TaxTMI 
TaxTMI 
2018 (9) TMI 1943
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....ion of "provision of Integrated Circuit ("I/C") design implementation, maintenance/ software development services: 2. That the Ld. TPO/ Hon'ble DRP/ Ld. AO erred on facts and in law in:- 2.1 rejecting the arm's length price ("ALP") determined by the Appellant and in conducting a fresh economic analysis by applying inappropriate filters; 2.2 the Ld. TPO erred in law in applying certain filters for selecting/ excluding comparables; 2.3 excluding companies selected by the Appellant as comparables (such as Cignity Technologies Limited, Caliber Point Systems solutions Limited, R Systems International Limited (Seg), etc.); 2.4 ignoring the information contained in respective annual reports and decisions of the Hon'ble Tribunal and High Court for selecting inappropriate comparables (such as Persistent Systems Ltd, Thirdware Solutions Ltd, etc.); 2.5 computing the operating profit margins of the comparables finally selected for benchmarking the international transaction; 2.5.1 by treating provision for bad and doubtful debts charged to Profit & Loss account as non-operating in nature; 2.6 not accepting the ....
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....ign exchange fluctuation Gain (Net) 3,73,28,435 3,73,28,435 3,73,28,435 Interest on bank deposits 8,71,438 8,71,438 8,71,438 Profit on sale of fixed assets 1,39,04,893 1,39,04,893 1,39,04,893 Gain on cancellation of lease 1,77,606 1,77,606 1,77,606 Miscellaneous Income 7,18,360 7,18,360 7,18,360 Consideration of Transfer of Assembled work force 2,01,17,159 2,01,17,159 2,01,17,159 Total operating Income 2,36,67,32,82 3,50,71,096 2,40,18,03,922 2,40,18,03,922 Expenditure Personnel Expenses 1,28,36,25,72 1,28,36,25,728 1,28,36,25,728 Administrative and general expenses 76,83,61,456 76,83,61,456 76,83,61,456 Depreciation 11,69,28,189 82,15,593 12,51,43,782 12,51,43,782 Total operating Cost 2,16,89,15,37 82,15,593 2,17,71,30,966 2,17,71,30,966 Operating/Net Profit 19,78,17,453 ....
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....an 10.13% 8. The arithmetic mean of the comparables, as can be seen from the above, is 10.13% and that of the OP/OC of the appellant is 9.12%. 9. The TPO used the following comparables for bench marking the international transactions relating to provision of IC design and software development services as under: S.No Company Name Corrected Adjusted . 1 Acropetal Technologies Ltd. (Seg.) 11.58OP/OC% OP/OC4.63% 2 CG VAK Software & Exports Ltd. 18.61% 16.96% 3 E-Zest Solutions Ltd. 9.79% 8.24% 4 ICRA Techno Analytics Ltd. 14.60% 10.05% 5 Mindtree Ltd. (Seg.) 20.23% 18.53% 6 Persistent Systems Ltd. 33.86% 32.08% 7 R S Software (India) Ltd. 17.48% 16.96% 8 Sasken Communication Technologies 11.82% 11.02% 9 Thirdware Solution Ltd. (Overseas 33.47% 32.17% Average 19.05% 16.74% 10. As can be seen from the above, adjusted OP/OC was taken at 16.74%. Accordingly, ALP of the international transactions was computed by the TPO as under: Particulars Amount (in Operating Cost (A) 2,168,915,373 Arm's Length ....
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....en by the lower authorities. 17. We have carefully considered the objections raised by the ld. counsel for the assessee and the submissions made by the ld. DR. We will now consider each comparable one by one as under. ICRA Techno Analytics Ltd 18. The Annual Report of ICRA is exhibited at pages 917 to 1037 of the paper book Volume II. We find that this company operates as full- fledged risk taking Entrepreneur and is engaged in the software development and consultancy engineering services, web development and hosting and subsequently, diversified itself into the domain of business analytics and business process outsourcing. This can be found from the significant accounting policies at page 958 of the paper book. Surprisingly, this company was not selected by the TPO in assessee's own case in assessment years 2009-10 and 2012-13. Moreover, this company was excluded from the comparables by the co-ordinate bench in the case B.C. Management Services Private Limited Vs. DCIT in ITA No. 1064 & 1083 of 2017. The reasons for exclusion were functional dissimilarities and that segmental data was unavailable. We find that there is no change in the facts of this company for assessment....
