TaxTMI 
TaxTMI 
2021 (6) TMI 611
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....appeal is against the transfer pricing addition of Rs. 1,35,74,804/- made by the AO. Briefly, the facts of the case are that the assessee is engaged in the business of rendering Software Development and testing services to its Associated Enterprise (AE). A return was filed declaring total income of Rs. 3.03 crore. Certain international transactions were reported in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. Instantly, we are concerned only with the international transaction of `Provision of Software Development services' with transacted value of Rs. 25,32,80,385/-. The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for showing that the international transaction was at ALP. In doing so, it used Profit Level Indicator (PLI) of Operating profit/Operating cost (OP/OC). Its own PLI was worked out at 13.24%. Ten comparables were chosen to show that the international transaction was at ALP. The TPO retained two companies from the assessee's list and added seven new companies and accordingly worked out the transfer pricing adjustment ....
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....hat the: `Ownership and title to all intellectual Property Rights of whatsoever nature in or related to any work produced by NNIPL under this Agreement, including but not limited to the Deliverables and associated documentation, shall vest exclusively with OYJ.' Thus, it is borne out from the Agreement that the assessee was supposed to render Software Development services to its AE, namely, NetHawk OYJ, Finland. The transfer pricing study report of the assessee also substantiates that the assessee rendered only Software Development services. With the above understanding of the character of services rendered by the assessee under the international transaction under review, we now proceed to examine the comparability or otherwise of the companies challenged before us. (i) Infobeans Systems Pvt. Ltd. : 5. The TPO chose this company as comparable. The assessee objected to its inclusion by contending that there was a merger in this company effective from 26-09-2012 and hence should be excluded because of this extra-ordinary financial event. The TPO did not find any merit in this argument because the effective date fell beyond the relevant previous year. The DRP observed that thoug....
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....osition follows on perusal of its Balance sheet. All the figures having some relevance with the business operations, such as, Fixed assets, Trade Receivables or Payables are Nil at the close of the last year. Total of balance sheet items for the preceding year is only Rs. 92,690, as against the total for the year under consideration at Rs. 10,04,63,809. This indicates that the company had no business operations in the preceding year and started effective functioning only w.e.f. 01-04-2011, namely, the first day of the relevant financial year on taking over the Software business of Seed Enterprises Private Limited, which was earlier called as InfoBeans Systems India Pvt. Ltd., being, the comparable company itself. 8. The raison d'etre for the exclusion of a company on account of extra-ordinary financial events is that the uninterrupted results of its hitherto continuously existing business get interrupted because of the abrupt infusion or diffusion on merger/demerger, thereby rendering it vulnerable for an effective comparison with an otherwise evenly poised company. Au contraire, if the company starts its operations ab initio by taking over business of another entity from the fi....
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....ation Solutions Ltd. : 11. This company was included by the TPO in the list of comparables. The assessee objected to the same by contending that it was functionally dissimilar. The DRP echoed the view of the TPO, against which the assessee has come up in appeal before the Tribunal. 12. We have heard the rival submissions and scanned through the relevant material on record including the Annual report of this company, a copy of which has been placed at page 176 onwards of the paper book. Note 1A forming part of the Financial statements reads as under: "About the Company ..... The Principal object of the Company is to act as consultants and advisors on information/internet system and surveyors of information services, and to carry on the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of information technology products and services, software and hardware systems to enterprise and embedded technologies in the telecom and other industries." 13. Profit and loss account of this company shows, "Sale of services" as the only item of Revenue from operations, except `Other income'....