TaxTMI 
TaxTMI 
2016 (5) TMI 198
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional AB), a company incorporated under the laws of Sweden. The assessee's Head office is a wholly owned subsidiary of Sony Ericson Mobile Communications AB (hereinafter referred to as `SEMC'). SMCI set up a branch office (R&D Centre) in a Special Economic Zone (SEZ) in Chennai with the objective of entering into research and development activity in the information technology industry. The assessee filed its return along with the audit report in Form No. 3CEB showing four international transactions. On a reference made by the AO to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of these international transactions, the TPO took up for consideration the international transaction of 'Rendering services' with the transacted value of Rs. 58,93,09,326/-. The TPO noticed that the assessee entered into an agreement with Sony Ericson Mobile Communications (SEMC) for carrying out R&D services relating to Contract software development maintenance and up gradation and Contract design, development, testing and any similar activities in relation to mobile phones, their accessories, communication devices or communication systems. The nature of business carried on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es in relation to mobile phones, their accessories, communication devices or communication systems. Such services were provided pursuant to an Agreement entered into between the assessee through its head office, namely, SMCI on the one hand and SEMC on the other. A copy of this Agreement dated 19.9.2008 is available on page 102 onwards. The nature of services provided by the assessee pursuant to this Agreement are contained in Annexure, which are verbatim reproduction of what has been mentioned above. This Agreement provides that the assessee will be compensated by its AE on all Costs incurred in providing such software services with a certain mark up. The term 'Costs' has been defined to mean all variable and fixed operating expenses including normal recurring costs, such as, lease rent, communication and linkage charges, salaries, employee benefits, depreciation, amortization and net loss of foreign exchange transactions. It has been provided that the term 'Costs' shall not include interest paid, loss in sale of fixed assets and any prior period or extraordinary expenses. As per this Agreement, the assessee, Indian Branch of SMCI, has undertaken to perform research and developmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany, then the TPO is obliged to include it in the list of comparables, and in the same manner, if an assessee wrongly reports an incomparable case as comparable in its TP study and then later on claims that it should be excluded, then, there should be nothing to forbid from claiming so, provided the TPO is satisfied that the company so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has also held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. 6.3. Turning to the functional comparability, we find that the assessee is simply a captive unit rendering services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of br....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... indicates that this company made acquisition during the year in question which is an extraordinary financial event. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been adopted by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. The ld. DR contended that the mere fact of acquisition and merger should not be considered as a decisive test for exclusion of a company unless it has affected the profitability due to such merger etc. We are not inclined to accept this contention for the obvious reason that once acquisition and merger etc. has taken place, it is always likely to affect the profitability of such a company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the overall profitability of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered opinion, when other co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny. 8.5. We find that the assessee is raising invoices on month to month basis. From the dates of invoices raised by the assessee, it is found that such invoices are raised in succeeding month of doing the work. For example, total expenses incurred by the assessee in rendering the services in the month of June, 2008 will be billed in the month of July, 2008. This shows that expenses incurred in rendering services between April 2008 to February, 2009 and debited to the Profit and loss account match with the corresponding invoices raised during the months of May 2008 to March 2009. However, difficulty arises qua the expenses incurred in rendering the services during the month of March, 2008, for which bill is raised in the month of April, 2008 and the expenses incurred in rendering the services during the month of March, 2009, for which the bill is raised in the month of April, 2000. The assessee follows the financial year closing, namely, March ending every year. The revenue for the year ending 31.3.2009 thus includes the invoice raised during the month of April, 2008 for which expenses were incurred and booked in the preceding year and accordingly the expenses incurred during the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stment. The assessee requested for allowing working capital adjustment which the TPO refused to allow on the ground that such adjustment would be relevant only when some inventory remains tied up or receivables are held up which cannot be a criteria in a service industry as the assessee is engaged in. He, therefore, refused to allow any working capital adjustment. 9.2. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee lodged a claim for grant of working capital adjustment. The TPO refused to allow such adjustment. The DRP strengthened the case of the TPO by adding one more reason, being the necessity and non-availability of daily average of working capital deployed as against the use by the assessee of the average of such figures of working capital on the first and the last days of the accounting period. 9.3. We are not inclined to accept the view canvassed by the authorities that the working capital adjustment cannot be allowed as the assessee is in service industry. Such an adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....less to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 11. The only other ground which survives for our consideration is the disallowance of deduction u/s 10AA of the Act amounting to Rs. 5,42,10,177/- 12. The facts apropos this issue are that the assessee claimed this deduction u/s 10AA. The AO refused it giving three major reasons as recorded on pages 6 and 7 of his order, namely, first, that the services were rendered by the Indian branch office to its holding company at cost plus basis and the branch office cannot be treated as separate taxable entity different from its head office for determining the income which accrues in respect of activities undertaken by it. The second reason given by the AO was that even if exports were made, but, sale proceeds in foreign currency were not received in or brought into India inasmuch as what was received in India was only remuneration determined on cost plus basis for development of computer software. And third reason was that the assessee cannot claim benefit of deduction u/s 10AA from the transfer of software services to its holding company. In view of the above reasons, the TPO ref....