TaxTMI 
TaxTMI 
2016 (1) TMI 598
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....issued by the Dispute Resolution Panel ("DRP") and consequently the Order is non-est, illegal and bad in law. 2. That the AO and Transfer Pricing Officer ("TPO") erred in finalizing the assessment without giving effect to the directions of the DRP in gross violation of the provisions of Section 144C(13) of the Act by not allowing working capital adjustment as directed to be allowed by the DRP. 3. That the AO and TPO erred in alleging that the Appellant did not provide the reliable data even after numerous follow-ups, ignoring the following facts: (i) Letter dated 5.12.2014 filed with the TPO for recomputing the Transfer pricing adjustment in accordance with Directions of DRP; (ii) In any event, in term of section 144C(13) of the Act, the AO has to pass an order giving effect to the findings of the DRP without providing any opportunity to the Assessee. (iii) Without prejudice, the directions issued by the DRP are in respect of the comparables chosen by the TPO, therefore there was no burden on the Appellant to file any details before the TPO. 4. That on facts and circumstances of the case and in law, the AO erred in assessing the....
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....companies with turnover below Rs. 5 crore; c) Rejecting companies whose ratio of service income to total income is less than 75%; d) Rejecting companies whose export revenues are less than 75% of the operating revenues without appreciating that the said filter has no effect on comparability analysis; e) Rejecting companies where related party transactions exceeds 25% of sales without appreciating that companies with any related party transactions should have been excluded or else companies with RPT of more than 10-15% to sales should have been excluded; f) Rejecting companies with employee cost less than 25% of total cost for the period under consideration; g) Rejecting companies with diminishing revenue/ persistent losses in complete contradiction of the filter of single year data applied by the TPO himself; h) Rejecting companies with different financial year ending without appreciating that the said filter would produce defective comparables; i) Rejecting R&D filter used by the Taxpayer. 10. That the AO and DRP erred in confirming the action of the TPO in rejecting the comparable companies selected by the Ap....
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.... contained in the proviso to Section 92C(2) of the Act to the Appellant. 19. That the Ld. AO erred on facts and in law in mechanically initiating penalty proceeding under Section 271(1)(c) of the Act without recording any adequate satisfaction for such initiation." 3. During the relevant assessment year, the assessee rendered software development and business support services to its AE viz. CashEdge Inc., USA. For this it was compensated based on the terms of the Professional Services Agreement dated 31.12.2003 entered between both the entities on cost plus basis. As per the transfer pricing (TP) document furnished for the AY 2010-11, the taxpayer company has entered into the following international transaction with its associated enterprises (AEs): S. NO. International Transaction Amount (in INR) 1 Rendering software development services 13,10,68,578 4. The arm's length price of the international transactions representing software development services provided to the associated enterprises (AE) is determined by applying transactional net margin method (TNMM), which is stated to be the most appropriate method in the facts and circumstances....
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.... 17.35% 7 Wipro Technology Services Ltd. 73.35% 8 Zylog Systems Limited 25.07% Average 22.86% 8. As a result of the above, the final assessment was completed vide order dated 31.12.2014, passed u/s 143(3) r.w.s. 144C of the IT Act, 1961 (the Act) assessing the total income of the assessee at Rs. 1,18,99,030/- under normal provisions of the Act and Rs. 2,56,61,736/- under MAT after making a transfer pricing addition of Rs. 1,18,93,468/- which has been computed as under:- Particulars Amount Operating cost 11,63,61,750 ALP @ 22.86% 14,29,62,046 Price Received 13,10,68,578 105% of price received 13,76,22,007 Adjustment u/s 92CA 1,18,93,468 9. During the course of hearing, the learned counsel for the assessee Shri Jolly submitted that since the Order passed by the TPO after directions were issued by the DRP was not in conformity with the directions of the DRP (insofar as allowance of working capital adjustment and furnishing the annual report of Wipro Technology Services Ltd.), the subsequent proceedings are without jurisdiction. However, he submitted that he does not wish to press the grou....
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....tween profitability and high turnover. Further as discussed above the RPT filter of 25% is held to be a valid filter. Hence the taxpayer's objection in this regard is rejected." 14. Before us the learned counsel, vide written submissions, submitted as under: "Functionally dissimilar: It is submitted that the company is not only engaged in software development services but also sale of software products and licenses. It is seen that the company deals in products like Wave Relay(r), Android(tm) Kit, Integration Board Gen4, Quad Radio Router, Tracking Antenna System, Management Tools, Cloud Relay(tm), Firefighting Kit etc. Diversified business v. Software development services Turnover of Rs. 504 crores as compared to Rs. 13 crores of the Assessee Domestic sale of Rs. 30 cores as compared to NIL of the Assessee The Hon'ble ITAT in the case of the Assessee's group company (Fiserv India Ltd.) vide Order dated 26.06.2015 in ITA No.6737/Del/2014 for AY 2010-11 has excluded the said comparable since it is engaged in diversified business activities." The counsel for the assessee has contended that Persistent System....
