TaxTMI 
TaxTMI 
2019 (9) TMI 1200
X X X X Extracts X X X X
X X X X Extracts X X X X
...., is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void abinitio. 2. That, in framing the impugned assessment order, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Assistant Commissioner of Income Tax, Transfer Pricing Officer - l(1)(1), New Delhi (hereinafter referred to as "Ld. TPO") for computation of arm's length price ("ALP"). TP adjustment in relation to software services [INR 20,55,61,108] 3. That on the fact of the case and in law, the Ld. AO/ TPO /Hon'ble DRP have erred, in making an adjustment of INR 20,55,61,108 to the total income of the Appellant in respect of international transaction pertaining to provision of software Services by the Appellant to its associated enterprise ("AE"). 3.1 That on the fact of the case and in law, the Ld. AO/ TPO / Hon'ble DRP has erred by n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ut appreciating that these companies are not functionally comparable to the Appellant in relation to the international transaction pertaining to provision of software services. 3.4.3 That on the facts of the case and in law, the Hon'ble DRP, in particular, erred in rejecting Sasken Communications Technologies Ltd, as comparable to the Appellant in relation to the international transaction pertaining to provision of software services on the ground that the FAR of the company is different than that of the Appellant. 3.4.4 That on the facts of the case and in law, the Hon'ble DRP, in particular, erred in rejecting Caliber Point Business Solutions, as comparable to the Appellant in relation to the international transaction pertaining to provision of software services on the ground that the company has different financial year ending. 3.4.5 That on the facts of the case and in law, the Ld. TPO/ Hon'ble DRP, in particular, erred in rejecting Cat Technologies Limited, as comparable to the Appellant in relation to the international transaction pertaining to provision of software services on the ground that the company fails to qualify the persistent loss filter w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e and in law, the Ld. TPO/ Hon'ble DRP has erred in not appreciating that intercompany receivables arising out of provision of services by the Appellant to its AE is closely linked to such transaction and if such services transaction is determined at an arm's length price after considering working capital adjusted margins of comparable companies, no separate adjustment can be made for such inter-company receivables. 4.4 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP has erred in determining the arm's length interest rate for inter-company receivables at LIBOR plus 400 basis points on an arbitrary basis without any cogent reasons. 4.5 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP has erred in granting the credit of period of 60 days instead of 90 days having regard to the provisions of Section 92CE of the Act. 4.6 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP has erred, by not appreciating that Appellant has earned more than arm's length return in its other segments, and such excess remuneration should be "set off with the proposed adjustment. Corporate Tax adjustment in relation to TDS Re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aning of section 92B of the Act. Sl. No. Nature of Transaction Value Rs. 1. Rendering Software Services 2398249108 2. Rendering marketing support Services 711835390 3. Rendering back office support services 1451879992 4. Purchase of fixed assets and miscellaneous items 108843969 5. Availing of technical services 45802045 6. Purchase of service stock 54526409 7. Sale of service stock 2035134 2.1 The learned Assessing Officer referred the determination of arm's length price of the International transactions carried out by the assessee to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO after considering submission of the assessee proposed adjustment to International transactions of 'software development services' and 'marketing support services'. 2.2 Under 'software development services' segment, the Ld. TPO accepted the Transaction Net Margin Method (TNMM) as appropriate method for benchmarking Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI). The learned TPO Identified 16 comparables, including 3 comparables chosen by the assessee and computed net average margin (PLI) of the comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the direction of the learned DRP, the transfer pricing adjustment in the case of the assessee was computed as under: Sl. No. nature of transaction amount of adjustment (INR) 1. Software development services 20, 55, 61, 108 2. Marketing support services NIL 3. Interest on receivables 3,81,58,172 Total 24,37,19,280 2.6 In the impugned assessment order, the Assessing Officer accordingly made addition of transfer pricing adjustment of Rs. 24,37,19,280/- and addition on account of TDS reconciliation of Rs. 34,72,945/-. 2.7 Aggrieved with the additions made, the assessee is before the Tribunal raising the grounds as reproduced above. 