TMI Blog2019 (12) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of the Income Tax Act, 1961 dt.29.10.2018 passed in pursuance to the directions of Dispute Resolution Panel (DRP) under Section 144C(5) of the Act Dt.12.09.2018. 2. The assessee has raised the following grounds of appeal : 1 Assessment and reference to Ld. Transfer Pricing Officer are bad in law and on facts a) The order issued by the Joint Commissioner of Income-Tax, Special Range -2 [ JCIT or Ld. AO ], under section 143(3) read with section 144C, pursuant to the directions issued by the Hon ble Dispute Resolution Panel [ DRP / Ld. Panel], is bad in law and on facts and is in violation of the principles of natural justice. Without prejudice to the generality of the above, the order passed by the Ld.AO is bad in law insofar as the fact that the Ld. AO did not issue to the Appellant a show cause notice, as per proviso to section 92C(3) of the Act b) The Ld. AO has erred in law in making a reference to the learned Deputy Commissioner of Income Tax [Transfer Pricing (1)(2)(1)] [ Ld. TPO ]. The Ld. Panel erred in upholding the actions of the Ld. AO/ TPO. c) The directions issued by the Ld. Panel did not take cognizance of the objections raised by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pricing Study without considering the functional and risk analysis of the Appellant and the Ld. Panel also erred in confirming the same f) The Ld. AO/ Ld. TPO erred in law and the Ld. Panel further erred in confirming nonapplication of multiple-year data while computing the margin of alleged comparable companies as such data had ah influence in determining the transfer pricing policy of the Appellant g) The Ld. AO/ Ld. TPO erred in law in rejecting the quantitative filters applied by the Appellant in its TP Study such as (i) use of multiple year data (ii) rejecting companies with R D to Sales of more than 3% (iii) rejecting companies with net fixed assets to sales of less than 2OO% (iv) rejecting companies with advertisement, marketing and distribution (AMD) expenses to sales less than 3% and Ld. Panel erred in upholding the actions of the Ld. AO / Ld. TPO h) The Ld. Panel grossly erred in upholding the rejecting of the positive net worth filter applied by the Appellant, when in fact, the Ld. TPO had accepted the application of the said filter i) The Ld. AO / ld. TPO erred in law in applying arbitrary filters as criterion for rejection of companies identified by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as to reject high turnover companies as well. The Ld. Panel also erred in confirming the same p) The Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. Panel also erred in confirming the same q) The Ld. AO /Ld. TPO erred in not applying the turnover range at the lower and upper limit so as to reject high/low turnover companies r) The Ld. AO /kl. TPO erred in not applying the abnormal profit earning filter to reject companies which had earned abnormal profits, indicating the existence of peculiar economic circumstance having an impact on the margin of the companies. The Ld. Panel erred in upholding the same 4 Comparability Analysis adopted by the Ld. TPO for determination of arm s length price for the Information Technology Enabled ( ITe ) services segment a) The Ld. AO/ In. TPO erred in rejecting the value of international transaction of provision of Information Technology Enabled services, as recorded in the books of account, as the arm's length price. The Ld. Panel erred in upholding the same b) The Ld. AO/ Ld. TPO erred in determining a new arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D) expenses to sales less than 3% and the Ld. Panel erred in upholding the actions of the Ld. AO/ Ld. TPO j) The Ld. AO / ld. TPO erred in law in applying arbitrary filters as criterion for rejection of companies identified by the Appellant in the Transfer pricing Study such as (i) Companies whose data for financial year (.FY') 2013-14 was not available (ii) Companies with different financial year ending (i.e., other than 3l March 2ol4) (iii) companies whose ITeS income is less than 75% of its total operating revenues (iv) Companies who have export service income less than 75% of the sales (v) companies with employee cost less than 25% of turnover (vi) companies with persistent ross (Companies reporting loss for any 2 years out of last three years (vii) companies having related party transactions greater than 25% of the sales The Ld. panel also erred in upholding the actions of the Ld. AO/ Ld. TPO k) The Ld. AO/ Ld. TPO erred in considering data obtained u/s 133(6) of the Act. The Ld. Panel erred in confirming the same l) The Ld. AO/ Ld. TPO erred in rejecting Jindal Intellicom limited despite being functionally comparable. The Ld. panel also erred in