TaxTMI 
TaxTMI 
TaxTMI 
2017 (6) TMI 1315
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....se was taken up for scrutiny and in view of the international transactions reported in Form 3CEB, the Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) u/s. 92CA of the Act for determination of the arms' length price ('ALP') of the international transactions entered into by the assessee with its associated enterprises ('AE'). The TPO vide order u/s. 92CA of the Act dated 27.11.2014 proposed a TP adjustment of Rs. 4,64,76,292/- to the ALP in respect of the international transactions the assessee entered into with its AE's. The draft order of assessment was completed u/s. 143(1) r.w.s. 144C of the Act vide order dated 26.03.2015 wherein the income of the assessee was determined at Rs. 10,21,75,484/- in view of (i) the aforesaid TP adjustment of Rs. 4,64,76,292/- and (ii) the disallowance of the assessee's claim for deduction u/s. 10A of the Act to the extent of Rs. 65,41,316/-. 2.2 Aggrieved by the draft order of assessment dated 26.03.2015 for Assessment Year 2011-12, the assessee filed its objections thereto before the DRP-2, Bangalore. The DRP issued its directions u/s. 144C(5) of the Act vide order dated 04.12.2015. (i) ....
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....endering of technical services outside India, the jurisdictional High Court of Karnataka in the case of Tata Elxsi Ltd. (supra) has held that when certain expenses are excluded from the, export turnover for the purpose of computing deduction admissible under the Act, like u/s. 10A of the Act, such expenses are also to be excluded from total turnover, as export turnover forms part of total turnover. The decision in the case of Tata Elxsi Ltd. (supra) has also been followed by the Hon'ble Court in the case of CIT v. Motor Industries Co. Ltd. [2015] 55 taxmann.com 377 (Kar.), holding that if any expenditure is sought to be reduced from export turnover, then it should also be reduced from total turnover for the purposes of computing the eligible deduction u/s 10A of the Act. In this legal and factual matrix of the case, as discussed above, we find no reason/requirement to interfere with or deviate from the finding rendered by the DRP on this issue and, therefore, uphold the same. Consequently, finding no merit in the grounds, No: 2 raised by Revenue (supra) we dismiss the same. 5. Ground No: 3 - Risk adjustment 5.1 In this ground, the Revenue assails the DRP order in granting the....
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....LP") as defined under section 92F(ii) of the Income-tax Act, 1961 ("Act"). Rejection of the transfer pricing documentation of the Appellant 3. The learned AO/TPO and the Honorable DRP have erred in law and on facts by rejecting without cogent reasons, the Transfer Pricing ("TP") documentation which was prepared by the Appellant in the manner contemplated under the relevant provisions of the Act and the Income-tax Rules, 1962 ("the Rules"). 4. The learned AO/TPO and the Honorable DRP have erred in undertaking a fresh search of comparable companies for benchmarking the international transaction of the Appellant without cogent reasons. The learned AO/TPO and the Honorable DRP did not consider that the AO/TPO can proceed to determine the arm's length price, for the international transactions of the Appellant, on its own only upon satisfaction of the conditions mentioned in 92C(3) of the Act which were not satisfied in the impugned case. Further, the learned AO/TPO and the Honorable DRP did not consider the requirement of Rule 10D(4) of the Rules when undertaking a fresh search of comparable companies. Filters and qualitative criteria and the Companies selected f....
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....ds 11. The learned AO, the DRP and the TPO have erred in levying consequential interest under Section 234C of the Act. 12. For these and such other grounds that may be raised either prior to or during the course of hearing." 8.2.1 Vide letter dated 29.05.2017, the assessee filed an application for filing of additional grounds 13 to 15; which grounds are extracted hereunder:- "13. The Hon'ble DRP/Ld. TPO have erred in selecting the following companies as comparable to the Appellant despite the same being functionally different to the Appellant or fails to meet the legally acceptable criteria for comparability: * Acropetal Technologies Limited * E-Infochips Limited 14. The Hon'ble DRP/Ld. TPO have erred in rejecting the following comparables selected by the Appellant in its TP study, despite the same being functionally comparable to the Appellant and qualify the legally acceptable criteria for comparability: * LGS Global Limited * Thinksoft Global Services Limited * CG-VAK Software & Exports Limited 15. The Ld. TPO erred in rejecting FCS Software Solutions Limited as a comparable to the Appellant merely on the ground of higher working capital adjustment, ....
