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TMI Blog2018 (5) TMI 2146X X X X Extracts X X X X X X X X Extracts X X X X ..... learned TPO and the learned AQ-under the directions of the Hon'ble DRP erred in arbitrarily cherry picking new companies and using non-contemporaneous data; 3. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in following an inconsistent approach in the application of filters in selecting comparable companies. 4. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in rejecting companies, by applying incorrect filters, which undertake functions, employ assets and bear risks similar to the Appellant; 5. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in cherry picking companies as comparable for the purpose of determining the arm's length price without considering the fact that their functions undertaken, assets employed and risks borne were not comparable to that of the Appellant; 6. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed several grounds, the main ground relates to the determination of the arm's length price by the Assessing Officer. 4. As regards ground nos. 13 & 14, the ld. Counsel of the assessee submitted that she will not be pressing for the same. Accordingly, ground nos. 13 & 14 are dismissed as not pressed. 5. The assessee is incorporated in India and is a wholly owned subsidiary of Lion bridge Mauritius Limited. The assessee has centers in Mumbai, Chennai and Bangalore. The services rendered by the assessee include providing low-end, routine, software development and related services (i.e., Information Technology (IT) and Information Technology Enabled Services (ITES) and export thereof. As per the Transfer Pricing (TP) study and based on functional and risk analysis it has been characterized as software development and globalization service provider and accordingly it has selected it as the tested party. As per the Profit Level Indication (PLI) working in the TP study report, the cost base did not consider the amount of outsourcing cost Rs.16,08,80,492/- as part of the cost base and the assessee did not charge mark-up on the same. The assessee has treated the same as a pass through ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggested by the Transfer Pricing Officer and the contentions of the assessee against them and Transfer Pricing Officer's comment against them are summaries as under: Sr. No. Name of the comparable Contentions of the assessee TPO comments 1 Acropetal Technologies Limited * Functionally not comparable - company operates under three business segments viz., Engineering Design Services, Information Technology Services and Health Care * Product company is different from a service company * Insufficient segment information between product and service income * Presence of intangibles i.e. 52.48% * Research and development activities Assesee's contentions are rejected as segmental profits are available and the function of IT segment is comparable with ; the assessee company. Hence, it is functionally comparable. 2 Aspire Systems (India) Private Limited * Functionally not comparable - providing services including Outsourced Product Development, Software Testing, and Infrastructure Application Support & Oracle Services Assessee's contentions are rejected and company is accepted as comparable due to the fact that it is engaged in providing software development & solution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication services, application development services support services in enterprise applications space * Product company is different from a service company * Non-availability of segment data * Presence of intangible assets in development of products_______ Assessee's contentions are rejected and company is accepted as comparable due to the fact that it is engaged in providing software development & solutions . Hence it is functionally comparable. 8. The Transfer Pricing Officer further rejected the following comparables selected by the assessee by observing as under: Sr. No. Name of the Company Reasons for rejecting 1 Cosmic Global Ltd. Export Turnover to total sales is 56.01% which is less than 75% 2 Kelton Tech Solutions Different accounting period. The company's year ended on 30 June 2013 3 Prism Informatics Export Turnover to total sales is 49.31% which is less than 75% 4 R Systems International Ltd. Different accounting period. The company's year ended on 31 December, 2012 5 Virinchi Technologies Limited Low employee cost of 18.88% being less than 20% employee cost filter 9. In view of the above, the final sets of comparables chosen by the Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover. We have gone through the submission of the assessee and have observed that the export turnover is just below 75%. Hence, the TPO was right in rejecting the comparable. * R Systems International Limited The TPO rejected the comparable as the company follows different accounting year ending December, 30 2012. Since the company does not follow the same accounting year as the assessee does and as there are other similar comparables available, the said comparable was rightly rejeaed by the TPO. * Virinchi Technologies Limited The TPO rejected the comparable as the company has low employee cost of 18.88% being less than 20% employee cost filter. Since the company has low man power cost, the business model is not comparable to assessee where employee cost is very high and as there are other similar comparables available, the said comparable was rightly rejected by the TPO. 4.4.3 We have also gone through the further submissions made by the assessee and it is observed that the TPO has selected the given below companies as comparables: (a) Acropetal Technologies Ltd. The assessee claims that the company operates under three business segments viz., Engineering Design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee which has IP's in the name of the company and in house R & D centre. From the submission of the assessee it is seen that the company Persistent is into development of software hence, the claim of the assessee that company is not functionally similar to the business of the assessee is rejected. Merely because the company has IP's and R & D centre in its own name, one cannot reject the comparable. Hence, the claim of the assessee is rejected. (e) Thirdware Solution limited The assessee objects to the selection of the company as comparable because it is not functionally comparable and is engaged in diversified operations offering comprehensive application implementation services, application services, application development services support services in enterprise applications spaceAs per details filed the company Thirdware Solution Limited is into comprehensive application implementation services, application services, application development services support services in enterprise applications space. Hence, the company is functionally comparable to the business of the assessee 4.4.4 We have already discussed in the above paragraphs that to fall in the filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices and the assessee has merely developed a part of the software through outsourcing instead of in-house development. It is not a case where AE has directly given contract to other parties rather it is the assessee, who has subcontracted its part of work. Therefore, the TPO has correctly considered the outsourcing cost as operating expenses of the assessee. Hence, the claim of the assessee in the said ground is rejected. 