TMI Blog2018 (2) TMI 1975X X X X Extracts X X X X X X X X Extracts X X X X ..... e charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. - IT (TP) Appeal Nos. 269 And 381/Bang/2016 - - - Dated:- 2-2-2018 - Sunil Kumar Yadav, Judicial Member And Jason P. Boaz, Accountant Member Nageshwar Rao, Adv. for the Appellant. Sunil Kumar Singh, CIT-1 (DR) for the Respondent. ORDER Jason P Boaz, These are cross appeals, by the assessee and revenue, directed against the order of assessment dt.20.01.2016 passed under Section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short 'the Act'), pursuant to the directions issued by the Dispute Resolution Panel-2, Bangalore ('DRP') under Section 144C(5) of the Act dt.14.12.2015. The Assessment Year involved is 2011-12. 2. Briefly stated, the facts of the case are as under :- 2.1 The assessee is a company engaged in the business of providing contract research and development services in automobile engineering. The assessee is a wholly owned subsidiary of Diamler AG Germany, to whom it provides the aforesaid services at a compensation at cost plus mark up. For the year under consideration, the assessee filed its return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;TPO') erred in making an addition of INR 234,637,983 to the total income of the Appellant on account of adjustment in the arm's length price of the software research and development services transaction entered by the Appellant with its associated enterprise; 4. The learned AO/TPO erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arms length; 5. The learned AO/TPO erred, in law and in facts, by determining the arm's length margin/price using only FY 2010-11 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 6. The learned AO/TPO erred in rejecting certain comparable companies by applying the following quantitative and qualitative filters: (a) The learned AO/TPO erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant for having diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, respectively. 14. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act. 3.1.2 The assessee has also filed additional grounds vide letter dt.21.7.2017 :- 15. The learned AO/TPO and DRP erred in accepting Acropetal Technologies Limited, E-Infochips Limited, E-Zest Solutions Limited, ICRA Techno Analytics Limited, Infosys Limited, Tata Elxsi Limited and Persistent Systems and Solutions Limited as comparable companies applying unreasonable comparability criteria. 16. The learned AO/TPO and DRP erred in rejecting Akshay Software Technologies Limited, Cat Technologies Limited, LGS Global Limited, Silverline Technologies Limited, Caliber Point Business Solutions Limited, Helios Matheson Information Technology Limited and R Systems International Limited as comparable companies. 17. Larsen Toubro Infotech Limited, Persistent Systems Limited and Sasken Communication Technologies Limited were chosen as comparables in transfer pricing study, however upon availability of more details in public domain, these companies are found to be not comparable and should be excluded from the final set of comparables. 3.1.3 Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Profit (Op. Income - Op. Expenses) 10,82,83,032 Operating / Net Margin (OP/TC) 7.23% 4.4 The assessee conducted a TP Study for the international transactions in respect of its software development activity and applying CUP Method as the Most Appropriate Method ('MAM') selected 23 companies as comparables to it after applying certain filters. Based on the comparability analysis carried out, the assessee concluded that its international transactions with the AE are at arm's length. 4.4.1 The TPO examined and assessee's TP Report and rejected the same for the various reasons given in his TP order. The TPO then, adopting TNMM as the MAM conducted his own comparability analysis and applying certain criteria / filters, finally selected the following 13 companies as the final set of comparables. Sl. No Name Sales Cost PLI 1 Acropetal Technologies Ltd.(seg) 814,016,893 616,754,876 31.98% 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Operating Cost) Price Received 1,60,51,01,082 Shortfall being adjustment u/s 92CA: 24,09,24,619 Based on the above computation, the TPO proposed an adjustment of ₹ 24,09,24,619 in respect of the international transactions entered into by the assessee with its AEs in the software development services segment which was incorporated in the draft order of assessment for Assessment Year 2011-12 dt.26.3.2015. 4.6 Aggrieved by the draft order of assessment for Assessment Year 2011-12 dt.26.3.2015, the assessee filed its objections thereto before the DRP, which disposed off the same by issuing directions thereon under Section 144C(5) of the Act on 14.12.2015. Pursuant thereto, the Assessing Officer passed the impugned final order of assessment dt.20.1.2016 for Assessment Year 2011-12, wherein the assessee's income was determined at ₹ 36,84,82,023 solely due to the Transfer Pricing Adjustment of ₹ 23,46,37,983. 