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TMI Blog2022 (3) TMI 1507X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Honourable Commissioner of Income Tax (Appeals) ["Hon'ble CIT(A)"] grossly erred in adjusting the transfer price by INR25,156,574/- with respect to the international transactionrendered by the Appellant under section 92CA of the Income-tax Act, 1961 ("the Act"). 2. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act. 3. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in rejecting comparability analysis undertakenin the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price (`ALP') of the international transaction. 4. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not considering the previous two years financial data of the comparable companies while determining the ALP. 5. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in disregarding multiple year data and they ought to have accepted the use of contemporaneous data due to nonavailability of current year data in the public domain at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction. 4. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not considering the previous two years financial data of the comparable companies while determining the ALP. 5. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in disregarding multiple year data and they ought to have accepted the use of contemporaneous data due to nonavailability of current year data in the public domain at the time of preparing the documentation. 6. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not applying the upper limit for sales turnover filter while carrying out the benchmarking analysis. 7. The learned AO/ learned TPO/ Hon'ble CIT(A) has erred in restricting the working capital and not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies. 8. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-a-vis the comparable companies. II. Corporate Tax 9. The learned AO/ Hon'ble CIT(A) has erred in disallowing the depreciation of software on the premise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same. Considering the submissions and respectfully following the decisions of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, we admit the additional grounds raised by assessee for both years under consideration. 2. Brief facts of the case are as under: The assessee is a captive service provider, rendering Software Development Services to its parent company Verifone Singapore Pte. Ltd. Assessment Year 2011-12 During the year, the assessee reported the following international transactions: International transaction Value (INR) Technical Support Services 6,04,28,097/- R&D Services 21,64,04,719/- The Ld.TPO noted that assessee computed the margin at 14.94% by using OP/OC PLI. It used TNMM as the most appropriate method and used 12 comparables having average margin at 10.94%. It was thus submitted by the assessee that the transaction is at arms length. The Ld.TPO rejected the TP study done by the assessee, and carried out analysis by adopting various filters. The Ld.TPO sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No other grounds have pressed for adjudication except the relief with regard to exclusion and inclusion of comparables raised in Ground no.7 and additional ground mentioned herein above. 7. Before we undertake the comparability analysis it is sine qua non to understand the FAR of assessee. Functions: Functions performed by Verifone India with respect to transactions with Verifone Singapore are : * Hire and train employees at Indian facilities to improvement of the general skill level and provide special training in specific domains as per the business need indicated from time to time by Verifone Singapore. * Software Development and technology support. Typically software development consists of following services: * Following the requirement analysis of Verifone Singapore * Resource planning for the development of software as per requirements of Verifone Singapore * Developing software as per Design drawn by Verifone Singapore. * Coding, Quality check, testing and validation of the program developed. Overall software authentication and validation is done by Verifone Singapore. * Performing of additional functional requirement marked by Verifone Singapore. Assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: "7. We have considered the rival submissions. Even, if the assessee had included these three companies in the list of comparables as part of the TP study analysis, however, mere inclusion of the companies in the list of comparables does not operate as estoppel against the assessee, if on examination of the relevant facts it is found that these companies are functionally not comparable with that of assessee. Therefore, the selection of the companies by the assessee itself is not the finality of the comparability of the entities when the TPO has to examine the functional comparability as well as the other filters for inclusion or exclusion of the companies in the list of comparables for determination of ALP. We find that prima facie assessee has made out a case that in a series of decisions of this Tribunal, these three companies are held to be not comparable on various reasons and therefore it necessitates the functional examination of these companies for the purpose of inclusion or exclusion in the list of comparables. The Special Bench of this Tribunal at Chandigarh in the case of Quark Systems P. Ltd, (supra) has held that if a company is otherwise not found to be comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Applied Materials (I) P. Ltd. (supra) wherein in para 9.3.1 to 9.3.3 this Tribunal came to the conclusion that comparability of this company has to be decided afresh by the TPO after considering the facts as recorded in the decisions rendered by the