TaxTMI 
TaxTMI 
2018 (8) TMI 2070
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....-. Subsequently, the return was revised declaring 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 re....
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....,340] 1. On the facts and in law, the Learned Transfer Pricing Officer - I(2), New Delhi ("Ld. TPO") and Deputy Commissioner of Income Tax, the 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....
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....AO and 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 working capital adjustment based on erroneous reasons. 2.6 On facts and in law, the Ld. TPO, the Ld. AO and 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.....
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....d Nos. 1 to 1.5) regarding the software development segment. Both the parties have agreed that lower authorities have not disputed the functional profile of the assessee under the Software Development Segment, wherein the assessee was acting as a captive service provider and all the risks were borne by the Associated 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) ....
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....e ground that thiscompany had categorised itself as a pure software developer, just like the assessee. In selecting this company as a comparable, the TPO had relied on information submitted by this company collected under Section 133(6) of the Act. We notice that the co-ordinate Bench of Tribunal in the case of Sun Gard Solutions India Pvt. vs. ACIT reported in [2015] 63 taxmann.com 323 (Bangalore - Trib.), while considering this comparable 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. ....
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....ectfully following the view taken by co-ordinate Benches of the Tribunal, we direct the AO / TPO to exclude this company from the list of comparables. We also note that since complete details of this comparable is not available in public domain and there is contradiction in the information collected under section 133(6) of the Act and the annual report then such a company cannot be selected as a fit comparable. (ii) Bodhtree Consulting Limited ("Bodhtree"): 3.2.5 The 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....
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....sultancy designs and software products; whereas the Assessee is engaged in rendering software development services. Under Note 5 "Segmental Information", it is stated that the company has only one identifiable reporting segment that is software development service, showing that no separate segmental finances relating to the software development open and end-to-end web solutions, software consultancy designs and software products are available. 44. It is argued on behalf of the assessee 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 technologi....
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....any from the list of comparables. Our view is further fortified by the judgment of the Hon'ble Delhi High Court in the case of Saxo India (supra) wherein their Lordships have clarified that a company engaged in providing Software Development Service cannot be regarded as a fit comparable to a company engaged in providing both Software Development and Software Product services and sufficient segmental details are not available. (iii) Celestial Labs ("Celestial"): 3.2.10 The next comparable being challenged by 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 Advi....
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....her fortified by the judgments of the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT, [2015] 377 ITR 533 (Delhi), Chryscapital Investment Advisors Pvt. Ltd. vs. DCIT [2015] 376 ITR 183 (Delhi) and Avenue Asia Advisors Private Limited vs. DCIT (ITA No. 350/2016). 3.2.14 On merits, we are of the view that the factual position in the present matter is similar with the decision of the Bangalore Bench of the Tribunal in Sun Gard Solutions India Pvt. vs. ACIT reported in [2015] 63 taxmann.com 323 (Bangalore - 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-o....
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....g Officer/TPO to omit this company from the list of comparables." 3.2.15 Respectfully following the decision of coordinate bench in Sun Gard Solutions India Pvt. vs. ACIT reported in [2015] 63 taxmann.com 323 (Bangalore - Trib.), we direct the Assessing Officer/TPO to exclude this company from the final list of comparables. (iv) E-Zest Solutions Limited("E-Zest"): 3.2.16 The Ld. Counsel for the assessee has argued for exclusion of E-Zest from the final list of comparables on the ground that the said company is functionally dissimilar to assessee, as 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 ....
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.... 8.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer to exclude this company i.e. e-Zest Solutions Ltd., from the list of comparables." 3.2.19 Respectfully following the decision of coordinate bench in Sun Gard Solutions India Pvt. vs. ACIT reported in [2015] 63 taxmann.com 323 (Bangalore - Trib.), we direct the Assessing Officer/TPO to exclude this company from the final list of comparables. (v) Igate Global Solutions Ltd. ("Igate"): 3.2.20 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 ....
