we have already seen that the tribunal order rendered in the case of Adaptec (India) Pvt. Ltd. Vs. ACIT (supra) is not applicable in the present case because it was found that in that case, the Tribunal decision is not on this aspect that working capital position affects the pricing of any services or goods in open market as the case made out by the TPO in the present case. Hence we hold that this Tribunal order is also not relevant in the present case. 15. The last Tribunal order on which reliance is placed is the Tribunal order rendered in the case of TNS India Pvt. Ltd. Vs. ACIT (supra), copy available on pages 296 to 310 of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s A.E. from its inception and has no working capital contingencies. * The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding risk and other adjustments. We first reproduce Para no. 13 available on page nos. 31 & 32 of TPO order. The same is as under. "13. RISK ADJUSTMENT: Risk adjustment involves two vital preconditions. They are that difference in risk level exists between the tested party and the uncontrolled comparables; and that it is. possible to calculate in terms of numbers the differences in risk so that adjustment can be made. But in case of the taxpayer, both the prerequisites are missing. Neither the difference in risk level of the tested party and uncontrolled comparables has been established nor is it possible to convert the difference in risk level, if there is any, into numbers. If there is any difference, for a moment academically speaking, it. rests in the realm of quality and not quantity. There is no reliable method to convert the qualitative difference into quantitative difference and to make adjustment on account of risk level. As per the provisions of Rule 10B (3), if any adjustment should be made, it should be reasonably accurate to eliminate the material effects of such differences. But in case of risk adjustment, neither reasonably accurate adjustment can be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was asked to give detailed working of the risk adjustment it was seeking and the basis thereof. However, as discussed supra, the assessee just sought an adhoc adjustment on this account. The assessee argued that it can be provided such adjustment on basis of various decisions of IAT. Such a claim of the assessee does not have any scientific backing. The claim of the assessee is only a theoretical one. Further, from the financials of the assessee it is noted that the assessee is not a 100% export entity but it is operating in the domestic market also and thus is subject to normal risks in relation to revenue from such source. The TPO has rightly pointed out that if the assessee is subject to 'single customer risk', the same in itself is huge and the comparables are not bearing such a risk. Mumbai ITAT in the case of Symantec Software Solutions (P.) Ltd. v Asstt. CIT [2011] 216 SOT 48/11 taxmann.com 264 for AY 2006-07, held that (para 16) - "As regards the difference in function and risk level adjustment; the assessee has raised this issue without quantification of such adjustment on this account. Even otherwise until and unless such difference results in def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile determining ALP. Further, in following cases this was held that the margin of +/- 5 % (now 3%) takes care of the risk difference: Symantec Software Solutions (P.) Ltd [2011] 11 taxmann.com 264 (Mumbai) Followed in SAP Labs India (P.) Ltd. [2012] 17 taxmann.com 16 (Bang.) Aptara Technologies Pvt Ltd [TS-309-1TAT-2016(PUN)-TP] 10.3 Considering above, the objection of the assessee is not accepted." 19. From the above Para no. 10 reproduced from the directions of DRP, it is seen that this is the basis of DRP directions that as per the Tribunal order rendered in the case of Symantec Software Solutions (P.) Ltd. Vs. ACIT (supra) in which the issue was decided against the assessee on this basis that the assessee did not quantify the alleged adjustments on account of difference in risk, the assessee, first time filed certain calculation before the DRP in support of its claim and although the same calculation is also not on the basis of any formula or principle rather it is general in nature.This finding is also given by DRP that the DRP asked the assessee to give detailed working of the risk adjustment which the assessee was seeking and the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional Limited on the ground that it follows the calendar year, i.e., 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by the Mumbai Bench of the Tribunal in Asst. CIT v. Hapag Lloyd Global Services P. Ltd. 2013-TII-68ITATMUM- TP in which it had been held that a company with a different financial year ending cannot be compared. 