TMI Blog2022 (8) TMI 892X X X X Extracts X X X X X X X X Extracts X X X X ..... ded are 100 % Software Development Companies, having high turnover and therefore respectfully following aforestated view in case of Genesis Integrating Systems India Pvt. Ltd. [ 2011 (8) TMI 952 - ITAT BANGALORE] these comparables are to be excluded on both the counts of functionally not being similar with that of assessee and also because they have a high turnover of more than 200 crore. Thus respectfully following above decisions, we uphold exclusion of Tata Elxsi Ltd., Sasken Communication Technologies Ldt, Persistent Systems Ltd., L T Infotech Ltd., and Infosys Ltd., by applying turnover filter under SWD Segment and for ITeS Segment, Infosys BPO Ltd., iGate Global Ltd., and Mindtree Ltd., by applying turnover filter, from final list. Foreign exchange loss or gain as part of operating expenditure and excluding depreciation cost - Whether DRP erred in directing the Ld.AO/TPO to consider the foreign exchange fluctuation to be operating in nature? - HELD THAT:- As relying on Finastra Software Solutions (India)(P.)Ltd. [ 2018 (5) TMI 1808 - ITAT BANGALORE] we uphold the treatment of foreign exchange loss/gain to be operating in nature. Depreciation cost treated as bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the DRP is correct in foreign exchange fluctuation as operating in nature and exclusion of depreciation from cost while treating foreign exchange fluctuation and deprecation non-operating in nature as applied by the TPO. 6. Whether the Ld.DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence requires seeking similar comparable companies. 7. For these and other grounds that may be urged upon, direction of the Dispute Resolution Panel may be reversed and that assessment order be restored. 8. The appellant craves leave to add, alter, amend or delete any other grounds on or before hearing of the appeal. Assessee s Appeal The Appellant submits as under: 1. Assessment and reference to Transfer Pricing Officer are bad in law a) That the final assessment order passed by the Respondent (hereinafter referred to as 'the AO') is bad in law and on facts, and has been passed in violation of the principles of natural justice. b) That, without prejudice to the above, the final assessment order passed by the AO is bad in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh benchmarking analyses conducted by the AO/ TPO are liable to be set aside. The DRP erred in upholding the actions of the AO/ TPO d) That the AO/TPO has erred in law and the DRP further erred in confirming the action of the TPO in using data which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. e) That the AO/ TPO erred in law and the DM' further erred in confirming the non-application of multipleyear data while computing the margins of alleged comparable companies. f) That the AO/TPO grossly erred on facts in benchmarking the international transactions of the Appellant with services provided by companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risks undertaken by the Appellant vis- -vis the other companies. g) That the AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies allegedly as comparables to the Appellant without establishing their functional comparability. The DRP further erred in confirming the same. h) That the AO/TPO grossly erred in law in deviating from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d those companies having employee costs less than 25% of their total revenues, the AO/TPO erred in rejecting CG Vak Software Export Ltd. and LGS Global Limited on that ground despite the said companies having employee costs in excess of 25% of their total revenues. The DRP further erred in confirming the same. g) That the AO/TPO also erred on facts and in law in arbitrarily rejecting R Systems International Ltd. for having a different financial year ending (i.e. other than 31' March 2011), despite the said company being functionally comparable to the Appellant. The DRP further erred in confirming the same. h) That the AO/ TPO erred in rejecting Akshay Software Technologies Ltd., CG Vak Software Export Ltd., LGS Global Ltd., Goldstone Technologies Ltd., Powersoft Global Solutions Ltd., R Systems International Ltd., Helios Matheson Information Technology Ltd.. and Varna Industries Ltd., despite these companies being functionally comparable to the Appellant. The DRP also erred in confirming the same. i) That the AO/ TPO erred in including Acropetal Technologies Ltd., e-zest Solutions Ltd., E-infochips Ltd., ICRA Techno Analytics Ltd., and Persistent Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating revenues. The DRP erred in confirming the same. g) That the AO/ TPO erred in including Accentia Technologies Ltd., Acropetal Technologies, ICRA Online Ltd., and Jeevan Scientific Technology Ltd. in the final list of comparables despite these companies being functionally dissimilar to the Appellant. The DRP also erred in confirming the same. h) The DRP has rejected Infosys BPO Ltd., Mindtree Ltd. and iGate Global Solutions Ltd. on application of upper turnover filter of INR 200 crores. However, the DRP has erred in tie 'not rejecting the said companies as being functionally dissimilar to the Appellant. 