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....ed with this company effective from 1.4.2011. 22. This company has been rejected as a comparable by the Tribunal in assessee's own case in assessment year 2010-11 in ITA Nos 609 and 168/DEL/2015. The relevant finding of the Tribunal is at para 49 of its order which reads as under: "49. The taxpayer sought exclusion of Persistent on ground of functional dissimilarity being a software product company having significant IPs and earning its revenue from its monetization, having intangibles in the nature of software licenses. 50. When we examine profit & loss account for the year ending March 31, 2010 of Persistent, available at page 1848 of the Paper Book - IV, it shows that the substantial income of Persistent is from sale of software services and products and has earned its revenue from sale of licensing of products and royalty. For ready perusal, revenue recognition of Persistent, available at page 1858, is extracted as under :- ITA No.168/Del./2015 "H. Revenue recognition Revenue is recognised to the extent it is probable that the economic benefits will flow to the Company an revenue can be reliably measured. I. Income from soft....
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....view of what has been discussed above, we are of the considered view that Persistent having a different business model with no segmental data available and having huge intangibles is not a valid comparables vis-à-vis the taxpayer which is a routine captive software development service providers, hence ordered to be excluded." 23. Considering the business profile of this company and in the light of findings of the co-ordinate bench, we direct for exclusion of this company from the final list of comparables. The assessee succeeds on this count. Thirdware Solutions Limited 24. The Annual Report of this company is exhibited at pages 811 to 916 of the paper book Volume -II. The Company is engaged in the business of Information Technology and Information Technology enabled services. The company caters to both domestic and international markets. A perusal of the Annual Report shows that segmental information of the revenue from information technology and information technology enabled services is not available. From page 882 of the paper book, we find that the revenue recognition policy is that Revenue from Subscription contract is recognised on acceptance or renewal of th....
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....are described as - (a) BPO activities which represent process management, outsourcing and transitioning services and others - (b) represent software support, maintenance and consulting related activities. 31. The other segment is functionally comparable to the appellant. We find that the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 609/DEL/2015 has considered the inclusion of this company. The relevant finding of the co-ordinate bench reads as under: "The taxpayer sought inclusion of R. Systems on the ground that it is functionally similar. The TPO has excluded R. Systems on the sole ground that its financial year is calendar year and also on the ground that data for the quarter ending December 2009 was unaudited and as such quarterly result shall not be considered. 61. Identical issue has been decided by Hon'ble High Court of Punjab & Haryana High Court in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. in ITA No.101 of 2015 (O&M) order dated 24.08.2016, available at page 2628 of Paper Book - V, relevant page 2637, which has been decided in favour of the assessee by returning following findings :- ....
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....ideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. ITA No.168/Del./2015 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B." 62. So, following the findings returned by Hon'ble High Court in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra), we are of the considered view that when data for the financia....
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....e of which, risk adjustment cannot be considered for enhancing comparability and thereby rejected the objection. Finding of the ld. DRP shows that the ld. DRP has not denied the risk adjustment but requires robust and reliable data to quantify the risk adjustment. It is settled principle of law that ITA No.168/Del./2015 claim cannot be rejected merely on the ground that it cannot be quantified. 20. Coordinate Bench of the Tribunal in case cited as Hyundai Rotem Company vs. ACIT (supra) decided the issue in favour of the assessee by returning following findings :- "18. Ld. DRP for the Revenue contended that the risk has to be explained in case of each comparable and economic analysis cannot be the basis for risk adjustment in the absence of complete data provided by the taxpayer. However, the ld. AR for the taxpayer contended that the risk adjustment is required to be given on each comparable as has been held by the coordinate Bench 'A', Pune Bench of the Tribunal in case of Honeywell Turbo Technologies (India) Pvt. Ltd. vs. DCIT in ITA No.2584/PUN/2012 order dated 10.02.2017 by following the case of Sony India Pvt. Ltd. cited as 114 ITD 448 by making follo....