TMI Blog2022 (5) TMI 1612X X X X Extracts X X X X X X X X Extracts X X X X ..... g internet based services relating to recruitment, matrimony and education etc. Whereas, the assessee provides sales and post sales support services to the products sold by its AE. Considering the huge difference in the functional profile between this comparable and the assessee, it will fail the functionality test, hence, cannot be considered as a valid comparable. Interactive Manpower Solution company provides offshore recruitment and staffing solutions. These activities of the company certainly cannot be compared to the sales and post sales services provided by the assessee. It is also observed that the company has reported huge increase in its profit margin. Therefore, without properly analyzing the factors leading to abnormal increase in profit margin, it would not be safe to include this company as a comparable. In any case of the matter, fact remains that the company is functionally dissimilar to the assessee. For this reason alone, it cannot be included as comparable. Sasken Network Engineering Ltd., Himachal Futuristic Communications Ltd. and Cameo Corporate Services Ltd. - as argued TPO has incorrectly computed the margin of these comparables by disregarding the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, it cannot be said that fulfillment of conditions of Section 10AA of the Act was examined in assessment year 2015-16. Since, AO has alleged that the assessee has failed to furnish complete details/information to evaluate the fulfillment of conditions of eligibility of claim of section 10AA and since learned DRP has simply relied upon its own decision in assessment year 2015-16 without verifying the facts, we are inclined to restore the issue to the assessing officer for fresh adjudication after verifying the fact whether the assessee has fulfilled the conditions of section 10AA. This ground of appeal is allowed for statistical purposes. - SAKTIJIT DEY, MEMBER (J) AND ANADEE NATH MISSHRA, MEMBER (A) For the Appellant : G.C. Srivastava, Kalrav Melhotra, Advs. and Mayank Patawari, CA For the Respondents : Surender Pal, CIT (DR) ORDER SAKTIJIT DEY, MEMBER (J) 1. Captioned appeal has been filed by the assessee, assailing the final assessment order dated 04.04.2021, passed under Section 143(3) read with sections 143(3A) and 143(3B) of the Income-Tax Act, 1961, pertaining to assessment year 2016-17, in pursuance to directions of learned Dispute Resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly erred in: 3.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case and disregarding the ALP as determined by the Appellant in the Transfer Pricing ( TP') documentation maintained by it in terms of Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ( the Rules'); 3.2. rejecting comparability analysis undertaken by the Appellant in the TP documentation and in conducting a fresh comparability analysis based on application of the additional/revised filters in determining the ALP; 3.3. not providing the search strategy and accept-reject reasons of the fresh economic analysis conducted by Ld. TPO which tantamount to choosing ad hoc companies as comparable; 3.4. including certain companies in the final set of comparable that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.5. excluding certain companies on arbitrary/frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.6. rejecting certain additional companies proposed/identified by the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .8. ignoring the business/commercial reality that the Appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact, thereby disregarding the law, international guidance and judicial precedents in this regard. 5. On the facts and circumstances of the case, in law the Ld. TPO/Ld. AO has erred in enhancing the income of the Appellant by Rs. 6,213,464 holding that the international transaction pertaining to availing of management services do not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in: 5.1 rejecting comparability analysis undertaken by the Appellant in the TP documentation; 5.2. holding that the Appellant did not receive any tangible benefit in lieu of the services availed; thereby challenging the commercial wisdom of the Appellant in making payment for services availed; 5.3. disregarding the elaborate documentary evidence submitted as part of assessment proceedings to erroneously assume that no benefit' has been conferred upon the Appellant from the impugned intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the case and in law, the Ld. AO has erred in computing the interest under section 234A, 234B and 234C of the Act. 9. On the facts and circumstances of the case and in law, the Ld. AO has erred in proposing to initiate penalty proceedings under section 271(i)(c) of the Act mechanically and without recording any adequate reasons for such initiation . 6. Ground Nos. 1 and 2 being of general nature, do not require specific adjudication. 