TaxTMI 
TaxTMI 
TaxTMI 
2018 (8) TMI 2070
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....ring an income of RS. 3,34,31,113/-. Since the Assessee had entered into international transactions, reference was made to the Transfer Pricing Officer ("TPO") to determine the Arm's Length Price (ALP) of the international transactions. Details of the transactions undertaken by the Assessee are as under:- S. NO. NATURE OF TRANSACTION AMOUNT (In INR) 1. Import of CVPS Machines and spare parts ("Distribution Function") 32,65,84,552 2. Import of Raw Material for SIM Card ("Assembly Function") 11,97,70,998 3. Software Development 8,93,34,164 4. Sale of SIM Cards 4,94,72,539 5. Import of Capital Equipment 2,22,07,884 6. Provision of Installation Services 93,23,193 7. Service Expenses 1,11,21,465 8. Commission Expenses 48,84,400 9. Interest on External Commercial Borrowing 73,87,140 10. Repairs and Maintenance 59,09,162 11. Other Expenses 34,97,831 12. Reimbursement of Expenses 51,43,772 13. Sale of others 1,13,248 2.2 From the international transactions declared by the Assessee, the TPO picked up the transactions regarding the Software Development Segment and the SIM Card Assembly Segment. With regard to the Software Development Segment, the As....
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....e Learned Assessing Officer ("Ld. AO") erred in determining and the Hon'ble Dispute Resolution Panel ("Hon'ble DRP") erred in confirming the addition of Rs. 1,10,57,340 in relation to international transactions pertaining to software development segment. 1.1 On facts and in law, the Ld. TPO, Ld. AO and the Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") Documentation maintained by the Appellant u/s 92D of the Income Tax Act, 1961 ("the Act"), read with Rule 10D of the Income Tax Rules, 1962 ("the Rules") and in carrying out a fresh search for comparable companies using inappropriate filters. 1.2 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in using data obtained pursuant to issuance of notice under Section 133(6) of the Act which was not available to the Appellant at the time of maintenance of Transfer Pricing Documentation, thereby contravening the provisions of Rule 10B(4) of the Rules and further, erred in not providing the complete information which was called pursuant to issuance of notice under Section 133(6) of the Act. 1.3 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in selecting certain companies ....
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....the Hon'ble DRP violated the provisions of Rule 10B(1)(e)(iii) and Rule 10B(3) of the Rules by denying the benefit of idle capacity adjustment to eliminate differences on account of capacity utilization of the Appellant vis-à-vis the comparable companies. 2.7 On facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in relying on erroneous calculation for computing 'cash losses' (before depreciation) for the purposes of eliminating differences arising on account of capacity utilization vis-à-vis comparables and further, failed to produce correct computation in this regard. 2.8 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in computing the amount of adjustment by considering total cost and sales, instead of apportioning the same to relevant transactions of the Appellant with associated enterprises and non-associated enterprises. 3. On the facts and in law, the Ld. TPO, the Ld. A.O. and the Hon'ble DRP erred in disregarding prior years' data used by the Appellant to benchmark the international transactions in its TP documentation for the year and holding that current year (i.e. Financial Year 2007-08) data for comparable c....
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....ociated Enterprise (AE). The assessee did not own any intellectual property. The assessee, vide a detailed chart, has agitated the exclusion of the following 16 comparables and the inclusion of 2 comparables finally selected by the TPO: (A) COMPARABLES BEING SOUGHT TO BE EXCLUDED: i. Avani Cincom Technologies ii. Bodhtree Consulting Limited iii. Celestial Labs iv. E-Zest Solutions Limited v. Igate Global Solutions Ltd. vi. Infosys Technologies Ltd. vii. Kals Systems Limited (Segmental) viii. LGS Global Ltd. ix. Mindtree Limited (Segmental) x. Persistent Systems Pvt. Ltd. xi. Quintegra Solutions Limited xii. R System International Limited xiii. Softsol India Limited xiv. Tata Elxi Limited xv. Thirdware Solution Limited xvi. Wipro Limited (Segmental) (B) COMPARABLES BEING SOUGHT TO BE INCLUDED: i. SIP Technologies and Exports Limited ii. PSI Data System Ltd. 3.2.0 Now, we will deal with all these comparables individually. We will first take up the comparables which the assessee is agitating for exclusion from the final set of comparables selected by the TPO and as affirmed by the Ld. DRP. (i) Avani Cincom Technologies ("Avani Cincom"): ....
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.... for the same financial year, has observed as follows : "6.4.1 We have heard the rival contentions and have perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that the coordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is functionally dis-similar and different from the assessee who is a provider of software development services to its AEs and directed that this company be omitted from the list of comparables. At paras 7.6.1 and 7.6.2 of its order, the co-ordinate bench held as under:- "7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information ob....
