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TMI Blog2018 (10) TMI 1947X X X X Extracts X X X X X X X X Extracts X X X X ..... eral ground The order of the learned Deputy Commissioner of Income Tax, Company Circle 2(2), Chennal ('Assessing Officer' or 'AO') passed pursuant to the order of the learned Transfer Pricing Officer-V, Chennal ('Transfer Pricing Officer' or 'TPO') and the directions issued by the Hon'ble Dispute Resolution Panel - II (the 'DRP'), to the extent prejudicial to the Appellant, is erroneous, bad in law, and contrary to the facts and circumstances of the case. Issue I - Grounds relating to Transfer Pricing Matters Ground of objection 2 - Rejection of economic analysis of the Appellant without any cogent reasons The Ld. AO/ TPO and the Hon'ble DRP have erred, in law and in facts by disregarding the economic analysis undertaken by the Appellant in accordance with the provisions of the Income tax Act, 1961 read with Income tax Rules, 1962 (the Rules) for determination of arm's length price of the 1- international transaction of the Appellant. The TPO also conducted a fresh economic analysis for selection of comparable companies without providing any cogent reasons for undertaking the same. Ground of objection 3- Objection on comparable companies The learned AOITPO and Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in law and facts, by considering provision for bad and doubtful debts to be non-operating item. Ground of objection 10- Use of single year data (which was not available at the time of maintaining TP documentation) - The Ld. TPO/ AO and the Hon'ble DRP have erred in law and in facts, by determining the arm's length margin! price using only Financial Year 2012-13 data, as against multiple year data adopted by the Appellant without appreciating that multiple year data has an influence on the determination of transfer prices in relation to the international transactions and also not giving due cognizance to the rules notified by the CBDT vide Notification No. 83/2015 [F.No. 142/25/2015-TPOJ. Ground of objection 11- +/-3% tolerable range as provided in proviso to Section 92C(2) of the Act. The Ld. TPO/ AO and the Hon'ble DRP have erred in law and in facts, in computing the arm's length price without giving benefit of +/- 3 percent under the proviso to Section 92C of the Act. Issue 2-Grounds relating to Corporate Tax Matters Ground of objection 12 - Depreciation on computer software The learned AO has erred in treating computer software as 'Intangible assets' elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dismissed as not pressed. 5. In regard to the transfer pricing issues, it was submitted by ld.A.R that the assessee has three lines of business; i) Software Development Services, ii) Content Development Services and iii) on-line Tutoring services. It was a submission that when the assessee had done transfer pricing study, it had treated the software development services and the content development services as Information Technology Services (I.T.Services) and in respect of on-line tutoring services, the same was treated as Information Technology Enabled Services (I.T.E.S). It was a submission that the ld. Assessing Officer however treated the software development services as Information Technology Services, but treated the content development services and the on-line tutoring services as Information Technology Enabled Services. It was a submission that the software development services involved software development process. It was a submission that no adjustment was found necessary by the ld. Assessing Officer in respect of software development services, income earned from software development services was disclosed by the assessee. In respect of content development services, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed -Ground No.3 Support from judicial pronouncements-covered judgements Hartron Communications Ltd (harton) Significant fluctuations in the turnover - Where revenue has increased 350% compared to previous years (Page 6 of paper book 3) High fluctuation in margins -The margins of Hartron has highly fluctuated which is as follows: Year 2010-11 2011-12 2012-13 2013-14 2014-15 Turnover INR Crores 2.08 3.81 18.43 10.33 14.37 % of change - +82.86 383.1 -43.95 39.19 Year 2010-11 2011-12 2012-13 2013-14 2014-15 Profit/Loss INR Crores -2.03 -1.41 4.61 -0.26 -3.74 % of change -97.56 -37.15 25.05 -2.52 -26.02 -Unreliable financial information -Qualification in theAuditor report. (Page 14 of Paper book 3) Pg.439-440 of paperbook for objections before DRP Pg.332-334 of paperbook for objections before TPO GE Converteam EDC Private Limited (ITAT Chennai )A.Y 2009-10 (Page 8 in para 9) Bangalore Tribunal in case of SAP LABS India Pvt. Ltd. (Page 6 in para 7.2.2) Q Logic (India) (P.) Ltd. (ITAT PUNE) (Page 9 in para 15) Infosys BPO Ltd (Infosys) Significant difference in turnover -(Infosys Turnover is INR 1831 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Technologies Ltd Hartron communication Ltd. Accentia Technologies Ltd.