4.7 Aggrieved by the order of assessment for Assessment Year 2011-12 passed under Section 143(3) r.w.s. 144C(13) dt.20.1.2016, both Revenue and the assessee hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not rendered any finding in this regard. In this factual matrix of the case, the finding of the DRP is being set aside and the matter is remanded to the file of the TPO for the limited extent of factual verification in this regard as observed above, before allowing it as operational in nature in keeping with the orders of the co-ordinate bench in the assessee's own case for Assessment Year 2010-11 (supra). Consequently, Revenue's grounds at S.Nos.2 3 are partly allowed for statistical purposes. 7. Ground No.4 - Risk Adjustment. 7.1 In this ground, Revenue assails the order of the DRP for granting 1% risk adjustment arbitrarily without appreciating the facts of the case and the comparables. According to the learned Departmental Representative since, except for making the claim, no working of the assessee's claim for risk adjustment had been filed, therefore the assessee is not entitled for being granted any risk adjustment. In support of this, reliance was placed on the decision of the co-ordinate bench of this Tribunal in the case of Syniverse Teledata Systems Ltd. v. Dy. CIT [2017] 80 taxmann.com 196 (Bang. - Trib.) (2017). 7.2 Per contra, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of Revenue's appeal for Assessment Year 2011-12 is allowed. 8. In the result, Revenue's appeal for A Y 2011-12 is partly allowed. Assessee's appeal in IT(TP)A No.269/Bang/2016 9. Ground No.1 - being general in nature, no adjudication is called for thereon. 10. Ground No.2 - Selection of Most Appropriate Method ('MAM') 10.1 In this ground, the assessee assails the order of the TPO in rejecting CUP Method adopted as the MAM by the assessee for its TP Study and adopting TNMM as the MAM for carrying out the comparability analysis. 10.2 Under the CUP Method, the assessee had compared the hourly rates charged by the assessee to the AE with the man hour rates adopted by other leading software companies whose information was available in the public domain. In the course of proceedings, it was brought to our notice that a co-ordinate bench of this Tribunal had considered and decided this issue against the assessee in the assessee's own case for the earlier year i.e. Assessment Year 2010-11. In its order in IT(TP) A No. 291/Bang/2015 at para 6 thereof the co-ordinate bench held as under : '6. We have heard the learned Authorised Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -up of 5% would be billed to the AE on a periodical basis. The conversion generally done at the prevailing rate of USD or foreign currency involved. Therefore, the basic concept is the margin would be about 5%. In case of any foreign exchange gain, this could increase the margin to that extent. In case of foreign exchange loss on the USD / foreign currency quoted by the assessee, then the margin would come down to that extent. However, as seen in this case, the margin without foreign exchange gain itself is less than 5%. Therefore, in the absence of correct cost structure and billing procedure, it is very difficult to accept the Cost Plus Method and analyse the issue. 5.7 The next contention of the assessee is with reference to CUP method. The assessee states in the Annexure III to 3CEB report that 'there are no internal comparables within the group as entire services of assessee are bought back by AE. Offshore software development work by other companies may represent external comparables. However, data in respect of the same which is available in terms of Euros per hour is not comparable without making suitable adjustments to the differences in the nature and terms of cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92C prescribes five methods - CUP, RPM, CPM, PSM and TNMM. Rule 10C provides the relevant guidelines for analyzing the most appropriate method to be selected. Under the Indian TP regulations, there is no priority or preference to any of the methods. There are also no regulations which prescribe any circumstances under which method is to be adopted, except for PSM. The above 5 methods are categorised generally as 1.Traditional methods i.e., CUP, RPM and CPM, and 2. Transactional profit methods of PSM and TNMM. In the absence of reliable data to undertake the exercise under the traditional methods, the only option is go for the transactional profit methods, when standard methods are not reasonably applied. In view of absence of reliable data either to adopt Cost Plus Method or to analyse the data on the basis of CUP method, either internal CUP or external CUP, we are of the opinion that under given facts and circumstances of the case, TNMM is the only option available to the TPO to analyse the assessee's transactions in order to arrive at the ALP. Therefore, we reject the assessee's contentions on CUP/CPM as most appropriate method and approve the approach taken by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Addl. Ground No.17, the assessee seeks exclusion of the following companies :- (viii) L T Infotech Limited (ix) Persistent Systems Limited and (x) Sasken Communication Technologies Limited. 11.3.3 AS per Addl. Ground No.16, the assessee seeks inclusion of the following companies :- (i) Akshay Software Technologies Ltd. (ii) Cat Technologies Ltd. (iii) LGS Global Limited (iv) Silverline Technologies Ltd. (v) Caliber Point Business Solutions Ltd. (vi) Helios Matheson Information Technology Ltd. (vii) R Systems International Ltd. 12. Addl. Ground No. 15 - Companies the assessee seeks Exclusion from list of comparables. 