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....011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Since both these companies are also engaged in the business of providing software development services to its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables." Similarly, in the case of assessee's group company, viz., Fiserv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables. 17. Further a perusal of page 484 (PB-2) Annual Report of Persistent reveals that it is not only engaged in....
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....e material on record. At first, we must record that he assessee had included Zylog Systems (India) Ltd. in its list of comparables which was substituted with Zylog by the TPO. Therefore, the DRP was not correct in holding that the assessee had himself selected Zylog. We also find from a perusal of the annual report that Zylog is not only engaged in software services but also software products and the revenue of the company is also derived from licensing of software products. Therefore, Zylog cannot be said to be a valid comparable at the entity level. 22. Further, as per annual report of Zylog the revenues from sale of services and products is Rs. 968.19 crores, however, the TPO in its Order has taken operating revenues of Zylog at Rs. 783.52. The basis for arriving at revenue of Rs. 783.52 crores and operating expenses of Rs. 658.08 crores is however not spelt out in the order by the TPO. During the course of hearing also the Ld. DR could not provide any basis for arriving at revenue of Rs. 783.52 crores and operating expenses of Rs. 658.08 crores. 23. In view of the aforesaid, we deem it proper to set-aside the issue of inclusion/exclusion of Zylog back to the file of the T....
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....ubmissions, submitted as under :- "This company did not feature in the accept/reject matrix applied by the TPO. However, it was included arbitrarily included in the final set of comparable without giving any background or approach as to how this comparable has been included in the final set. In fact, the TPO has erroneously presumed that Wipro Ltd. and Wipro Technology Services Ltd are the same companies. At the outset, it is submitted that the Delhi Bench of the Tribunal in the case of Agnity India for the AY 2010-11 (ITA No.955/Del/2015) has held the company to be incomparable for detailed reasons set out in that decision. The facts obtaining in the case of Agnity and the present case are similar insofar as both the assessees are into software development services. In that view of the matter, Wipro Technologies Services Ltd. has to be excluded from the list of comparables. Without prejudice, it is submitted that before 20.01.2009, the Company was part of the Citi group and rendered services to various entities of the Citi group worldwide. With effect from 21.01.2009, the Company was acquired by Wipro Ltd. As part of the acquisition by Wipro, it was also....
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....rovide the annual report to the Appellant. However, despite the specific directions of the DRP and letter dated 05.12.2014 filed by the Appellant asking for the annual report of the said company, the TPO passed order dated 29.12.2014 without providing the annual report of WTS to the Appellant. It was further submitted that even when the Appellant filed an application for rectification under Section 154 of the Act before the TPO on 02.02.2015 and made specific requests for the annual reports of WTS before the TPO on 10.04.2015 and 15.04.2015, the TPO did not provide the complete annual report of the said comparable. It was, accordingly, submitted that since complete data of the said comparable was not furnished to the Appellant, it should be deleted from the list of comparables. Without prejudice, the Counsel also submitted that in the case of Agnity India Technologies, which is in the same line of business, viz., software development services, a co-ordinate Bench of the Tribunal has deleted the said comparable on the ground of functional dissimilarity. 27. The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that WTS is a good com....
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....s available in the annual report. Further, the 'Balance Sheet Abstract and the Company's General Business Profile' section on Page 14 does not provide any information regarding the type of products/ services the company deals in as shown below: V. Generic names of the three Products/Services of the Company(as per monetary terms) (i) Item Code No (ITC Cod.) Product Description (ii) Item Code No (ITC Code) Product Description (iii) Item Code No (ITC Code) Product Description " 28.2 In the light of the aforesaid facts emerging from few extracts of the annual report, we concur with the submissions advanced by Ld AR that in the absence of the Director's Report and Notes to Account for this comparable are not available in public domain it would not be prudent to take this company as a comparable. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable as we have done in the case of Avaya India (P) Ltd. vs. Addl.CIT, Range 2, New Delhi in ITA No.5528/Del./2011 for AY 2007-08 order dated 18.09.2015. FOREIGN EXCHANGE GAIN/LOSS 29. The ne....
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....aposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of 'Assembly' done by the assessee under this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost." 16 We find that the aforesaid basis that foreign exchange gain/loss should be treated as non-operating item is based on the notification of CBDT issued on 18.9.2018 on safe harbour. However, such a contention has been rejected in the aforesaid order of the coordinate bench wherein it was held as under: "4.8. The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple ....