TMI Blog2018 (8) TMI 2070X X X X Extracts X X X X X X X X Extracts X X X X ..... e of AO/TPO for re-computation in light of our observations in the preceding paragraph, after granting sufficient opportunity of hearing to the assessee. Allowability of working capacity adjustment - We are of the opinion that once the TPO/Ld. DRP has principally allowed the claim of working capital adjustment with respect to Software Development Segment than there is no occasion to disallow similar claim for SIM Card Assembly Segment. Now there are various guidelines and factors that have been laid down to work out the working capital adjustment and accordingly, we direct the assessee to provide the detailed working of the working capital adjustment to the TPO and he is directed to verify the correctness of the amount and the working capital adjustment as given by the assessee and allow the same in accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes. Levy of interest under section 234B - We direct the AO to verify and allow the claim of the Assessee regarding granting full credit of advance tax of ₹ 20,698,500/- paid by the Assessee and also short credit of tax deducted at source. - ITA No.-592 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Repairs and Maintenance 59,09,162 11. Other Expenses 34,97,831 12. Reimbursement of Expenses 51,43,772 13. Sale of others 1,13,248 2.2 From the international transactions declared by the Assessee, the TPO picked up the transactions regarding the Software Development Segment and the SIM Card Assembly Segment. With regard to the Software Development Segment, the Assessee had selected OP/OC as the Profit Level Indicator ( PLI ) whilst applying TNMM as the Most Appropriate Method ( MAM ) and declared its margin at 11.04%. The assessee, further, in its Transfer Pricing Study (TP Study) had selected a total of 18 comparables with an average OP/OC of 14.05% and hence claimed the said transaction to be at arm s length. The TPO while accepting the MAM as selected by the assessee, accepted only 7 out of the 18 comparables and further introduced 12 additional comparables with an average OP/OC of 24.95% thereby determining an adjustment of ₹ 1,10,57,340/- for the Software Development Segment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in law, the Ld. TPO, the Ld. AO and the Hon ble DRP erred in using data obtained pursuant to issuance of notice under Section 133(6) of the Act which was not available to the Appellant at the time of maintenance of Transfer Pricing Documentation, thereby contravening the provisions of Rule 10B(4) of the Rules and further, erred in not providing the complete information which was called pursuant to issuance of notice under Section 133(6) of the Act. 1.3 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon ble DRP erred in selecting certain companies as comparable, with a prejudiced intention of making an addition to the returned income of the Appellant, without appreciating that in cognizance of Rule 10B(2)(b), the functional, asset and risk profile of these alleged comparable companies are dissimilar with that of the Appellant. 1.4 On the fact and in the circumstances of the case and in law, the Ld. TPO, the Ld. AO and the Hon ble DRP erred in changing the profit margin computation of alleged comparable companies by incorrectly considering certain income / expense as operating / non-operating. 1.5 On the facts and in law, the Ld. TPO, the Ld. AO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and in law, the Ld. TPO, the Ld. AO and the Hon ble DRP erred in computing the amount of adjustment by considering total cost and sales, instead of apportioning the same to relevant transactions of the Appellant with associated enterprises and non-associated enterprises. 3. On the facts and in law, the Ld. TPO, the Ld. A.O. and the Hon ble DRP erred in disregarding prior years data used by the Appellant to benchmark the international transactions in its TP documentation for the year and holding that current year (i.e. Financial Year 2007-08) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation, and grossly misinterpreting the requirement of contemporaneous data in the Rule 10B(4) of the Rules to necessarily imply current year data, thereby breaching the principles in natural justice and impossibility of performance . 4. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon ble DRP erred in not granting the benefit of the 5% variation as per the proviso to section 92C(2) of the Act to the Appellant, as the law stood at the time of preparation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. xi. Quintegra Solutions Limited xii. R System International Limited xiii. Softsol India Limited xiv. Tata Elxi Limited xv. Thirdware Solution Limited xvi. Wipro Limited (Segmental) (B) COMPARABLES BEING SOUGHT TO BE INCLUDED: i. SIP Technologies and Exports Limited ii. PSI Data System Ltd. 3.2.0 Now, we will deal with all these comparables individually. We will first take up the comparables which the assessee is agitating for exclusion from the final set of comparables selected by the TPO and as affirmed by the Ld. DRP. (i) Avani Cincom Technologies ( Avani Cincom ): 3.2.1 This comparable was rejected by the assessee in the TP study for the reason of there being insufficient data in the public domain but was introduced by the TPO. The assessee objected to the inclusion of Avani Cincom but the objections were rejected by the TPO/ Ld. DRP. Before us, the Ld. Counsel for the assessee, vide a detailed chart and a hand out from of the website, argued that Avani Cincom was not functionally comparable to the assessee since the assessee was a captive software service provider and on the contrary Avani Cincom was engaged in provision of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paras 7.6.1 and 7.6.2 of its order, the co-ordinate bench held as under:- 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t segmental data vis- -vis the incomes from services and products. The Ld. Counsel placed strong reliance on the co-ordinate bench decision in the case of Sun Gard Solutions India Pvt. vs. ACIT reported in [2015] 63 taxmann.com 323 (Bangalore - Trib.) and order of the Delhi Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd v ACIT in ITA No. 333/Del/2013, wherein the said comparable was excluded primarily for being a software product company. Reliance was also placed on the decision of Delhi Bench of the Tribunal in Saxo India Private Limited vs. ACIT (ITA No. 6148/Del/2015) [subsequently affirmed by Hon'ble Delhi High Court in ITA 682/2016] wherein the comparable was excluded as being engaged in the business of Software Development and Software Product and no segmental details being available. It was fairly pointed out that though there is no finding of the Ld. DRP on this comparable but it was submitted that since all the material facts are available on record and there is no dispute on application of filters, the issue may be adjudicated. 