12.1 In this additional ground (supra), the assessee seeks exclusion of the following seven companies from the TPO's set of comparables. (i) Acropetal Technologies Limited (ii) E-infochips Limited (iii) E-Zest Solutions Ltd. (iv) ICRA Techno Analytics Limited (v) Infosys Technologies Limited (vi) Tata Elxsi Limited (Seg.) and (vii) Persistent Systems Solutions Ltd. 12.2 Before us, the learned Authorised Representative for the assessee submitted that the aforesaid 7 companies need to be exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on hand, after affording the assessee adequate opportunity of being heard in the matter. We hold and direct accordingly. 13. Acropetal Technologies Ltd. ('Acropetal') 13.1 Before us, the learned Authorised Representative for the assessee submitted that this company, 'Acropetal' needs to be excluded from the TPO list of comparables as it is carrying out business in four segments, and segmental details are available only for three segments. According to the learned Authorised Representative the functions of this company are akin to KPO Services and it has substantial R D activities. It was also submitted that this company needs to be rejected as it is functionally not comparable and fails the employee cost filter. In support of the assessee's plea for exclusion of this company from the list of comparables, reliance was placed on the following decisions :- (i) AMD India (P.) Ltd.'s case (supra); and (ii) Applied Materials India (P.) Ltd.'s case (supra) 13.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company in the final set of comparables. 13.3.1 We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of comparables to the assessee. In support of this proposition, the learned Departmental Representative relied on the latest decision of the co-ordinate bench in the case of AMD India (P.) Ltd. (supra) wherein at para 9 thereof this company has been retained in the list of comparables. 14.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the assessee has raised objections against the inclusion of this company 'E-Zest' as a comparable before the DRP, and notice that the DRP has observed that this company's activities predominantly revolve around software development services and that this company was selected as functionally comparable to the assessee in Assessment Year 2007-08; and therefore retained this company as a comparable. We find that a co-ordinate bench of this Tribunal in its decision in the case of AMD India (P.) Ltd. (supra) also for Assessment Year 2011-12; following the decision of the Delhi ITAT in Saxo India (P.) Ltd. v. Asstt. CIT[2016] 67 taxmann.com 155, which was upheld by the order of the Hon'ble Delhi High Court (supra), at para 9 of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issues raised. 15.3 We have heard the rival contentions, perused and carefully considered the orders of the authorities below. It is seen that the TPO has rejected these comparables chosen by the assessee with a single line explanation in the table at para 6.1 of his order under Section 92CA of the Act. As was pointed out to us, many of the companies have been rejected on the ground that data was not available or that data was not available in the Prowess data base. The DRP too has not rendered a proper finding in respect of each of the 7 comparables listed above. In some cases, the DRP has given a cryptic one line - observation, without dealing with the issues raised by the assessee in objections before the DRP. Some of these companies have not been addressed / adjudicated at all as there is no mention of these companies in the DRP order. In this factual matrix of the case, we are of the considered view that it is necessary and appropriate to remand the issue of comparability of the above 7 companies to the file of the DRP for examining the issues and adjudication on each of these companies, on the issues raised by the assessee, after affording the assessee adequate opportunit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd.[2010] 38 SOT 307. As per the principles laid down in the aforesaid decision of the Special Bench (supra), we admit this additional ground raised by the assessee seeking exclusion of these two companies (i) L T Infotech Limited (ii) Sasken Communication Technologies Limited without commenting on the merits of the case and remit the matter of their comparability analysis to the file of the TPO/A.O. for examination of the assessee's claim and to adjudicate thereon after providing the assessee adequate opportunity of being heard, which shall be duly considered. We hold and direct accordingly. 17. Ground No.13 - Charging of Interest u/s. 234B 234D of the Act. In this ground, the assessee denies itself liable to be charged interest under Sections 234B 234D of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition was upheld by the Hon'ble Apex Court in the case of CIT v. Anjum M. H. Ghaswala[2001] 119 Taxman 352/252 ITR 1 (SC), and we therefore uphold the action of the Assessing Officer in charging the said interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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