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....ed for exclusion by the assessee is Infosys Technologies Ltd. The said comparable was included by the TPO whilst holding that Infosys passes all filters and was, hence, comparable to the Assessee. Before us, the Ld. Counsel of the Assessee submitted that not only is Infosys an industry giant but it also spends heavily on its Research & Development (R&D) activities and owns significant intangibles. He took us through the Annual Report of Infosys to substantiate that there is significant difference in the scale of operations. Additionally, from the various pages of the Annual report, he showcased 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.....
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.... the assessee company. This company is, therefore, directed to be excluded from the list of comparables." 80. The diversified activities of business, its deployment of capital, resources and the brand name make this company not comparable with the assessee and, therefore, this company has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment." 3.2.26 Respectfully following the view taken by the coordinate Bench, whilst, following the judgment of the Hon'ble Delhi High Court, as afore mentioned, we direct the AO/ TPO to exclude Infosys from 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....
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.... inclusion of this company in the list of comparables is that the software products and training constitute only 4.24% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: "the use of readymade object laboratories is only to the tune of about (3.4 to 6.96) % in the year 200708 to 2008-09 . We fail to comprehend as to how the above line conveys that the software products' revenue stands at 4.24%. What has been written is that the company's use of the readymade object laboratories is only to the tune of maximum 4.24%. By no imagination this can be construed as revenues from software products. When we peruse 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.....
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....is no estoppel against law and the assessee can agitate its own comparables. He submitted that recently the Hon'ble High Court of Bombay in the case of CIT vs. Tata Power Solar Systems Ltd. reported in [2017] 298 CTR 197 (Bombay) has taken similar view. He submitted that although the said comparable was submitted by the assessee itself in the Transfer Pricing study, but it was objected to during the TP proceedings itself as is evident from Pg. 68 of the TPO's order. 3.2.32 On merits, the Ld. Counsel submitted that LGS could not be considered as a comparable owing to functional differences in the profile of LGS in comparison to that of the assessee. He took us through various 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 subm....
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....e same. 86. Page No. 26 of the 9th annual report 2007-08 of this company can be found at page No. 935 of the paper book clearly establishes that this company is engaged in a multifarious activities including an end to end service provider and offers variety of services. It is involved in product evaluation, design & development etc. of the products. Further, it also renders BPO services in the field of Human Resources, Life Sciences, Legal Services, Supply Chain Management, Sales, and Customer Support etc. Further, the financial statements lacks in providing the segmental results as well. 87. Further reading of the notes forming part of the accounts vide schedule 14 incorporated at page No. 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 cir....
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....rlier comparables, she fairly conceded that since the assessee is not arguing regarding application of filters, she has no objection if the issue of exclusion of this comparable is adjudicated by the Bench. 3.2.40 We have heard the rival submissions and considered the relevant material on record. In view of all material facts being available on record, we proceed to adjudicate this issue. On merits, we are of the view that the factual position in the present case is similar to the decision of coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, wherein this comparable was excluded by observing as follows: "91. Assessee sought the exclusion of this company on 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 a....
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....material facts are available on record and as there is no dispute on application of filters, the issue could be adjudicated. 3.2.44 Per contra, the Ld. CIT Departmental Representative placed heavy reliance on the orders of the lower authorities and prayed that since this company passes all filters, it is a suitable comparable. In terms of the submission made by the Ld. Counsel for assessee that he is not disputing the application of filters, the Ld. CIT Departmental Representative conceded to the adjudication of this comparable by this Bench. 3.2.45 We have heard the rival submissions and perused the relevant material on record. We are of the opinion that since all the relevant facts are available on record and since the assessee is not disputing the 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 compar....
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....heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly." 3.2.46 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 compa....
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....see's objections, holding that this company qualifies all the filters applied. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee had not adduced any evidence to show that this event had any influence on the pricing or the margin earned. 12.2 Before us, the assessee objected to the inclusion of this company in the list of comparables on the ground that it was functionally different and also that there were other factors for which this company cannot be considered as a comparable to the assessee in the case on hand who was a captive software service provider to its AEs. It is submitted that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and its Annual Report states that it is engaged in proprietary software products and in research and development 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 wh....
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....he company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider." 12.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables." 3.2.50 Respectfully following the view taken by the coordinate Bench, we direct the AO / TPO to exclude this comparable from the list of comparables. (xii) R System International Limited ("R System"): 3.2.51 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 ....
