TaxTMI 
TaxTMI 
2017 (3) TMI 1316
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....9;ble Dispute Resolution Panel - III ("the DRP"), are in bad in law and void ad-initio. 2. The AO following the order of the TPO and DRP has erred in law and on the facts of the case in determining the total income of the Appellant at Rs. 213,195,622/- as against returned income of Rs. 122,498,921/- and thereby made an upward adjustment of INR 90,696,701/-. Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRP/ TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the international transaction pertaining to IC design and software development services ("impugned transaction"). 4. That on facts of the case and in law, the DRP erred and vitiated the principle of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the Appellant in respect of certain companies inter-alia ICRA Techno Analytics Private Limited, Indus Networks Limited, Quintegra Solutions Limited, SIP Technologies and Exports Limited, Blue Star Infotech Limited and....
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....ed comparables and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence. 12. That on facts and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 13. That on facts of the case and in law, the DRP/TPO/AO have erred in using single year data for financial year ("FY") 2008-09 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 14. That on facts and in law, the DRP/AO has erred in confirming that TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the arm's length price determined by th....
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....as the most appropriate method with Operating Profit / Operating Cost (OP/OC) as PLI benchmarked its international transaction relating to software development services by selecting 20 comparables with the average working capital adjusted PLI of 3.11% and risk adjusted margin of (-) 9.06% as against the operating profit margin of the assessee company of 11.17% and held its transaction at arms length. 5. TPO, on the basis of TP study put forth by the assessee and after applying filters, finally selected 17 comparables having the average OP/TC of 25.40%, out of which 10 comparables were out of assessee's 20 comparables and 7 were identified by the TPO himself. On the basis of 17 comparables identified by the ld. TPO having average OP/TC at 25.40% proposed to determine the adjustment at Rs. 10,12,17,069/-. 6. Assessee filed objections before the ld. DRP raising objections for introducing wrong filters; for wrong inclusion of 7 comparables and wrong exclusion of 2 comparables and against denying the working capital adjustment to the assessee. However, the ld. DRP upheld the order passed by the TPO except excluding 1 comparable, namely, Bodhtree Consulting Limited. On the basis of....
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....m 52 (Delhi - Trib.). 11. However, on the other hand, ld. Senior DR for the Revenue relied upon the detailed reasons given by ld. TPO and DRP for denying the working capital adjustment to the assessee company. 12. The ld. TPO denied the working capital adjustment to the assessee for the reasons inter alia that there used to be unreliable and inadequate data in case of comparable company; that working capital adjustment can be given on the basis of daily or at least monthly average payables, receivables and inventory and not on the basis of year end figures; that the issue of working capital is relevant when there is a situation of inventory remaining tied up or receivable being held up; that out of the three components of working capital i.e. payables, receivables and inventory, only one component is effected on account of transactions with AE viz. receivables. Ld. DRP has upheld the order passed by TPO regarding working capital adjustment by and large on the same ground taken by the TPO. 13. Identical issue has already been dealt with by the ITAT, Delhi Bench-I in the cases cited as United Health Group Information Services (P.) Ltd. and Marubeni-Itochu Steel India (P.) Lt....
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....assed by TPO/DRP denying the working capital adjustment to the assessee to decide afresh by the TPO by providing an opportunity of being heard to the assessee. GROUND NO.6 15. Ld. TPO as well as ld. DRP have treated foreign exchange gain/loss as non-operating in nature by relying upon Notification of CBDT issued on 18.09.2013, which is a notification on 'Safe Harbour Rules'. Ld. DRP has categorically held as under :- "However, the position has changed since the notification of CBDT issued on 18.09.2013. This is the notification on 'Safe Harbour Rules'. Rule 10TA(j)(k) and (l) define the concept of "operating expense", "operating revenue" and "operating profit" respectively. According to this Rule, loss or income arising on account of foreign currency fluctuations are excluded from the calculation of "operating expense" and "operating income" respectively. Therefore, the TPO was correct in excluding forex items from the calculation of operating profit. This objection of the assessee is rejected." 16. However, as is apparent from the date of Notification of the Rule relied upon by the ld. DRP dated 18.09.2013, the same is not applicable to the case of the assessee....
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....ppeal before the Tribunal. 22. Undisputedly, the assessee is engaged in IC design and software development related to the communication devises. Assessee is a contract IC design and software development services provider which is remunerated on a cost plus mark-up basis for carrying out services towards integrated design development, verification, maintenance and software development and is rendering these services only to ST-Ericsson (STE Group). 23. The ld. DR for the assessee contended that the assessee is not into software development rather assessee is engaged in development, verification and maintenance and integrated service design and software development to communication services which is a high end job which can only be benchmarked qua international transaction with proper FAR analysis and further contended that the error committed by TPO cannot be perpetuated. 24. Bare perusal of the profile of the assessee company and Agreement dated 03.08.2008 entered into between the assessee and STE Group apparently goes to prove that the assessee is a designer and not a software developer. In other words, the assessee is a IC Designer, so cannot be a software developer as i....
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....be permitted to raise a ground, which will work adversely to the appellant. 12. Indisputably, the Revenue could also not take recourse to Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. By virtue of the said Rule, a respondent before the Tribunal can support the decision appealed against not only on the grounds decided in favour of the respondent but also on grounds decided against it. However, Rule 27 of the said Rules would not extend to permitting the respondent to expand the scope of an appeal and assail the decision on issues, which are not subject matter of the appeal. In CIT vs. Edward Keventer (Successors) Pvt. Ltd (supra), this court had reiterated that "it would not be open to a respondent to travel outside the scope of the subject matter of the appeal under the guise of invoking r 27." 29. In the given circumstances, the judgment cited as in cases of CIT vs. Jansampark Advertising & Marketing (P.) Ltd and ITO vs. Smt. Gurinder Kaur (supra) relied upon by the ld. DR are not applicable to the facts and circumstances of the case. 30. So, we are of the considered view that the assessee being a hardware designer, a captive service provider involved at the de....