5. Determination of arm's length price relating to Software Duplication and Re-Distribution Services a) That the AO/TPO erred in law and on facts in rejecting the Appellant's application of the Resale Price Method ('RPM') as the Most Appropriate Method (`MAM') in its TP Study for determination of the arm s length price of the above international transaction, and consequently erred in applying the Transactional Net Margin Method (`TNMM') as the MAM for the said transaction. The DRP erred in confirming the same. b) That the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upper caps to the working capital adjustments allowable to the Appellant while determining the arm's length prices of its international transactions without there being any legal basis or rationale for limiting the working capital adjustments to the said percentages, and thus erred in not granting the entire adjustments allowable under Rule 10B of the Rules to account for the differences in the working capital positions of the Appellant and of the comparable companies. c) That, despite the binding directions of the DRP, the AO / TPO grossly erred in law and on facts in not excluding the Appellant's cost of depreciation from its operating cost bases while determining the arm's length prices of its international transactions of provision of software development services and telecom support services, and thus erred in not complying with the binding directions of the DRP in this regard. 7. Variation of 5% from the arithmetic mean That the AO/TPO erred in law in not granting the benefit of the proviso to Section 92C(2) to the Appellant. 8. Non set-off of the entire brought forward losses a) That, after having made the transfer pricing adjustments and with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction. 2.2 Upon receipt of reference, the Ld.TPO called for economic details of international transaction in Form 3CEB. The Ld.TPO observed that, the assessee entered into following international transaction with its associated enterprises: Particulars Amount in Rs. Provision of software development services 115,84,60,432/- Provision of IT enabled services 7,52,73,455/- Software Duplication and Re-distribution 4,03,96,085 /- Reimbursement of expenses 8,61,778/- Recovery of services 2,71,58,603/- 2.3 Ld.TPO accepted arms length price, computed by assessee in respect of Software Duplication and Re-distribution (comprising purchase of software and royalty on sale of duplicated software). The only segment disputed by the Ld.TPO was in respect of Software Development Services and Provision of IT enabled serviced. It is observed that, for software development service segment, the assessee used TNMM as most appropriate metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Inhouse Production Limited 10.97% 7. Jindal intellicom Ltd. 9.75% 8. Spanco Limited 12.46% Arithmetical Mean 15.10% 2.5 The assessee, thus held the transaction to be at arms length. 2.6 Ld.TPO dissatisfied with comparables selected by the assessee, applied various filters and excluded certain comparables from assessee's list. The Ld.TPO thus selected following comparables for software development service segment and IT enabled service segment. Software development service segment: Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) Mark-up on Total Costs (WC adj) (in %) 1 Acropetal Technologies Ltd. (seg) 31.98 27.53 2 e-Zest Solutions Ltd. 21.03 17.82 3 E-Infochips Ltd. 56. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. iGate Global solutions Ltd. 25.07 23.82 AVERAGE MARGIN 24.77 23.18 2.7 The Ld.TPO, proposed adjustment in respect of the 2 segment is under: Particulars Proposed adjustment Software development service segment Rs.13,89,09,426/- IT enabled services meant Rs.90,93,681/- 2.8 Software Duplication and Re distribution(SDR) segment: The Ld.TPO though held that the transaction in SDR segment to be at arm s length, he subsequently passed an order under Section 154 of the Act dated 04.02.2015, determining adjustment in respect of the SDR segment. The Ld.TPO under 154 proceedings observed that, for SDR segment, the assessee used RPM as the most appropriate method and PLI was computed at 41.79% by using GP/sales. The assessee used following 8 comparables having average margin of 19.83%: Sl. No. Name of the company Average PLI 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after excluding depreciation from the cost base. 5. On giving effect to the DRP directions, the final list of comparable to the SWD service segment are as follows: SI. No. Name of the Company Adjusted Margin 1. Acropetal Technologies Ltd. (seg) 71.68 2. e-Zest Solutions Ltd. 29.11 3. E-Infochips Ltd. 70.50 