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.... next comparable being agitated by the Assessee is Bodhtree Consulting Limited. The said comparable was rejected by the Assessee in its Transfer Pricing study for not being functionally comparable and being engaged in niche IT services. Before us, the Ld. Counsel for the Assessee strongly argued for exclusion of the said comparable on the ground that Bodhtree is an end to end web solutions provider and was earning income from sale of its software products. Additionally, it was pointed out whilst referring to the Annual report that there was insufficient segmental data vis-à-vis the incomes from services and products. The Ld. Counsel placed strong reliance on the co-ordinate bench decision in the case of Sun Gard Solutions India Pvt. vs. ACIT reported in [2015] 63 taxmann.com 323 (Bangalore - Trib.) and order of the Delhi Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd v ACIT in ITA No. 333/Del/2013, wherein the said comparable was excluded primarily for being a software product company. Reliance was also placed on the decision of Delhi Bench of the Tribunal in Saxo India Private Limited vs. ACIT (ITA No. 6148/Del/2015) [subsequently affirmed by Hon'....
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....ee that this company is following a different pricing model, as is evident from the annual report to be found at paper book page No. 24 that the revenues from software development is recognized based on software developed and billed to the client whereas the assessee is a captive software developer for its AE's. 45. Ld. AR placed reliance on a decision of this Tribunal in ITA No. 6402/DEL/2012 (AY 2008-09) in the case of Aircom International (India) Pvt Ltd v DCIT, (2017) 50 CCH 0280 (hereinafter "Aircom") in support of his plea that Bodhtree is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies and not comparable with the company which is into the business of softwaredevelopment and providing related services to its AE. The coordinate Bench in the judgment of Aircom (supra) has excluded this comparable company by making following observations: "15.2. We find from the Annual report of this company that it: "has only one segment, namely, software development. Being a software solutions company, which is engaged in providing open and end-to-end web solutions, software consultancy, design....
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.... the assessee is Celestial Labs. The said comparable was introduced by the TPO as being functionally comparable to the assessee and also on the ground that the said comparable was considered as a comparable in the preceding assessment year. Before us, the Ld. Counsel for the Assessee firstly contended that merely because the comparable was taken as a comparable in the preceding assessment year would not by itself be a ground for its acceptance in the subsequent assessment year. The Ld. Counsel placed reliance on the judgments of the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT reported in [2015] 377 ITR 533 (Delhi), Chryscapital Investment Advisors Pvt. Ltd. vs. DCIT reported in [2015] 376 ITR 183 (Delhi) and Avenue Asia Advisors Private Limited vs. DCIT (ITA No. 350/2016) and submitted that the functionality of an entity is the key determinative factor for its inclusion or exclusion in the list of comparables and there is no such thing as estoppel on the ground that the assessee had accepted the entity as being functionally comparable in a previous assessment year. It was fairly accepted that though there is no finding of the Ld. DRP on this comparable but....
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....e - Trib.), wherein this comparable was excluded by the coordinate bench whilst observing as follows : "7.4.1 We have heard the rival submissions and perused and carefully considered the material on record, including the judicial decisions cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company, being into bio-informatics and software products and services, is to be omitted from the list of comparables as it was functionally dissimilar and different from a captive software service provider. At paras 9.4.1 and 9.4.2 of the above order, the co-ordinate bench held as under:- "9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for t....
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.... it is engaged in providing e-Business Consulting services including product development services and technical services which they themselves characterise as Knowledge Process Outsourcing ('KPO') services. He submitted that even as per the information gathered by the TPO under section 133(6) of the Act, this comparable is also engaged in software products. Whilst placing heavy reliance on the company's website handout along with the Annual Report, he submitted that the assessee being a captive software development company cannot be compared with a KPO. Additionally, he took us through the annual report to evidence that no segmental data vis-à-vis the services and products was available. 3.2.17 Per contra, the Ld. CIT DR supported the orders of the TPO in including this company as a comparable. 3.2.18 We have considered the arguments of both the parties and also the material available on record. We are of the view that the factual position in the present matter is similar with decision of coordinate bench in Sun Gard Solutions India Pvt. Ltd. vs. ACIT in ITA No. 1487/Bang/2012, wherein it is held as follows: "8.4.1 We have heard the rival contentions and perused ....
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....The next comparable being contested for exclusion is Igate Global Solutions Limited. The assessee rejected Igate in its TP Study holding the same to be functionally different. The TPO, however, included the same in the final list of comparables. Before us, the Ld. Counsel of the assessee submitted that Igate deserved to be excluded from the final list of comparables since Igate was engaged in rendering both software development as well as ITES Services. While referring to the notes to accounts of the annual report, he argued that that no proper segmental data were maintained by the said company. He also drew our attention to the fact that there was a merger during the relevant year. Hence, it was submitted that the said comparable deserves to be excluded. It was fairly accepted that though there is no finding of the Ld. DRP on this comparable but since all the material facts were available on record and as there was no dispute on application of filters,the issue could be adjudicated. He relied on the co-ordinate bench's decision in the case of Nokia Siemens Networks India Pvt. Ltd vs. ACIT in ITA No. 333/Del/2013 in which the coordinate bench, whilst appreciating the fact that Igat....
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.... as to how Infosys was providing a wide array of services including software products, but insufficient segmental details were mentioned in the financials. 3.2.24 Per contra the Ld. CIT Departmental Representative placed heavy reliance on the order passed by the lower authorities. 3.2.25 We have heard the rival submissions and perused the relevant material on record. We notice that on similar set of facts coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, has excluded this comparable by observing as follows: "78. This company is undoubtedly a corporate giant with its large scale of operations vis-à-vis the Assessee company; that it had a brand impact to determine the premium pricing; that it has a different model of revenue recognition. It is submitted on behalf of the assessee that this comparable has been rejected in Assessee's own case in immediately preceding year, i.e. AY 200708 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further....
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....m the final list of comparables. (vii) Kals Systems Limited (Segmental) ["Kals"]: 3.2.27 The next comparable being agitated before us is Kals Systems Limited. In its TP study, the assessee has rejected the said comparable as not being functionally comparable. The TPO, however, introduced Kals as a comparable that it passes all filters. Before us, the Ld. Counsel of the assessee strongly opposed the inclusion of Kals and referring to the Annual Report of Kals submitted that this comparable dealt in software products as well as services. By relying on the screenshot of website of Kals, he argued that this company is engaged in providing varied array of activities including software products. He argued that even though the TPO had taken segmental details of Kals namely "Software Development & Training" segment for comparison with assessee, but, as per the financials, there is lack of segmental data/bifurcation vis-à-vis the income and expenses in relation to the products developed and sold by Kals. 3.2.28 The Ld. CIT Departmental Representative relied on the orders of the lower authorities and strongly argued for its inclusion. 3.2.29 We have heard the rival contentions of....
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....e the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software products revenue limited to 4.24%. On the contrary, it has been mentioned in the Notes to the financial statement that: "the company is engaged in development of software and software products since its inception." The company consisting of STPI unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee's business, namely, 'Software Deployment, Training, Consultancy and Equipment Rental.' Since the assessee's activity under this segment does not include any revenue from training, but the revenue of Kals Information Systems Ltd., for the purpose of comparison includes income from training, this company ceases to be comparable with the asses....
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....us pages of the Annual Report to demonstrate that LGS was an end-to-end service provider and was providing product evaluation, design and development of products. Additionally, it was also pointed out that this comparable was providing BPO Services in the field of Human Resources, life sciences, legal services, supply chain management, sales, customer support etc. He drew our attention to the notes to accounts to substantiate that segmental data for the variety of services was not available. It was further submitted that the said comparable failed the TPO's own foreign exchange earning filter. 3.2.33 The Ld. CIT Departmental Representative, on the other hand, strongly opposed the assessee agitating the said comparable since the same was submitted and accepted by the assessee in its Transfer Pricing study. Additionally, the Ld. CIT DR relied on the orders of the TPO and the Ld. DRP. 3.2.34 We have heard the parties at length and also perused the material on record. We agree with the arguments advanced by the Ld. Counsel for the assessee that there can be no estoppel against law in terms of selection of a comparable and the comparability has to be adjudicated in terms of parameters....
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....971 of the paper book coupled with entries in scheduled 5 at page No. 966 thereof show that there is an exceptional circumstances during the year, i.e. the company has written off Goodwill, which arose on account of merger of Lanco Global Systems Inc. 88. In view of the vast functional diversity of this company as is evident from the "offerings of the LGS service and solution" to be found at page No. 935 of its annual report coupled with the fact of the exceptional circumstance occurred during the year, we are of the considered opinion that this company is not a good comparable with the assessee and on that score it has to be excluded from the final set of comparable companies for the present year under consideration." 3.2.36 Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude this company from the list of comparables. (ix) Mindtree Limited (Segmental) ["Mindtree"]: 3.2.37 The assessee's next contention is regarding the exclusion of Mindtree as a comparable. As in the case of LGS, the Ld. Counsel of the Assessee fairly accepted that the said comparable was proposed as a comparable by the assessee itself in its TP Study and placed rel....
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....the ground of functional dissimilarity. However Ld. TPO included it on the ground that this company is deriving revenue from both software as well as ITES and sufficient segmental information is not available in the financial statements. Under the head "the business performance", at page No. 1010 of the paper book it is revealed that this company is structured into two business units that focus on software development R&D services, and IT services. It also offers IT Strategic Consulting, Application Development, Data Warehousing and Business Intelligence, Application Maintenance, Package Implementation, Product Architecture, Design and Engineering, Embedded Software, Technical Support, Testing and Infrastructure Management Service. 92. Further at page No. 27 of the annual report incorporated at page No. 1027 of the paper book it is mentioned that on 17/12/2007 the company acquired hundred percent of the outstanding equity shares of TES PV and Projects Solutions Private Limited which was subsequently renamed as Mindtree Technologies Private Limited at a total consideration of Rs. 259.7 million equivalent to USD 6.55 million. It is further stated that as a consequence of this, the ....
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.... application of filters, there is no reason to remit the matter back to the lower authorities. We note that on similar set of facts, the coordinate Bench of Tribunal in the case of Trianz Holdings Pvt. Ltd. vs. DCIT in ITA No. 1568/Bang/2012, has excluded this comparable by observing as follows: "17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparab....
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....2.46 Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude this company from the list of comparables. (xi) Quintegra Solutions Limited ("Quintegra"): 3.2.47 Quintegra was rejected by the assessee in its TP Study as not being functionally comparable to the assessee. The TPO however included the same holding it to be comparable to the assessee. The Ld. Counsel for the assessee submitted before us that Quintegra could not be taken as a comparable since the same was functionally different from the assessee. It was submitted that Quintegra was mainly a KPO and was engaged in product engineering services, having proprietary software products and was hence not a pure software developer like the assessee. Additionally, it was submitted that owing to the lack of segmental data between the products and services, the same could not be held to be comparable to the assessee. He also took us through the Annual Report to demonstrate that Quintegra was making substantial investments in its Research & Development activities and, as a result, was owning substantial intangibles. He further argued that there was an acquisition during the year and, hence, Qui....
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....evelopment activities which has resulted in creation of its own IPRs. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 where this company was excluded from the list of comparables on the ground of functional differences from a captive software service provider. 12.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company as a comparable to the assessee. 12.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company i.e. Quintegra Solutions Ltd. from the list of comparables since it is into product engineering services; is engaged in proprietary software products, has substantial R&D activity which has resulted in creation of IPRs a....
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....1 R System International Limited was a comparable chosen by the assessee itself in its TP Study. The Ld. Counsel for the Assessee relied on the case of laws as referred in the case of LGS and other comparables, to contend its exclusion even though this comparable was chosen by the assessee itself in the Transfer Pricing documentation. 3.2.52 On merits, the Ld. Counsel for the Assessee, whilst taking us through the various pages of the Annual Report, submitted that R System was mainly into the business of outsourced product development and customer support services and from the Notes to Accounts it was argued that sufficient segmental details are not available. Additionally, it was also submitted that R Systems was providing BPO services to its customers, which is not akin to software development and hence could not be functionally comparable to the profile of the assessee. Further, he took us through pages 18, 23, 32 and 104 of the Annual Report to show how the company had issued an IPO and also made strategic acquisitions during the impugned year. From the financials he submitted how R Systems was spending extensively on their R&D activities and resultantly owned intangibles as w....
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.... the assessee in its Transfer Pricing Study on the ground that it failed the RPT filter. The TPO however rejected the filter applied by the Assessee and applied the filter of RPT< 25% as opposed to RPT<15% as applied by the assessee. Hence, the TPO held Softsol of being a fit comparable and added the same to the final list. Before us, the Ld. Counsel for the assessee submitted that Softsol was not functionally comparable to the FAR profile of the assessee since the same is in the business of providing end to end services. Referring the screenshot of website (handout) of Softsol, he argued that the company was in the business of manufacturing wide range of software products, software development and training services. He also took us through the Annual Report of the company wherein it was mentioned that they deal in software products and from the notes to accounts it was shown that the company does not maintain proper segmentals. Thereafter, the Ld. Counsel took us though the financials and it was submitted that the company develops intangibles and also that their revenue recognition model was different from that of the assessee. Additionally, without prejudice to the above argument....
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.... This fact evidences that this company is confined only to software development and not yet into net work or internet infrastructure. Even the Profit and Loss Account to be found at page No. 1536 also shows that other than the other income, the company is deriving income only from software exports. Even the Note 15 of the Notes on Account reads that there are no separate reportable segments. We do not find any material from the record that this company has actually been engaged in the activities like a) business of Software Products b) Software Development c) Training Services; and d) manufacture of vide range of products or that it provides end to end business solutions. 107. We therefore find it difficult that this company is functionally different from the assessee or that it is not a good comparable for want of any segmental information or related party information. We, therefore, find that this company has to be retained as a good comparable in the final list of comparables." 3.2.59 Respectfully following the view taken by the coordinate Bench, we reject the arguments of the assessee and direct the AO/TPO to include this company in the final list of comparables. (xiv) Tata....