7. In ground Nos. 3 and 4 along with their sub-grounds, assessee has challenged the addition made on account of transfer pricing adjustment made to the price of the international transaction pertaining to sales and support services provided to the Associated Enterprises (AE). Though, in these grounds, a number of issues have been raised by the assessee, however, at the time of hearing, Shri G.C. Srivastava, learned counsel appearing for the assessee, submitted that the real dispute between the parties is only in relation to certain comparables selected by the assessee and erroneous margin computation in case of some other comparables. 8. In view of the aforesaid submissions of the learned counsel for the assessee, we will confine our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plying certain additional filters. In the process, the TPO shortlisted 12 companies as comparables with average margin of 18.405%. Applying the said margin to the operating cost, he determined the ALP of price charged for sales and post sales services at Rs. 16,95,07,289, which resulted in an upward adjustment of Rs. 1,63,27,273. 10. While doing so, the TPO clubbed various services provided by the assessee to the following three segments: i) Software Development Services; ii) Management Services; iii) All other services; 11. As far as sales and Post Sales Service segment is concerned, which is the dispute in these grounds, the TPO selected 12 comparables. Before learned DRP, assessee objected to some of the comparables selected by the TPO. 12. After considering the submissions of the assessee, learned DRP excluded some of the comparables selected by the TPO while retaining others. Before us, the assessee has challenged selection of the following four comparables: i) Killick Agencies Marketing Ltd.; ii) Febulka Advertising Pvt. Ltd.; iii) Info Edge India Ltd.; iv) Interacted Man Power Solution Pvt. Ltd. 13. Hereinafter, we will deal with accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices including warranty and maintenance services. Therefore, due to significant differences in the functional profile of the assessee and the selected comparable, we hold that this company cannot be treated as comparable to the assessee. Accordingly, assessing officer is directed to exclude this company from the list of comparables. II. Febulka Advertising Pvt. Ltd.: 19. Objecting to this company being selected as a comparable, learned counsel for the assessee submitted, audited final report of the company is not available in public domain. He submitted, though, TPO himself rejected comparables by applying the filter of non-availability of financial information in public domain, nevertheless, he has selected the company. Without prejudice, he submitted, from whatever information available on record, it is evident that this company is purely an advertising agency which aims at brand building of its customers. Further, he submitted that this company has shown super normal profit, the reason for which is not available. Thus, he submitted, this company cannot be treated as comparable. 20. Learned Departmental Representative strongly relied upon the observations of TPO and le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Departmental Representative strongly relied upon the observations of the TPO and learned DRP. 26. We have considered rival submissions and perused the material on record. 27. Upon going through the functional profile of the company as mentioned in the annual report, we find that this company is providing internet based services relating to recruitment, matrimony and education etc. Whereas, the assessee provides sales and post sales support services to the products sold by its AE. 28. Considering the huge difference in the functional profile between this comparable and the assessee, it will fail the functionality test, hence, cannot be considered as a valid comparable. 29. In view of the aforesaid, we exclude this company from the list of comparables. IV. Interactive Manpower Solution: 30. Objecting to the selection of this company as comparable, learned counsel for the assessee submitted, it is functionally dissimilar, as, it operates as an offshore recruitment service company which deals in various services, such as recruitment and administrative services, accounting support and bespoke one off creative solutions. Thus, he submitted, this company is not providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. ought to be considered. Broadly, therefore, the dictum by this Court was that though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient. 35. Therefore, by simply saying that TNMM allows broad comparability, a company having significant functional differences, cannot be treated as comparable. In this context, we must observe, not only before the TPO but before learned DRP, the assessee had raised specific issue based objections against the afore-stated comparables. However, neither the TPO nor learned DRP have dealt with the specific objections of the assessee. Rather, the objections of the assessee have been rejected by making general observations. In the aforesaid scenario, revenue's stand cannot be supported. Thus, in ultimate analysis, we hold that the aforesaid companies being not-comparable to the assessee should be excluded. 