TMI Blog2020 (6) TMI 712X 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 - Decided in favour of assessee. - ITA No.8726/Del/2019 - - - Dated:- 29-6-2020 - Ms. Sushma Chowla, VP And Shri R.K.Panda, AM Appellant by: Sh. Ajay Vohra, Sh. Neeraj Jain, And Sh. Abhishek Agarwal, Respondent by : Sh. Surender Pal, CIT DR ORDER Sushma Chowla,VP The present appeal filed by assessee is against order of the ACIT, Circle-10(1), Delhi dated 28.09.2019 relating to assessment year 2015-16 against the order passed under section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised following grounds of appeal:- 1. That the assessing officer erred on [acts and in law in passing order under section 143(3) read with Section 144C of the Act at an income of ₹ 56,30,73,240 as against returned income of ₹ 41,05,03,780 after making transfer pricing adjustment of ₹ 15,25,69,460 under section 92CA(3) of the Income Tax Act, 1961 ('the Act'). 1.1. That the assessing officer erred on facts and in law in making an adjustment of ₹ 9,24,50,771 to the arm's length price of the International transactions' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciating that the appellant has received receivables from unrelated parties with similar delay of period and accordingly the delay in receipt of receivables from unrelated parties should be considered as a valid internal CUP for the purpose of benchmarking. 2.4. That the DRP/ TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely linked to the 'international transaction' of export and since the profit earned by the appellant as a percentage of cost is higher than the profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard. 2.5. That the DRP/ TPO erred on facts and in law in not appreciating that working capital adjustment is more appropriate measure to benchmark the realisation of trade receivables of the appellant instead of application of an interest rate. 2.6. That the DRP/ TPO erred Oil facts and in law in not appreciating that similar adjustment made in the preceding year, i.e. assessment year 2010-11 and 2012-13 has been deleted by the Hon'ble Income Tax Appellate Tribunal in their order dated 12.12.2017 passed in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the list of comparables selected by the assessee and pointed out that multiple year data could not be used; and also company where turnover was less than ₹ 1 crore was to be deleted. Further companies having persistent loss and negative network also could not be selected and the TPO also applied RPT filter of 25% to the turn over. Consequent thereto, the TPO selected 11 concerns as comparable whose 35 th Percentile and 65th Percentile was 18.54% 28.81% respectively; Median 22.12%. The TPO show caused the assessee to recast the ALP of the international transaction relating to provision of software development services. The assessee in response pointed out that while calculating OP/OC margin at (-5.14%), the exceptional item of ESOP expenses has been considered, but the same had to be excluded, which was not accepted by the TPO. However, expenses relating to the employees of subsidiary of the assessee were excluded and the margins were re-computed at 10.48%. The assessee s objection on the comparables selected by the TPO were considered and finally 10 companies were selected as comparable, whose 35th Percentile and 65th Percentile was 19.36%-28.81%; Median 22.78%. Conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcentile and 65th Percentile is 18.68%-25.22% respectively, Median 22.78% and proposed an adjustment on account of ALP of the international transaction relating to software development services was computed at ₹ 9,24,50,771/-. The Assessing Officer passed final assessment order u/s 143(3) r.w.s 144C(13) of the Act. 8. The first issue raised by the assessee before us is against the adjustment made of ₹ 9.24 crores (approx.) to the ALP of international transaction of provision of software development services undertaken by the assessee with its AE. The assessee had raised several aspects in relation to the aforesaid adjustment but the Ld.AR for the assessee pointed out that incase three concerns are excluded, then the margins of the assessee would be within 35th Percentile and 65th Percentile of the mean margins of the comparables. It was further pointed out by the Ld.AR for the assessee that the Tribunal in assessee s own case for Assessment Year 2014-15 in ITA No.4740/Del/2018 vide order dated 01.05.2020 has directed the exclusion of two concerns i.e Larsen Turbo Infotech Ltd. and Tata Elxsi Ltd. It was further pointed out by the Ld.AR that incase two concerns are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Logic Inc. The assessee has been engaged in the said provision of software development services to its AE for the past of several years and there is no change in the business profile of the assessee. The Assessing Officer/DRP has also accepted the same. 12. The assessee has adopted TNMM method to benchmark its international transaction of provision of software development services to its AE with OP/OC as PLI. The Assessing Officer had re-calculated the margin of the assessee, against which objections were filed before the DRP and consequent to the order of DRP, margins of the assessee has been re-computed at 18.06% and there is no dispute to the same. The assessee had applied certain filters and had also applied multiple year data for benchmarking its international transaction of provision of software development services to its AE. The TPO had applied revised filters and also data for current year and has selected a set of comparables and finally after the directions of the DRP, the list of the comparables finally selected was as under:- S.No. Name of Company Margin as per TPO order OP/OC 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (PES) which is a part of discontinued business [refer note S.(12)]. The company has presented its segment results accordingly. 15. Further in the segmental result, the company has reported un-allocable expenses of ₹ 1,93,89,60,396/-. The revenue and operating profit of segment is as under:- Particulars Service Cluster Industrials Cluster Telecom (PES) Discontinued Business Total (Rs.) Revenue 24,468,341,824 (20,191,107,744) 22,975,690,744 (22,577,483,587) - (3,670,811,848) 47,444,032,568 (46,439,403,178) Segmental operating profit 5,521,276,983 (4,855,234,977) 5,966,683,197 (6,984,817,534) - (870,021,098) 11,487,960,180 (12,710,073,609) Unallocable expenses (net) 1,938,960,396 (2,058,017,445) 16. The Ld.AR for the assessee pointed out that the said concern has been directed to be excluded on the ground that the company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Resource Centre Private limited ( ISRC ) thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so. 21. Coming to the next concern i.e Tata Elxsi Ltd. The case of the assessee was that the said concern was not functionally comparable. As per the annual report of the company, it had two main business segments, namely, System integration support and software development services. As per the annual report of the said company, it had two main business: (a) Sale of traded goods including sales of computers, networking and storage systems and (b) Rendering of services comprising of product design, graphics animation and gaming and system integration and support. The said concern is engaged in development of hardware and software for embedded products such as multimedia and some other electronics etc. 22. The case of the Revenue before us was that segmental of M/s. Tata Elxsi Ltd. were picked up, then the same were comparable for benchmarking the assessee s transaction of software development servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com is also a product company and was providing software development to its associated enterprises and was also selling developed software products. Both the activities were clubbed under one software segment. As per the annual report of said company, it was engaged in providing consultancy and advisory services and was also carrying out the business of development, testing, marketing and manufacturing of information technology products and services. The annual report of the said concern placed at page 918 of Paper book declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras herein above in respect of Cybermate, we hold that Cybercome is also to be excluded from final set of comparables. 27. The assessee before us is solely engaged in the provision of software development concern hence, where the concern was also a product company, margin of the said concern cannot be included for benchmarking the ALP of the international transaction undertaken by the assessee. Accordingly, we direct its exclusion from the final set of comparable. 28. The Ld.AR for the assessee fairly pointed out that on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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