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....services segment, namely product design, innovation design engineering, visual computing labs etc. as per the details reflected in its Annual Report; whereas the assessee in the case on hand is a captive software service provider. In support of its plea for excluding this company from the limit of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was omitted from the list of comparables on grounds of being functionally different and dis-similar to a captive software service provider. 13.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the set of comparables as it is function....
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....this company from the list of comparables. (xv) Thirdware Solution Limited ("Thirdware"): 3.2.65 The next comparable agitated before us is Thirdware Solution Limited. The Ld. Counsel for the assessee has objected to the inclusion of this company as a comparable on the ground that apart from software development services, it is in the business of product development; trading in software and giving licenses for the use of software. He also pointed out from the Annual Report that this company has not provided any separate segmental profit and loss account for software development services and product development services. He further argued that the TPO has wrongly computed the margin of this comparable and has taken entity level sales figure whilst calculating the operating margin and not the sales of the software segment. He argued that no details are given in the financials in respect of nature of transaction with subsidiaries. It was also fairly accepted that though there is no finding of the Ld. DRP on this comparable but in view of all the material facts being available on record and there being no dispute on application of filters, request was made to adjudicate this comparab....
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....censes and subscription, etc. holding as under at para 15.3 of its order:- "15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." 14.3.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to exclu....
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....er which render it not functionally comparable to a captive provider of software development services. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was held to be functionally different and dis-similar and not comparable to a captive provider of software development services. 15.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 15.4.1 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be excluded from the list of comparables as it is functionally different and dis-similar from a captive software development service provider, as is in the case on hand. At para 12.4.1 and 12.4.2 of its order the co-ordinate bench in its order (sup....
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....the TPO whilst holding that the said company has declining revenue. Before us, the Ld. Counsel for the Assessee submitted that diminishing revenue has to be seen for three consecutive years and since this company does not have losses for three consecutive years, the said comparable ought to be included. It was further submitted that the TPO himself has not disputed the fact that SIP Technologies is functionally comparable to the Assessee and the TPO has only rejected the said comparable on the ground that the said company has diminishing revenue. It was further submitted that turnover cannot be a criteria for inclusion or exclusion of a comparable. 3.3.2 On specific query by the Bench, the Ld. CIT Departmental Representative fairly accepted that in principle the criteria of checking the financials of three year consecutive years has consistently been followed by both the Department as well as the assessees over the years. On merits she relied on the orders of the lower authorities. 3.3.3 We have heard the rival submissions of the parties and also perused the relevant material on record. We are of the view that the factual position in the present case is similar to the decision of....
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....s in some years and losses in some years is a business reality. If one were to go with the logic assumed by the learned TPO, every company should have increasing revenues and the company which has lower profits or returns losses should discontinue business operations because it would not represent an arm's length nature of business. 118. Ld. AR submits that this position has now been accepted by the Delhi High Court and various benches of this Tribunal. In a recent order passed by the coordinate bench in case of Aithent Technologies (P.) Ltd. vs. DCIT [2016] 74 taxmann.com 214 (DelhiTrib.) on the adoption of diminishing revenue filter it has been held as under:- "14.3 A careful perusal of the pattern of profit/loss earned by the assesse as per its audited accounts divulges that as against the current year's profit of Rs. 62.39 lac, the earlier years' profit was Rs. 92.74 lac. This manifests that the profit for this year has diminished from the earlier year. When we consider the figures of losses for the financial years 2005-06 and earlier years, it comes to light that there were losses right from financial year 2002-03 up to 2005-06. On an overview of the above extracte....
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....: "'33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can be viewed independently from other activities cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule 1OB (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B (1), while judging comparability. Rule 10B (3) on the other hand indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company - otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made." In light of the above, we direct the TPO to include this company in the list of comparables." 120. With regards ....
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....ble/s. Further, he prayed that risk adjustment may be allowed in terms of Rule 10B (1)(e) read with Rule 10B(2)/(3) of the Rules. 3.4.1 On the issue of claim for risk adjustment, the Ld. Counsel submitted that the claim had been made both before the TPO as well as the Ld. DRP. However, both have denied the assessee's claim. The Ld. Counsel further submitted that while estimating the return for uncontrolled company, there is a need to give an appropriate adjustment pertaining to market/systematic risk faced. Uncontrolled comparable companies operate under uncontrolled conditions bearing certain risks during the course of its operations. Therefore, such comparable uncontrolled companies earn a risk premium which is not earned by a captive software development provider similar to the assessee which is a risk averse and, therefore, the profits of the captive unit would be less than risk taking companies and hence, an adjustment in this regard is required. He placed reliance on the decision of the coordinate Bench in Motorola Solutions India (P.) Ltd's case, Intellinet Technologies India (P.) Ltd. vs. ITO reported in [2012] 22 taxmann.com 28/53 SOT 92 (Bang.) (URO) and Bearing ....