3. Before us, the Ld. counsel submitted that the ground No. 1 and 2, 3 and 3.1, 3.3 are general in nature. Accordingly, we are not required to adjudicate upon those grounds. 3.1 He also did not press ground No.3.2, 3.4.3 and 3.4.4. In ground No. 3.4.6, he did not press inclusion of 'Lucid Software Ltd.' for set of comparable companies. Accordingly, all these grounds are dismissed as infructuous to the extent not pressed on behalf of the assessee. 4. In respect of the balance grounds, the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Ltd 2. Mavric Systems Ltd. 4.5 We have heard rival submission of the assessee as well as of the Revenue on the exclusion/inclusion of the comparables challenged by the assessee. The arguments of the parties and our decision in respect of the each company are discussed below: 5. Thirdware Solutions Ltd. 5.1 The learned TPO held the company as functionally comparable in view of observation that it is engaged in the implementation and consulting services of software based on ERP and business intelligence, however, the learned DRP observed that company was engaged in different business segments and directed to retain this company as comparable only if segment data is available. 5.2 The learned counsel of the assessee submitted that the Ld. AO/TPO in the order passed in pursuant to the direction of the Ld. DRP, has not followed this direction of the learned DRP. He referred to various pages of the paper book, which contained extract of annual report of the company. He referred to page 259 and supplementary papers of annual report filed and submitted that in the statement of profit and loss, the entire revenue of Rs. 20,675 lakhs was from sale of product and rev....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... page 250 of the assessee's paper book and submitted that revenue has been only shown from IT services and there is no sale of products by the company. He submitted that, the service cluster, industrial cluster telecom (PES) discontinued business are only verticals wherein the company has provided software services and thus the company is a valid comparable to the assessee. Decision 6.4 We have heard submission of the parties. On perusal of the extract of the annual reports filed in the paper-book by the assessee, we find that as far as function of the assessee is concerned, the word service and products have been used interchangeably and it cannot be ascertained from the part of the annual reports filed before us, that the company was engaged only in providing software services. In the circumstances, we feel it appropriate to restore the issue of deciding functional comparability to the learned AO/TPO with the direction to the assessee to file the complete annual report of the company. If required, the TPO may gather information u/s 133(6) of the Act form the company. He shall provide a copy of the information to the assessee also. If after inquiry , no separate segment data....
X X X X Extracts X X X X
X X X X Extracts X X X X
....view of the Note 27, the quantum of export of the goods and export of the services cannot be ascertained and thus in view of no segmental data of export of the goods and export of the services available separately, we are of the opinion that the company cannot we selected as comparable at entity level. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of the comparables. 8. Persistent Systems Ltd. 8.1 According to the learned TPO, the company passed all filters and is functionally comparable. The learned DRP also held that the company has only one stream of the revenue i.e. sale of software services and there was no stock in trade. Before us, the learned counsel of the assessee referred to page 284 to 290 of the paper-book submitted that the company was engaged in providing software products along with software services. He referred to page 287 the paper-book and submitted that the company specialized in building software products and has developed its own brand "Accelerite" for branding its products. He submitted that in view of no segmental data available, the company cannot be selected as comparable at entity level. 8.2 The Ld. DR, on the othe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany owned intellectual property right, however, the company was engaged only in providing software development services. He submitted that the assessee has not demonstrated as how owning of intellectual property rights has affected the margin of the company. 9.3 We have heard the rival submission of the parties. The various segments mentioned in the annual report comprises of manufacturing, BFSI, hi-tech, travel and transportation and others, but the assessee is primarily engaged in providing global software development in these areas. In the background to significant accounting policies, however, mention other services offered by the company which also include business process management, business technology consulting, cloud, digital businesses, independent testing, infrastructure management services, product engineering and SAP services. The company also own intellectual property rights as pointed out by the learned counsel as against no intellectual property rights owned by the assessee, and thus, assets of the company cannot be compared with the assessee. In view of functional dissimilarity as well as the difference in the assets owned by the company vis- a-vis the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness. The Ld. counsel relied on the decision of the tribunal in the case of Mercedes-Benz research and development India Private Limited in IT(TP)A No. 1645/Bang/2016, wherein it is held that software testing company cannot be compared with software development company. 