(Rejected by DRP) TP Study comprables Aptech Ltd. Compucom Software Ltd. First Object Technology Ltd. Usha Martin Education Ltd. NIIT Ltd. Education initiative Pvt Ltd. 7. Disallowance on 60% depreciation on computer software- INR 30.37 lacs - Ground No 12 * The Company has claimed depreciation on software licenses at the rate of 60 percent. * The description of additions made to computer software during the subject AY are as follows: Description of Asset Date put to Use Amount (in INR) Microsoft Visual Professional 2-May-12 9,01,602 Microsoft Visual Studio Professional 2-May-12 4,55,107 Minitab 16 for windows license 9-May-12 79,111 SPSS Statistic License 18-May-12 1,28,605 8 to 16 partition license 14-Jun-12 61,619 Vmware License 1-Jul-12 6,71,153 Access 2010 lifetime license 10-Jul-12 8,231 Net Software 25-Oct-12 97,801 Vmware License 4-Dec-12 1,48,926 ReSharper 7.0 C# Edition Commercial License 13-Dec-12 14,106 ReSharper 7.0 Edition Commercial License 18-Feb-13 15,380 Total 25,81,641 Remarks made by the learned AO The learned AO has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a submission that as KPO services were specific services and hired services, the same cannot be compared to the services rendered by the assessee. 6.3 In respect of fourth comparables being M/s.E4e Health Business, It was a submission that the said comparable was again in the KPO services and there was no segmented information available in respect of the same. It was a prayer that this company was to be excluded as incomparable. 6.4 In respect of fifth comparables being M/s.R.Systems, it was submitted by ld.A.R that this company was liable to be treated as one of the comparables, but the same had been rejected by the TPO and the DRP on the ground that the financial year was different. It was a submission that M/s.R.Systems was following financial year from January to December, whereas the assessee was following financial year from April to March. It was a submission that the assessee had re-worked the account sof the said comparable and had taken average of the quarterly results and placed the same before the TPO and the DRP. It was a submission that this comparable was liable to be considered. In respect of M/s.R.Systems, ld.A.R placed reliance in the decision of Delhi High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, is TNMM i.e. Transactional Net Margin Method, whether the turnover is high or not, would not make a different nor would be the question working capital adjustments be required, what is being compared as a percentage of profitability. It is very much open to the assessee to point out how the percentages as disclosed by the comparables are higher on account of from specific reasons as long as the products deal with the comparables and the assessees are comparable, then it is only a net margin, which is being compared. It would not lead to the requirements of the exclusion of any particular comparable. In the case of M/s.Hartron communication Ltd., no such specific reason for exclusion has been pointed out. In the circumstances, we are of the view that the comparables taken by the ld. Assessing Officer /TPO representing M/s.Hartron communication Ltd., does not call for exclusion. The same also goes for the case of M/s.Infosys BPO Ltd. It is the TNMM method, which is being applied and the margins are in the percentage and no way such margins are effected substantially on account of the turnover. In fact, from the Note of the assessee, the assessee itself said that the turnover of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied herein is TNMM, no specific adjustments towards working capital is permitted, in so far as making only an adjustment of one item being working capital will make the financials of the comparable unworkable. What is comparable is the percentage of the margins, and obviously when arriving at the margins for each of the comparables, such comparables would have taken into consideration their cost of working capital. Therefore, any tinkering to that would have a negative impact, which could be many of the financials of comparables unworkable. It must be remembered that when arriving at margins, various components would go into its calculations, such as the cost of capital, the number of employees, number of working days, type of assets, cost of assets etc. If each of these is to be adjusted, then there would be no comparison. Basically, TNMM what is being looked at, is the margin that normally comparable business would generate. This being so, the working capital adjustments applied for stand rejected. 11. Coming to the issue of Corporate Tax being depreciation on the software, the list of the software on which the assessee is claiming depreciation clearly shows that these are n ..... 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