TMI Blog2020 (4) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... red to assessee engaged in the business of development and distribution of software used in banking and finance industry. E-Zest is a product company and hence, cannot be compared with the assessee engaged in software development services. See AMBER POINT TECHNOLOGY INDIA PVT. LTD. AND VICE-VERSA [ 2018 (1) TMI 1318 - ITAT PUNE] Inclusion of these companies, i.e. Acropetal Technologies Limited, Cepha Imaging Private Limited and Polaris Retail Infotech Limited - HELD THAT:- The exercise of conducting transfer pricing study is to ascertain arm s length price of international transactions of assessee with its AE. If in the process, the assessee has selected any wrong comparable, it is the duty of TPO to examine and reject the same before ascertaining arm s length price of the international transactions. An inclusion of certain entity in the list of comparables by the assessee in transfer pricing study report cannot act as estoppel against the assessee if, at a later stage, assessee seeks exclusion of the said comparable on account of functional disparity or it fails to qualify any of the filters applied. Our view is fortified by the decision of Tribunal in the case of DCIT vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department before the Tribunal. Thus, without going into merit of the issues raised in the appeal, the present appeal of the Revenue is dismissed on account of low tax effect. 5. Before parting, we clarify here that the Revenue shall be at liberty to approach the Tribunal for restoration of appeal, with the requisite material to show that the appeal is protected by the exceptions provided in para 10 of the Circular dated 11.07.2018 and its amendment dated 20.08.2018. The appeal of Revenue is accordingly dismissed on account of low tax effect. 6. The assessee has filed cross objection supporting the assessment order on issues against which Revenue is in appeal. Since the appeal of Revenue has been dismissed, the cross objection filed by assessee has become infructuous and the same is dismissed as such. 7. In the result, appeal of Revenue and the cross objection of assessee are dismissed. ITA No. 1098/Mum/2014 8. The learned AR stated at the outset that in this appeal he would not be pressing ground nos. 1, 4 to 7 and additional ground no. 8 of the appeal. Thus, the only grounds he would be pressing are ground nos. 2, 3 and additional ground no. 9. 9. The grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of software used in banking and finance industry. During the period relevant to assessment year under appeal, the assessee entered into international transaction with its Associated Enterprise (AE) for providing software development services amounting to ₹ 13,27,18,885/-. The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method to benchmark the international transactions. The assessee selected Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI). The PLI of the assessee for assessment year 2009-10 was 10.25%. The assessee selected 24 companies as comparables in its Transfer Pricing Study Report to determine Arm s Length Price (ALP) of the transactions with AE. The Transfer Pricing Officer (TPO) applied turnover filter to select the comparable companies with lower range of turnover ₹ 1.3 crores and upper cap of ₹ 130 crores. The TPO introduced 13 fresh comparables and excluded 10 companies selected by the assessee in the list of comparables. The TPO accepted only 7 comparables selected by assessee in the final set of comparables. The TPO s final set of comparables had 23 companies with PLI of 20.69%. In light ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of some of the comparables selected by the TPO/DRP. The learned AR pointed that assessee wants inclusion of : (i) PSI Data Systems Ltd.; (ii) SIP Technologies Exports Ltd.; and, (iii) TVS Infotech Ltd. The TPO and the DRP have excluded the aforesaid three companies from the list of comparables only on the ground that these are loss making companies. The learned AR submitted that admittedly the aforesaid three companies have incurred loss in assessment year 2009-10, but all these companies are not persistent loss making companies. The Tribunal in various decisions have held that comparables should be rejected only if they are persistent loss making, i.e. the comparable is having loss in three consecutive financial years including the relevant assessment year and immediately two preceding years. In support of his contention, the learned AR placed reliance on the decision of John Deere India Pvt. Ltd. vs ACIT in ITA No. 2236/PUN/2012, assessment year 2008-09 decided on 18.11.2015. To further buttress his argument, the learned AR referred to summary of the financials of comparables at page 279 of the Paper Book. The learned AR submitted that in financial years 2006-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 77 taxmann.com 7 (Pune) 14. In respect of E-Zest, the learned AR submitted that the said company is engaged in Knowledge Processing Outsourcing (KPO) and ITeS services. It is a product engineering and software development company having expertise in cloud, SAAS and business intelligence. The said company is also engaged in implementing ERP and related consultancy services. Since financial statement for the year ended 31.03.2009 was not available in public domain, the information of financial performance was obtained from the official website of the company. The learned AR further pointed that the TPO selected E-Zest as comparable without affording opportunity to assessee to file objections against selection of the said company. The learned AR referred to para 6.1.4 of the order of TPO to contend that the TPO had issued show cause only in respect of inclusion of KALS and Ocimum Bio Solutions India Ltd. There was no reference to E-Zest in the said show cause notice. Thus, proper opportunity was not afforded to the assessee to file objections against selection of E-Zest as comparable by the TPO. The learned AR submitted that Pune Bench of the Tribunal in the case of John Deere (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king companies. However, the learned AR has pointed from the financials of these companies that they were profit making companies in financial year 2006-07. The Tribunal, in the case of John Deere (supra) has held that only persistent loss making companies are to be excluded from the list of comparables. The relevant extract of the findings of the Tribunal on this issue reads as under :- 21.2 ........... The contention of the assessee is that the said company is not a persistent loss making company. Only for the reason that the comparable has suffered loss in one year the same should not be rejected. We find merit in the submission of the Ld. A.R. In the case of Bobst India Pvt. Ltd. Vs. DCIT in ITA No. 1380/PN/2010 for A.Y. 2006-07 the Tribunal has observed that only persistent loss making companies should be held as not good comparable. The Tribunal held that the persistent loss means, continuous loss for more than 3 years. Thus, where the comparable entity is not under persistent loss, the same should not be rejected as comparable. Similar view has been taken in the case of Goldman Sachs (India) Securities Pvt. Ltd. Vs. ACIT, ITA No. 7724/Mum/2011, and Brigade Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evident from the inventory at the end of the financial year 2008-09. As per Balance-sheet of the company as on 31.03.2009, the said company is having inventory of ₹ 71,47,977/-. We further find that in the case of PTC Software India Pvt. Ltd. vs DCIT (supra), the Pune Bench of Tribunal has considered the issue whether KALS is comparable to software development company. The Tribunal held that KALS is engaged in sale of software products and hence, the said company is not functionally comparable with entity engaged in designing and developing software. The decision of the Tribunal has been upheld by the Hon'ble Bombay High Court in the case of PCIT vs PTC Software India Pvt. Ltd., [2019] 101 taxmann.com 117. Similar view has been taken by the Pune Bench of Tribunal in the case of John Deere (supra), though the assessment year under consideration was assessment year 2008-09. No material has been placed on record by the Revenue to show that there was change in the activities carried out by the assessee or KALS, respectively in assessment year 2009-10. We find merit in the contentions of the assessee. Hence, we hold that KALS being functionally different should be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of additional ground of appeal no. 9, the learned AR has prayed to restore the same to the TPO for afresh examination as assessee had not objected to inclusion of these companies, i.e. Acropetal Technologies Limited, Cepha Imaging Private Limited and Polaris Retail Infotech Limited before the DRP. The contention of the assessee is that these companies are functionally different and hence should be excluded from the list of comparables. 25. The exercise of conducting transfer pricing study is to ascertain arm s length price of international transactions of assessee with its AE. If in the process, the assessee has selected any wrong comparable, it is the duty of TPO to examine and reject the same before ascertaining arm s length price of the international transactions. An inclusion of certain entity in the list of comparables by the assessee in transfer pricing study report cannot act as estoppel against the assessee if, at a later stage, assessee seeks exclusion of the said comparable on account of functional disparity or it fails to qualify any of the filters applied. Our view is fortified by the decision of Tribunal in the case of DCIT vs Quark Systems Pvt. Ltd., 38 SOT 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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