AI Drafter 
TaxTMI 
TaxTMI 
2017 (5) TMI 1651
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....e above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Tavant Technologies India Private Limited ('the Appellant or the Company'), a show cause notice, as per proviso to section 92C(3) of the Income- tax Act, 1961 [the Act]. (b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA(1) of the Act. 2 The fresh comparable search undertaken by the AO/TPO is bad in law (a) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. (b) On the facts and in the circumstances of the case and in law, the learned AO/TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, wh....
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....ing employee cost less than 25% of the operating revenue. (j) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2008). (k) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability. (l) The TPO erred on facts and in law in considering a set of 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. 6 Erroneous data used by the AO/TPO (a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. (b) The AO/TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of alleged comparable companies. 7 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO (a) The TPO erred in law and on facts in not allowing ap....
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....ute Resolution Panel ['DRP'] (a) The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO in the proceedings before them. (b) The DRP further erred on facts and in law confirming the draft order of the AO. (c) Without prejudice, the additions/disallowances are excessive, arbitrary and unreasonable and ought to be reduced substantially. 16. The Assessing Officer further erred in charging the interest u/s. 234B and 234D of the Act. 17. Penalty under section 271(l)(c) (a) The learned AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act. 18. Relief (a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. (b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. (c) Further, the Appellant prays that all the above adjustments/additions/disallowance....
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....ry comparable company in comparison to the assessee's capacity utilization. Therefore in the absence of necessary details and evidences, this ground of the assessee's appeal is rejected. 8. Ground Nos. 5 to 8 are regarding determination of Arm's Length Price (ALP) and TP Adjustment made by the TPO/A.O. 9. The assessee is a software development services provider to its Associated Enterprise (AE). To determine the ALP, the TPO has selected 20 comparable companies as under : Sl. No. Name of the company OP/TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd 29.81 5 Flextronics (Aricent) 7.86 6 iGate Global solution ltd 13.99 7 Infosys 40.37 8 Kals Information systems Ltd (seg) 41.94 9 LGS Global Ltd 27.52 10 Mindtree Ltd (seg) 16.41 11 Persistent Systems Ltd 20.31 12 Quintegra Solution Ltd 21.74 13 R systems International (seg) 15.30 14 R S Software (India) Ltd 7.41 15 Sasken Communication Technologies Ltd (seg) 7.58 16 Tata Elxsi (Seg) 18.97 17 ....
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....ties below. 13. We have considered the rival submissions as well as the relevant material on record. It is pertinent to note that turnover and size are relevant factor for selecting the comparable companies for the purpose of determining the ALP however a proper parameter of turnover has to be applied. This Tribunal is taking a consistent view of applying the turnover filter of 10 times of assessee's turnover on both sides for selecting the comparable companies. Further the RPT is also a relevant factor for selecting comparable companies though the comparable price should be uncontrolled and unrelated however it is not possible to find a company without having RPT therefore, in due course of consideration and in analyzing this issue, this Tribunal has taken a view that a tolerance range of 5% to 25% can be considered depending upon the availability of the comparable companies. Accordingly, in normal course 15% of RPT can be a tolerance range for selection of comparable entity. Since the TPO has not applied and also not given the details of turnover as well as RPT of the comparable. Therefore we are of the considered opinion that the entire issue of TP Adjustment requires a f....
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....tual payment may be made in the subsequent year or in future but the liability cannot be treated as uncertain. Therefore in view of the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra) the provision made towards accrued long term retained bonus is an allowable claim. Accordingly, the Assessing Officer is directed to allow the claim of the assessee after verification of the quantum which has accrued as a bonus to the employees though the payment may be paid in future. 21. Ground No. 12 is regarding rent equilisation provision. 22. The assessee has debited an amount of Rs. 7,47,33,780 towards rent expenditure. On verification of the record, the Assessing Officer found that the amount of Rs. 11,86,981 is a provision and cannot be recognized as a certain liability. Accordingly, the Assessing Officer has made addition of Rs. 11,86,981. 23. Before us, the learned Authorised Representative of the assessee has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Telelogic India (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 159 (Bang. - Trib.) and submitted that the Tribunal has decided this issue in favour of the assess....
