TMI Blog2021 (3) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of being heard. Spry Resources India Pvt. Ltd to be included as relying on case of Synamedia India (P) Ltd. [ 2020 (5) TMI 211 - ITAT BANGALORE ] dealt with an identical claim made by the assessee who a SWD service provider such as the assessee and in whose case also, the very same 7 comparables chosen in the case of assessee in the appeal was chosen as comparable by the TPO. Inclusion of a company by name Evoke Technologies Ltd. - Reasons given by the DRP for not considering this company as a comparable company was due to inconsistency in export turnover for different AYs and incurring of consultancy charges which was alien in the business of SWD services. In this regard, the learned Counsel for the assessee has drawn our attention to a decision of the ITAT Delhi Bench in the case of DCIT Vs. Sumi Motherson Innovative Engineering Ltd. [ 2014 (2) TMI 652 - ITAT DELHI ] Tribunal took the view that while applying TNMM, it is not allowed to compare each and every item of operating cost incurred by assessee with similar cost in case of comparables to ask for adjustment, rather it is overall effect of all such individual items culminating into operating profit, which is cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the Any income arising from an international transaction shall be computed having regard to the arm s length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% Less: Working Capital Adjustment 1.49% (As per Annex. A) Adjusted margin 19.41% Operating Cost ' 106908,53,680 Arms Length Price(ALP) 127659,71,725 119.41% of Operating Cost) Price Received 118991,83,039 Variation in Price 8667,88,686 3% of price received 3569,75,491 Shortfall being adjustment 8667,88,686 The above shortfall of Rs. 8667,88,686/-(Rupees Eighty-Six Crore sixtyseven Lakhs eighty eight Thousand six Hundred eighty-Six Only) is treated as transfer pricing adjustment 92CA in respect of software development segment of the taxpayer's international transactions. Thus a sum of R.86,67,88,686/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of M/s. EPAM Systems (I) P. Ltd. v. ACIT, ITA No.2122/Hyd/2017 for AY 2013-14, order dated 20.11.2017. Vide para 12 of the decision, the Tribunal took the view that Persistent Systems Ltd. was into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee's profit margin. As far as L T Infotech Ltd. is concerned, the Tribunal vide para 17 of the aforesaid order came to a similar conclusion to hold that L T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies. 22.1 It was also brought to our notice that in earlier year, Larsen Toubro Infotech Limited has incurred expenditure on cost of brought out items for resale at Rs.27,10,89,274 for which he drew our attention to the financial statement of Larsen Toubro Infotech Limited placed at paper book page No.1081, which is absent in the case of present assessee. He also submitted that it has huge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different (viz. being engaged in product development and product design services) from the assessee in the case on hand which is rendering software development services. It is ordered accordingly. 23.1 Therefore, Persistent Systems Limited cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the said company from the list of comparables, with the similar directions given in the above order of the Tribunal (supra). III. C G VAX SOFTWARE EXPORTS LIMITED 24. The learned AR submitted that this company should be excluded for the reason that C G VAX Software Exports Limited is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly. 24.2 In our opinion, there is force in the argument of the learned AR. M/s.C G VAX Software Exports Limited is not only engaged in the business of computer software development, but also engaged in product manufacturing process, whereas the present assessee is not in product manufacture activity. M/s. C G VAX Software Exports Ltd. owns huge intangible assets and also engaged in outsourced product development. In view of the foregoing reasons, we hold that the said company cannot be considered for inclusion in the list of comparables. We, therefore, direct the TPO to exclude the said company from the list of comparables. 9. The learned DR relied on the order of the DRP. We however find that the reasons given by the DRP are the same reasons which the Tribunal has not accepted in its order in the case of NXP India Pvt.Ltd. (supra). Therefore, respectfully following the aforesaid decision, we direct exclusion of the following three companies from the list of comparable companies viz., CG Vak Software Exports Ltd., Larsen Toubro Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment Year 2013-14 dealt with an identical claim made by the assessee who a SWD service provider such as the assessee and in whose case also, the very same 7 comparables chosen in the case of assessee in the appeal was chosen as comparable by the TPO. On inclusion of the company Spry Resources India Pvt. Ltd., (supra) the Tribunal held as follows: (c) Spy Resources India Pvt.Ltd., 39.This comparable was excluded by Ld.TPO by observing that this company has reported trade receivables at Rs.7.49 crores for year under consideration whereas, in immediately preceding year, total turnover was Rs.3.45 crores only. Ld.AR submitted that, there is no objection raised by Ld.TPO regarding its functional similarities. He further submitted that merely because trade receivables for year under consideration are more than what was in the preceding year, exclusion of this comparable is not appropriate. 40.Ld.CIT DR placed reliance upon orders passed by authorities below. 41.We have perused submissions advanced by both sides in light of records placed before us. 42.We are of opinion that this comparable needs to be relooked into by Ld.AO/TPO, as this has not been raised before DRP an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnual Report for the financial year 20132014, that the company offers end-to-end IT business solutions to enable clients to enhance business performance. In view of the above facts, we do not find any infirmity in rejection of the above company. The objection is accordingly rejected. 15. After considering the reasons given by the DRP and the rival submissions, we are of the view that the reasons given by the DRP for not considering this company as a comparable company was due to inconsistency in export turnover for different AYs and incurring of consultancy charges which was alien in the business of SWD services. In this regard, the learned Counsel for the assessee has drawn our attention to a decision of the ITAT Delhi Bench in the case of DCIT Vs. Sumi Motherson Innovative Engineering Ltd., (2014) 42 taxmann.com 242 (Delhi Tribunal) wherein the Tribunal took the view that while applying TNMM, it is not allowed to compare each and every item of operating cost incurred by assessee with similar cost in case of comparables to ask for adjustment, rather it is overall effect of all such individual items culminating into operating profit, which is considered for benchmarking assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would prevail over the general provisions. 19. The learned Counsel for the assessee brought to our notice that in the final Order of Assessment dated 30.10.2017, the AO has not followed the direction of the DRP. We have perused the final Order of Assessment and in para 2, the AO has not followed the directions of the DRP. The DRP had given a specific direction to the AO to examine the invoice and ascertain the nature of expenses and if it is noticed that the expenses are only renewal of licence fees for application software for an year or less, then the expenditure has to be allowed as a revenue expenditure. We therefore deem it fit and proper to set aside the order of AO and remand the issue to AO for fresh consideration in accordance with directions of the DRP. We hold and direct accordingly. 20. The next issue which the assessee has raised in the grounds of appeal is with regard to disallowance of a sum of Rs.3,88,45,034/- on account of provision for leave encashment. It was submitted by learned Counsel for the assessee that in view of the provisions of section 43B(f), the provision for leave encashment cannot be allowed as a deduction. The learned Counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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