TMI Blog2020 (7) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolled and uncontrolled transactions had to be judged inter alia, with reference to comparability factors as indicated under Rule 10B(2) of I.T. Rules. Whether a concern which fails service revenue filter applied by the TPO, can this be excluded from final list of comparable? - We find that the TPO had mentioned the same to be at 74% whereas the learned AR for the assessee claims that it is 75% and on the other hand the learned DR for the Revenue points out that the employee service revenue filter comes to 84.93%. In view of the dis-similarity in the figures proposed by the AO / TPO, the learned AR for the assessee and learned DR for the Revenue, we remit this issue to the file of AO / TPO to verify the stand of the assessee and in case it fails to service revenue filter, which is proposed by the TPO himself then the said concern is to be excluded from the final list of comparable. Exclusion of Persistent Systems Limited - As in assessee s own case, relating to assessment year 2007-08 and pointed out that the said concern was held to be functionally similar to the assessee. The learned AR for the assessee fairly pointed out that the issue was decided against the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant : Ms. Shruti Khimta, Adv. For the Respondent : Ms. Nidhi Sharma, Sr.DR ORDER PER SUSHMA CHOWLA,VP The present appeal filed by assessee is against order of DCIT, Circle- 17(1), New Delhi dated 28.10.2015 relating to assessment year 2011-12 against the order passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised following grounds of appeal:- That on the facts and circumstances of the case, and in law: 1. The assessment order passed by the Learned Assessing Officer ('Ld. AO') pursuant to the directions of Learned Dispute Resolution Panel ('Ld. DRP') is bad in law and void ab-initio. 2. The Ld. AO / Learned Transfer Pricing Officer (Ld. TPO') (following the directions of the Ld. DRP, have erred on facts and in law in enhancing the income of the Appellant by ₹ 3,46,60,211/-. 2.1. The Ld. TPO erred on the facts and in the circumstances of the case and in law in framing the order u/s 92CA of the Income Tax Act, 1961 ('the Act') on findings which are erroneous in law, contrary to the facts and based on mere conjectures and surmises. 2.2. The Ld. TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.9. by committing a number of factual /computational errors in selection/ rejection of proposed comparables and/ or in the operating profit mark-ups of the comparables; 3.10. ignoring the business/ commercial reality that the Appellant undertakes limited business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; 3.11. by making the addition to the entire value of transactions entered into by the Appellant in its export segment and not only to the value of international transactions entered into by the Appellant (i.e. proportionate adjustment) and ignoring established jurisprudence in this regard; 3.12. disregarding the analysis and documentation submitted by the Appellant to benchmark the international transaction pertaining to provision of software development services by using internal Comparable Uncontrolled Price as the most appropriate method to determine the arm's length price; 3.13. disregarding the analysis and documentation s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Software Development Services by the assessee to its AE. The TPO noted certain defects in the transfer pricing study report and also the application of average margin of three years by the assessee and proposed that only data for contemporaneous period had to be applied. He also revised the filters to be applied and show caused assessee with a fresh list of comparables of 18 companies, whose mean margin worked out to 22.32%. Admittedly there was no dispute on FAR analysis and the PLI to be adopted. The TPO in the order passed under section 92CA(3) of the Act also proposed an adjustment on account of interest on receivables from AE. The TPO thus proposed an upward adjustment of ₹ 05,01,36,985/-. The Assessing Officer in the draft assessment order show caused the assessee as to the upward adjustment to be made in its hand. The assessee filed objection before the DRP, which in turn directed exclusion of two concerns i.e. Infosys Ltd. and eZest Solutions Ltd. and inclusion of Think Soft Global Services Ltd. The DRP also directed that working capital adjustment is to be allowed. The DRP directed application of LIBOR rates instead of SBI PLR lending rates for the adjustment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny name OP/TC 1. Acropetal Technologies Limited (Seg) 36.69% 2. Akshay Software Technologies Limited 0.16% 3. Celstream Technolgies Pvt.Ltd. 16.27% 4. E-Infochips Limited 56.44% 5. Evoke Technolgoies Pvt.Ltd. 8.11% 6. CG Vak Software and Exports Ltd. (Segment-IT) -4.63% 7. Larsen Toubro Infotech Ltd. 18.40% 8. LGS Global Limited (Lanco