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....under Section 14A of the Act. 30. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 31. We have considered the rival submissions as well as the relevant material on record. As regards the disallowance made by the Assessing Officer on account of interest expenditure computed as per Rule 8D(2)(ii), we find that when the assessee has not shown any interest expenditure in the profit and loss account then no disallowance is called for on account of interest expenditure under Section 14A of the Act. As regards, the administrative expenditure that the assessee has claimed that it has not incurred any expenditure for earning the exempt income however, we find that in the investment portfolio of assessee there is a significant change and movement. The balance as on 31.3.2007 was Rs. 30,85,00,000 which has been reduced to Rs. 7,06,00,000 which shows a significant change in the investment portfolio and the assessee has taken a decision to sell the securities/shares during the year under consideration. The decision of making fresh investment or selling the existing investment is taken at a very high level of management therefo....
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....tated that the assessee has disputed the bill therefore, the the liability is not an ascertained liability. Moreover according to print out of the email communication furnished during the course of hearing the total outstanding amount is Rs. 12,18,178/-. Office rent CSRIE 13,74,005 Claimed to have been provided for as per working. On verification it is seen that the assessee has not paid the amount till date and no TDS has been deducted. It is stated that the differential rent has been provided as per working, pending settlement but no such working has been produced by the assessee and since the amount is under dispute, it cannot be aao to be an ascertained liability. Moreover the assessee has not deducted and paid the TDS. Repairs and maintenance payable to Brigade Enterprises 6,76,793 Estimate value As can be seen from the annexure the assessee had just stated that the provision had been made as per the estimated value but no basis of estimation has been provided. The payment has not been made till date and no TDS has been deducted Repairs and maintenance payable to Janardhana Rao Mana 1,44,000 Estimate value As can be seen from the annexure th....
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....properly examine the relevant provisions of Chapter XVII qua these payments on account of repairs and maintenance and then decide the issue. 38. As regards the staff welfare expenses, the Assessing Officer has disallowed this amount on the ground that it is a provision on estimate basis but no estimation has been provided by the assessee. It is pertinent to note that if an amount has accrued in respect of staff welfare expenses then the payment of the same in future cannot be a ground for disallowance of expenditure. However, since the assessee has not provided the necessary details to show that this expenditure is already accrued on account of staff welfare, therefore we do not find any reason to interfere with the order of the Assessing Officer qua this issue. 39. In the result, the appeal of the assessee is partly allowed. Assessment 2007-08 40. The assessee has raised the following grounds : 1. Assessment and reference to Transfer Pricing Officer are bad in law (a) The final order issued by the Deputy Commissioner of Income Tax - Circle 12(4) ['ITO' or 'AO'], is bad on facts and in law and is in violation of the principles of natura....
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.... in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. (f) The AO /TPO grossly erred on facts in arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue. (g) The AO/ TPO erred on facts in arbitrarily rejecting companies having export sales less than 25% of total sales. (h) The AO/TPO erred on facts in arbitrarily rejecting companies having onsite revenue more than 75% of the export revenue. (i) The AO/TPO erred on facts in arbitrarily rejecting companies having employee cost less than 25% of the operating revenue. (j) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2008). (k) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability. (l) The TPO erred on facts and in law in considering a set of 'secret data', i.e. data which was not available in public doma....
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....t in question payable is part of employee compensation itself forming part of emoluments. Hence, it: is a. known liability and the same cannot, be disallowed. 11. The learned Assessing Officer further made addition to the tune of Rs. 25,01,680/- towards rent equalization provision without appreciating that the said was a provision towards rent which was not added back and the same is in accordance with AS 19 and hence the same should be held as allowable expenditure. 12. The learned Assessing Officer also further erred in adding an amount to the tune of Rs. 77,139/- towards purchase of software as capital expenditure as against revenue expenditure claimed by the Appellant without appreciating the plea of the Appellant. 13. The learned assessing officer also further erred in calculating the Education Cess at the rate of 3% instead of 2%. 14. The learned Assessing Officer erred in charging interest under Sections 234B and 234C of the Act. 15. Directions issued by the Honorable Dispute Resolution Panel ['DRP'] (a) The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relatio....
