TaxTMI 
TaxTMI 
2015 (1) TMI 1155
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent Rs. 2,20,03,000/- in the ordinary course and for the purpose of its business during the relevant previous year and in holding the said expenses as capital expenditure. 3. Your appellant craves leave to add to, alter, amend, modify or delete any of the above grounds of appeal, if necessary. 2.1 The assessee is engaged in providing IT enabled design engineering services in the field of automotive products and components viz. Heating Ventilation Air Conditioning (HVAC), Cooling module, EGR and components thereof in automotive sector to its parent company Behr Gmbh, Germany and/its affiliates. It is in respect of the said international transaction viz. exports of the said services, that an upward adjustment of Rs. 38,41,754/- to the Operating Profit has been made by the TPO and confirmed by the DRP. 2.2 The first issue is with regard to allowing of adjustment in respect of the adverse impact on the operating profit of excess depreciation Rs. 12.87 lakhs charged by the assessee due to change in its accounting policy in respect of charging of depreciation on fixed assets for the said A.Y. 2006-07. The Transfer Pricing Officer (TPO) did not allow the adjustment asked for by way of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e to be adjusted and not of the tested party. The Tribunal in such a situation has upheld the validity of such an adjustment to the profits of the assessee. It was also claimed that the DRP has not adjudicated this issue. Nothing contrary has been brought to our knowledge on behalf of the Revenue. So, in the interest of justice, we restore this issue to the DRP with a direction to decide the same as per fact and law after providing an opportunity of being heard to the assessee. 3. The next issue raised under transfer pricing is as under: "DRP and the AO/TPO ought not to have compared the giant companies with the appellant being a pigmy company and all the three companies chosen by the TPO did not satisfy the comparability criteria as laid down in Rule 10 B (2) viz. functions performed, risks assumed and assets employed and size of the comparable companies. 3.1 The TPO rejected the external comparables selected by the assessee for the following reasons: Name of Comparable Reason for rejection Ace Software Exports Ltd. Functionally not comparable Federal Technologies Ltd. Data for FY 2005-06 (A.Y.2006-07) not available Infotech Enterprises Ltd., WTI Advance Technology Ltd. a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ices in the Engineering Design Automation domain for Owner - Operators in the aforesaid business segment viz. Oil, Power, Infrastructure and Construction management. The company is engaged predominantly in Project business and the aforesaid services comprise of designing of equipments, preparation of technical specifications for procurement of equipment, generation of fabrication drawings, technical bid evaluation, vendor co ordination and follow up. The aforesaid contracts are fixed price fixed time frame contracts or time and material basis. The revenue on such long term contracts is recognised on percentage of completion basis. Rolta for that purpose is purchasing boughtouts i.e. hardware and peripheral items and the material cost predominantly involves cost of sub contracted third party costs. The said expenses are therefore grouped by Rolta under Cost of Traded Software Packages in the Profit & Loss Statement for the year ended 30th June 2006. The expenses on material consumed are therefore more than employee costs. It is stated in the annual report that Rolta has over the years through investments in people, technology Research & Development built a critical mass of intellect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....business segments during the relevant previous year. In view of this, Powersoft Global ought to have been excluded by the TPO.IN this regards, the assessee has relied on the decisions of decisions Delhi Tribunal in the case of Agilent Technologies International Private Ltd. Tax sutra TS-165- ITAT-2013(DEL) and Hyderabad Tribunal in Zavata India P. Ltd. In both the aforesaid cases Hon'ble Tribunal has held that companies having merger/acquisition with another company in the relevant previous year should be excluded from the comparables. Powersoft Global had drawn up its accounts upto 30th September 2006 as it had adopted October to September as its accounting year. In the light of this fact the financial results of Powersoft are not comparable with those of the assessee company for its financial year ended 31st March, 2006. b. It was further submitted that the functions performed by all the aforesaid so called comparables selected by the TPO were subject to distinctive set of cost drivers as different functions were performed differently. The difference in PLI of OPM to Operating cost therefore reflected in terms of margins earned by the aforesaid purported peer companies vis-a-vis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ew has been taken by ITAT, Delhi in case of Vedaris Technology P. Ltd 41 DTR 73, wherein the Tribunal has held as under: "Rule 10B specifically mentions that the functions performed, taking into account assets employed or to be employed and risk assumed, by respective parties to the transaction shall be one of the criteria for the purpose of comparability. The assessee is engaged in the business of development of software while Kushal Software Ltd. is engaged in the business of trading in software. The two companies are performing totally different functions and, therefore, this case is not a valid comparable case. The differences in the business models are irreconciably different and no reasonably accurate adjustment can be made to make them comparable cases. The ld. AR was not able to furnish any valid reason for taking this to be a comparable case under Rule 10-B. In view of the basic difference in business models, we need not refer to the case law to come to the conclusion that the aforesaid Kushal is not a valid comparable case. Therefore, we are of the view that the ld. DR rightly argued that this case was not a comparable case. Coming to the annual accounts of Tera Software....