11.2 The Ld. DR, on the other hand, submitted that the ground of acquisition and an extraordinary event was not contested before the learned DRP. 11.3 We have heard the rival submission and perused the relevant material on record. The fact that of extraordinary event resulted into rise in revenue of the company, has not been disputed. In our opinion, if any fact, which is evident from the record, then any party cannot be prohibited to present the said fact in pleading to support its claim. The Tribunal the case of Hyundai motors India engineering Private Limited in ITA no. 255/Hyd/2014 has excluded the company from set of the comparables on account of extraordinary event of acquisition. Respectfully, following the same ratio, in view of extraordinary event during the year under consideration, we direct the Ld. AO/TPO to exclude the company from the set of the comparables. 12. R. S. Software (India) Ltd. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....et of comparables. 14. CAT Technologies Ltd. 14.1 The learned TPO and learned DRP rejected this company as comparable, as according to them it fails on the ground of persistent loss filter. 14.2 The Ld. counsel referred to Page No. 752 & 753 of the paper-book and submitted that company was having operating margin of 5.11% in financial year 2011-12 and as it was not a continuous loss-making for more than 3 years and thus, cannot be rejected on account of persistent operating losses in view of the decision of the Tribunal bench Pune in the case of Bost India (P) Ltd in ITA No. 1380/PN/2010. 14.3 The Ld. DR, on the other hand, objected and relied on the order of the lower authorities. 14.4 We have heard rival submission and perused the relevant material on record. On perusal of page 380 of the paper book, which is a copy of profit and loss account of the company, we find that revenue receipts also include consultancy fee received and there is no separate segment for consultancy in the annual accounts of the company. In our opinion, in absence of any separate segmental date of software development services, the company cannot be treated as comparable at entity level. In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by all the comparable companies accordingly, he held the foreign exchange fluctuation as non-operating in nature. The Ld. DRP upheld the finding of the Ld. TPO in view of the decision of the Hon'ble Supreme Court in the case of Woodward Governor India Private Limited in Civil appeal No. 2006 of 2009, wherein the foreign exchange difference arising from foreign currency transaction has been held to be a deductible expenditure under section 37 of the Act i.e. non-operating item. The learned DRP accordingly, rejected the objection of the assessee. 17.2 Before us, the Ld. counsel of the assessee submitted that Ld. CIT(A) in the assessee's own case for assessment year 2013-14, followed the principle of consistency and held that foreign exchange is to be considered as operating in nature. 17.3 The learned DR, on the other hand, submitted that it cannot be verified from the annual reports of the comparable company's that the foreign exchange gain/loss relates only to revenue transaction and not capital transaction and in absence of which considering foreign exchange gain/loss as part of the operating margin will distort the true margin from the relevant segment. He further subm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a debt free entity and since it does not carry any interest cost on its funds, therefore, it is not necessarily required to charge an interest on delayed realization. In this respect, the Ld. counsel relied on the decision of the Hon'ble jurisdictional Delhi High Court in the case of Bechtel India (ITA 379/2016). 19.2 On the other hand, the learned DR relied on the order of the lower authorities. 19.3 We have heard the rival submissions and perused the relevant material on record. On perusal of financial statements of the assessee placed on page 1 to 27 of the paper book, we find that assessee has not borrowed any money. We find that the Hon'ble Delhi High Court in the case of Bechtel India (supra) has observed that where the appellant is a debt free company, the question of receiving any interest in receivable did not arise. The relevant finding of the Hon'ble High Court is reproduced as under: "4. As far as question (B) concerning the adjustment for interest no receivables, the Court finds that the ITAT has returned a detailed finding of fact that the Assessee is a debt free company and the question of receiving any interest on receivables did not arise. Consequently, no....