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....tware Ltd. 12. Persistent Systems Ltd. 13. Tata Elxsi Ltd. (Seg.) 14. Thirdware Solutions Ltd. 15. Wipro Ltd. (Seg.) 45. The learned Authorised Representative of the assessee has submitted that the functional comparability of all these 15 companies have been examined by the co-ordinate bench of this Tribunal vide order dt.28.2.2013 in the case of Logica (P.) Ltd. (supra), in the case of Tesco Hindustan Service Centre (P) Ltd. (supra), in the case of Societe Generale Global Solution Centre (P.) Ltd. (supra) and the decision dt.18.3.2016 in the case of McAfee Software (India) (P.) Ltd. (supra). Thus the learned Authorised Representative has submitted that these 15 companies are required to be excluded from the set of comparables. 46. On the other hand, the learned Departmental Representative has objected to the exclusion of these companies and submitted that without examination of FAR Analysis of each and every comparable company with the assessee, it cannot be excluded merely on the basis of the finding of the Tribunal in some other case. He has relied upon the orders of the authorities below. 47. Having considered the rival submissions as ....
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....en given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FY 05-06 FY 06-07 FY 07-08 FY 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expenses 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that t....
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....developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submit....
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.... in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the ....
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....tted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s. 133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software....
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....accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables.' 13. So also, the comparables listed at Sl.Nos. 10, 14 and 26 have to be rejected as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96 (Mum.) wherein it was held as under:- "7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software....
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....ement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of 'FAR' ie. function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of lnfosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of 'Agnity India Technologies Private Limited' (ITA No.3856/Delhi/2010), wherein it was held that lnfosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the ca....
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....From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable." Following the earlier order of this Tribunal, we direct the TPO/A.O. to exclude the above menti....
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....of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd) of 2011, dated 23-11-2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement ma....
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....he list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04- ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above f....
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....se of Tesco Hindustan Service Centre (P.) Ltd. (supra) in para Nos.26 to 28 as under : " (10) Flextronics Software Systems Ltd (seg) : 26. Now taking up the question of exclusion of Flextronics Software Systems Ltd (seg), it is true that the decision of Motorola Solutions (India) P. Ltd (supra) also was for the very same year and also on software development services sector. This Tribunal held as under: 97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information us/133(6), the object of which is primarily only to supplement the information already available on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in agreement with ld. counsel for the assessee that this company canno....
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....TPO has applied 25% filter of RPT then these two companies should not be excluded on this ground. He has relied upon the orders of the authorities below. 59. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that the co-ordinate Bench of this Tribunal vide order dt.18.3.2016 in the case of McAfee Software India (P.) Ltd. (supra) has considered this issue of RPT filter in para 7 as under : " 7. Both Revenue appeal and Assessee's appeal are interrelated. Revenue is mainly aggrieved on the RPT filter adopted by Ld.CIT(A) at 0% where as the Co-ordinate Benches have been accepting upto 15% and in some orders up to 25%. Depending on the facts of each case in each year, the RPT filter is being used / approved. Learned Counsel fairly admitted that Co-ordinate Bench in the case of ITO v. Sunquest Information Systems (India) (P.) Ltd. [2015] 61 taxmann.com 81 (Bang. - Trib.) a (Sunquest) has followed the other decisions on the issue and held that in various other cases companies having related party transaction upto 15% of total revenues can be considered. Considering the above, it was contended that the Revenue's ....
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....C Software (India) (P.) Ltd. v. Asstt. CIT [2012] 28 taxmann.com 412 (Pune - Trib.) also given similar findings in respect of this comparable. It is now trite law that a company engaged in software development cannot be compared with the company engaged in development of software products. Therefore, we direct the AO/TPO to exclude this company from the list of comparables. (x) Persistent Systems Ltd. : This company was excluded from the list of comparable by this Tribunal in the case of LSI Research (India) (P.) Ltd. (supra) which is engaged in software service provider on the ground of functional dissimilarities. The Hon'ble Tribunal further observed that it is engaged in the business of product development, software product document and product design services and no segmental details were available. Therefore, it was held that this company was not comparable with that of the assessee-company. Similar observations have been made in the following decisions: Bearing Point Business Consulting (P.) Ltd.'s case (supra) CSR India (P.) Ltd.'s case (supra) LG Soft India (P.) Ltd.'s case (supra) Mercedes Benz R & D Ind....