3.2.6 The Learned Departmental Representative, on the other hand, supported the orders of the authorities below. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies and not comparable with the company which is into the business of softwaredevelopment and providing related services to its AE. The coordinate Bench in the judgment of Aircom (supra) has excluded this comparable company by making following observations: 15.2. We find from the Annual report of this company that it: has only one segment, namely, software development. Being a software solutions company, which is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies. Thus, it can be seen that this company is providing end-to-end solutions and also consultancy which is not the case with the assesse company. Another relevant factor to be noticed is Page 1254 of the paper book, which divulges the significant accounting policies of this company. Under the head Revenue recognition , it has been mentioned that: revenue from software development is recognized based on software developed and billed to clients. As against this, the Schedule forming part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT reported in [2015] 377 ITR 533 (Delhi), Chryscapital Investment Advisors Pvt. Ltd. vs. DCIT reported in [2015] 376 ITR 183 (Delhi) and Avenue Asia Advisors Private Limited vs. DCIT (ITA No. 350/2016) and submitted that the functionality of an entity is the key determinative factor for its inclusion or exclusion in the list of comparables and there is no such thing as estoppel on the ground that the assessee had accepted the entity as being functionally comparable in a previous assessment year. It was fairly accepted that though there is no finding of the Ld. DRP on this comparable but since all material facts are available on record and there is no dispute on application of filters, adjudication on this comparable could be made. 3.2.11 On merits, the Ld. Counsel submitted that Celestial could not be held as a comparable since its functionality was very different from that of the Assessee. It was further submitted that Celestial was into bio-informatics software products and owing to insufficiency of segmental data in the Annual Report, the same could not be accepted as a comparable. The Ld. Counsel took us through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally dissimilar and different from a captive software service provider. At paras 9.4.1 and 9.4.2 of the above order, the co-ordinate bench held as under:- 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt company cannot be compared with a KPO. Additionally, he took us through the annual report to evidence that no segmental data vis- -vis the services and products was available. 3.2.17 Per contra, the Ld. CIT DR supported the orders of the TPO in including this company as a comparable. 3.2.18 We have considered the arguments of both the parties and also the material available on record. We are of the view that the factual position in the present matter is similar with decision of coordinate bench in Sun Gard Solutions India Pvt. Ltd. vs. ACIT in ITA No. 1487/Bang/2012, wherein it is held as follows: 8.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company from the list of comparables on the ground that the KPO services rendered by it are not comparable to those rendered by a captive provider of software development services. At para 14.4 of its order, the coordinate bench has held as under:- 14.4 We have heard the rival submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, he argued that that no proper segmental data were maintained by the said company. He also drew our attention to the fact that there was a merger during the relevant year. Hence, it was submitted that the said comparable deserves to be excluded. It was fairly accepted that though there is no finding of the Ld. DRP on this comparable but since all the material facts were available on record and as there was no dispute on application of filters,the issue could be adjudicated. He relied on the co-ordinate bench s decision in the case of Nokia Siemens Networks India Pvt. Ltd vs. ACIT in ITA No. 333/Del/2013 in which the coordinate bench, whilst appreciating the fact that Igate was providing various services and owing to the fact that there was no segmental data, directed its exclusion. 3.2.21 The Ld. CIT DR, on the other hand, whilst taking support from the orders of the lower authorities vehemently supported Igate s inclusion. She fairly conceded that since the assessee is not arguing regarding application of filters and reliance is placed only on the financials to demonstrate difference in functionality, she has no objection if the issue of exclusion of this comparable is adjudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ITA No. 333/Del/2013, has excluded this comparable by observing as follows: 78. This company is undoubtedly a corporate giant with its large scale of operations vis- -vis the Assessee company; that it had a brand impact to determine the premium pricing; that it has a different model of revenue recognition. It is submitted on behalf of the assessee that this comparable has been rejected in Assessee s own case in immediately preceding year, i.e. AY 200708 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:- 17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee s contentions. The assessee is providing and assigning software services to its AE alone wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alt in software products as well as services. By relying on the screenshot of website of Kals, he argued that this company is engaged in providing varied array of activities including software products. He argued that even though the TPO had taken segmental details of Kals namely Software Development Training segment for comparison with assessee, but, as per the financials, there is lack of segmental data/bifurcation vis- -vis the income and expenses in relation to the products developed and sold by Kals. 3.2.28 The Ld. CIT Departmental Representative relied on the orders of the lower authorities and strongly argued for its inclusion. 