4. Evoke Technologies Pvt. Ltd. 11.07 5. ICRA Techno Analytics Ltd. 31.76 6. Persistent Systems and Solutions Ltd. Ltd. 25.67 7. R S Software (India) Ltd. 19.75 ARITHMETICAL MEAN 37.08 For IT enabled service segment: v. Turnover filter: The DRP directed exclusion of companies having turnover in excess of Rs. 200 crores. vi. Foreign exchange fluctuation: The DRP directed that the foreign excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which includes developing certain components of Novell products, like e-directory, developer tools for NetWare 6 and NetWare 5 ex-IP etc. In TP study, assessee has been classified into various product groups: the application group; networking and advanced services group; network management services group; operating Systems group; quality management group and technology group; It has been submitted in TP study that workflow of software development services provided by assessee can be summarised as follows: Novell US prepares a product requirement document(PRD) which is developed y the product management team of Nov ell based on the inputs from the customer, the marketing team of the product group and the core team management of Novell US, and the product engineering group of Novell India. The product is initiated once the PRD is received. The product engineering team of Novell India makes an engineering requirement specification. The project engineering team at Novell India develops the project based on the inputs received from Novell US to ensure that the deliveries are tied into the product release. Based on the project plan developed, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not prescribed under IT Rules, as one, which is to be applied while determining arms length price of international transaction. The Ld.CIT.DR placed reliance on orders passed by Ld.AO/TPO. He relied on following decisions of coordinate bench of this Tribunal in support of his contention: NTT Data Global Delivery Services Ltd. vs ACIT reported in (2016) 59 Taxmann.com 7; LSI Technologies India Pvt.Ltd vs ITO reported in (2016) 70 Taxmann.com 189; Societe Generale Global Solutions Centre Pvt.Ltd vs DCIT reported in (2016) 69 Taxmann.com 336 Capgemini India Pvt.Ltd vs ACIT reported in (2015) 58 Taxmann.com 175; Wills Processing Services India Pvt.Ltd vs DCIT reported in (2013) 30 Taxmann.com 350. 9.2 Ld.AR submitted that, application of turnover filter is upheld by coordinate Bench of this Tribunal in several decisions, including Genesis Integrating Systems India Pvt. Ltd. vs DCIT reported in (2012) 20 taxmann.com 715, wherein, comparables were excluded on high turnover filter, and that, it is held that appropriate turnover range should be applied in selecting comparables of uncontrolled companies. He submitted that, this Tribunal in case of Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to investigate the so called 'domain' of the software, because more knowledgeable they are about the domain already, the less the work that is required. Another objective of this work is to make the analysts who will later try to elicit and gather the requirements from the area experts or professionals, speak with them in the domain's own terminology and to better understand what is being said by these people because otherwise they will not be taken seriously. The next most important task in creating a software product is extracting the requirement of the customers and then precisely describing the software to be written possibly in a rigorous way. In practice, most successful specifications are written to understand and fine tune applications that were already well developed, although safety critical software systems are often carefully specified prior to application and development. The architecture of a software system refers to an abstract specification of the software system and is concerned with making sure that the software system will meet the requirements of the product as well as ensuring that future requirements can be addressed. The architecture step als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomization to suit the requirements of the customer and in this case, only the right to use the software is passed on to the customer and therefore, the same is also considered as software development service providers. A software trading company purchases software products in the form of licenses or on royalty basis as a right to use and sells these products as a reseller. 3.1 The assessee being a software development service provider, it cannot be compared to a software development company or a software trading company. Therefore, the companies that are functionally different from that of the tax payer are to be excluded. ..... 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded on both the counts of functionally not being similar with that of assessee and also because they have a high turnover of more than 200 crore. 