TMI Blog2020 (6) TMI 584X X X X Extracts X X X X X X X X Extracts X X X X ..... . Risk adjustment - HELD THAT:- Reliance in this regard was placed on the decision of the Hon ble Delhi Bench of the Tribunal in the case of Honeywell Turbo Technologies (India) (P.) Ltd. v. DCIT [ 2017 (3) TMI 1533 - ITAT PUNE] wherein the Tribunal granted an adjustment to be granted for differences in risk assumed by the tested party and the comparable entities. We are of the view that the question of allowing risk adjustment should be considered by the TPO afresh in the light of the submissions and after examining the computation of risk adjustment and affording opportunity of being heard to the assessee. Mistakes in computation of PLI - HELD THAT:- We are of the view that in the light of the decision of the Tribunal in the case of Rolls- Royce India (P.) Ltd. [ 2015 (12) TMI 516 - ITAT DELHI] the PLI should directed to be reworked by considering the provision for doubtful debts as operating expenditure. We hold and direct accordingly. Unexplained investment - Tax value of certain assets received by it free of cost from its AEs - Additions u/s 28(iv) - HELD THAT:- The provisions of section 69 are not attracted because there is nothing brought on record to show th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch development services and marketing technical support services to its AEs. 4. For the year under consideration, the assessee, inter alia, provided contract SWD services to its AEs for a consideration of ₹ 161,91,46,172. It is not in dispute that the transaction of rendering SWD services by the assessee to its AE was an international transaction and therefore the price received by the assessee from its AE and income received from such transaction has to pass the Arm s Length Price [ALP] test as laid down in section 92 of the Act. 5. The assessee in support of its claim, that the price received from the AE was at arm s length, filed a TP analysis in which it adopted Transaction Net Margin Method [TNMM] as the Most Appropriate Method [MAM] for determining the ALP. The Profit Level Indicator [PLI] chosen for comparing the assessee s profit margin with that of the comparables was Operating Profit to Operating Cost [OP/OC]. The OP/OC of the assessee was as follows:- Operating Income ₹ 162,92,37,531/- Operating Cost ₹ 139,58,15,664/- Operating Profit (Op. Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition suggested by the TPO was added to the total income of the assessee by the AO in the draft order of assessment. The assessee preferred objections to the said draft assessment order before the Dispute Resolution Panel u/s. 144C of the Act. 9. Briefly, the directions issued by the DRP are as follows: (i) Functionality Filter: The following companies were directed by the DRP to be excluded from the list of comparables by accepting the contentions of the Appellant: (i) Cigniti Technologies Ltd.; and (ii) SQS India Ltd. The DRP also directed the inclusion of CG-Vak Software and Exports Ltd. However the other contentions of the Appellant seeking the exclusion of incomparable companies and inclusion of comparable companies came to be rejected. (ii) Working capital and risk adjustments: The DRP upheld the action of the TPO in not granting any adjustment towards the differences in working capital ( WC Adjustment ) and risk of the Appellant and the comparable companies. 10. On giving effect to the above directions issued by the DRP, the final list of comparables is as follows: Sl. No. Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018), wherein the aforesaid 4 companies were directed to be excluded. In view of the above, it is submitted that this company ought to be excluded from the final list of comparables:- (a) Infosys Ltd. was directed to be excluded on the ground that it owns IPRs, brand value, focusses on R D and operates in diversified markets, etc. (b) Larsen Toubro was excluded on the ground that it is functionally incomparable to the assessee on various counts. The company deals with software products and renders aftermarket service management services, integrated IT service management SaaS solution, business process management implementation services, cloud computing, consulting, enterprise integration, geographical information system and infrastructure management services. Despite rendering these diverse services, the segmental details of the various services and products are not available. The company s business segments are divided into service cluster, industrial cluster and telecom business. In the absence of segmental data being made available as regards the diverse services, it is not possible to determine whether the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cloud layers of enterprise application. The company also renders industryspecific solutions spanning business applications consulting, design, implementation and support. The said services are in the nature of knowledge process outsourcing services and are entirely different from the routine SWD services rendered by the assessee. The company is also engaged in development of software products and earns revenues from sale of user licenses for software applications. These diverse services are reported under one segment without any details being available as regards these services. 15. For the reasons given above and following the decisions of the Tribunal, we direct exclusion of the 4 companies mentioned in ground No.9 and thus ground No.9 is accordingly allowed. 16. As far as ground Nos. 7 8 are concerned, the assessee seeks inclusion of Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd. Maveric Systems Ltd., Sakhya Infotech Ltd. and 8K Miles Software Ltd. Akshay Software Technologies Ltd. ( Akshay ) 17. This company was selected by the assessee in its TP analysis but was rejected by the TPO for the reason that the company is engaged in prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as remanded to the TPO. 20. The ld. DR relied on the order of the DRP. 21. We are of the view that in the light of the submissions made as above and as directed by the Tribunal in the case of EMC Software and Services India Pvt. Ltd. (supra) , the comparability of the this company should be considered afresh by the TPO after affording assessee opportunity of being heard. We therefore order accordingly. Sasken Communication Technologies Ltd. ( Sasken ) 22. This company was selected by the assessee and came to be rejected by the TPO for the reason that the company was functionally dissimilar. The exclusion of the company came to be upheld by the DRP on the grounds that (i) the company fails export turnover filter; (ii) the company earns revenue from licensing, SWD and royalty; and (iii) the company offers R D consultancy, wireless and software products. 