3.2.29 We have heard the rival contentions of the parties and also perused the relevant material on record. We note that on similar set of facts, the coordinate Bench of the Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013 has excluded this comparable by observing as follows: 81. At the outset it is brought to our notice that this company was considered by a coordinate bench of this tribunal in the immediately preceding year that is assessment year 2007-08 in assessee s own case and this Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofessionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee s business, namely, Software Deployment, Training, Consultancy and Equipment Rental. Since the assessee s activity under this segment does not include any revenue from training, but the revenue of Kals Information Systems Ltd., for the purpose of comparison includes income from training, this company ceases to be comparable with the assessee s segment of `Software development services . Similar view has been taken by the Tribunal in the assessee s own case for the immediately preceding assessment years 2006-07 and 2007-08. Respectfully following the precedents, we hold that Kals Information Systems Ltd. (Seg.) should be expunged from the set of comparables. 84. No change of circumstances is brought to our notice either by the assesse or the revenue, as such we do not find any reason to take a different view from the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable. It was further submitted that the said comparable failed the TPO s own foreign exchange earning filter. 3.2.33 The Ld. CIT Departmental Representative, on the other hand, strongly opposed the assessee agitating the said comparable since the same was submitted and accepted by the assessee in its Transfer Pricing study. Additionally, the Ld. CIT DR relied on the orders of the TPO and the Ld. DRP. 3.2.34 We have heard the parties at length and also perused the material on record. We agree with the arguments advanced by the Ld. Counsel for the assessee that there can be no estoppel against law in terms of selection of a comparable and the comparability has to be adjudicated in terms of parameters laid down under Rule 10B of the Rules. Our view is further fortified by the judgment of the Hon'ble Bombay High Court in CIT vs. Tata Power Solar Systems Ltd. reported in [2017] 298 CTR 197 (Bombay), wherein it has been observed as follows : We find that the impugned order of the Tribunal holding that a party is not barred in law from withdrawing from its list of comparables, a company, if the same is found to have been included on account of mistake as on facts, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstance occurred during the year, we are of the considered opinion that this company is not a good comparable with the assessee and on that score it has to be excluded from the final set of comparable companies for the present year under consideration. 3.2.36 Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude this company from the list of comparables. (ix) Mindtree Limited (Segmental) [ Mindtree ]: 3.2.37 The assessee s next contention is regarding the exclusion of Mindtree as a comparable. As in the case of LGS, the Ld. Counsel of the Assessee fairly accepted that the said comparable was proposed as a comparable by the assessee itself in its TP Study and placed reliance on his arguments advanced for the earlier comparable i.e. LGS Global Ltd. 3.2.38 On merits, the Ld. Counsel submitted that Mindtree is structured into two business units that focus on software development Research and Development Services and IT Services. It was further submitted that in addition to these services, Mindtree also offers IT strategic consulting services, application development, data warehousing and business intelligence, application mainte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offers IT Strategic Consulting, Application Development, Data Warehousing and Business Intelligence, Application Maintenance, Package Implementation, Product Architecture, Design and Engineering, Embedded Software, Technical Support, Testing and Infrastructure Management Service. 92. Further at page No. 27 of the annual report incorporated at page No. 1027 of the paper book it is mentioned that on 17/12/2007 the company acquired hundred percent of the outstanding equity shares of TES PV and Projects Solutions Private Limited which was subsequently renamed as Mindtree Technologies Private Limited at a total consideration of ₹ 259.7 million equivalent to USD 6.55 million. It is further stated that as a consequence of this, the revenues of this company as on 31st March 2008 of ₹ 64.80 millions has been included in the above revenues for that year. 93. Needless to say the vast functional dissimilarity coupled with the extraordinary event of acquisition of equity shares stated above suggests that this company is not a good comparable with the assessee and consequently is liable to be excluded from the list of comparables. 