28. We are unable to agree with the decision of the Transfer Pricing Officer and of the Dispute Resolution Panel that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rule 10B. In para no. 29 this judgment, it is noted by Hon'ble High Court that it is noted by Tribunal in that case that the audited accounts of R System International Ltd. for the year ending December 31, 2008 had been given under one column and the data for the quarter ending March 31, 2009 and March 31, 2008 (both audited) had been given in two other columns. In the present case, the assessee has submitted annual report of R Systems International for the year ending 31.12.2013 by way of additional evidence containing 1 to 188 pages and we find that the P&L account is available and although statement of P&L account is for year ended 31.12.2013 in the said additional evidence paper book but it is not shown to us that the figures for 31.03.2012 and 31.03.2013 are also available on any page of this additional evidence as has been noted by Punjab & Haryana High Court in that case. But still we feel it proper to restore this matter back to the file of AO/TPO for fresh decision and we order accordingly. The AO/TPO is directed that if the assessee can establish that the figures for Financial Year ending on 31.03.2013 can be worked out from audited accounts of that company then it sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked out by dividing the profit by the turnover. If a receipt or expenditure is not related to the turnover of the present year being the denominator to work out the profit percentage then such receipt or expenditure also cannot be considered to compute the profit percentage of that tested party or comparable being numerator because if we reduce the numerator by the amount of provision for doubtful debts and the denominator is not reduced by the amount of related turnover then the result will be absurd. Hence it has to be found out from the annual report of the concerned company as to whether provision for doubtful debts is in relation to sale of the present year or of an earlier year. As per the annual report of this company available on pages 559 to 608 of paper book, this cannot be ascertained as to whether the provision for doubtful debts is against the turnover of the present year or of an earlier year. Generally the provision for doubtful debts is created in a later year when it is felt that the debt has become bad or doubtful and therefore, in the absence of any categorical reporting in the annual report that the provision for doubtful debts is against the turnover of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the order of TPO, 7 comparables have been selected and out of the same, the assessee is requesting for exclusion of four comparables i.e. ICRA Techno Analytics Ltd., L&T Infotech Ltd., Mindtree Ltd. (segment) and Persistent Systems Ltd. (Seg) and if these four comparables are excluded, the remaining comparables will be 3 only and hence, in our considered opinion, in the facts of the present case, 25% RPT filter is proper and not 15%. 27. Now we examine the assessee's claim in respect of exclusion of L&T InfoTech Ltd. This is the case of the assessee that this company should be excluded because this company has substantial brand value and this is functionally different. The assessee has placed reliance on Tribunal order rendered in the case of Cisco Systems (India) Pvt. Ltd. Vs. DCIT as reported in 50 taxmann.com 280 (Bangalore-Trib.), copy available on pages 181 to 211 of case law compilation. We find that this Tribunal order is for Assessment Year 2009-10 whereas in the present case, Assessment Year involved is Assessment Year 2013-14 and therefore, this Tribunal order is not relevant. One more argument is made by ld. AR of assessee that this company is having high turnover of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP are not speaking orders on these aspects which are raised before us and therefore, we feel it proper to restore this matter also back to the TPO for fresh decision by way of a speaking order after considering all these aspects and after providing adequate opportunity of being heard to the assessee. We order accordingly. 29. The last company for which the assessee is requesting for exclusion is Persistent Systems Ltd. This is the claim of the assessee that this company is functionally different fromthe assessee and this company's RPT is 19.62% as per the TPO. On this aspect that this company is having RPT of 19.62%, we hold that since this company is having RPT% less than 25%, this company cannot be excluded by applying RPT filter. There is one more argument on account of this company that while working out the PLI of this company also, the AO has reduced the provision for doubtful debts from the operating expenses and as a consequence, the profit margin has been increased from 27% to 28.27%. This is the claim of the assessee that provision for doubtful debts should be part of operating expenditure. Hence it was submitted that for this issue, the same arguments should be consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial amount of intangibles assets. Further it also has a significant brand value and is engaged in diversities including IP Led business activities. It was also the case of the assessee that segmental information is not available and therefore cannot be compared with the assessee. Similar argument was submitted before us in respect of Persistent Systems Ltd, wherein the assessee has submitted that the comparable is engaged in software product development and further engaged in diversified business in IP Led and therefore the segmental information is not available and therefore has sought the exclusion of these two companies. Further it was submitted by the Ld. AR that the facts of the present case are similar to that of Microsoft Research Lab India P. Ltd [TS-994- ITAT-2017(Bang)], wherein the coordinate bench, in which one of us i.e., the Accountant Member was a party to the order, remanded the matter back to the file of the TPO for examining afresh the contention of the assessee as well as with respect to the functionality of these two comparables. 09. On the other hand the Ld. DR has submitted that in terms of the decision of the Tribunal in Microsoft Research Lab Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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