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....etion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1/119 Taxman 352 and we, therefore, uphold the action of the AO in charging the said interest. The AO is, however, directed to re-compute the interest chargeable u/s. 234C of the Act, if any, while giving effect to this order. 11. Grounds No: 3, 4, 5 and 6 11.1 In submissions made before the Bench, the ld. AR submitted that the assessee is not pressing grounds S.No: 3 to 6 raised in this appeal (supra). In view of these grounds not being pressed by the assessee, they are rendered infructuous and are accordingly dismissed. Grounds 7 and 8 and Additional grounds 13 to 15-T.P. Adjustment - 12. TRANSFER PRICING - BACKGROUND 12.1 In its T.P. study, the assessee taking TNMM as the most appropriate method has selected 23 comparable companies having mean margin of 12.84% in comparison to the assessee's profit margin of 11.98%. 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, selected a final list of 13 compar....
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....art from software development services, this company also owns products, is engaged in R & D activities and owns its own intangibles. In support of its plea for exclusion of this company from the list of comparables,. 'reliance was, inter alia, placed on the decision of the co-ordinate bench in the case of GT Nexus Software (P.) Ltd. v. Dy. CIT [IT (TP) Appeal Nos. 31 & 409 (Bang) of 2016, dated 18-4-2017]. 14.2 Per contra, the ld. DR for Revenue supported the orders of the authorities below in including this company in the final list of comparables. 14.3.1 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 Information Technology Services is less than 75% of total revenues and consequently this company does not satisfy the filter of information technology services revenue being more than 75% of total revenues, applied by the TPO himself. We find th....
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....] 67 taxmann.com 155. In its order in the case of GT Nexus Software (P.) Ltd. (supra) at para 12 thereof has held as under:- '12. The functional comparability of this company has been considered by the Delhi Bench of the Tribunal in the case of Saxo India Pvt Ltd. v. ACIT (supra) in paras 10.1 to 10.2 as under: "(i) E-infochips Limited: 10.1. The Transfer Pricing Officer included this company 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 hardwar....
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.... company was selected by the assessee as a comparable in its TP study. The TPO rejected this company as a comparable on the ground that it is functionally different and is not into provision of software development services, as the annual report indicates that it is into software validation and verification services and further it would not have incurred expenditure on sales commission if it was into provision of software development services. It was also rejected on grounds of failing the ForEx filter. According to the ld. AR for the assessee, this company is engaged in provision of software development services to the banking and financial services and is therefore functionally comparable to the assessee. It is further submitted that the assessee passes the forex filter being at 91.21% of sale. It is also contended that in immediately preceding year i.e. Assessment Year 2010-11; the TPO has accepted this company and included this in the final set of comparables. 17.2 Per contra, the ld. DR for revenue supported the orders of the authorities below in excluding this company from the final set of comparables. 17.3 We have heard the rival contentions and perused and carefully consi....
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....e. Assessment Year 2011-12 was considered by a co-ordinate bench in the case of Informatica Business (P.) Ltd. and its order in [IT Appeal Nos. 1285 & 1294 (Bang.) of 2014, dated 17-3-2017] the Tribunal had directed the TPO/AO to include this company as a comparable to the assessee who is a provider of software development services. It is prayed that this company be included in the final set of comparables. 18.2 Per contra, the ld. DR for revenue supported the orders of the authorities below in rejecting this company as a comparable to the assessee. 18.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. It is seen from a careful appreciation of the material on record that this company i.e. FCS Software Solutions Ltd., though into providing software development services, as is the assessee in the case on hand, was rejected by the TPO on the ground of its working capital adjustment being high, it would affect the profit margin and hence rendered as not comparable to the assessee in the case on hand. We find that similar case of rejection of this company as a comparable on grounds of high w....
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.... placed on the decision of the co-ordinate bench in the case of Moog Controls (India) (P.) Ltd. v. Dy. CIT [IT(TP) Appeal No. 551(Bang.) of 2015, dated 27-11-2015]. 19.2 Per contra, the ld. DR for revenue supported the orders of the authorities below on this issue. 19.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On the appreciation of the facts on record on this issue, it is seen that the TPO has restricted the working capital adjustment to 1.63%. According to the assessee such a restriction is not justified as the adjustment seeks to remove the differences in working capital position between the assessee and the comparable companies. We find that this issue of restriction 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 thereof, the co-ordinate bench held as under:- '24. The next contention of the assessee is that the workin....
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....ed the above principles of comparability and contested that the transfer price of uncontrolled independent companies have component of return for functions and return for working capital, it was submitted that though the assessee is not denying this fact, but the return for working capital position between the assessee and the companies selected as comparable vary due to their characterisation and there exists a methodology which is also well accepted Internationally to nullify these differences. Therefore, it was submitted that such an adjustment should be carried out to bring in appropriate comparability between the tested party and the companies selected as comparable without 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....