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xternal comparables had come up for consideration of Bangalore Bench in the case of 24/7 Customer.com P. Ltd. 144 ITD 344 and 3DPLM Solutions Ltd. 42 taxmann.com 333 , wherein in both cases it was held that comparables viz. Infosys Technologies Ltd. and Wipro Limited selected by TPO are giants, functionally not comparable and are full fledged risk bearers owning intellectual property rights both related to technology and brand name vis-à-vis the assessee who was only a restricted service provider. The Tribunal has excluded the said companies as comparables on the said criteria. The ratio of 24/7 Customer.com (Supra) and 3DPLM Soluations Ltd (Supra) supports the case of the assessee because the assessee is only the restricted service provider. 3.9 In view of the above discussion the AO/TPO is directed to omit these three companies chosen by the TPO from the set of comparables for the year under consideration and the matter is restored back to the TPO/AO who shall carry the search of comparables afresh in terms of criteria laid down in Rule 10B(2) of Income Tax Rules 1962 after giving an opportunity of being heard to the assessee. 4. In non Transfer Pricing issue in A.Y. 200....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laced at pages 26 to 67 of the Paper Book, which prima facie support the assertion of the assessee that the expenditure is towards testing of the products manufactured by the assessee. So, however, it is apparent that the aforesaid factual assertion was not made before the Assessing Officer. Such a plea, though in a generalized formulation, was made before the Commissioner of Income-tax (Appeals) as it appears from para 17 of the order of the Commissioner of Income-tax (Appeals). Of- course there is no determination on this aspect made by the Commissioner of Income-tax (Appeals) who has proceeded on the same basis as that of the Assessing officer. Be that as it may, in our view, it is imperative that the complete particulars of the expenditure are culled out and since the same requires factual appreciation, we deem it fit and proper to restore the matter to the file of the Assessing officer. The orders of the authorities below are accordingly set aside and the issue is restored to the file of the Assessing Officer, who shall cull out the appropriate facts and thereafter, determine the nature of the expenditure in accordance with law. Needless to mention, the Assessing Officer shall....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of comparables on the ground that the learned CIT A in A.Y. 2007-08 and 2008-09 had observed that Rolta India was functionally comparable but had excluded it on the basis of huge difference in turnover and turnover filter could not be applied. The stand of the assessee has been that all the three companies chosen by the TPO as comparables for benchmarking did not satisfy the comparability criteria viz. functions performed, risks assumed, size of the company in terms of sales revenue and assets deployed in consonance with Rule 10B (2) (b) of the Income Tax Rules 1962. 5.4 The issue stands covered by our decision in the assessee's Appeal No. 1376 for A.Y. 2006-07 and on the backdrop of same set of facts and reasons stated therein we direct that the said three companies chosen by the TPO be omitted from the set of comparables for the said two years under our consideration. We hold accordingly. 6. With regard to the assessee`s appeal No 568/PN/2013 for A.Y. 2008-09 wherein vide modified ground prays for direction to exclude Caliber Point Business Solutions Limited from the set of independent comparables as the said company is having related party transactions of 30% of its Gross op....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot at the same time be branded as ad hoc. The Delhi bench of Tribunal has taken assistance from certain other provisions of the Act for the adoption of such limit. Following the precedent, the TPO is approved in preference to 10 percent as applied by the assessee on ad hoc basis. Going by this filter, it is found that since the related party transactions in case of TRF Ltd are less than 25 percent, the TPO was justified in admitting this case in the list of comparable cases." 6.2. And in the case of Stream International Services P.Ltd vs Asst. Director of Income Tax (International Taxation) - 7(2), Mumbai, the ITAT, Mumbai has held as under: "Since the TPO applied the filter of having companies less than 25 per cent related party transactions, it is not open to argue that the transactions of reimbursement of the expenses duly reported by 'D' as an international transaction within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the revenue that the reimbursement of expense not involving profit element should not be construed as transaction, is taken to a logical conclusion, it would mean that all such deali....