3.2.41 Respectfully following the view take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that: (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted before us that Quintegra could not be taken as a comparable since the same was functionally different from the assessee. It was submitted that Quintegra was mainly a KPO and was engaged in product engineering services, having proprietary software products and was hence not a pure software developer like the assessee. Additionally, it was submitted that owing to the lack of segmental data between the products and services, the same could not be held to be comparable to the assessee. He also took us through the Annual Report to demonstrate that Quintegra was making substantial investments in its Research Development activities and, as a result, was owning substantial intangibles. He further argued that there was an acquisition during the year and, hence, Quintegra on this count as well could not be accepted as a comparable. It was also fairly accepted that though there is no finding of the Ld. DRP on this comparable but since all the material facts are available on record and as there is no dispute on application of filters, the issue could be adjudicated. 3.2.48 In response, the Ld. CIT Departmental Representative vehemently opposed the submissions of the assessee s c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of functional differences from a captive software service provider. 12.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company as a comparable to the assessee. 12.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company i.e. Quintegra Solutions Ltd. from the list of comparables since it is into product engineering services; is engaged in proprietary software products, has substantial R D activity which has resulted in creation of IPRs and its own intangible assets thereby making it functionally different from the assessee in the case on hand is a captive software service provider; as is the assessee in the case on hand. At paras18.3.1 to 18.3.3 of its order, the co-ordinate bench has held as under:- 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing us through the various pages of the Annual Report, submitted that R System was mainly into the business of outsourced product development and customer support services and from the Notes to Accounts it was argued that sufficient segmental details are not available. Additionally, it was also submitted that R Systems was providing BPO services to its customers, which is not akin to software development and hence could not be functionally comparable to the profile of the assessee. Further, he took us through pages 18, 23, 32 and 104 of the Annual Report to show how the company had issued an IPO and also made strategic acquisitions during the impugned year. From the financials he submitted how R Systems was spending extensively on their R D activities and resultantly owned intangibles as well. It was also fairly accepted that though there is no finding of the Ld. DRP on this comparable, the same could be adjudicated. 3.2.53 The Ld. CIT Departmental Representative relied on the orders of the lower authorities and prayed that since this company passes all filters, it is a suitable comparable. In terms of the submission made by the Ld. Counsel for Assessee that he is not disputing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftsol was not functionally comparable to the FAR profile of the assessee since the same is in the business of providing end to end services. Referring the screenshot of website (handout) of Softsol, he argued that the company was in the business of manufacturing wide range of software products, software development and training services. He also took us through the Annual Report of the company wherein it was mentioned that they deal in software products and from the notes to accounts it was shown that the company does not maintain proper segmentals. Thereafter, the Ld. Counsel took us though the financials and it was submitted that the company develops intangibles and also that their revenue recognition model was different from that of the assessee. Additionally, without prejudice to the above arguments, the Ld. Counsel submitted that the filter as adopted by the TPO of RPT 25% was not a valid filter and for the same the assessee placed reliance on the Bengaluru Bench s decision in the case of LSI Technologies India Pvt. Ltd. vs. ITO in ITA No. 1380/Bang/2010, order dated 13.05.2016. As in the case of some of the earlier comparables being contested, it was fairly pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able segments. We do not find any material from the record that this company has actually been engaged in the activities like a) business of Software Products b) Software Development c) Training Services; and d) manufacture of vide range of products or that it provides end to end business solutions. 107. We therefore find it difficult that this company is functionally different from the assessee or that it is not a good comparable for want of any segmental information or related party information. We, therefore, find that this company has to be retained as a good comparable in the final list of comparables. 3.2.59 Respectfully following the view taken by the coordinate Bench, we reject the arguments of the assessee and direct the AO/TPO to include this company in the final list of comparables. (xiv) Tata Elxsi Limited ( Tata Elxsi ): 3.2.60 The next comparable being agitated before us is Tata Elxsi Limited. The said comparable was chosen by the assessee itself in its TP Study. The Ld. Counsel for the assessee relied on the case laws as relied upon while arguing for exclusion of LGS and some other comparables, to contend exclusion of Tata Elxsi even though the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was omitted from the list of comparables on grounds of being functionally different and dis-similar to a captive software service provider. 13.