TMI Blog2024 (1) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... the functions performed by the assessee under ITeS segment. We also note that the reasoning by the assessee Ld.TPO to aggregate both these segments are not justifiable and therefore cannot be upheld. We under such circumstances inclined to remand both these segments back to the Ld.TPO/Assessing Officer to reverify the services rendered by assessee under both the segments vis- -vis the specific functions performed by it. The Ld.AO shall not forget that, the assessee has admittedly made a statement in respect of ITeS services being rendered by the assessee for the first time in the financial year relevant to Assessment Year under consideration. Accordingly, grounds 3 to 5 are remanded back to the Ld.TPO/AO for denovo consideration. AO/TPO is directed to recompute the ALP margin of the assessee under both the segments independently based on respective functions performed by the assessee under each segment in accordance with law. Needless to say that proper opportunity of being heard must be granted to the assessee. - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER For the Appellant : Shri Padam Chand Khincha, CA For the Respondent : S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of clause (c) of sub-section 3 of Section 92C read with Section 92CA of the Act contending that information/ data used in computation of ALP is not reliable or correct and rejecting the TP documentation maintained by the Appellant thereby arriving at a different ALP. 7. Incorrectly applying the following quantitative and qualitative filters: a) Rejecting the filter applied by the Appellant for eliminating companies having research and development (R D) expenses more than 3 percent of sales. b) Rejecting the filter applied by the Appellant for eliminating companies having more than 200 percent of net fixed assets of turnover. c) Applying the current year data filter while undertaking search for comparable companies. thereby accepting only those companies whose data is available for FY 2015-16 d) Applying different accounting year filter as a comparability criterion (i.e., rejecting companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) e) Rejecting certain comparable companies using employee cost greater than 25 percent of the total operating revenue as a comparabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies engaged in similar activity as comparable to the Appellant while undertaking search for software development service segment. i. Maveric Systems Limited ii. Celstream Technologies Private Limited iii. Batchmaster Software Private Limited iv. Isummation Technologies Private Limited v. Sagarsoft (India) Limited vi. Extentia Information Technology Private Limited vii. InfoMile Technologies Limited 13. Accepting certain functionally non-comparable companies based on unreasonable comparability criteria for the software development service segment: i. Inteq Software Private Limited ii. R S Software (India) Limited iii. Larsen Toubro Infotech Limited iv. Nihilent Technologies Private Limited v. Infobeans Technologies Limited vi. Thirdware Solution Limited vii. Cybage Software Private Limited 14. Erroneously computing the operating margins of the comparable companies and the Appellant by not considering certain expenses/ income on the premise that these are not routine operating costs/ income, without providing any cogent reason to substantiate the findings 15. Not making suita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity analysis of the comparable companies is an art and not exact science as no two companies are exactly same. 6. Whether the CIT(A) was right in fact and in law in demanding comparability standards that may itself defeat the purpose of law relating to determination of ALP under the Income Tax Act. 7. Whether on the facts and the circumstances of the case the CIT(A) was right in not considering that under TNMM the comparability of an international transaction with an uncontrolled transaction has to be seen with reference to the functions performed, assets employed, and the risks assumed by the respective parties to the transactions as per Rule 1 OB(2)(b). 8. Whether on the facts and the circumstances of the case the CIT(A) was right in not considering that Rule 108(3) mandates that a given or select uncontrolled transaction selected in terms of Rule 1 OB(2) Shall be comparable to an international transaction if none of the differences, if any, between the compared transactions are likely to materially affect the price or cost charged or paid or the profit arising from such transactions in the open market and that the mere circumstance of a company presenting a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and there is no problem in its infrastructure. If any issue arises, at the request of Huawei China, HTIPL provides technical support services to Huawei group entities. It was submitted that the services under the technical support services were rendered for the first time by the assessee during the FY 2015-16. Such services were rendered from October 2015. These services had not been rendered in any of the earlier previous years. The Ld.TPO noted that the assessee was remunerated at cost plus mark-up of 13% both for provision for SWD services and provision for IT (support) services being ( ITeS ). 