confirming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts in disregarding the application of multiple-year data while computing the margins of comparable companies. The Ld. Panel erred in upholding the same 6 Non-allowance of appropriate adjustments to the comparable companies, by the Ld. TPO The Ld. AO/ Ld. TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B of the Rules to account for, inter alia, differences in (a) accounting practices, (b) Working capital adjustment (c) Risk profile between the Appellant and the comparable companies. The Ld. Panel erred in confirming the same. 7 Variation of 3% from the arithmetic mean The Ld. AO/Ld. TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Income Tax Act, 1961 ( Act ) available to the Appellant. The Ld. Panel erred in upholding the actions of the Ld. AO/ Ld. TPO. 8 The Ld. AO/Ld. TPO erred in law in erroneously not granting complete credit for advance tax and self-assessment tax paid by the Appellant, as claimed in the return of income 9 The Ld. AO/Ld. TPO erred in law in erroneously not granting credit for Minimum Alternate Tax (MAT), as claimed in the return of income under section 115JAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Software Development Services to its AEs adopted TNMM method and the PLI on OP/TC (Total Cost) is 14.18%. The TPO has rejected TP Study and called for the documents in respect of comparables selected for determination of arm s length in accordance with Section 92C(1) and 92C(2) of the Act. The TPO made comparison and examination of the comparables selected by assessee and found that the assessee has adopted 7 comparables on Software Development Services segment and Profit Level Indicator (PLI) i.e. OP/TC being 14.18%. Whereas the TPO has dealt on the filters in the TP Study and calculated the average Arithmetic Mean (AM) of comparables which has worked out to average OP/TC at 11.91%. After verification and examination of TP Document, the TPO found pertinent defects in the TP Study and finally the TPO has rejected the comparables selected by the assessee in TP Study and applied filters with criteria of current year data where the companies whose data for the F.Y. 2013-14 is excluded, the companies having different financial year ending falls within 12 months period for 1.4.2013 to 31.3.2014 were rejected. The companies whose income was less than ₹ 1 Crore were excluded an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd similarly inclusion of 7 comparables in the Software Development Services segment. Whereas in the case of ITES, the ld. AR prayed for exclusion of 3 comparables and inclusion of 3 comparables and filed synopsis and chart in support of his arguments. The assessee has only argued and made submissions on related grounds of appeal only. Contra, the ld. DR supported the orders of TPO and DRP and filed written submissions. 6. We heard the rival contentions and perused the material on record. The learned Authorised Representative submitted that the assessee has two segments (i) Software Development Services segment and (ii) ITES segment. We shall deal with the exclusion of comparables as submitted in the course of hearing by the learned Authorised Representative in Software Development Services segment. (i) Infosys Limited : This company is functionally dissimilar and provides end to end business solutions like business consulting technology engineering and outsourcing services and no segmental details in respect of services are available and made investments and products to establish as a tradable IPO owner. Further the comparable owns significant brand value products and focus on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in proprietary products. Significant expenditure in foreign currency to the extent of 57.13%. During the year the product engineering business service of the company was transferred to its subsidiary. The company segments are divided into service cluster, industrial cluster and telecom business. As per the Annual Report of the company, the company has a significant capital work-in-progress and the company has developmental products. The comparable was excluded from the final list of comparable in assessee's own case for the Assessment Year 2011-12 by the DRP and further the comparable company was excluded by the co-ordinate Bench of Delhi Tribunal in the case of Pitney Bowes Software India Pvt. Ltd. Vs. ACIT 101 Taxman.com 350. The learned Authorised Representative also relied on CGI Information Systems Management Consultants (P) Ltd. Vs. ACIT (2018) 94 taxman.com 97 and DCIT Vs. Taxman India Pvt. Ltd. (2016) 74 Taxmann.com 88 (Del). We found that the co-ordinate Bench of Tribunal in M.P. No.95/Bang/2019 in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 has dealt on the issue at page 2 para 4 as under : 4. We heard Ld