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the set of comparables as it is functionally different and dis-similar from a captive software service provider, as is the assessee in the case on hand. At paras 13.4.1 and 13.4.2 of its order, the co-ordinate bench has held as under:- '13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of product development; trading in software and giving licenses for the use of software. He also pointed out from the Annual Report that this company has not provided any separate segmental profit and loss account for software development services and product development services. He further argued that the TPO has wrongly computed the margin of this comparable and has taken entity level sales figure whilst calculating the operating margin and not the sales of the software segment. He argued that no details are given in the financials in respect of nature of transaction with subsidiaries. It was also fairly accepted that though there is no finding of the Ld. DRP on this comparable but in view of all the material facts being available on record and there being no dispute on application of filters, request was made to adjudicate this comparable. 3.2.66 The Learned CIT Departmental Representative, on the other hand, supported the orders of the authorities below. She also had no objection to the adjudication of this comparable by the Bench. 3.2.67 We have heard the rival submissions of the parties and also perused the relevant material on record. We are of the opinion that all ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 14.3.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 3.2.68 Respectfully following the view taken by the coordinate Bench, we direct the AO / TPO to exclude this company from the list of comparables. (xvi) Wipro Limited (Segmental) [ Wipro ]: 3.2.69 The last comparable being agitated for exclusion before us is Wipro Limited. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was held to be functionally different and dis-similar and not comparable to a captive provider of software development services. 15.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 15.4.1 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be excluded from the list of comparables as it is functionally different and dis-similar from a captive software development service provider, as is in the case on hand. At para 12.4.1 and 12.4.2 of its order the co-ordinate bench in its order (supra) has held as under:- 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was further submitted that the TPO himself has not disputed the fact that SIP Technologies is functionally comparable to the Assessee and the TPO has only rejected the said comparable on the ground that the said company has diminishing revenue. It was further submitted that turnover cannot be a criteria for inclusion or exclusion of a comparable. 3.3.2 On specific query by the Bench, the Ld. CIT Departmental Representative fairly accepted that in principle the criteria of checking the financials of three year consecutive years has consistently been followed by both the Department as well as the assessees over the years. On merits she relied on the orders of the lower authorities. 3.3.3 We have heard the rival submissions of the parties and also perused the relevant material on record. We are of the view that the factual position in the present case is similar to the decision of coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, wherein this comparable was included by observing as follows: 116. This company selected by the assessee was rejected by the TPO on the ground of diminishing revenues. Ld. DRP also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n arm s length nature of business. 118. Ld. AR submits that this position has now been accepted by the Delhi High Court and various benches of this Tribunal. In a recent order passed by the coordinate bench in case of Aithent Technologies (P.) Ltd. vs. DCIT [2016] 74 taxmann.com 214 (DelhiTrib.) on the adoption of diminishing revenue filter it has been held as under:- 14.3 A careful perusal of the pattern of profit/loss earned by the assesse as per its audited accounts divulges that as against the current year's profit of ₹ 62.39 lac, the earlier years' profit was ₹ 92.74 lac. This manifests that the profit for this year has diminished from the earlier year. When we consider the figures of losses for the financial years 2005-06 and earlier years, it comes to light that there were losses right from financial year 2002-03 up to 2005-06. On an overview of the above extracted Table, it can be seen that the assessee's profit is not steady, but, has diminished during the instant year from the preceding year. In such a situation, if we exclude the companies having diminishing profits, it would mean that the companies whose profit pattern is also similar to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al profit making concern or huge or mega turnover company. As explained earlier, Rule 1OB (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B (1), while judging comparability. Rule 10B (3) on the other hand indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company - otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not materially affect the price...or cost ; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. In light of the above, we direct the TPO to include this company in the list of comparables. 120. With regards to Revenue s stand that SIP technologies need to be rejected on the ground that it suffered losses, it is submitted on behalf of the assessee that for the filter of persistent losses to come into play it should be shown that the comparable under dispute has incurred losses for three preceding yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, both have denied the assessee's claim. The Ld. Counsel further submitted that while estimating the return for uncontrolled company, there is a need to give an appropriate adjustment pertaining to market/systematic risk faced. Uncontrolled comparable companies operate under uncontrolled conditions bearing certain risks during the course of its operations. Therefore, such comparable uncontrolled companies earn a risk premium which is not earned by a captive software development provider similar to the assessee which is a risk averse and, therefore, the profits of the captive unit would be less than risk taking companies and hence, an adjustment in this regard is required. He placed reliance on the decision of the coordinate Bench in Motorola Solutions India (P.) Ltd's case, Intellinet Technologies India (P.) Ltd. vs. ITO reported in [2012] 22 taxmann.com 28/53 SOT 92 (Bang.) (URO) and Bearing Point Business Consulting (P.) Ltd. vs. Dy. CIT reported in [2013] 33 taxmann.com 92/57 SOT 244 (Bang. - Trib.) in support of assessee's claim for risk adjustment. 