TaxTMI 
TaxTMI 
2020 (10) TMI 32
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....in law, the Assessing Officer ("AO") erred in assessing the total income of the Appellant at Rs. 14,61,18,000/-(rounded off) as against income of Rs. 11,35,03,990/- returned by the Appellant after making transfer pricing addition of Rs. 3,26,14,009/- in respect of international transaction of software development services rendered by the Appellant to its parent company, viz., Open Solutions Inc., USA. 2. That on facts and in circumstances of the case and in law, the AO erred in making a reference to the Transfer Pricing Officer ("TPO") under Section 92CA of the Income tax Act, 1961 (the "Act") without recording reasons on the basis which the AO considered it "necessary or expedient" to refer the international transaction entered into by the Appellant with its associated enterprise ("AE"). 3. That the DRP erred in confirming the action of the TPO in segregating the international transaction entered into by the Appellant with its AE, into IT segment and ITeS segment, without appreciating that there were no separate segments into which the international transactions could be segregated. 4. That on facts and in circumstances of the case and in law, the AO and....
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....h RPT of more than 10-15% to sales should have been excluded; g) Rejecting companies with diminishing revenue/ persistent losses in complete contradiction of the filter of single year data applied by the TPO himself; 8. That the Ld. AO and DRP erred in confirming the incorrect computation of margins of the comparable companies selected by the TPO. 9. That the Ld. AO and DRP erred in confirming the action of the TPO in rejecting the comparable companies selected by the Appellant without providing any cogent and sufficient reasoning. 10. That the Ld. AO and DRP erred in confirming the action of the TPO in selecting the following companies which were not functionally comparable to the Appellant for the purposes of benchmarking the international transaction entered into by the Appellant: a) Cybercom Datamatics Information Solutions Ltd. b) Persistent Systems Ltd. c) Mindtree Ltd. d) Larsen & Toubro Infotech Ltd. e) Cigniti Technologies Ltd. f) Sasken Communication Technologies Ltd. 11. That the DRP erred in upholding the action of the TPO in cherry picking Cybercom Datamatics Information ....
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....e method, selected 12 comparables was 7.05%, therefore, the assessee as per TP documentation held same to be at arm's length. The 6. The ld TPO recomputed the PLI of the assessee and held that same is at 15.72% and also decided the 12 comparables. He carried out the fresh search and after discussion selected 16 compares shows PLI margin determined at 30.30%. He applied the same to the operating cost of the assessee of Rs. 280016195/- and found that the arms length price of the assessee should be Rs. 365029112/-. The price charged by the assessee was Rs. 324042619/- and therefore, proposed an adjustment Rs. 40986493/- with respect to the IT Services. In ITES services he also proposed an adjustment of Rs. 15082666/-. 7. On the basis of draft assessment order on which objections were filed by the assessee, the ld DRP-2, New Delhi after considering the objections of the assessee the ld TPO passed an order on 29.08.2018, wherein in IT sector 12 comparables were retained whose PLI is 27.37% and adjustment was reduced to Rs. 32614009/- against the original adjustment proposed at Rs. 40986493/-. The addition on account of ITES segment was Nil against proposed adjustment of Rs. 150826....
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....#39; of the assessee and commission paid to agents on sales is at Rs. 3.31 crores, which indicates or demonstrate that, this company has substantial income from sales. Further in the case of group company of the assessee which is in the same line of business, i.e., Fiserve India in ITA 6737/Del/2014 the Tribunal has excluded this comparable and such an order of the Tribunal has now been confirmed by the Hon'ble Delhi High Court vide judgment dated 7.10.2016 in ITA 602/2016. Further in another group company's case, i.e. Cash Edge India Pvt.Ltd. (order dt. 23.9.2015 in ITA 64/Del/15) for the A.Y. 2010-11 again this company was held to be incomparable. This judgement of the Tribunal too has been confirmed by Hon'ble High Court vide order in ITA 279/2015. 8.1 On the other hand the Ld.D.R. drew our attention to functional analysis of PSL pointing out that in the course of its software development functions it gets into product development segment also. Here in case of assessee also once the concept of the product is determined, then A.E. contracts with the assessee to execute the design and software development products on a module/part of the final product....
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....learly shows that it is also paid to a related party and with respect to sales only. Therefore, there is no reference to any commission on sale of product. The reference made by the ld AR at page No. 636 of Accelerite Products with related to Santa Clara, California relates to US subsidiary Persistent Systems incorporated. Page No. 644 is an overview business of the Persistent Systems Ltd including its subsidiary and not of Persistent Systems only. Page NO. 704 is also related to the consolidated financial statements. Hence, these are not related to the comparability analysis hence rejected. Therefore, for this year we are not inclined to note that persistent Systems Ltd is functionally not comparable to the assessee. Therefore, the coordinate bench in assessee's own case for assessment year 2010 - 11 excluded this company on altogether different facts, for this year we have noted the facts on the standalone financial statements of persistent Systems Ltd which does not support its exclusion. 16. Ld DRP has considered this issue at page No. 5 and 6 of its direction. The finding of the ld DRP is as under:- Persistent Systems Ltd The assessee has contended that company is ....
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....to be excluded from the comparability analysis in case of that company. The order of the coordinate bench when challenged by the revenue has been upheld before the honourable High Court as per order dated 28 September 2016 in ITA number 682/2016. No doubt, for the comparability analysis in case of that assessee, persistent Systems Ltd was held to be not a good comparable and therefore same was excluded. 19. On comparing the functions of the assessee in that case we note that it was engaged in the business of design and development of customized software application and was also providing technical support services. The assessee is engaged in providing software development research and related services to its associated enterprises. From the above observation of the coordinate bench in that case as well as the functional profile of the assessee available before us, we do not find any similarity. Further the issue was decided in ITA number 6148/del/2015 for assessment year 2011 - 12, we do not have any financial statements are available of assessee in that case or of persistent Systems Ltd for that financial year i.e. 2010 - 11. 20. Further, the comparability analysis is always....
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....ted that however when the IT segment services were computed at Sl NO. 11 at Page NO. 52 the margin of this company taken at 33.20%. He further submitted that in the decision of coordinate bench in case of another assessee Saxo India, the coordinate bench has deleted, excluded the above comparable company and therefore it should also be excluded in case of the assessee. 24. The learned DR submitted that assessee has not objected this comparable company before the learned DRP and therefore there is no direction of the learned dispute resolution panel with respect to above comparable. 25. We have carefully considered the rival contention and find that only objection of the assessee is that above comparable company has different margin shown in the show cause notice and order of the TPO. In the show was notice at page number four of the order the margins of this comparable was shown to be 7.28% whereas in the TP order as well as the effect order passed by the TPO on direction of the learned dispute resolution panel the margin of this comparable were taken at 33.2%. There is no justification or reasons were found in the TP order for change in the margins and the basis of such chan....