2.2 The assessee filed its original return of income on 30.11.2016, declaring a total income of INR 72,23,42,710. The case was selected for scrutiny and reference was made to the Ld.TPO to determine the arm's length price ( ALP ) of the international transactions the assessee had with its associated enterprises ( AEs ). 2.3 On receipt of the reference, the Ld.TPO noted that assessee had following international transactions with its AEs. Provision of Software development services ( SWD ) INR 7,95,04,85,139 Provision of IT services ( ITeS ) - INR 45,43,24,895 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 24.31% No of comparables 8 35 th Percentile 3.64% Median 8.05% 65 th Percentile 10.65% 2.5 The Ld.TPO noted that assessee computed its margin at 13.03% for SWD segment and 13% for ITeS segment and the comparables under SWD segment, the average margin was computed at 15.57% and 8.04% for ITeS segments. The assessee had thus treated its transaction to be at arms length. 2.6 The Ld.TPO dissatisfied with the approach adopted by assessee aggregated the ITeS and SWD segment into one single segment being SWD services. The Ld.TPO considered the functions performed by the assessee under ITeS service segment to be similar to that of SWD service segment and computed the margins of the assessee for the entity as a whole and recomputed the operating margin of assessee at 7.2%. 2.7 The Ld.TPO then undertook the selection of fresh comparables consisting of 14 companies that had an average median of 27.28%, the details of the comparables so selected by the Ld.TPO are as under: Sl. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee raised the grounds challenging aggregation of ITeS and SWD segment of the assessee, recomputation of operating margin of the assessee and inappropriate selection of certain comparables under SWD segment. 2.10 The Ld.CIT(A) after considering various submissions of the assessee confirmed the action of the Ld.AO regarding aggregation of ITeS and SWD segments. The Ld.CIT(A) relied on the order of this Tribunal in assessee s own case for A.Ys. 2012-13 to 2014- 15, and held that as no distinction has been made in respect of the services rendered by the assessee and the entire service segment was benchmarked under SWD services, during 2012-13 to 2014-15, upheld the action of the Ld.AO. The Ld.CIT(A) also agreed with the recomputation of operating margin of the assessee and that of the comparables. 2.11 Regarding the inappropriate selection of certain comparables challenged by the assessee, the Ld.CIT(A) accepted the exclusion of 3 companies being Infosys Ltd., Aspire Systems India Pvt. Ltd. and Persistent Systems Ltd. In respect of remaining comparables, the Ld.CIT(A) upheld the action of the Ld.AO. The Ld.CIT(A) also dismissed the grounds wherein assessee sought inclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the year under consideration before this Tribunal is the first year when assessee has provided ITeS services to its AE. 3.5 The Ld.DR on the contrary, relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 3.6 In order to understand the functions performed by the assessee under SWD and ITeS segment, it is necessary to go through the transfer pricing study report filed by the assessee and identifying the services that has been rendered by it under the relevant segments. The Ld.TPO in the transfer pricing order has observed that assessee operates under two business segments; The Ld.TPO has noted as under: 1. The IT services rendered by the taxpayer is in the nature of providing Network Operating Services (NOS) covering real-time network monitoring, fault management, proactive maintenance etc. According to Rule 10TA(m) software development services means, (i) Business application software and information system development using known methods and existing software tools; (ii) Support for existing systems; (iii) Converting or translating compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly, all policies within Huawei India are determined by its own management who continuously monitor the economic environment surrounding the Indian entity, assess their strategic position within the industry and target to achieve its corporate objective with guidance from Huawei Group. Finance, Accounting, Treasury and Legal Function: The management in Huawei India is responsible for managing the finance, treasury, legal and accounting functions. In certain areas, wherever necessary, Huawei India is guided by the Huawei Group. Huawei India is also responsible for all local statutory compliance. Human Resource Management Function: The human resource function at Huawei India is coordinated by its management, which is responsible for recruitment, development and training of the personnel including the emolument structure. In this respect, where appropriate, it is guided by Huawei Group policies. 3.8 On analysis of the functions performed by the assessee under both segments, it is clear that the assessee has provided services to its AE under SWD segment as well as ITeS segment. It is noted that the Ld.TPO also has observed that the services rendered by the assessee are under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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