3.4.2 The Learned CIT Departmental Representative, on the other hand, supported the orders of the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding restricting the transfer pricing adjustment to the value of the international transaction. Our attention was drawn to Pages 32, 46, 57 and 288 of the Paper book to show that during the relevant period the total operating expenses of ₹ 63,79,13,808/- were incurred on the SIM Card Segment. Out of the total operating expenses, a sum of ₹ 41,04,24,653/- related to raw materials, stores and spares consumes and out of this a sum of ₹ 7,07,33,702/- pertained to indigenous purchase (domestic transaction). It was argued before us that the TPO, while determining the arm's length price of this transaction, has erroneously taken the total operating expenses at the entity level, which is not permissible. Reliance was placed on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Alstom Projects India Ltd. reported in [2017] 394 ITR 141 (Bombay) and of the Hon'ble Delhi High Court in the case of CIT v. Keihin Panalfa Ltd. (ITA No.11 of 2015), judgment dated 09.09.2015. He further pointed out that the Ld. Dispute Resolution Panel has decided this issue in favour of Assessee in Assessment Year 2014-15 whilst directing the TPO to allow proport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt and in particular invited our attention to the following orders passed at the stage of admission:- (a) CIT vs. Super Diamonds, Income Tax Appeal No. 298 of 2013; (Order dated 16 February 2015); and (b) CIT v. Global Jewellery (P.) Ltd. Income Tax Appeal No.1395 of 2013. (Order dated 16 April 2015) 6. In both the above appeals we find that the question admitted was with regard to transfer pricing adjustment being done at the entity level and not restricted only to the transactions with Associated Enterprises. However, both the appeals were admitted without the Court having had benefit of submissions on behalf of the Respondent-assessee. 7. Thereafter this Court consequent to the above two orders had occasion to consider the issue of transfer pricing adjustments being done in respect of all transactions (entity level) or only in respect of transaction entered into with Associated Enterprises in the following cases:- (i) CIT v. Hindustan Unilever Ltd. [2017] 394 ITR 73/[2016] 72 taxmann.com 325 (Bom.); (ii) CIT v. Tara Jewels Exports (P.) Ltd. [2016] 381 ITR 404/80 taxmann.com 117 (Bom.); (iii) CIT v. Petro Araldite (P.) Ltd. Income Tax Appeal No.1804 of 2013 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts) to apply different standards to different assessee. The administration of the tax laws should not degenerate into an arbitrary and inconsistent application of law dependent upon the Assessee concerned. 11. We also note that the Delhi High Court in CIT v. Keihin Panalfa Ltd. (ITA No.11 of 2015) decided on 9th September, 2015 has while dealing with transfer pricing adjustment in the absence of segmental accounts held that adjustments have to be restricted only to transactions with Associated Enterprises. It further held that where separate accounts are not available, then proportionate adjustments to be made only in respect of the international transactions with Associated Enterprises. 12. We are in respectful agreement with the view of the Delhi High Court in Keihin Panalfa Ltd. (supra). One must not lose sight of the fact that the transfer pricing adjustment is done under Chapter X of the Act. The mandate therein is only to redetermine the consideration received or given to arrive at income arising from for International Transactions with Associated Enterprises. This is particularly so as in respect of transaction with non Associated Enterprises, Chapter X of the Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BCC Fuba India Ltd. 10.06 2. Circuit Systems India Ltd. 3.95 3. Fine-line Circuits India Ltd. 5.32 4. Solectron EMS India Ltd. 1.80 Average 5.28 As it can be seen, the difference is not so large as to have a telling effect on the profitability of the assesse. Another exercise was undertaken, of calculating the OP/Sale margin of the assesse and comparables after excluding depreciation. The result in the case of the assesse was (-) 15.22%. In the case of the comparables it was as follows: S.No. Name OP/Sales (%) 1. BCC Fuba India Ltd. 1.18 2. Circuit Systems India Ltd. 12.76 3. Fine-line Circuits India Ltd. (-)1.45 4. Solectron EMS India Ltd. 6.64 Average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Services Inc. v. ADIT (International Taxation) [2013] 38 taxmann.com 220 (Delhi) ix. Dy. CIT v. Innodata Isogen India (P.) Ltd. [IT Appeal No. 5390 (Delhi) of 2010] x. Google India (P.) Ltd. [IT Appeal No. 1170 (Bang.) of 2011] xi. Calsonic Kansel Motherson Products Ltd. vs DCIT [2016] 72 taxmann.com 109 (Delhi - Trib.) xii. Fiat India (P.) Ltd. [IT Appeal No. 1848 (Mum.) of 2009] xiii. Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi). xiv. Tasty Bite Eatables Ltd. vs ACIT [2015] 59 taxmann.com 437 (Pune - Trib.) 3.6.3 Further, the Ld. Counsel fairly accepted out that the issue of allowability of capacity adjustment was decided against the assessee in earlier assessment year by the co-ordinate Bench of this Tribunal vide order dated 15.03.2013. He submitted that though an appeal was filed challenging the said order dated 15.03.2013 passed by the Tribunal, the Hon'ble Delhi High Court, vide order dated 27.08.2014, dismissed the appeal of the Assessee as being barred by limitation, but with a liberty to agitate this issue before the Tribunal in subsequent years and to suitably represent the relevant facts and legal position before the Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 10B of the Rules. Our view is further fortified by the decision of Hon'ble Supreme Court in Canara Bank vs. N.G. Subbaraya Setty Anr. Reported