9.7 Reliance is also placed on decision of this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT reported in (2018) 96 Taxmann.com 263, followed similar view to exclude identical comparables by applying turnover filter, wherein all the decisions relied upon by Ld.CIT.DR has been considered and dealt with. 9.8 In support, reliance was placed on decisions of this Tribunal in case of Triology E Business Software India Pvt.Ltd., vs DCIT reported in (2013) 29 Taxmann.com 310 and decision of Hon'ble Bombay High Court in case of CIT vs Pentair Water India Pvt. Ltd in ITA No. 18/2015 vide order dated 16/09/15. Hon'ble High Court in case of Paintair water India Pvt.Ltd (supra) held that, turnover is a relevant criteria for choosing companies as comparables for determining ALP of international transaction. Even otherwise, all above referred comparables are functionally not similar with that of assessee, which is only a captive software development service provider, which does not design/develop/sell software products and does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the ITAT Bangalore Bench in the case of Commonscope Networks (India) Pvt.Ltd. Vs. The ITO IT(TP) A.No.166 181/Bang/2016 order dated 22.2.2017 wherein it was the foreign exchange gain or loss that arises should relate to the concerned AY because what is compared is the profit margin of a particular AY. According to him therefore the TPO/AO should examine the nature of foreign exchange gain or loss in the case of the Assessee and the comparable companies and to the extent it relates to turnover of the relevant AY and the segment for which ALP is being determined, the same should alone be considered as part of the operating revenue or loss. The learned counsel for the Assessee pointed out that it is impossible to carry out such an exercise. The Assessee might be willing to carry out such an exercise but the same cannot be expected from the comparable companies who have to furnish the relevant data. He also pointed out that under rule 10B (3) of the criteria for comparability is the effect of profit on account of differences. Rule 10B(3) reads thus: (3) An uncontrolled transaction shall be comparable to an international transaction if-- (i) none of the differences, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2009-10 (iii) Decision of by coordinate bench of this in case of Honeywell Technology Solutions Lab (P.) Ltd.v. DCIT reported in (2013) 35 taxmann.com 144; (iv) Decision of Hon ble Pune Tribunal of this in case of E-gain Communication (P.) Ltd. v. ITO reported in (2009) 118 ITD 243; and (v) Decision of by coordinate bench of this in case of 24/7 Customer.com (P.) Ltd. v. DCIT reported in (2012) 28 taxmann.com 258). 10.6 On the contrary, the Ld.CIT.DR relied on orders passed by authorities below. 10.7 We have perused the submission advanced by both sides in light of records placed before us. As far as issue of excluding depreciation cost alleged by the revenue is concerned, Coordinate Bench of this Tribunal in assessee s own case for A.Y: 2009-10 in IT(TP)A No. 1491/Bang/2014 C.O. No.69/Bang/2015 by order dated 04.09.2019 observed and held as under: 11. Ground No.3 is in respect of disallowing depreciation as an adjustment in comparables. Ld.AR submitted that assessee has a policy of charging higher rate of depreciation as compared to companies selected by Ld.TPO. Assessee placed reliance on the accounting notes wherein policy of depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly. Considering above discussion and observations by Ld.CIT (A), we do not find any infirmity in adopting a consistent view and the same is upheld. 10.8 Ld.AR submitted that for year under consideration also the assessee charged higher rate of depreciation as compared to companies selected by Ld.TPO. Facts being the same with assessment year 2009-10, we do not find any infirmity in adopting the consistent view to in computing the margin in respect of the comparables after excluding the depreciation from the cost. In the result the appeal filed by revenue stands dismissed. 11. As far as the appeal filed by assessee is concerned, the grounds that are pressed and argued by the Ld.AR are adjudicated as follows. 12. Ground No.3(i): That the lower authorities erred in including Acropetal Technologies Ltd., e-Zest Solutions Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd. and Persistent Systems Solutions Ltd. despite these companies being functionally dissimilar to the SWD services segment of Assessee. A. Acropetal Technologies Ltd A.1 The Ld.AR submitted that assessee seeks exclusion of this comparable as it fails the software development services revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s filter (Pages 18-20 of the DRP's directions). Revenue vide ground Nos. 2 to 4 is seeking the inclusion of the company in the final list of comparables. After hearing the rival submission on exclusion of Acropetal from the list of comparable companies, we find that exclusion of this company from the list of