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....ence. 3.5.3 It is submitted before us that if the legal submissions regarding the first three arguments are accepted then there would be no necessity to adjudicate the alternative arguments. 3.5.4 The first issue raised by the Ld. Counsel for the assessee is regarding restricting the transfer pricing adjustment to the value of the international transaction. Our attention was drawn to Pages 32, 46, 57 and 288 of the Paper book to show that during the relevant period the total operating expenses of Rs. 63,79,13,808/- were incurred on the SIM Card Segment. Out of the total operating expenses, a sum of Rs. 41,04,24,653/- related to raw materials, stores and spares consumes and out of this a sum of Rs. 7,07,33,702/- pertained to indigenous purchase (domestic transaction). It was argued before us that the TPO, while determining the arm's length price of this transaction, has erroneously taken the total operating expenses at the entity level, which is not permissible. Reliance was placed on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Alstom Projects India Ltd. reported in [2017] 394 ITR 141 (Bombay) and of the Hon'ble Delhi High Court in the case of ....
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....ail to understand how the present question arises from the impugned order of the Tribunal. 5. Be that as it may, Mr. Chhotaray, learned Counsel for the Revenue submits that identical question as raised herein had been admitted by this Court and in particular invited our attention to the following orders passed at the stage of admission:- (a) CIT vs. Super Diamonds, Income Tax Appeal No. 298 of 2013; (Order dated 16 February 2015); and (b) CIT v. Global Jewellery (P.) Ltd. Income Tax Appeal No.1395 of 2013. (Order dated 16 April 2015) 6. In both the above appeals we find that the question admitted was with regard to transfer pricing adjustment being done at the entity level and not restricted only to the transactions with Associated Enterprises. However, both the appeals were admitted without the Court having had benefit of submissions on behalf of the Respondent-assessee. 7. Thereafter this Court consequent to the above two orders had occasion to consider the issue of transfer pricing adjustments being done in respect of all transactions (entity level) or only in respect of transaction entered into with Associated Enterprises in the following cases:- (i) CIT v. Hindusta....
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....he point, as even according to it the issue stood covered by the earlier orders of this Court in favour of the Assessee. The Revenue must apply the law equally to all and cannot take inconsistent position in law (de hors the facts) to apply different standards to different assessee. The administration of the tax laws should not degenerate into an arbitrary and inconsistent application of law dependent upon the Assessee concerned. 11. We also note that the Delhi High Court in CIT v. Keihin Panalfa Ltd. (ITA No.11 of 2015) decided on 9th September, 2015 has while dealing with transfer pricing adjustment in the absence of segmental accounts held that adjustments have to be restricted only to transactions with Associated Enterprises. It further held that where separate accounts are not available, then proportionate adjustments to be made only in respect of the international transactions with Associated Enterprises. 12. We are in respectful agreement with the view of the Delhi High Court in Keihin Panalfa Ltd. (supra). One must not lose sight of the fact that the transfer pricing adjustment is done under Chapter X of the Act. The mandate therein is only to redetermine the considerat....
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....tion was 4.27% of the total expenditure of this segment. In respect of the comparables it was seen as below. S.No. Name Depn./TC (%) 1. BCC Fuba India Ltd. 10.06 2. Circuit Systems India Ltd. 3.95 3. Fine-line Circuits India Ltd. 5.32 4. Solectron EMS India Ltd. 1.80 Average 5.28 As it can be seen, the difference is not so large as to have a telling effect on the profitability of the assesse. Another exercise was undertaken, of calculating the OP/Sale margin of the assesse and comparables after excluding depreciation. The result in the case of the assesse was (-) 15.22%. In the case of the comparables it was as follows: S.No. Name OP/Sales (%) 1. BCC Fuba India Ltd. 1.18 2. Circuit Systems India Ltd. 12.76 3. Fine-line Circuits India Ltd. (-)1.45 4. Solectron EMS India Ltd. 6.64 Average 4.78 As can be seen, the difference between the assessee's margin and that of the comparables with or without depreciation remains more or less constant. Hence, there is no case for a comparability adjustment on account of unutilized capacity in this case. Besides this, admittedly the capacity utilization risk in this segment is also borne by the assesse. Henc....