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....urced Product Development and Customer Support Services. Further, it also offers low end BPO Services. Page No. 9 of the annual report of this company establishes this fact. 104. Having regard to the information furnished in the annual report of this company vide page numbers 1356, 1362, 1366, 1371, 1378 and 1380 of the paper book, we are convinced that that this company is not a pure software service provider but is engaged in development and sale of products and on the ground excludable from the final set of comparable companies for benchmarking international transaction related to software segment." 3.2.55 Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude this company from the list of comparables. (xiii) Softsol India Limited ("Softsol"): 3.2.56 The next comparable being agitated before us is Softsol India Ltd. The said comparable was rejected by 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....
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....Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, wherein this comparable was retained by observing as follows: 105. The Assessee objected this company from the list of comparable while preparing its TP study on the ground of related party transactions and also basing on the statement in the annual report to the effect that this company is a provider of e-commerce, network technology, Internet infrastructure and other special technology areas and has diverse client base ranging from large customers to small high-tech start-up companies. 106. Ld. TPO observed that the company at present is in various areas of software development industry and what is stated above in the annual report is a futuristic statement. Ld. TPO referred to para 2.1 to be found on page No. 1533 of the paper book to the effect that no inventory is held, since the company is engaged in developing software and providing IT solutions. 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 de....
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....arable by the Bench. 3.2.63 We have heard the rival submissions of the parties and also perused the relevant material on record. We are of the opinion that since all the necessary facts for adjudication of this comparable are available on record, we can adjudicate this issue. We are of the view that the factual position in the present matter is similar with decision of the coordinate bench in Sun Gard Solutions India Pvt. Ltd. v ACIT in ITA No. 1487/Bang/2012, wherein it is held as follows: "13.1 This company was selected as a comparable by the TPO overruling the objections of the assessee to the inclusion of this company on several counts like functional dis-similarity, having significant R&D activity, brand value, size, etc. 13.2 Before us, the learned Authorised Representative contended that this company i.e. Tata Elxsi Ltd., is not functionally comparable to the assessee as it performs a variety of functions under software development 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 provi....
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....have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.' 13.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables to the assessee." 3.2.64 Respectfully following the view taken by the coordinate Bench, we direct the AO / TPO to exclude 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. Th....
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.... 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, wherein it was held to be not comparable to a purely software development service provider. 14.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decision relied 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 directed exclusion of this company from the list of comparables to a pure software service provider, like the assessee in the case on hand, as it is functionally different; being engaged in product development and earns revenue from sale of licenses and subscription, etc. holding as under at para 15.3 of its order:- "15.3 We have heard the rival submissions and perused and caref....
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....cquisitions during the relevant assessment year. 3.2.70 The Learned CIT Departmental Representative, on the other hand, supported the orders of the authorities below. 3.2.71 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 matter is similar with decision of the coordinate bench in Sun Gard Solutions India Pvt. Ltd. vs. ACIT in ITA No. 1487/Bang/2012, wherein it is held as follows: 15.1 This company was selected as a comparable by the TPO inspite of the objections by the assessee to its inclusion in the list of comparables on several grounds like functional dis- similarity, brand value, size, turnover etc. 15.2 Before us, the learned Authorised Representative of the assessee contended that this company namely, Wipro Ltd., is not functionally comparable to the assessee as it owns significant intangibles in the nature of customer related intangibles and technology related intangibles; has huge brand value, is a market leader in size and turnover which render it not functionally comparable to a captive provider of software development services. In supp....
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....le and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration." 15.4.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables." 3.2.72 Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude this company from the list of comparables. 3.3.0 Now, we will deal with comparables which the assessee is agitating for inclusion in the final set of comparables selected by the TPO / DRP. SIP Technologies and Exports Limited ("SIP Technologies") 3.3.1 The first inclusion being prayed by the Assessee is of SIP Technologies. The said comparable was rejected by the TPO whilst holding that the said company has declining revenue. ....