Tribunal in the case of Electronics for Imaging India P. Ltd. (2017) 85 taxmann.com 124 (Bang.Trib.). We are of the view that similar directions would be appropriate in the present assessment year also. Thus, ground No.3(k) is decided accordingly." Respectfully following the aforesaid decision, we direct exclusion of the aforesaid three comparable companies from the list of comparable companies chosen by the TPO." There is nothing placed on record by the revenue to take a different view. Respectfully following the above view, we direct the Ld.AO/TPO to exclude excluded Persistent Systems & Solutions Ltd., and Sasken Communications Technologies Ltd.from the final list. Accordingly this ground raised by the assessee stands partly allowed. Additional Ground: 10. In the Additional Ground, assessee is seeking exclusion of Acropetal Technologies Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd., Persistent Systems & Sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. DCIT in ITA No.696/Mum/2016 held Infosys Ltd. to be not comparable for the reason that this company was engaged in manufacturing of software products and was a giant company assuming various risks. As far as Larsen & Toubro Infotech Ltd., is concerned, vide paragraph-8 page-16 of the order in the case of Electronics for imaging India Pvt. Ltd., (supra) this tribunal excluded this company on the ground of presence of onsite revenue of more than 50% and that the related party transaction was more than 15% (18.66%). 15. Respectfully following the aforesaid decisions, we uphold the exclusion of the aforesaid 7 companies from the list of comparable companies and ground No.2 raised by the assessee to this extent is dismissed. 16. Now we shall take up the appeal of the assessee. The assessee in ground No.13 seeks exclusion of 3 companies viz., Persistent Systems & Solutions Ltd., Sasken Communication Technologies Ltd. and Persistent Systems Ltd. Exclusion of these 3 companies was considered by the Tribunal in the case of Electronics for Imaging (I) Pvt. Ltd. (supra). In para 8 of the order, this Tribunal held that Persistent Systems & Solutions Ltd. was a company engaged in SWD s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. The Ld.TPO rejected the TP study done by the assessee, and carried out analysis by adopting various filters. The Ld.TPO selected following set of comparables having average margin of 22.63%. Sl. No. Company Name (OP/OC) 1 Datamatics Global Services Ltd. 14.57% 2 Genesys International Corporation Ltd. 30.09% 3 ICRA Techno Analytics Ltd. 17.24% 4 Infosys Ltd. 43.10% 5 Larsen & Toubro Ltd. 25.47% 6 Mindtree Ltd. 15.01% 7 Persistent Systems Ltd. 27.20% 8 R S Software India Ltd. 15.34% 9 Sasken Communication Technologies Ltd. 12.15% 10 Spry Resources India Pvt. Ltd. 26.18% AVERAGE 22.63% 15. The Ld.TPO restricted the working capital adjustment at 0.36%, however while computing the ALP. The Ld.TPO proposed an adjustment at Rs.2,37,82,190/-. On receipt of the order under section 92CA of the Act, the Ld.AO passed the draft assessment order confirming the addition as per the order under section 92 CA of the Act. Aggrieved by the order of the Ld.AO, the assessee preferred appeal before the Ld.CIT(A). The Ld.CIT(A) did not allow any relief to the assessee on the grounds raised. Aggrieved by the order of the Ld.CIT(A), the assessee pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally different from assessee's case and it has earned revenue from R&D activities. Persistent Systems Limited also owns intellectual properties. Further, segmental data is not available. It is also to be noted that Persistent Systems Limited is not considered as a comparable by various orders of the Tribunal in the following case of NXP Semiconductor (P.) Ltd. (supra), the Tribunal observed as under:- "13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is functionally different from a pure software service provider and therefore excluded it from the list of comparables for software development services; holding as under at para 17.3 of its order:- "17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight 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. " It was also brought to our notice that in earlier year, Larsen & Toubro Infotech Ltd., 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 which is absent in the case of present assessee. He also submitted that it has huge intangible assets and brand value in software at Rs.143,61,95,196 and it has intangible asset in the form of business rights to the tune of Rs.153,42,45,196 as shown in the Fixed Assets as on 31.03.2013 of the annual reports. Being so, in our opinion, it cannot be compared with the assessee's case. The Ld.AR also relied on following decision in support, wherein case of a contract service provider like assessee this comparable was excluded: * Applied Materials India Pvt. Ltd. v. DCIT by order dated 13.05.2020 in IT(TP) A No. 2687/Bang/2017 * EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R that these comparables cannot be considered as good comparable companies. In support, the Ld.AR placed his reliance on the decision of by co-ordinate bench of this Tribunal in case of Autodesk India Pvt.Ltd vs.DCIT reported in (2018) 96 taxman.com 263. On the contrary, the Ld.CIT.DR relied on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 21. We note that coordinate bench of this Tribunal for assessment year 2013-14 in case of Evolving Systems Network (I) Pvt.Ltd Vs.ACIT reported in (2021) 130 taxman.com212 held as under: "9. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of AutodeskIndia (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib). The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini IndiaPvt. Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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