AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2016 (9) TMI 1525
X X X X Extracts X X X X
X X X X Extracts X X X X
....39;s total income based on the provisions of Chapter X of the Income-tax Act, 1961 (the Act'). Incorrect selection of comparables by the learned TPO:- 2. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding I confirming the action of TPO in selection of the companies in case of marketing and customer support services which are not comparable despite detailed submissions filed by the Appellant. 3. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding I confirming the action of TPO in cherry picking few companies from the set of comparable companies used by the Appellant in its transfer pricing study report in case of software research and development services. Incorrect rejection of Appellant's benchmarking analysis and comparables:- 4. On the facts and in the circumstances of the case and in law, the learned TPO I AO erred and the DRP further erred in upholding / confirming the action of the learned TPO / AO of disregarding some of the comparable companies selected by the Appellant based on the cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e research and development services to its AE. The international transactions reported during the financial year 2007-08 were as under:- S.No. Name of International Transaction Amount (in INR) Most Appropriate Method 1 Purchase of Expansion 694,628 Transactional Net Margin Method TNMM 2 Sale of Goods 1,818,970 TNMM 3 Purchase of lab equipment and software 52,707,039 TNMM 4* Rendering of software research and development services 62,138,724 TNMM 5* Rendering of marketing and customer Support Services 40,863,007 TNMM 6 Technical Support services availed 19,290,103 TNMM 7 Referral commission paid for the services availed 53,936,065 TNMM 8 Interest paid on working capital Loan Availed 2,181,406 - 9 Reimbursement of expenses 722,867 - 10 Recovery of expenses 6,058,650 - (* Segments/transactions in dispute) 4. The dispute regarding transfer pricing adjustment in the impugned order is with regard to segments firstly, the marketing support/customer support services; and secondly, software research and development services. For rendering of mark....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is is considered an appropriate filter since this filter will help to identify companies which are similar in function (MSS) to arrive at appropriate comparables. Wherever segmental information is available, the same is considered as a comparable 7 Companies excluded for Other reasons (based on Information contained in the product profile, Director's report and other information in the database This is to be seen case by case. This office has tried to obtain maximum information using powers u/s. 133(6). If sufficient information is not obtained, the decision is taken based on the information available in the Public Domain. Out of 7 comparable chosen by the assessee company, the TPO rejected 6 comparable companies, except for IDC (India) Ltd. The reasons for such rejection of comparables have been given at page 4 of the TPO's order. Thereafter, the assessee was required to carry out fresh search of comparables. In the second search process, the assessee identified 8 comparable companies with arithmetic mean of 12.16%. Thereafter, TPO again analyze the comparable companies which have been discussed at page 6 of the order and again rejected all the comparable....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee had adopted TNMM as MAM and identified 24 comparable companies in its search process, the arithmetic mean of which was arrived at 15.75% whereas, the assessee has disclosed NCP of 13.26% and accordingly, it was reported that, assessee's transaction are at arm's length price as the same falls within range of +/- 5%. The TPO after analyzing all the 24 comparables found that, out of 24 comparables, only 10 companies were functionally comparable and for the balance 14, he did not accept the assessee's submission. All the 24 comparables selected by the assessee have been discussed by him from pages 26 to 29 of the TPO's order. Under this segment the TPO did not carry out search/select for his own comparables, instead has analyzed and shortlisted finally 10 comparable companies after detail discussion, the arithmetic mean of such comparables were arrived at 22.52%. The lists of these comparable companies are as under:- S. No Name of the Company OP/TC % AY 2008-09 1 Hellos & Matherson Information Technology Limited 33.40 2 Infosys Technologies Ltd. 39.62 3 LGS Global Ltd. 26.46 4 Mindtree Ltd. 15.34 5 Persistent Systems Limited....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity analysis vis-à-vis the comparables and they have to be analyzed and examined independently rather than blindly relying upon the case laws. He submitted that ld. Counsel has not analyzed the comparables vis-à-vis the functions carried out by the assessee. Referring to relevant observations of the TPO with regard to the various comparable companies, he submitted that, firstly TPO has rejected the entire search and selection process of the assessee on cogent grounds and then he has analyzed the Annual report and carried out functional analysis of these companies for inclusion and exclusion of the comparables. In support, he drew our attention to TPO's observation in para 10.1 given from pages 22 to 24 of the TPO's order. He further submitted that under TNMM broad analysis has to be seen which has been done by the TPO and no discrepancy has been pointed out by the ld. Counsel. Thus he strongly relied upon the orders of the TPO as well as the DRP. 9. Regarding software services, the Ld. Counsel before us submitted that, assessee is challenging the 5 comparables, three of which has been excluded by the TPO viz:- (i) Sagar Soft India Ltd; (ii) Birla Technologies....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and acting as a communication channel with prospective customers. There is no dispute regarding MAM, which has been accepted to be TNMM. The PLI has been adopted as Net Cost on the mark-up and for this segment and the NCP have been shown at 9.48%. The 7 comparable companies which were selected by the assessee for benchmarking the profit margin has been rejected by the TPO (barring one), firstly, on the ground that, assessee has not adopted appropriate filters for short-listing the comparable companies and secondly, in most of the cases, financial data/information for the relevant accounting period were not available. He again asked the assessee to carry out fresh search of comparable and in the second exercise, the assessee identified 8 comparables, which again has been rejected by the AO except for one comparable company, namely, IDC (India) Ltd. The TPO, accordingly, proceeded with his own search process after elaborating the various filter criteria which has been discussed by him at page 3 of TPO's order, the gist of which has already been incorporated above of our order. Based on his search, 10 comparable companies were shortlisted, out of which 3 has been rejected by the DRP.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nded back to the file of the AO / TPO so that proper analysis on FAR basis can be presented by the assessee. In case the similarity of facts are found vis-à-vis the comparable companies as discussed in the ITAT orders relied by the assessee, then AO should consider the same. However, the onus will be on the assessee to show that, how these decisions of the Tribunal qua the comparable companies are applicable on the facts of the assessee's case. With this direction so far as Transfer Pricing adjustment with regard to market support system is concerned, the same is remanded back to the file of the AO for fresh adjudication in line of the directions given above. 12. Now, coming to the software research and development services, it has been stated that the assessee has been providing software services to its AE, ECI Israel, whereby, it is developing and testing the software's used for telecommunication services manufactured by ECI Israel. R&D focuses on transmission and broad band access solutions to develop next generation product line and management solutions and also to expedite the penetration of new products in the market. Under this segment, the assessee has shown NCP o....