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....ight still incur losses. Similarly, a company with diminishing revenues over a period of time need not imply that the performance of the company is deteriorating as it might still have good profit margin on account of cost efficiency i.e. minimizing/ reducing its expenses. Therefore, the net operating margin of the company with increasing revenues over a period of time is a better indicator of the performance of the company. Thus it is submitted that excluding companies having persistent losses is a more appropriate filter and on this basis, assessee himself has excluded companies which have shown persistent losses. It is further submitted by the Ld. AR that the Ld. DRP as well as TPO has taken a stand that such diminishing revenue goes against the industry trend, that there can be nothing farther from the truth as variance in profitability is the very essence of business and which more than demonstrates the arm's length character prevalent in a free market economy, and it would defy commercial logic and rationale, and economic business cycle if every company were to only make profits and increase profits year after year. Low profits in some years and losses in some years is a busi....
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....e assessee was rejected by the TPO on the ground that its revenue is continuously diminishing over the years. ..................... 30. The Ld. DR on the other hand argued that the revenue of the company has been reducing over a number of years. This fact indicates that the company is undergoing abnormal/exceptional circumstances and therefore its margins cannot be taken as reflecting those of the industry. He vehemently argued that this company should be excluded from the comparability analysis. ............. 33. As regards the argument of diminishing revenue, we note that the reduction of revenue from FY 2009-10 (3.99 crore) to FY 2010-11 (3.98 crore) is approximately Rs. 1 lac. In our view, such a minor difference in revenue cannot be taken to mean that the company is undergoing abnormal circumstances and should be rejected. Even otherwise, if the functional similarity of the company with the assessee is accepted, the same should not be rejected simply because of difference in revenue. Our view is supported by the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. (supra), in which it....
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....he view taken by the coordinate Bench, we direct the AO / TPO to include this company in the list of comparables. (ii) PSI Data System Ltd. ("PSI Data"): 3.3.5 The next comparable being agitated for inclusion by the Assessee is PSI Data which the Ld. Counsel mentioned was submitted as a comparable in its TP Study and been accepted by the TPO as well, as evidenced from page 44 of the TPO's order, however the same has not been inadvertently been added in the final list of comparables. 3.3.6 The Ld. CIT Departmental Representative fairly accepted that if this company passes all filters and has been accepted by the TPO itself, then this comparable may be included. 3.3.7 We have heard the rival submissions of the parties and also perused the relevant material on record. In view of the acceptance given by the Ld. CIT Departmental Representative, we direct the AO/TPO to include this company in the list of comparables. 3.4.0 As regards ground Nos. 1.4 and 1.5, the Ld. Counsel for the assessee submitted that while computing the profit margin of the comparables, the TPO has incorrectly considered certain income/ expenses as operating/non-operating and prayed that necessary dir....
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....ounsel for the assessee has submitted that his pleadings can be summarized on the following legal points: a. Transfer Pricing adjustment should be restricted to the value of international transaction (i.e. excluding domestic transaction with unrelated parties) b. Capacity Adjustment may be granted c. Working Capital Adjustment may be granted d. As an alternative argument, it is submitted that since the Assessee has also undertaken domestic transactions in SIM Card Assembly Segment and an internal comparable in that regard is available, necessary directions may be passed to use internal comparable to determine the arm's length price. e. Lastly, as an alternative argument, it is submitted that if reliable data is not available to determine arm's length price of an international transaction by taking the Indian entity as the tested party, then the foreign Associated Enterprise ('AE') may be taken as the tested party. 3.5.2 The additional grounds (Ground Nos. 2.9 and 2.10) filed in the present appeal deal with taking foreign AE as the tested party. Further, contemporaneous data and transfer pricing analysis by taking forei....
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....the purposes of benchmarking. Our view is further fortified by the decision of Hon'ble Bombay High Court in CIT vs. Alstom Projects India Ltd reported in [2017] 394 ITR 141 (Bombay), wherein it is held as follows : "2. Mr. P.C. Chhotaray, learned Counsel for the Appellant urges the following question of law for our consideration:- "Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the TPO has applied the transfer pricing adjustment to all transactions, i.e. entity level in the absence of actual segmental accounts being maintained on regular basis by the assessee ?" 3. The impugned order of the Tribunal upheld the Respondent- assessee's contention that the transfer pricing adjustment has to be made only in respect of transaction entered into by the Respondent-assessee with its Associated Enterprises. 4. The grievance of the Revenue is that in the absence of segmental accounts being maintained by the Respondentassessee, transfer pricing adjustment had to be done at entity level. We specifically asked Mr. Chhotaray, learned Counsel for the appellant whether any such submission w....