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.... Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi). xiv. Tasty Bite Eatables Ltd. vs ACIT [2015] 59 taxmann.com 437 (Pune - Trib.) 3.6.3 Further, the Ld. Counsel fairly accepted out that the issue of allowability of capacity adjustment was decided against the assessee in earlier assessment year by the co-ordinate Bench of this Tribunal vide order dated 15.03.2013. He submitted that though an appeal was filed challenging the said order dated 15.03.2013 passed by the Tribunal, the Hon'ble Delhi High Court, vide order dated 27.08.2014, dismissed the appeal of the Assessee as being barred by limitation, but with a liberty to agitate this issue before the Tribunal in subsequent years and to suitably represent the relevant facts and legal position before the Tribunal in accordance with law. He further tried to distinguish the earlier decision of the coordinate Bench whilst arguing that the Tribunal in its earlier decision had per se not considered the issue of allowability of capacity adjustment and had refused to interfere with the findings of lower authorities on this issue as the relevant data was not available on record. He submitted that the relevant data is now av....
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....s: (1) The general rule is that all issues that arise directly and substantially in a former suit or proceeding between the same parties are res judicata in a subsequent suit or proceeding between the same parties. These would include issues of fact, mixed questions of fact and law, and issues of law. (2) To this general proposition of law, there are certain exceptions when it comes to issues of law: (i) Where an issue of law decided between the same parties in a former suit or proceeding relates to the jurisdiction of the Court, an erroneous decision in the former suit or proceeding is not res judicata in a subsequent suit or proceeding between the same parties, even where the issue raised in the second suit or proceeding is directly and substantially the same as that raised in the former suit or proceeding. This follows from a reading of Section 11 of the Code of Civil Procedure itself, for the Court which decides the suit has to be a Court competent to try such suit. When read with Explanation (I) to Section 11, it is obvious that both the former as well as the subsequent suit need to be decided in Courts competent to try such suits, for the "former suit" can be a suit ins....
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.... statute inter parties), as the public policy contained in the statutory prohibition cannot be set at naught. This is for the same reason as that contained in matters which pertain to issues of law that raise jurisdictional questions. We have seen how, in Natraj Studios (supra), it is the public policy of the statutory prohibition contained in Section 28 of the Bombay Rent Act that has to be given effect to. Likewise, the public policy contained in other statutory prohibitions, which need not necessarily go to jurisdiction of a Court, must equally be given effect to, as otherwise special principles of law are fastened upon parties when special considerations relating to public policy mandate that this cannot be done. (iii) Another exception to this general rule follows from the matter in issue being an issue of law different from that in the previous suit or proceeding. This can happen when the issue of law in the second suit or proceeding is based on different facts from the matter directly and substantially in issue in the first suit or proceeding. Equally, where the law is altered by a competent authority since the earlier decision, the matter in issue in the subsequent suit o....
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....ssary analysis. The appeal of the assessee is allowed for statistical purposes in the aforesaid terms." 30. Reliance in this regard is placed on the decision of Pune Bench of the Tribunal in the case of Amdocs Business Services (P.) Ltd. v. Dy. CIT [2012] 54 SOT 46 (URO)/26 taxmann.com 120 wherein, the Tribunal allowed economic adjustment on account of under capacity utilization holding that the appellant was in start up phase during the assessment year consideration. The relevant extract of the decision is reproduced as under: "9. The next major point made out by the appellant is that this being the first full year of operation, the assessee had incurred certain expenditure which are start-up costs and cannot be fully recovered in the instant year itself, and such an expenditure has abnormally affected the profit margin. It is also canvassed that due to the start-up year the capacity utilization was not satisfactory, whereas its profitability has been bench marked against comparables which are established entities -and have been set up over the years. The plea set- up by the assessee for economic adjustments on account of under capacity utilization and being in start up phase,....
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.... there was a material difference in the facts of the appellant's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences" 33. Further, the Hon'ble Pune Bench of the Tribunal in the case of Brintons Carpets Asia (P.) Ltd. v. Dy. CIT [2011] 46 SOT 289 (URO)/12 taxmann.com 148 while allowing adjustment for idle capacity caused due to labour unrest/strike and relying upon the above observation of the Mumbai Tribunal held as follows: "15. From the above, it is clear the AO has authority vide clause (iii) above to make the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or anomaly in the said comparable. - Such adjustments are authenticated by the OECD guidelines too. In this regard, we have perused the important findings of the Tribunal in the case of the Fiat India (P.) Ltd (supra ) placed at page 191 of the paper book. For the sake completeness, the same is reproduced as under. . . . . . as regards the adjustments made by the appellant to work out its operating margin for comparing the sam....