in 2018 SCC OnLine SC 427, wherein exceptions to the principle of res judicata have been explained, by observing as follows: 34. Given the conspectus of authorities that have been referred to by us hereinabove, the law on the subject may be stated as follows: (1) The general rule is that all issues that arise directly and substantially in a former suit or proceeding between the same parties are res judicata in a subsequent suit or proceeding between the same parties. These would include issues of fact, mixed questions of fact and law, and issues of law. (2) To this general proposition of law, there are certain exceptions when it comes to issues of law: (i) Where an issue of law decided between the same parties in a former suit or proceeding relates to the jurisdiction of the Court, an erroneous decision in the former suit or proceeding is not res judicata in a subsequent suit or proceeding between the same parties, even where the issue raised in the second suit or proceeding is directly and substantially the same as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition in the former suit or proceeding, the statutory prohibition is not given effect to. This is despite the fact that the matter in issue between the parties may be the same as that directly and substantially in issue in the previous suit or proceeding. This is for the reason that in such cases, the rights of the parties are not the only matter for consideration (as is the case of an erroneous interpretation of a statute inter parties), as the public policy contained in the statutory prohibition cannot be set at naught. This is for the same reason as that contained in matters which pertain to issues of law that raise jurisdictional questions. We have seen how, in Natraj Studios (supra), it is the public policy of the statutory prohibition contained in Section 28 of the Bombay Rent Act that has to be given effect to. Likewise, the public policy contained in other statutory prohibitions, which need not necessarily go to jurisdiction of a Court, must equally be given effect to, as otherwise special principles of law are fastened upon parties when special considerations relating to public policy mandate that this cannot be done. (iii) Another exception to this general rule follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce for the higher overhead expenditure during the initial period of production. In view of the above, we deem it appropriate to remit this issue back to the Assessing Officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The assessee is also directed to produce relevant documents in comparable units for the necessary analysis. The appeal of the assessee is allowed for statistical purposes in the aforesaid terms. 30. Reliance in this regard is placed on the decision of Pune Bench of the Tribunal in the case of Amdocs Business Services (P.) Ltd. v. Dy. CIT [2012] 54 SOT 46 (URO)/26 taxmann.com 120 wherein, the Tribunal allowed economic adjustment on account of under capacity utilization holding that the appellant was in start up phase during the assessment year consideration. The relevant extract of the decision is reproduced as under: 9. The next major point made out by the appellant is that this being the first full year of operation, the assessee had incurred certain expenditure which are start-up costs and cannot be fully recovered in the instant year itself, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is behalf. Needless to say that a proper and speaking order will be passed deciding the issue in accordance with law. 32. Reliance in this regard is placed on the following observation of the Hon'ble Mumbai Bench of the Tribunal in the case of ACIT v. Fiat India (P.) Ltd. [IT Appeal no 1848 (Mum) of 2009): As rightly held by the ld. CIT(A), the said submission made by the appellant is sufficient to demonstrate that there was a material difference in the facts of the appellant's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences 33. Further, the Hon'ble Pune Bench of the Tribunal in the case of Brintons Carpets Asia (P.) Ltd. v. Dy. CIT [2011] 46 SOT 289 (URO)/12 taxmann.com 148 while allowing adjustment for idle capacity caused due to labour unrest/strike and relying upon the above observation of the Mumbai Tribunal held as follows: 15. From the above, it is clear the AO has authority vide clause (iii) above to make the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has gone into the details of such economic adjustments and they summarily rejected the claims. As such, the requisite adjustments are borne out of the relevant rules/provisions and therefore, the claim is bona fide and has support of the law. For this, the appellant prefers to go to the files of the AO for want of a speaking order on this issue. In our opinion, the request of the appellant deserves to be considered favourable. 34. Also, in the case of E.I. Dupont India (P.) Ltd. v. Dy. CIT [2012] 49 SOT 123/[2011] 16 taxmann.com 352 (Delhi), the Hon'ble Delhi Bench of the Tribunal, while allowing the adjustment for capacity utilization held that: ' It is a matter of fact that fixed costs remain the same even when there is under utilization of capacity. Therefore, the case of the appellant and the comparable cases have to be examined in respect of capacity utilization so as to make the controlled and uncontrolled transactions comparable. Also, the Hon'ble Delhi Bench of the Tribunal in the case of ITO v. CRM Services India Pvt. Ltd. upheld the claim of the appellant towards adjustment of idle capacity: 8.1 This brings us to the alternative argument that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderutilization is an important factor affecting net profit margin as lower capacity utilization results in higher per unit costs which in turn results in lower profits. The relevant finding of the decision reads as under: 5. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in very well reasoned findings and directions of the learned CIT (A). Rule 10B (1)(e)(ii) of the Income Tax Rules 1962 does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market. Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, 'end as long as such an adjustment mechanism can be found, no objection can be taken to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo sub-issues for consideration, viz., first, whether the adjustment should be allowed in the hands of the assessee as has been done by the authorities below or comparables and second, how to compute capacity utilization adjustment under the TNMM. We will deal with these aspects one by one. i. Capacity adjustment should be allowed in whose hands? 9.1 It has been noticed above that the assessee claimed idle capacity adjustment by reducing its own operating costs. It is further observed that the authorities below have reduced the amount of adjustment by excluding certain costs from the ambit of the costs qualifying for adjustment. However, the adjustment has been ultimately allowed from the operating costs incurred by the assessee. In such circumstances, the question arises as to whether the action of the authorities in allowing the reduction of the operating costs incurred by the assessee, is in accordance with law? In order to find answer to this question, we need to refer to the manner of computation of the arm's length price under TNMM, which has been set out in Rule 10B (1)(e) as under:- (e) transactional net margin method, by which,- (i) the net profit margin r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction with an uncontrolled transaction shall be judged with reference to certain factors which have been enumerated therein. Rule 10B(3) states that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the two or a 'reasonably accurate adjustment can be made to eliminate the material effects of such differences.' When we read sub-clauses (ii) (iii) of Rule 10B(1)(e) in juxtaposition to sub-rules (2) (3) of rule 10B, the position which emerges is that the net operating profit margin of comparable companies calls for adjustment in such a manner so as to bring both the international transaction and comparable cases at the same pedestal. In other words, if there are no differences in these two, then the average of the net operating profit margin of the comparable companies becomes a benchmark. However, in case there are some differences between the comparables and the assessee, then the effect of such differences should be ironed out by making suitable adjustment to the operating profit margin of comparables. That is the way for bringing both the transactions, namely, the international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There can be no difficulty in working out these percentages. The second step is to give effect (positive or negative) to the difference in the percentage of capacity utilizations of the assessee vis- -vis comparables, one by one, in the operating profit of comparables by adjusting their respective operating costs. Operating costs can be either fixed or variable or semi-variable. One needs to split semi-variable costs into the fixed part and variable part. In so far as the variable costs and the variable part of the semi-variable costs are concerned, these remain unaffected due to any under or over utilization of capacity. Accordingly, such variable operating costs remain unchanged. The adjustment is called for only in respect of the fixed operating costs and fixed part of semi-variable costs. Such costs are scaled up or down by considering the percentage of capacity utilization by the assessee and such comparable. It can be illustrated with the help of a simple example. Suppose the fixed costs incurred by a comparable (say, A) are ₹ 100 and it has capacity utilization of 50% as against the capacity utilization of 25% by the assessee. The above percentages show that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the calculation of such capacity utilization adjustment, the ld. CIT (A) has considered four companies as comparable, which view has been modified by us supra inasmuch as we have held that M/s Eicher Motors and M/s. Force Motors are incomparable. Naturally, they would also go out of reckoning in the computation of idle capacity utilization adjustment. In the absence of the availability of financials of all the comparable companies, it is not possible at our end to work out the amount of capacity adjustment in the manner discussed above. Ergo, we set aside the impugned order and direct the TPO/AO to work out the amount of capacity utilization adjustment afresh in terms of our above observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 3.6.9 Respectfully following the decision of the coordinate bench of the Tribunal in DCIT vs. Claas India (P) Ltd. reported in [2015] 62 taxmann.com 173 (Delhi - Trib.), we are of the opinion that the issue of computation of capacity adjustment requires reconsideration and is thus, restored to file of AO/TPO for re-computation in light of our observations in the preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the TPO and he is directed to verify the correctness of the amount and the working capital adjustment as given by the assessee and allow the same in accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes. 3.8.0 Having considered the main arguments of the assessee regarding allowability of proportionate adjustment, capacity adjustment and working capital adjustment and allowing the same for statistical purpose, while restoring them to the file of AO/TPO for computation, we are not inclined to adjudicate on the other alternative legal issues regarding admissibility of internal comparable and taking foreign AE as the tested party. The assessee is, however, at liberty to raise such issues before the lower authorities, should the need arise. 3.9.0 Ground No. 6 of the appeal dealing with levy of interest under section 234B of the Act, is disposed off as being mandatory and consequential. 3.10.0 Ground No. 7 of the appeal deals with corporate tax issue regarding not granting full credit of advance tax of ₹ 20,698,500/- paid by the Assessee and also short credit of tax deducted at source of ₹ 15,01,872 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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