Global Solutions Ltd.) 13.75% 9. Mindtree Limited (Seg0 10.74% 10. Persistent Systems Solutions Limited (Merged) 22.12% 11. Persistent Systems Limited 23.08% 12. R S Software (India) Limited 16.20% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dule of working is different, then such a concern cannot be held to be functionally comparable and cannot be selected in the final list of comparables. The Hon ble Delhi High Court in Rampgreen Solutions vs. CIT (supra) while adjudicating similar issue of application of TNMM method and whether functionality being same was sufficient held that the comparable transaction/entities must be selected on the basis of similarity with the control transaction/entity. The comparability of controlled and uncontrolled transactions had to be judged inter alia, with reference to comparability factors as indicated under Rule 10B(2) of I.T. Rules. The relevant findings of the Hon ble Delhi High Court in Rampgreen Solutions vs. CIT (supra) in paras 42 to 44 of judgement reads as under:- 42. Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying TNMM method, broad functionality is sufficient and it is not necessary that further effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The DRP held that TNMM allows flexibility and tolerance in selection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (b) the difference in services/products offered has no material bearing on the profitability. 12. The Hon ble Delhi High Court while deciding the case of BPO company held that BPO services does not necessarily involve advanced skill and knowledge; and comparing it with KPO services, it was held that KPO would involve employment of advanced skill and knowledge for providing services. The Hon ble High Court in Rampgreen Solutions vs. CIT (supra) categorically held that KPO service provider would indicate an I.T.E.S. provider providing completely different nature of services than any BPO service provider. It was thus held that functionality of BPO service provider would be functionally different from KPO service provider. The Hon ble Delhi High Court in Rampgreen Solutions vs. CIT (supra) thus held that the differences could not be undermined by u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent Systems Limited. The learned AR for the assessee elaborately pointed out that the said concern was functionally dis-similar to the assessee by referring to the nature of services provided by the said concern and also stated that the segmental were unavailable and even it owned IPFs. The learned DR for the Revenue however referred to the order of the Tribunal in assessee s own case, relating to assessment year 2007-08 and pointed out that the said concern was held to be functionally similar to the assessee. The learned AR for the assessee fairly pointed out that the issue was decided against the assessee by the Tribunal. Accordingly, we find no merit in the plea of the assessee and the said concern i.e. Persistent Systems Limited is to be included in the final list of comparable. 18. The next concern which the assessee wants to be excluded Wipro Technology Services Limited. The learned AR for the assessee pointed out that it was a concern with huge brand value and also failed RPT filter. We find merit in the plea of the assessee that the concern having such huge brand value and owning intangibles cannot be compared with the concern providing BPO services. The Delhi Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter hearing both the learned counsels, we note that the assessee is engaged in the provisions of Software Development Services to its AE and hence the concern engaged in similar activity should be picked up for comparable. In case, we look at the annual report of the concern i.e. Thirdware Solutions Limited, we find that it was engaged in implementation and consulting services of software and business intelligence. It has also declared Revenue from sale of license, Software Services, export from SEZ and STPI. However, the segmental details are not available and the same is to be excluded from the final list of comparable. Accordingly, we hold so. The ground of appeal no. 3 raised by the assessee thus is allowed. 25. Now coming to the issue raised vide ground no. 4 which is against the adjustment made on account of receivables from AE. The case of the Revenue is that as the assessee has not received the amount due from the AEs, within the stipulated period then interest adjustment needs to be made on account of interest due on Receivables, as this was an International Transaction. The case of the assessee on the other hand is that on such outstandings from both AE and non AEs, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- -vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the Assessing Officer was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis- -vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi). 12. Conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