23. In this regard, it was submitted by the ld. AR that the company is functionally similar to the Appellant as the services rendered by the company predominantly are in the nature of SWD services, with 99.12% of its revenue for the year being generated from rendering the said services. The income from software product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices India Pvt. Ltd. (supra) , we are of the view that the comparability of the this company should be considered afresh by the TPO after affording assessee opportunity of being heard. We hold accordingly. Maveric Systems Ltd. ( Maveric ) 29. It was submitted that this company appeared in the accept/reject matrix of the search conducted by the TPO and was rejected by the TPO on the basis that the company was engaged in software testing. The company s inclusion was sought by the assessee. In the order passed under Section 92CA of the Act, the TPO excluded the company on the ground that the company is engaged in significant R D activity and incurred expenditure of 6% of turnover. The DRP upheld the exclusion of the company on the basis that generally, companies with R D expenditure of less than 3% alone were considered. 30. In this regard it was submitted that the actions of the lower authorities are erroneous and wholly inconsistent. It was submitted that while the TPO rejected the application of R D expenses 3% of total turnover filter, the DRP upheld the exclusion of the company on the basis that it incurred R D expenses in excess of 3% of revenue. This action of the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee in its TP study and came to be rejected by the TPO for the reason that it fails the export revenue filter. While the assessee demonstrated before the DRP that the company passes the filter and earned revenue from export of services comprising 95.41% of the total revenue, the DRP upheld the rejection of the company on an altogether new basis that the company had employed more assets in the nature of intangibles. 38. At the outset, it was submitted that the company is functionally comparable and passes all the filters applied by the TPO. It is submitted that action of the DRP in upholding the exclusion of the company on an altogether new basis without first putting the assessee on notice of the same is wholly erroneous and unsustainable. 39. We are of the view that the comparability of the company should be considered afresh by the TPO both on the export revenue filter and the filters applied by the DRP, because admittedly the assessee was not confronted by the DRP on the new filter it applied nor did it give a finding one way or the other on the export turnover filter. 40. In ground no.4, the assessee has projected its grievance regarding non-grant of work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng chart sets out the levels of risk assumed by the assessee and its AE: Risk Appellant AE Market risk 0 4 Project liability risk 1 3 R D risk 0 4 Credit risk 0 4 Foreign exchange risk 2 2 Manpower risk 0 4 General business risk 2 2 Note: 0 indicates no responsibility, 1 indicates low risk, 2 indicates moderate risk, 3 indicates high risk, 4 indicates significant risk. Detailed submissions in this regard are placed at pages 249-266 of the paperbook. 45. Reliance in this regard was placed on the decision of the Hon ble Delhi Bench of the Tribunal in the case of Honeywell Turbo Technologies (India) (P.) Ltd. v. DCIT (reported in [2017] 78 taxmann.com 342 (Pune -Trib.) , wherein the Tribunal granted an adjustment to be granted for di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation on the same were claimed by the AEs. Since the assets were received free of cost, the same were not reflected in the books of the assessee. 53. The DRP upheld the action of the AO in bringing the value of assets to tax under Section 28(iv) of the Act inter alia on the basis that the assessee was the beneficial owner of the asset. In this regard it was submitted that the action of the lower authorities is erroneous. It was submitted that in order to bring a benefit or perquisite to tax under Section 28(iv) of the Act, the necessary preconditions are that such benefit or perquisite should arise from the business and there must be a nexus between the benefit/perquisite and the business. It was submitted that the assets received by the assessee free of cost did not arise from the business inasmuch as the same was not as a consequence of the services rendered by the assessee to the AEs/third parties who supplied the assets. Therefore, at the threshold, this section cannot be invoked. 54. It was submitted that the assets received by the assessee free of cost cannot be brought to tax under Section 28(iv) of the Act. Reliance in this regard is placed on the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 12 , the assessee has submitted that during the year under consideration the assessee is eligible to claim deduction of its profits and gains derived from export of articles, under Section 10A of the Act. The addition made under Section 28(iv) of the Act would go to enhance the profits of the assessee and the assessee would be eligible to claim deduction of the enhanced profits. However, the DRP rejected the claim on the basis that the issue had not reached finality. In this regard it was submitted that the assessee is entitled to claim deduction on the enhanced profits and reliance in this regard is placed on the decision of the Hon ble High Court of Karnataka in CIT v. Mpact Technology Services Pvt. Ltd. (Order dated 11.07.2018 passed in ITA No. 228/2013) . 58. The ld. DR relied on the order of DRP. 59. We have given a careful consideration to the rival submissions. The facts as recorded in the order of DRP shows that the assessee received capital assets worth ₹ 15,07,90,003 from the holding company, Brocade Communication Systems LLC. Out of the aforesaid assets received by the assessee, the DRP found that the invoices submitted in respect of the assets of the va ..... X X X X Extracts X X X X X X X X Extracts X X X X
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