D.R and perused the record. We find meri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 74 taxmann.com 88 (Delhi). We relied on the decision of CGI Information Systems Management Consultants Pvt. Ltd. (supra) at paras 28 to 30 as under : We rely on judicial decisions and facts in respect of comparable Persistent Systems Ltd. and direct the Assessing Officer to exclude from the final list of comparable for determination of ALP. (iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No.31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO on the functional dissimilarity and was confirmed by the DRP observing that the company fails export turnover filter. The company earns revenue from licensing and software development and royalty and the company offers software products. The learned Authorised Representative submissions are that the company is functionally similar to the assessee's profile and services rendered are predominantly software development services and income from software products constitute a meager amount of total revenue shall not have any impact on the profitability of the company s software development segment. The learned Authorised Representative referred to the profit and loss account at page 1455 where the abridged statement profit and loss account was disclosed and as on 31.3.2014, the revenue from the operations of software products is ₹ 309.17 lakhs and software services are ₹ 3508.49 lakhs. The learned Authorised Representative emphasizing that there is no impact on the profits. We are of the opinion that the assessee company has customers in US and Europe area and the export revenue filter test has to be applied by the TPO. Accordingly we restore this issue to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mary of business for the relevant year. As this information is available, we consider it proper to restore this comparable to the file of TPO for examination and verification. (vii) Celstream Technologies Limited - The TPO and DRP has rejected the comparable as profit and loss account is not available in public domain and the learned Authorised Representative referred to page 1755 to 1786 of Paper Book where the details of profit and loss account and Annual Report of the company are filed. Since the financial statements are available, we restore this issue to the file of the TPO to consider the financial statements, profit and loss account and Director s Report. Accordingly, we restore the comparable to the file of TPO for verification of the financial statements. 8. The learned Authorised Representative made submissions in respect of exclusion of three comparables in the ITES segment and substantiated with chart and Paper Book. (i) Infosys BPO Limited - The comparable is functionally dissimilar as it is engaged in provision of Integrated IT and end to end business process, outsourcing solutions and has high brand value and also made significant investment creating inta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. These activities are totally different from the activities of the assessee which perform very limited/low end functions back office services. The review and business functions of Cross Domain is as follows:- With a decade of experience in Payroll Outsourcing, Crossdomain has created a re-engineered payroll service EFFIPAY that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. Crossdomain s IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes. Source: http:/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue is from ITES. We found that this issue was considered by the co-ordinate Bench in the case of Ocwen Financial Solutions Pvt. Ltd. Vs. JCIT (supra) at para 10.4.1 held as under : We follow the co-ordinate Bench decision and direct the TPO to include comparable for determination of ALP. (iii) Accentia Technologies Limited, the TPO has rejected the comparable and DRP has upheld the exclusion of comparable altogether on a new basis that the company failed the RPT filter. The DRP has observed that the RPT is more than 25% therefore it cannot be comparable. Considering the facts and circumstances and material on hand, we consider it proper to restore this issue to the file of the TPO for verification and examination. 10. Further, the learned Authorised Representative argued on Ground of Appeal No.4C and 4D in respect of Revenue not considering the foreign exchange gain and Working Capital Adjustment. Whereas the TP Adjustment was made to non-AE transactions and foreign exchange gain in ITES has to be considered. Considering these facts, we restore this disputed issue to the file of the TPO to consider the assessee s submissions and facts envisaged for determination ..... X X X X Extracts X X X X X X X X Extracts X X X X
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