comparable companies should be upheld because this company fails the employee cost filter of employee cost being equal to at least 25% of the total operating revenue. From the annual report of the company it can be seen that the employee costs incurred by the company is 11.51% of the total operating revenue. Apart from the above, the Company also fails the TPO's filter of service revenue is excess of 75% as the income from software development activity is Rs. 81.40 Crores out of total operating revenue of Rs. 141 Crores. As it is clear that the company fails TPO's own filters of employee cost in excess of 25% and service revenue is excess of 75%, the company ought to remain excluded from the final list of comparables. We also find that this Tribunal in Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 39/Bang/2016 ] at paras 16.1 to 16.4 at pages 1606-160 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tems Solutions Ltd., is concerned, these were Comparable companies chosen by the TPO. The Assessee did not object to inclusion of these two companies before the TPO nor were objections filed against inclusion of these two companies before the DRP. The Assessee now wants to content that these two companies are functionally different and based on judicial decisions in which these two companies were excluded as functionally not comparable with a company rendering SWD services such as the Assessee. The Assessee seeks to rely on the decision of the Special Bench ITAT Chandigarh in the case of DCIT Vs. Quarks Systems Pvt. Ltd., 42 DTR 414 (Chandigarh-SB) wherein it was held that there cannot be estoppel against law and that non-comparable companies even if selected by the assessee in TP study can be sought to be excluded by the assessee based on functional comparability or other valid reasons. We therefore admit the relevant ground of appeal seeking exclusion of these two companies. Since the TPO/AO did not have opportunity to decide the issue, we are of the view that it would be just and appropriate to remand the issue to the TPO for deciding the correctness of choosing this company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, has challenged its exclusion only the first and the third grounds. In other words, the Revenue has not challenged its exclusion on the ground of presence of significant inventory and thus its exclusion on this ground has attained finality and cannot be disturbed by this Hon'ble Tribunal. Apart from the above, we find that the company's software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for that year. Thus, the above action of the DRP in rejecting the above company is correct. The DRP has also rightly appreciated that the above company is engaged in diverse activities such as product development and the provision of IT enabled services for which no separate segmental information is available in its Annual Report. On the contrary, the diverse activities of software development and the IT enabled services are considered and reported together in one segment. Thus, in the absence of such segmental details, the company was rightly held to be functionally not comparable to the Assessee which is a captive software development service provider (relevant submissions at internal IT(TP)A Nos.187 175/Bang/2016 page 73 of the objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. ITO (supra) at para 22, where in the case of assessees similar to the assessee herein, the exclusion of the said company from the final list of comparables was upheld. D.3 On the contrary, the Ld.DR relied on orders passed by the authorities below. D.4 We have perused the submission advanced by both sides in light of records placed before us. D.5 We note that in similar circumstance of a captive service provider, this Tribunal in case of Aspect Technology Center (I.) Pvt. Ltd. vs. ITO(supra) observed and held as under: As far as Gr.No.7 raised by the revenue is concerned, the revenue in this ground has challenged the action of the DRP in excluding ICRA Techno Analytics Ltd. This company was rejected by the DRP for the reason that the entire revenue of the company has been reported under one segment, and in the absence of segmental information regarding the same, the company could not be held as a comparable to the Assessee. At the outset it is submitted that the action of DRP in rejecting this company is right in law and does not require any interference by this Hon'ble Tribunal. We find that this company is engaged in diversified activities of software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in Applied Materials India Pvt. Ltd. v. ACIT (supra) at paras 9,2.1 to 9.2.4 pages 18-22, where in the case of assessees similar to the assessee herein, the exclusion of the said company from the final list of comparables was upheld. E.5 On the contrary, the Ld.DR relied on orders passed by the authorities below. E.6 We have perused the submission advanced by both sides in light of records placed before us. E.7 We note that in similar circumstance of a captive service provider, this Tribunal in case of Applied Materials India Pvt. Ltd. v. ACIT (supra) observed and held as under: 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 paras 24 to 26 as under : Persistent Systems Solutions Ltd. The assessee has the grievance against rejection of this company by the DRP. The Id. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, the financial data of the company is not available in the public domain, whereas, the assessee had furnished the annual report before the Ld.TPO. It is submitted that the Ld.TPO failed to take the same into consideration. In this regard, it is submitted that the company is functionally comparable and passes all the filters applied by the TPO. Submissions in this regard are placed at pages 1497-1500 and 1977-1981 of the paperbook. 13.2. As regard employee cost, the assessee submits that under Schedule VI to the Companies Act, 1956, all categories of expenditure incurred on account of salary and wages are not required to be disclosed under the head personnel expenditure . Further, it is submitted that, the employee costs incurred by many companies are not separately clubbed as Employee expenses in their financial statements. For instance, some companies club the employee costs under the head Cost of Services . Some others, like LGS Global Ltd., club the expenses under the head Personnel and Purchase Cost . 13.3. Since, for a service provider, the major component of the Purchases Personnel Cost would be employee-related expenses, it is apparent that LGS would pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils of its various activities are unavailable. The company further owns significant intangibles. Submissions in this regard are placed at pages 1448-1455 and 2104-2111 of the paperbook. B. Acropetal Technologies Ltd. - The assessee seeks rejection of Acropetal Technologies Ltd. because the EDS segment of Acropetal fails the 75% service revenue filter applied by the Ld.TPO. Acropetal is engaged in software development, web development and engineering design services. The engineering design service has been considered as comparable to the Assesse by the Ld.TPO. However, the Assessee wishes to highlight that the functions under taken by Acropetal under the engineering design segment are different from the ITES provided by Assessee. Therefore, the assessee seeks exclusion of the above company as it fails the service revenue filter besides also being functionally not comparable to the assessee company. Submissions in this regard are placed at pages 1441-1448 and 2097-2103 of the paperbook. C. ICRA Online Ltd. - The assessee company seeks exclusion of ICRA Online Ltd. as it is functionally not comparable to its ITE service segment. It is engaged in high end KPO services whereas the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nastra Software Solutions (India) (P.) Ltd. v ACIT (supra) at para 25 and Aspect Technology Center (India) Pvt. Ltd. v. ITO (supra) at para 41, where, in the case of assessees similar to the assessee herein, for the same Assessment Year, the company was directed to be excluded from the list of comparables/exclusion was upheld. The company is, therefore, not comparable to the assessee and it ought to be rejected from the list of comparables. D.4. On the contrary, the Ld.DR relied on orders passed by the authorities below. D.5. We have perused the submission advanced by both sides in light of records placed before us. We note that in similar circumstance of a captive service provider, this Tribunal in case of Aspect Technology Center (I.) Pvt. Ltd. v. ITO(supra) observed and held as under: 41. We have heard the rival submissions of the parties. As far as Gr.No.14 of the revenue's appeal is concerned, the Revenue is seeking the inclusion of Acropetal Technologies Ltd., Jeevan Scientific Technology Ltd., Accentia Technologies Ltd., iGate Global Solutions Ltd. and ICRA Online Ltd. We find that the above companies were rightly rejected by the DRP and the same requires no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) Pvt. Ltd. v. ACIT (order dated 08.07.2016 in IT(TP)A No. 380/Bang/2016) directed the TPO to verify as to whether the TPO's filter of Sales 1 Crore is satisfied by this company. In the present case, as can be seen from the annual report of the company the sale of the company in respect of the BPO segment amounts to only 79 lakhs, and therefore it fails the TPO's filter. As far as exclusion of Accentia Technologies Ltd., is concerned, we find that this company was excluded by the DRP for the reason that the details regarding its diverse functions were reported under one segment, without segmental details regarding the same being made available. In the absence of segmental details being made available, the comparability of the company with that of the assessee cannot be determined. In any event, Accentia is engaged in providing high end services in the nature of Knowledge Process Outsourcing ('KPO') which is evident from its annual report, whereas, the assessee is engaged in rendering routine low end information technology enabled services. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned. In any event, this company is functionally dissimilar for the reason that the outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, the company fails the TPO's own filter of export turnover in excess of 75% of total sales as the export turnover of the company amount to only 61.88% of its sales. Therefore, the company cannot be held as a comparable to the assessee. D.6. Respectfully following the above view, we direct the Ld.AO/TPO to exclude Accentia Technologies Ltd, Acropetal Technologies, ICRA Online Ltd. (seg) and Jeevan Scientific Technology Ltd., from the final list. Accordingly this ground raised by assesee stands allowed. 15. Ground No.5 (a): That the lower authorities erred in rejecting the Assessee s application of the Resale Price Method ( RPM for short) as most appropriate method in its TP study for determination of ALP in the SDR services segment and consequently erred in applying the Transactional Net Margin Method ( TNMM for short) as the most appropriate method fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illai v. AITO reported in (1955) 28 ITR 885 and the decision of the Hon ble Supreme Court in the case of ITO v. Volkart Brothers reported in (1971) 82 ITR 50 . Therefore, the TP adjustment determined vide order passed under Section 154 of the Act is unsustainable. 15.5. Secondly, the action of the Ld.TPO in determining the adjustment as is done, is erroneous. The TPO failed to furnish the search process adopted, the filters applied and the final list of comparables arrived at. In effect, the order passed under Section 154 of the Act is a non-speaking order and is therefore erroneous and unsustainable. 15.6. Lastly, it is submitted that the Appellant is a routine distributor and does not perform any value added services to the product, which is also accepted by the Ld.TPO. Since the assessee is merely a routine trader of services, without any value addition, RPM is the MAM. Reliance in this regard is placed on the following decisions: (i) Textronix India (P.) Ltd. v. DCIT ([2013] 29 taxmann.com 288 (Bangalore-Trib.) at para 5); (ii) ACIT v. Akzo Nobel Car Refinishes India (P.) Ltd. ([2017] 84 taxmann.com 199 (Delhi-Trib.) at paras 6 and 7); (iii) ITO v. L oreal I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate directions in this regard be issued to the Ld.TPO. 15.10. Both sides submitted that the issue may be remanded to the Ld.TPO for de novo consideration. Based on the above discussions and submissions, we direct the Ld.TPO to consider the claim of the assessee as submitted in the TP study. Admittedly, in the assessee s own case for the assessment years 2012-13 to 2014-15, the transaction in the SDR segment, benchmarked by the assessee by applying RPM was accepted by the revenue. In the event the comparables captured under the search process is akin to RPM as MAM, then the same must be resorted to, for computing the margin. Only under the circumstances as considered by Hon ble Mumbai Tribunal in the case of Bristol Myers Squibb India Pvt.Ltd. vs. DCIT (supra), TNMM should be considered. 15.11. The assesse is directed to provide all relevant information and evidences to substantiate its claim. Needless to say that proper opportunity of being heard must be granted to the assessee in accordance with law. Accordingly, Ground No.5 raised by assessee stands allowed for statistical purposes. 16. Ground No.6(b): In this ground, it is alleged by the assessee that the lower au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection of the DRP is erroneous and merits the interference of this Hon'ble Tribunal. It is submitted that working capital adjustment must be granted in full without there being any arbitrary and ad hoc upper cap or restriction to the same, as has been done by the TPO. The working capital adjustment has been arrived at by the TPO on the basis of a scientific calculation and by adopting the methodology prescribed by the OECD Guidelines. Thus, once a working capital adjustment is arrived at in the manner prescribed by law, the consequences of such an adjustment on a comparable's profit margin cannot be the reason for applying a cap on such adjustment. Rule 10B(3) of the Income-tax Rules, 1962 ('the IT Rules' for short), provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A working capital adjustment is one such adjustment which is to be applied in order to adjust for the differences between the working capital positions of the tested party and of the comparable. The IT Rules do not provide for the requirement of application of any cap or upper limit to such adjustments. This po ..... X X X X Extracts X X X X X X X X Extracts X X X X
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