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TMI Blog2020 (11) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... O") in not accepting the Transfer Pricing ("TP") Study/economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rule, 1962 ("the Rules"), conducting a fresh economic analysis for the determination of the Arm's Length Price ("ALP") in connection with the impugned international transactions, and holding that the Appellant's international transactions are not at arm's length. 3. That the Hon'ble DRP has erred in upholding the learned TPO's approach using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining ALP, ignoring the fact that this data was not available to the Appellant at the time of complying with the TP documentation requirements. 4. That the Hon'ble DRP erred in upholding the approach of the learned TPO, in rejecting the Appellant's contentions against the use of information under section 133(6) of the Act, as that tantamounts to choosing secret comparable companies whose information were not available in public domain while undertaking the TP study for the respective finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned TPO has earned in margin computation of the comparable, hence the crfr operating margin is to be considered. 12. That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including Larsen & Toubro Infotech Private Limited, as a comparable whereas this company should have been excluded on grounds of functional dissimilarity. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the correct operating margin is to be considered. 13. That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including Persistent Systems Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the correct operating margin is to be considered. Information Technology Enabled Services 14. The Hon'ble DRP erred in upholding the approach of the learned TPO, in law and on facts by excluding Tech process Solutions Limited, as a comparable by appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w facts needs to be investigated upon in order to adjudicate these grounds. It has been submitted that by way of abundant caution assessee raises exclusion of certain comparables on turnover filter. He also submitted that in the event these comparables are excluded based on turnover filter other grounds relating to exclusion of the same comparables on other dissimilarities need not be adjudicated. 4. On the contrary Ld.DR submitted that turnover filter is not a relevant criteria based on which comparables could be considered for exclusion. He thus objected for admission of additional ground. 5. We have perused the submissions advanced by both sides and records placed before us. 6. The additional ground raised vide application dated 09/06/2020 is fundamental to the appeal and the nonadmission of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that failure to raise this ground at an earlier stage either neither wilful or wanton. We therefore admit the additional ground raised vide application dated 09/06/2020 by assessee. 7. Ground raised by application dated 13/10/2020 Ground relating to other than transfer pricing mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that, in respect of ITeS services, assessee wishes to allege following comparables for exclusion raised in Ground 15-17. He submitted that these comparables are to be excluded on turnover filter which has been raised by way of additional ground * Capgemini Business Services(India) Ltd., * Infosys BPO Ltd., * Harton Communications Ltd., Brief facts of the case are as under: 17. Assessee filed its return of income for year under consideration on 30/11/2013 declaring total income of Rs. 5,34,58,390/-. It has been submitted that assessee is engaged in the business of development and technical maintenance work in certain intellectual property and knowhow related to certain products and systems. Ld.AO noted that during the year assessee had international transaction more than Rs. 15 Crores, and therefore, the case was referred to Ld.TPO to determined arm's length price of the international transaction. 18. Upon receipt of reference, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB. From the details filed by assessee Ld.TPO noted that assessee provided following international transaction to its AE: Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nologies Ltd. 24.16 2. Microgenetic Systems Ltd. 16.34 3. Jindal Intellicom Ltd. -3.00 4. Hartron Communications Ltd (Seg) 44.07 5. Microland Ltd. 8.62 6. Capgemini Business Services (India) Pvt. Ltd. 26.78 7. Tech Mahindra Ltd (Seg) 22.27 8. e4e Healthcare Business Pvt. Ltd. 17.26 9. Infosys BPO Ltd. 29.28 Average Margin 20.64 21. Ld.TPO thus computed shortfall being the proposed adjustment under both segments as under: SOFTWARE DEVELOPMENT SERVICES Arm's Length Mean Margin on cost 20.90% Less: Working Capital Adjustment -1,38% (As per Annex. C) Adjusted margin 22.28% Operating Cost 2943,85,019 Arm's Length Price(ALP) 3599,74,001 122.28% of Operating Cost) Price Received 3361,42,260 Variation in Price 238,31,741 3% of price received 100,84,268 Shortfall being adjustment 238,31,741 ITES SEGMENT Arm's Length Mean Margin on cost 20.64% Less: Working Capital Adjustment -0.99% (As per Annex. D) Adjusted margin 21.63% Operating Cost 169,77,390 Arm's Length Price(ALP) 206,49,966 121.46% of Operating Cost Price Received 198,43,778 Variation in Price 805,821 3% of price received 595,313 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01/11/2004. Under this segment services include back-office support and designing of printed circuit boards. Functions: 30. Functions performed by assessee under this segment include Quote Data Processing, front-and engineering , PreCAM and post-CAM services. It has been recorded in the trans-apprising study at page 420-421 that assessee is compensated at cost plus basis. Assets owned: 31. It has been submitted that assessee does not own any non-routine valuable intangibles. Risks assumed: 32. It has been submitted that assessee owns Ltd contract risk and foreign exchange risk as the invoices raised by assessee are on its AE and is remunerated in foreign currency. Categorisation: 33. Assessee has thus been concluded as less than ordinary risks in the course of providing services to its AE based upon the above analysis, we shall consider the comparability of assessee with alleged comparables for exclusion/inclusion. 