TaxTMI 
TaxTMI 
2017 (6) TMI 1315
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....eclaring total income of Rs. 4,91,57,876/-. The case 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/....
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....reign currency i.e; on communication and travel which are attributable to the delivery of software outside India and in rendering 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 di....
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....n of rendering software development services undertaken by the Appellant with its associated enterprise ("AE") were not at Arm's Length Price ("ALP") 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 ....
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....arables companies. Such restriction is not justified as such an adjustment aims to remove differences in working capital position between the Appellant and the comparable companies. Other transfer pricing related grounds 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 f....
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....o adjudication is called for thereon. These grounds are therefore rendered infructuous and are accordingly dismissed. 10. Ground No. 11-Interest u/s. 234C of the Act 10.1 In this ground, the assessee denies itself liable to be charged interest u/s. 234C of the Act. The charging of interest is consequential and mandatory and the AO has no discretion 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 appr....
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....nd 389 of paper book. It is further pointed out that this company also fails the 75% software development services filter, also another filter applied by the TPO himself. Reference in this regard was invited to pages 39 and 53 of the Annual Report to submit that income from software development services is Rs. 81.40 crores out of total revenue of Rs. 141 crores. It was also contended that this company is functionally different from the assessee in the case on hand, as apart 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....
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....ncement cited. We find from a perusal of the order of the co-ordinate bench in the case of GT Nexus Software (P.) Ltd. (supra), that the co-ordinate bench has excluded this company from the list of comparables on grounds of it being not functionally comparable to a company engaged in provision of software development services to its AE's. In doing so, the co-ordinate bench followed the decision of the Delhi Bench of the ITAT in the case of Saxo India (P.) Ltd. v Asstt. CIT [2016] 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 ....
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....ngs before this Bench, the ld. AR submitted that the assessee is not pressing for the inclusion of the following two companies in the final set of comparables. (i) LGS Global Limited; (ii) CG-VAK Software & Exports Ltd.; In view of the submissions of the AR, that the assessee is not pressing for inclusion of the aforesaid two comparables in the final set of comparables, the orders of the authorities below in not including them in the final set of comparables is upheld. We hold and direct accordingly. 17. Thinksoft Global Services Ltd.: 17.1 This 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 t....
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....ompany in the final set of comparables for computing the ALP of the assessee's international transactions in software development services. 18. FCS Software Solutions Ltd.:- 18.1 This company was first proposed as a comparable by the TPO in the show cause notice. The TPO however excluded the same from the final set of comparables on the ground of the working capital adjustment being high and effecting the profit margin. According to the ld. AR for the assessee, a similar stand taken by the TPO in excluding this company as a comparable for the year under consideration i.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 perus....
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.... & 10 - Working capital Adjustment:- 19.1 In these grounds, the assessee contends that it has not been granted appropriate working capital adjustment by the TPO and the DRP, by not granting appropriate adjustment to those of the comparable companies to remove differences between them and the assessee. It is further contended that the TPO has erred in restricting the working capital adjustment to 1.63% as such a restriction is not justified as the adjustment seeks to remove differences in the working capital position between the assessee and the comparable companies. In this regard reliance was 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 see....
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.... the advantage of healthy working capital position, whereas, entrepreneurial companies cannot have that advantage and therefore, need to adjust their prices for the services accordingly to account for working capital related functions, costs and risks. The objective of a benchmarking analysis is to neutralise these differences and bring about an appropriate comparison as far as possible. According to the ld. counsel for the assessee, even. Rule 10B says that reasonable and appropriate adjustment needs to be made for a better comparability between the transactions being compared. 28. It was further submitted that the TPO ignored 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 shou....