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....ted is into selling software product; that it incurred substantial R&D expenditure and is developing intangibles; that this comparable's risk profile is different which affects its profitability. However, TPO overruled all the objections and included the same in the final list of comparables by relying upon the decision rendered by ITAT, Delhi in case of ST Micro (2011-TII-63-ITAT-DEL-TP). 37. Assessee in order to highlight the dissimilarities between the assessee company and Infosys Technologies Limited and TCS, referred to the chart "Annexure 1" annexed with its synopsis which has not been controverted by the Revenue, which is reproduced as under for ready perusal :- S. No. Basic / Particular Infosys Technologies Ltd. TCS ST Ericsson 1. Reserve & Surplus 17, 523 crores 13,248 crores 3.77 crores 2. Current Liabilities 1507 crores 3501 crores 35.98 crores 3. Operating income Rs.6,212 crores (Pg 65/ Annual Report (AR) 5139 crores (Pg 105 / AR) 6.47 crores (pg 435 / Annual Report) 4. OP / TC 40.74% 11.17% 5. Risk Profile Operates as a full fledged risk taking entrepreneur Operates as a fu....
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....tract Info not available Info not available ST Ericsson has entered into a long term contract with its AE 38. Keeping in view the reserved surplus, current liabilities, expenditure on research development, expenditure on sales promotion and brand building of Infosys Technologies Limited visà- vis ST Ericsson company having surplus of Rs. 7523 crores as against Rs. 3.77 crores of the assessee and similarly, Infosys Technologies Ltd has expenditure of Rs. 267 crores on its R&D which would certainly affect its profitability and is a highly risk taking company whereas the assessee company being a captive service provider is remunerated on a cost plus mark up basis for rendering services only to STE Group. 39. Hon'ble High Court in case cited as CIT vs. Agnity India Technologies Pvt. Ltd. - (2013) 219 Taxman 26 (Delhi) upheld the decision rendered by the Tribunal by making following observations :- "3. Before the TPO, the respondent-assessee was asked to re-work the list of comparables and the same was reduced to 20. TPO also directed inclusion of Infosys Technologies Ltd. in the said list. The TPO in the final analysis has taken the comparables as und....
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.... 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent - assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted." 40. So following the decision rendered by Hon'ble jurisdictional High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra) wherein on the basis of high risk profile, nature of services, number of employees, ownership of branded products and giant status of the company, I....
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.... for rendering services to only STE Group. In other words, TCS is a giant company having huge profit and cannot be retained as a comparable for benchmarking the international transaction. So, we order to exclude this company as a comparable. TATA ELXSI LIMITED 45. Assessee raised objection before the TPO/DRP that this company is not a valid comparable as this is an IT enabled and software product company. TPO/DRP overruled this objection by observing that it can easily be included in the list of comparable as it is providing software services and only verticals are different. 46. From the annual report of this company, available at page 1465 to 1540 of the Paper Book, we can easily make out that this company is into software development services, product design services, innovation design engineering services, system integration and support services. But the TPO has taken software development services only for the purpose of comparability with the assessee. However, perusal of the detail segment goes to prove that design and development of hardware is also included in the software services. In other words, Tata Elexi Ltd. is into software produce as is evident from the ann....
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....t in response to the queries raised by TPO which is extracted below from the synopsis filed by the assessee as under :- Particulars Amount (pg. 1456 / Vol.III) Sales 1,24,87,209 Forex Gain 5,59,446 Operating Revenue 1,30,46,655 Salaries & Allowances 63,00,740 Administrative & Other expenses 1,21,18,448 Loss in value of investments written off 1,10,74,943 Depreciation 20,25,692 Total Cost 3,15,19,823 Less : Loss in value of investments written off 1,10,74,943 Donation 6,000 Loss on sale of fixed assets 1,49,097 Loss on sale of current investments 38,16,711 Operating Cost 1,64,73,072 Operating Profit -34,26,417 OP / OC -20.80% Particulars Reference Amount (Rs. in million) Employee Cost Page 1456/Vol. III 63,00 Employee Cost Ratio 38.25% Export Earning Page 1463/Vol. III 12.48 Forex Gain Page 1461/Vol. III 0.55 Total Exports 13.04 Export Earning Ratio 100.00% 52. From the perusal of the aforesaid table based upon P&L account and relevant schedule and Notes, it be....
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....during benefit accrues to the assessee nor any ownership right vests in the assessee. Issue in controversy has already been dealt with by the Hon'ble jurisdictional High Court in Director of Income-tax vs. Infrasoft Ltd. (supra), the ratio of which is that :- "what is transferred is neither the copyright in the software nor the use of the copyright in software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the right in the copyright which is too for only limited period." 59. So, these expenses, to our mind, are in the nature of revenue expenses incurred for the purpose of business. Moreover, one time expenditure to purchase time based software licenses cannot be deferred and as such, are revenue expenses to run the business. So, the AO is directed to re-examine the issue accordingly and as such, this ground is determined in favour of the assessee. 60. Assessee debited an amount of Rs. 38,09,220/- in his profit & loss account on account of training expenses and claimed the same as revenue expenditure. However, AO being not satisfied with the explanation given by the assessee came to the conclusion that these e....