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....egmental accounts by the Assessee was not for consideration in the above cases which were dismissed, as in this case. 9. This very issue/question as raised herein was raised by the Revenue in Petro Araldite (P.) Ltd. (supra). The question raised therein was as under:- "Whether on the facts and law the Tribunal was justified in directing AO/TPO to bench mark as AE transactions without appreciating (a) the Assessee itself in its transfer pricing study & report (TPSR) has chosen entity level PLI to benchmark the AE transactions; (b) the Assessee had itself failed to furnish audited segmental accounts and therefore, the TPO had rightly applied revised PLI at the entity level to determine the ALP?" At the above hearing, the Revenue accepted that even in the absence of segmental accounts, the adjustment has to be done only in respect of the international transactions with Associated Enterprises. This is so recorded in the order dated 24 November 2015. Therefore, on the above ground itself, the question as proposed does not give rise to any substantial question of law. 10. We may once more note that the Income Tax Department within the jurisdiction of t....
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....view, no substantial question of law arises. Therefore, we do not entertain the present appeal." 3.5.7 After considering the above and respectfully following the judgments of the Hon'ble Bombay High Court and the Hon'ble Delhi High Court, we hold that the proportionate adjustment is to be allowed to the assessee and the exercise of benchmarking is to be restricted to the value of international transaction. On the overall factual matrix, we restore this issue to the file of AO/TPO to recompute and benchmark this transaction, after giving sufficient opportunity of hearing to the assessee. 3.6.0 The second issue argued by the Ld. Counsel for the assessee is regarding allowability of capacity adjustment. During the course of assessment, TPO has dealt with the issue of allowability of capacity adjustment whilst observing as follows: "The assesse has provided some of the capacity utilization figures of the comparables. However out of the 4 comparables, data is not available in respect of Circuit Systems India Ltd. In respect of Fine-line Circuit Ltd, the data is not available in respect of High technology multilayer broad segment. Under these circumstances, this da....
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....s, the Ld. Counsel for the assessee has vehemently argued that, undisputedly, assessee was bearing the risk of idle capacity and this being one of the initial years of operation of its business, capacity adjustment ought to have been granted in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/(3) of the Income Tax Rules, 1962 ('Rules'). On the issue of allowability and the manner of computing the capacity adjustment, he placed heavy reliance on the following judicial precedents: i. CIT vs Petro Araldite Pvt. Ltd. [2018] 93 taxmann.com 438 (Bombay)/[2018] 256 Taxman 16 (Bombay) ii. M/s. Royal Star Jewellery Pvt. Ltd. vs ACIT & Other, ITA 2463/2013, order dated 30.01.2017 (Bombay High Court) iii. Transwitch India (P.) Ltd. v. Dy. CIT [2012] 21 taxmann.com 257/53 SOT 151 (Delhi - Trib.) iv. Dy. CIT v. Class India (P.) Ltd. [2015] 62 taxmann.com 173 (Delhi); v. Saxo India (P.) Ltd. v Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.) vi. Molex India Tooling (P.) Ltd. vs DCIT [2016] 75 taxmann.com 303 (Bangalore - Trib.) vii. HCL Technologies BPO Services Ltd. v. Asstt. CIT [2015] 60 taxmann.com 186/69 SOT....
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.... the decision of this Tribunal rejecting the claim of capacity adjustment be followed. 3.6.5 We have heard the rival submissions of the parties and also perused the relevant material on record. We find force in the submissions of the Ld. Counsel for the assessee that in terms of the liberty granted by the Hon'ble High Court in assessee's own case and in view of the recent decision of Hon'ble Bombay High Court in CIT vs. Petro Araldite Pvt. Ltd. reported in [2018] 93 taxmann.com 438 (Bombay)/[2018] 256 Taxman 16 (Bombay), wherein it is held that capacity adjustment is allowable in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/(3) of the Rules, the earlier decision of coordinate Bench in Assessee's own case would no act as a impediment to allow capacity adjustment for the relevant period. We notice that Ld. Counsel for the assessee has placed on record revised working with respect to computation of capacity adjustment in terms of the recent decision of coordinate Benches of the Tribunal and the Hon'ble High Court and, therefore, the earlier decision of Tribunal is distinguishable on this count itself. We are of the opinion that if correct and reliable dat....
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.... where the Rent Act clothes a special Court with jurisdiction to decide such suits. As an example, under Section 28 of the Bombay Rent Act, 1947, the Small Causes Court has exclusive jurisdiction to hear and decide proceedings between a landlord and a tenant in respect of rights which arise out of the Bombay Rent Act, and no other Court has jurisdiction to embark upon the same. In this case, even though the Civil Court, in the absence of the statutory bar created by the Rent Act, would have jurisdiction to decide such suits, it is the statutory bar created by the Rent Act that must be given effect to as a matter of public policy. (See, Natraj Studios (P) Ltd. v. Navrang Studios, (1981) 1 SCC 523 : (1981) 2 SCR 466 at 482). An erroneous decision clothing the Civil Court with jurisdiction to embark upon a suit filed by a landlord against a tenant, in respect of rights claimed under the Bombay Rent Act, would, therefore, not operate as res judicata in a subsequent suit filed before the Small Causes Court between the same parties in respect of the same matter directly and substantially in issue in the former suit. (ii) An issue of law which arises between the same parties in a....
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....ount of difference in capacity utilization in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/(3) of the Rules. Our view is fortified by the recent decision of Hon'ble Bombay High Court in the case of CIT vs. Petro Araldite Pvt. Ltd. reported in [2018] 93 taxmann.com 438 (Bombay)/[2018] 256 Taxman 16 (Bombay). After considering plethora of case laws on the issue of allowability of capacity adjustment, the coordinate Bench of the Delhi Tribunal in HCL Technologies BPO Services Ltd. vs. ACIT reported in [2015] 172 TTJ 1 (Delhi - Trib.), observed as follows : "29. Reliance in this regard is also placed on the recent decision of Chennai Bench of the Tribunal in the case of Mando India Steering Systems (P.) Ltd. v. Asstt. CIT [2014] 49 ITD 284/45 taxmann.com 160 wherein, the Hon'ble Bench has remitted the issue back to the file of the assessing officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The relevant extract of the decision reads as under: "We are of the considered view that under-utilization of production capacity in the initial years is a....
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.... reasonable basis." 31. On the same lines, Delhi Bench of the Tribunal in the case of Global Turbine Services Inc. v. ADIT (International Taxation) [2013] 38 taxmann.com 220 allowed economic adjustment on-account of under capacity utilization considering the fact that the year under consideration was the first full year of operation of the appellant. Relevant extract of the decision reads as under: "10. We have heard the rival contentions and perused the material available on record. The suitable adjustment for non-utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by co-ordinate Bench in the case of the Amdocs Business Services (P.) Ltd. (supra ) and various other cases as cited here in above. 11. In the given facts and circumstances it was required on the part of the lower authorities to have given due effect to under capacity utilization of the assessee which has not been done TPO for adjustment for ALP determination. In view of the facts and circumstances we are inclined to set aside the matter and restore the issue of under capacity utilization back to the fil....
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....e year under consideration i.e. AY 2004-05; accordingly, no infirmity is found in the impugned order of the CIT (A) as the adjustments made by the appellant in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the appellant company with its associated concerns during the year under consideration were at arm's length requiring no adjustment/addition on this issue. 16. From the above, it is evident that the appellant is entitled to economic adjustments in the circumstances of under capacity utilization of the company. Of course, such adjustments must be restricted to fixed cost/overheads only. In the instant case, the AO/TPO did not have the occasion to go into the period or the extent of the labour unrest, break-up of the claimed adjustments amounting Rs. 7.32 crores (rounded off), fixed cost versus the variable cost etc. as they summarily rejected the external comparables in view of their preference to the operating profits of the domestic segment of the carpets. Therefore and consequently, this key issue also has to be set aside to the files of the TPO/AO for fresh examination of the iss....