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....4. Also, in the case of E.I. Dupont India (P.) Ltd. v. Dy. CIT [2012] 49 SOT 123/[2011] 16 taxmann.com 352 (Delhi), the Hon'ble Delhi Bench of the Tribunal, while allowing the adjustment for capacity utilization held that: '"It is a matter of fact that fixed costs remain the same even when there is under utilization of capacity. Therefore, the case of the appellant and the comparable cases have to be examined in respect of capacity utilization so as to make the controlled and uncontrolled transactions comparable." Also, the Hon'ble Delhi Bench of the Tribunal in the case of ITO v. CRM Services India Pvt. Ltd. upheld the claim of the appellant towards adjustment of idle capacity: "8.1 This brings us to the alternative argument that the appellant is entitled to get adjustment in respect of capacity under-utilization. No objection has been raised by the ld. CIT, DR in this matter. As a matter of fact, he has fairly accepted the proposition that adjustment in this regard is required to be made. At the same time, it is also held that suitable adjustment has to be made to such PLI in respect of idle capacity."' 35. Further, the Hon'ble Bangalore bench of the....
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....Rules 1962 does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market. Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, 'end as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. In our considered view, the learned CIT (A)'s approach is reasonable in this regard and the adjustments are on a conceptually sound basis. In any case, as pointed out by the learned counsel, the adjustments so directed by the learned CIT(A) have duly been made by the Assessing Officer, and there have been no issues regarding implementing these adjustments. We approve the conclusions arrived by the CIT (A) on this issue and de....
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....its own operating costs. It is further observed that the authorities below have reduced the amount of adjustment by excluding certain costs from the ambit of the costs qualifying for adjustment. However, the adjustment has been ultimately allowed from the operating costs incurred by the assessee. In such circumstances, the question arises as to whether the action of the authorities in allowing the reduction of the operating costs incurred by the assessee, is in accordance with law? In order to find answer to this question, we need to refer to the manner of computation of the arm's length price under TNMM, which has been set out in Rule 10B (1)(e) as under:- "(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regar....
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....1)(e) in juxtaposition to sub-rules (2) & (3) of rule 10B, the position which emerges is that the net operating profit margin of comparable companies calls for adjustment in such a manner so as to bring both the international transaction and comparable cases at the same pedestal. In other words, if there are no differences in these two, then the average of the net operating profit margin of the comparable companies becomes a benchmark. However, in case there are some differences between the comparables and the assessee, then the effect of such differences should be ironed out by making suitable adjustment to the operating profit margin of comparables. That is the way for bringing both the transactions, namely, the international transaction and the comparable uncontrolled transactions, on the same platform for making a meaningful and effective comparison. The above analysis overtly transpires that the law provides for adjusting the profit margin of comparables on account of the material differences between the international transaction of the assessee and comparable uncontrolled transactions. It is not the other way around to adjust the profit margin of the assessee. In other words,....
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....e part. In so far as the variable costs and the variable part of the semi-variable costs are concerned, these remain unaffected due to any under or over utilization of capacity. Accordingly, such variable operating costs remain unchanged. The adjustment is called for only in respect of the fixed operating costs and fixed part of semi-variable costs. Such costs are scaled up or down by considering the percentage of capacity utilization by the assessee and such comparable. It can be illustrated with the help of a simple example. Suppose the fixed costs incurred by a comparable (say, A) are Rs. 100 and it has capacity utilization of 50% as against the capacity utilization of 25% by the assessee. The above percentages show that the assessee has incurred full fixed costs with 25% of the utilization of its capacity, as against A incurring full fixed costs with 50% of its capacity utilization. This divulges that the assessee has incurred relatively more fixed costs and A has incurred lower costs. In order to make an effective comparison, there arises a need to obliterate the effect of this difference in capacity utilizations. It can be done by proportionately scaling up the fixed costs in....
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....apacity adjustment in the manner discussed above. Ergo, we set aside the impugned order and direct the TPO/AO to work out the amount of capacity utilization adjustment afresh in terms of our above observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings." 3.6.9 Respectfully following the decision of the coordinate bench of the Tribunal in DCIT vs. Claas India (P) Ltd. reported in [2015] 62 taxmann.com 173 (Delhi - Trib.), we are of the opinion that the issue of computation of capacity adjustment requires reconsideration and is thus, restored to file of AO/TPO for re-computation in light of our observations in the preceding paragraph, after granting sufficient opportunity of hearing to the assessee. 3.7.0 The next issue is regarding allowability of working capacity adjustment. Before us, the Ld. Counsel for the assessee has vehemently argued that the TPO/Ld. DRP has erred in not allowing working capital adjustment in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/ (3) of the Rules. He pointed out that during the relevant period, working capital adjustment has been granted for Software Development Segment, howeve....