14. As regards the assessee's objection, the use of the single year data the Dispute Resolution Panel gave the following directions: 7.2 Discussions and Directions of the DRP: 7.2.1 We have considered the facts of the case and submissions made by the assessee. As regards the objection of the assessee relating to the use of single year data, the taxpayer's submissions before us have been considered but the same are not acceptable. Rule 108(4) very clearly states that the data of the comparable transactions should be the data pertaining to the financial year in which the taxpayer has entered into international transactions. The word used is "shall" and not "may". It implies that neither the tax payer nor the department has any choice regarding the use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the same, the assessee's contention is rejected. 15. Finally, the Dispute Resolution Panel summarized its discussion on risk adjustment as under: 12.2.8 The discussion on the risk adjustment is summarized as under: a. As discussed above, the assessee has also undertaken several risks. Therefore, it is not correct to say that it is a risk mitigated entity. b. The assessee is totally dependent on the AE for business. Thus the assessee takes the risks associated with heavy dependence on a single customer. In common business parlance it is known as 'single customer risk'. c. The compensation model with the AE does not guarantee volume of business nor the period. The agreement can be terminated by any party at any time after giving a stipulated period notice. Thus the assessee is not free from the risk of losing business entirely or losing volume of business. d. The assessee is not compensated any amount for termination of agreement even if it is terminated without any cause. No independent enterprise would like to agree for a termination clause without compensation if it is terminated without any cause. e. The independent entrepreneur has to incur expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the records. The ld. Counsel of the assessee made submissions in support of some of the comparables selected by the assessee and rejected by the Transfer Pricing Officer. She further made submissions against some of the comparable selected by the Transfer Pricing Officer. 18. Per contra, the ld. Departmental Representative relied upon the orders of the Transfer Pricing Officer. He also made submissions regarding mistakes committed by the Transfer Pricing Officer. R Systems International Limited 19. This comparable selected by the assessee was rejected by the Transfer Pricing Officer on the ground that it has different accounting period inasmuch as this company's year ended on 31.12.2012. In this regard, the ld. Counsel of the assessee submitted that there are case laws for the proposition that companies having a different financial year ending can be selected if the margin for the period April-March can be computed based on audited segmental information available. In this regard, she referred to following case laws: CIT vs. Mercer Consulting (India) (P.) Ltd. [2016] 76 taxmann.com 153 (Punjab & Haryana); Pangea3 & Legal Database Systems (P.) Ltd. vs. ITO [2017] 79 taxmann.c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and it is not Software Service Company. In this regard, we note that the Transfer Pricing Officer has held that this company as well as the assessee are broadly engage into same services. This proposition has also been accepted by the Dispute Resolution Panel. We find that this plea of the assessee has been rejected by the Dispute Resolution Panel. The Dispute Resolution Panel has held that it was the assessee's submissions that this comparable is into varied activities, the same argument has been placed before us. The Dispute Resolution Panel has held that this company is into Development and Software. Dispute Resolution Panel has held that merely because this company is having IPs & R & D centre, one cannot reject the comparable. We find that the ld. Counsel of the assessee has not been able to cogently rebut the findings of the authorities below. Hence, the objection of the ld. Counsel of the assessee against the selection of Aspire System Ltd. is rejected. Infobeans Technologies Limited: 24. This comparable was selected by the Transfer Pricing Officer but has been objected by the assessee. The ld. Counsel of the assessee submitted that during the year, the Hon'ble Madhy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantial revenue is from other various business segments like sale of licence, software services and segmental results are not available, this company cannot be a valid comparable for benchmarking the international transaction. This decision of the ITAT had been upheld by the Hon'ble Delhi High Court in ITA No. 821 of 2017 vide order dated 31.01.2018. For similar proposition, the ld. Counsel of the assessee cited CIT vs. IVY Computech Ltd. (in ITA No. 707 of 214 (AP HC) and CIT vs. Intoto Software India Pvt. Ltd. (ITTA No. 233 of 2014 (AP HC)). Following the above precedent, we hold that this is not a valid comparable in the present case. 26. In the background of the aforesaid discussion, we remit the issue of computation of margin of comparable to the file of the Transfer Pricing Officer to make the computation in accordance with our discussion and direction hereinabove. Needless to add the assessee should be granted adequate opportunity of being heard. Apropos ground no. 7: Inclusion of Pass-through Costs in the Operating Margin: 27. On this issue, the Transfer Pricing Officer has recomputed the PLI by considering the out sourcing cost of INR 16,08,80,492/- as operating c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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