36. Having held so, we will now deal with assessee's objections regarding three more comparables selected by the TPO which are, Sasken Network Engineering Ltd., Himachal Futuristic Communications Ltd. and Cameo Corporate Services Ltd. As regards, these three comparables, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the assessing officer. Following the aforesaid decision, the Tribunal again restored the issue in assessment year 2014-15 to the assessing officer for reconsideration while deciding assessee's appeal in ITA No. 6133/Del/20128 in order dated 31.12.2018. For ease of reference, the relevant observations of the Tribunal are reproduced hereunder: 5. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that a similar issue having ITA No. 6133/Del/2018 Mavenir India Pvt. Ltd. identical facts was a subject matter of the assessee's appeals for the preceding assessment years 2012-13 and 2013-14 in ITA Nos. 408 7328/Del/2017 respectively wherein the matter has been restored to the file of the TPO. The relevant findings have been given in paras 14 to 22 of the order dated 31.07.2018 which read as under: 14. Before us, the Ld. AR vehemently stated that the TPO did not give any justification in rejecting the comparables of the assessee. It is the say of the Ld. AR that in the cases of comparables, Nu Tek India Limited and Teracom Limited, the TPO has simply mentioned that these are functionally different. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. We, accordingly, restore this issue to the file of the TPO with the above directions. The TPO is directed to decide the issue afresh after giving reasonable opportunity of being heard to the assessee. 18. In so far as provision of management and support services are concerned, we find that the assessee has given complete details of the technical services utilised by it from its AE and the same are exhibited at pages 704 to 708 of the paper book. Details of management services have also been given by the assessee. We find that the TPO/DRP has nowhere considered the details submitted by the assessee. 19. Before us, the Ld. DR pointed out that in so far as management services are concerned, the assessee has not brought anything on record to suggest what type of services were given by the AEs for which the assessee had made the payments. 20. In so far as technical services are concerned, the Ld. DR fairly conceded that the details were furnished but not properly appreciated by the TPO. 21. Considering the facts in totality, we are of the considered view that this issue also needs fresh adjudication. We, accordingly, restore this issue to the file of the TPO. The TPO is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of its unit set up in Special-Economic Zone (SEZ). He submitted, though, the departmental authorities disallowed the deduction claimed by the assessee, however, by virtue of order passed by the Tribunal, assessee was allowed deduction. However, he fairly submitted that the Tribunal quashed the assessment order on a legal issue. Therefore, the issue relating to assessee's claim of deduction under Section 10AA of the Act was not decided on merits. Nevertheless, he submitted, fulfillment of conditions for claiming deduction under Section 10AA of the Act has to be examined in the first year of claim. He submitted, once assessee's claim of deduction in the first year has been allowed, the eligibility of the assessee to claim such deduction, cannot be examined in the subsequent years. Thus, he submitted the deduction claimed should be allowed. 49. Learned Departmental Representative submitted, since, the deduction claimed by the assessee has to be examined subject to fulfillment of conditions under Section 10AA of the Act, the issue may be restored back to the assessing officer. 50. We have considered rival contentions and perused material on record. 51. It is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-16. Therefore, it cannot be said that fulfillment of conditions of Section 10AA of the Act was examined in assessment year 2015-16. 55. Since, the assessing officer has alleged that the assessee has failed to furnish complete details/information to evaluate the fulfillment of conditions of eligibility of claim of section 10AA of the Act and since learned DRP has simply relied upon its own decision in assessment year 2015-16 without verifying the facts, we are inclined to restore the issue to the assessing officer for fresh adjudication after verifying the fact whether the assessee has fulfilled the conditions of section 10AA of the Act. Needless to mention, before deciding the issue, assessing officer must afford reasonable opportunity of hearing to the assessee. This ground of appeal is allowed for statistical purposes. 56. In ground No. 7, assessee has raised the issue of non-grant of TDS credit. 57. Having considered the submissions of the parties, we direct the assessing officer to verify assessee's claim based on material on record and allow TDS credit in accordance with law. 58. Ground No. 8 being consequential and ground No. 9 being premature at this stage, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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