34. Ground 7- 8 has been raised for inclusion of following comparables. Akshay software technologies Ltd. 35. It has been submitted that Ld.TPO rejected this comparable on the ground it is functionally different from the activities of the assessee. Ld.TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to contend that this company is comparable. However, TPO has issued notice u/s 133(6) of the Act to the above said company and collected the details of functions performed by it, wherein the nature of activities performed by this company is stated as "providing professional services, procurement, installation, implementation and support & maintenance of ERP products and services". It is pertinent to note that the above said information was given by M/s Akshay Software Technologies Ltd. However, we find that they are general description of the functions performed. Specific functional details have not been furnished. What is required to be found out is whether these functions fall under the category of "Software development services", as in the case of the assessee company. Accordingly, we are of the view that this company may also be restored to the file of AO/TPO, so that the assessee would get an opportunity to show that the functions performed by this company and the assessee are similar. Accordingly, we restore this company also to the file of the AO/TPO." 39. As there are no functional differences brought out by revenue between assessee and Autodesk India Pvt Ltd., and that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Technologies India Pvt.Ltd vs DCIT reported in (2020) 120 taxmann.com 122. 48. On the contrary Ld.Sr.DR placed reliance on orders passed by authorities below. 49. We have perused submissions advanced by both sides in light of records placed before us. 50. We note that there is nothing on record placed by revenue to show that Tavent technologies India Pvt Ltd (supra) is not a captive service provider. Assessee before us is also a captive service provider providing services only to its associated enterprise. We note that under similar circumstances Tribunal in case of Tavent technologies India Pvt Ltd (supra) observed as under: 9. Ground No. 5.3 relates to the assessee's plea for exclusion of CG Vak Software Exports Ltd. as a comparable by the TPO which action was confirmed by the DRP. The grounds on which the assessee sought exclusion of this company as a comparable by the TPO was that it was functionally different in the sense that it was engaged in software product development and absence of segmental data. The TPO & DRP took the view that product development was part of software development services. 10. The ld. counsel for the assessee brought to our notice a decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015, held as under:- "21. We have considered the submission of the Id. counsel for the assessee and have considered the argument of the ld. DR that the assessee is not producing any product, however, we find that CG-Vak Software and Exports Limited is not only into computer software but it is a product manufacturer too. Since assessee is not into product manufacturing and the segmental details cannot be bifurcated from the financial details, we find that the assessee and the CG-Vak Software and Exports Limited are not comparables. Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly. " 24.2 In our opinion, there is force in the argument of the learned AR. M/s. CG VAK Software & Exports Limited is not only engaged in the business of computer software development, but also engaged in product manufacturing process, whereas the present assessee is not in product manufacture activity. M/s. CG VAK Software & Exports Ltd. owns huge intangible assets and also engaged in outsourced product development. In view of the foregoing reasons, we hold that the said company cannot be considered for inclusion in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of CIT v. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16-9-2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion that they cannot be included in the final list for computing the arm's length margin. Accordingly grounds 12-13 and 15-17 stands allowed. Additional ground raised by assessee wide letter dated 13/10/2020 55. In respect of additional ground raised by assessee vide letter dated 13/10/2020, Ld.AR submitted that this issue stands squarely covered in favour of assessee by decision of orderable Rajasthan High Court in case of Chambal Fertilizers & Chemicals Ltd. Vs. JCT in ITA No.52/2018 by order dated 31/07/2018. He submitted that's education says and secondary and higher education cess has been duly discharged by assessee while computing tax liability under normal provisions of income tax act. Placing reliance on following decisions Ld.AR submitted that 'cess' is deductible as business expenditure under section 37 (1) of the Act for determining the assessed income for year under consideration and that this view is upheld in following decisions: * Sesa Goa Ltd. vs. Joint Commissioner of Income-tax. 1(2020) 117 taxmann.com 96 (Bombay High Court)] * Reckitt Benckiser (I) Pvt. Ltd. vs. Deputy Commissioner of Income-tax [(2020) 117 taxmann.com 519 (Kolkata Tribunal)] * ITC ..... 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