TaxTMI 
TaxTMI 
2017 (8) TMI 1585
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....n of income on 30.11.2011 declaring income of Rs. 7,83,25,779/-. The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. In view of the international transactions reported in form 3CEB, the Assessing Officer ('AO') made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determination of the arms length price (ALP) of the international transactions entered into by the assessee with its AEs. The TPO, vide order under section 92CA of the Act dated 05.01.2015 determined a transfer pricing adjustment of Rs. 4,05,33,797/- to the AI.P in respect of the international transactions entered into by the assessee with its AEs. The draft order of assessment was completed under section 143(3) r.w.s. 144C of the Act vide order dated 16.03.2015, wherein the income of the assessee was determined at Rs. 11.88,59,576/- in view of the aforesaid transfer pricing adjustment of Rs. 4.05,33,797/-. 2.2 Aggrieved by the draft order of assessment dated .16.03.2015 for assessment year 2011-12, the assessee filed its objections thereto before the DRP-2, Bengaluru. The DRP issued its directions in this reg....
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.... consistency. 5. That on facts and in law. the Ld. TPO/AO/DRP have erred by: (a) Using single year data of companies lo determine the arm's length price of the impugned transaction and disregarding the Appellant's claim for use of multiple year data for computing the arms length price: and (b) Rejecting the data used by the Appellant which was available to it at the relevant time and proceeding to use the data which was available only at-the time, of transfer pricing audit. 6. That on facts and- in law, the Ld. TPOIAO erred in rejecting certain comparable identified by the Appellant and performing a fresh comparability analysis by applying following arbitrary filters without any rationale: (a) Rejection of comparable having different financial year end (i.e. not March 31, 2011) or if data of the company did not fall within 12 month period i.e. 01-04-2010 to 31-03-2011. Without prejudice to the other arguments, the Ld. TPO has also ignored the fact that financial data for a company namely R Systems International Limited for the year ended 31 March 2011 is available-in public domain. (b) Rejection o....
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....in law the Ld., AO has erred by initialing penalty proceedings u/s 271(l)(c) of the Act." 3.2 Additional grounds: 3.2.1 Vide letter dated 24.07.2017, the assessee has filed the following additional grounds: "16. The learned AO/TPO/DRP erred by including functionally similar companies such an E-infochips Limited, Acropetal Technologies Limited, 1CRA Techno Analytics Limited and E-Zest Solutions Limited in the final set of comparable companies; 17. The learned AO/TPO/DRP erred by rejecting functionally similar companies such as R Systems International Limited and Akshay Software Technologies Limited from the final set of comparable companies." 3.2.2 In its application for admission of the additional grounds 16 and 17 (supra), the assessee submits that the same are clarificatory and specific in nature with regard to the exclusions and inclusion of comparable companies in the final set of comparable and are to be read in conjuction with grounds raised at SI. Nos. 7, 9 and 10 (supra) on Transfer Pricing issues. It is prayed that these grounds be admitted and adjudicated on merits on the basis of facts/material already on record before the authorities below. In....
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.... selected 24 comparable companies having mean margin of 13.73% in comparison to the assessee's profit margin of 13.38%. In these circumstances, the assessee claimed its international transactions are at arm's length. The TPO rejected the assessee's TP study and after carrying out a fresh search and applying various filters, selected a final list of 13 comparable companies with an average mean margin of 24.82%. In these circumstances, the TPO, after allowing working capital adjustment of 1.63% determined the TPO adjustment u/s. 92CA of the Act of Rs. 4,05,33,797/- in respect of the ALP of international transactions entered into by the assessee in this year in respect of software development services. The TPO's list of comparables is as under: SI. No. Name PLI 1 Acropetal Technologies Ltd., (seg) 31.98% 2 E zest solutions (from Capitaline) 21.03% 3 E-infochips Ltd., 56.44% 4 Evoke, (from Capitaline) 8.11% 5 ICRA Techno Analytics Ltd.. (in 000) 24.83% 6 Infosys Ltd.. 43.39% 7 Larsen & Toubro infotech Ltd., 19.83% 8 Mindtree Ltd., (seg) 10.66% 9 Persistent Systems & Solutions Ltd. ....
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....t of comparables. 7.3 We have heard both parties and perused and carefully considered the material on record including the judicial pronouncement cited. We find that as per the segmental reporting at page 53 of the Annual report of this company, the income from information Technology Services is Rs. 81.40 crores out of total income of Rs. 141.65 crores. Therefore, it is amply clear that the income from software development services is less than 75% of total revenues and consequently this company does not satisfy the filter of software development services revenue being more than 75% of total revenues, applied by the TPO himself. We find that on similar facts for the year under consideration, i.e., Assessment Year 2011-12, a coordinate bench in the case of GT Nexus Software Pvt. Ltd.,(supra) for Assessment Year 2011 -12 has upheld the DRP's exclusion of this company from the list of comparables on account of it failing to satisfy the filter of 75% revenues to be from software development services revenue, In the said order the co-ordinate bench has also held this company to be functionally not comparable to a provider of pure software development services to its AE's. Fol....
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.... in the list of comparables On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology., consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As....
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....ction of working capital adjustment was considered by a co-ordinate bench of this Tribunal in the case of Moog Controls (India) (P.) Ltd. (supra) and the co-ordinate bench directed the AO/TPO to allow actual adjustments towards the differences in working capital position between the assessee and the companies selected as comparables. At paras 24 to 29 therof, the-coordinate bench held as under:- '24. The next contention of the assesses is that the working capital adjustment should not have an upper limit, it was submitted that the average cost of capital cannot be used as a upper threshold for working capital adjustment. 25. The TPO in the order has stated that the profit margin computed in TNMM is a composite figure which includes two components. They are the profit margin on. account of operating profit and . profit margin on account of cost of capital recovered, therefore, when the arithmetical average of net profit margins computed in the case, of uncontrolled comparables is considered as arm's length profit margin in transfer pricing that arise from operating business, then the average cost of capital computed in the case of uncontrolled comparables s....
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....thout any upper cap, which is not based on any sound rationale. The ld. counsel for the assessee relied on the. decision of the Mumbai Bench of the Tribunal in the case of Dresser-Rand India Pvt. Ltd. v. ACIT (ITA No 8753/.Mum/2010) has held that "The soul of an order is in its reasoning, and unless the reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order." The Mumbai Bench in the above case has referred to the observations made by Hon'ble Supreme Court in the case of Union of India v. Mohan Lal Capoor (AIR 1974 SC 87) wherein Their Lordships have, inter alia, observed as follows: - "If the statute requires recording of reasons, then it is the statutory requirement and, therefore, there is no scope for further inquiry. But even when the statute does not impose such an obligation it is necessary for the quasi-judicial authorities to record reason as it is only visible safeguard against possible injustice and arbitrariness and affords protection to the person adversely affected. Reasons are the links between the material on which certain conclusions are based and the actual conclusions. They di....