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....switch India (P.) Ltd. v. Dy. CIT [2012] 53 SOT 151/21 taxmann.com 257 held as under: "4.11 Another TPO's contention is that claim of the appellant that the sealing drive reduced its revenue is unsubstantiated. In this regard, appellant has submitted that the appellant had placed on record its quarterly 'capacity' utilization statement demonstrating the fall in its capacity utilization during the quarter January to March, 2006. The capacity utilization, of the appellant during the quarter January to March, 2006 fell to 72% as' against the normal capacity utilization of 87% to 94% during the financial year ending December, 31, 2005. Further, the fact that the appellant had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the appellant during the last quarter of financial year 2005-06. We find out ourselves in agreement with the appellant's submission in this regard." 37. Hon'ble Delhi High Court, in the appeal preferred by the revenue in the case of Transwitch India (P.) Ltd. (supra), vide order dated 17.07.2013, upheld the adjustment claimed by the assessee on account of capacit....
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....on the above lines to arrive at operating profit." 3.6.7 Respectfully following the judgment of the Hon'ble Bombay High Court and the decision/s of the coordinate benches of Tribunal as aforementioned, we are of the considered opinion that the Assessee is entitled to the benefit of capacity adjustment whilst benchmarking the international transaction of SIM Card Assembly. 3.6.8 Another linked issue is regarding computation of capacity adjustment. In our opinion, the methodology adopted by TPO/DRP in computing 'capacity adjustment' whilst only considering the depreciation, is erroneous. Recently, the issue of computation of capacity adjustment has been considered by the coordinate Bench of the Delhi Tribunal in DCIT vs. Claas India (P) Ltd reported in [2015] 62 taxmann.com 173 (Delhi - Trib.) by observing as follows: "8. We have heard the rival submissions and perused the relevant material on record. Before embarking upon the question of allowability and extent of capacity adjustment under the TNMM, we want to make it clear that the assessee reduced its operating costs by considering its capacity utilization vis-à-vis that of comparables and resulta....
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.... (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in subclause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." 9.2 Sub-clause (i) in the process of determination of the ALP under the TNMM talks of the computation of net operating profit margin realized by the assessee from an international transaction. Subclause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. This refers to determining the operating profit margin of comparables with the same base as that of the assessee. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, 'is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.' It is this adjusted net profi....
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....ties below have adjusted the operating costs of the assessee in allowing the capacity adjustment. As against that, the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. ii. How to compute capacity utilization adjustment under TNMM: 10.1 Under the TNMM, the ALP of an international transaction is determined by computing and comparing the percentage of operating profit margin realized by the assessee with that of the comparables. We have noticed above that the difference in the capacity utilizations is an i....
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....sts incurred by the assessee and A are at the same capacity utilization. There can be converse situation as well. Suppose the fixed costs incurred by a comparable (say, B) are Rs. 100 and it has capacity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacityutilizations can be eliminated by proportionately scaling down the fixed costs incurred by B so as to make it fully comparable. This we can do by reducing the fixed costs of B to Rs. 50 (Rs. 100 into 25/50) as against the actually incurred fixed cost by it at Rs. 100. When we compute operating profit of B by substituting the fixed costs at Rs. 50 with the actually incurred at Rs. 100, it would mean that the fixed costs incurred by the assessee and B are at the same capacity utilization level. 10.3 Turning to the facts of the instant case, we find that both the TPO as well ....
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....e industry also. He argued that such an adjustment is restricted to inventory, trade receivables and trade payables. It was submitted that if a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back the dues to its suppliers, which reduces the interest cost and increases profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade receivables, as the case may be, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. 3.7.1 On the other hand, the Ld. CIT Departmental Representative placed heavy reliance on the order of lower authorities. 3.7.2 We have heard the rival submissions of the parties and perused the relevant material on record. We are of the opinion that once the TPO/Ld. DRP has principally allowed the claim of working capital adjustment with....