TaxTMI 
TaxTMI 
2018 (10) TMI 1947
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.... prejudice to each other. Ground of objection I - General ground The order of the learned Deputy Commissioner of Income Tax, Company Circle 2(2), Chennal ('Assessing Officer' or 'AO') passed pursuant to the order of the learned Transfer Pricing Officer-V, Chennal ('Transfer Pricing Officer' or 'TPO') and the directions issued by the Hon'ble Dispute Resolution Panel - II (the 'DRP'), to the extent prejudicial to the Appellant, is erroneous, bad in law, and contrary to the facts and circumstances of the case. Issue I - Grounds relating to Transfer Pricing Matters Ground of objection 2 - Rejection of economic analysis of the Appellant without any cogent reasons The Ld. AO/ TPO and the Hon'ble DRP have erred, in law and in facts by disregarding the economic analysis undertaken by the Appellant in accordance with the provisions of the Income tax Act, 1961 read with Income tax Rules, 1962 (the Rules) for determination of arm's length price of the 1- international transaction of the Appellant. The TPO also conducted a fresh economic analysis for selection of comparable companies without providing any cogent reasons for undertaking the same. ....
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....ed to cherry picking of the companies undertaking noncomparable activities. Ground of objection 9- Erroneous treatment of expenses The learned AOITPO has erred in law and facts, by considering provision for bad and doubtful debts to be non-operating item. Ground of objection 10- Use of single year data (which was not available at the time of maintaining TP documentation) - The Ld. TPO/ AO and the Hon'ble DRP have erred in law and in facts, by determining the arm's length margin! price using only Financial Year 2012-13 data, as against multiple year data adopted by the Appellant without appreciating that multiple year data has an influence on the determination of transfer prices in relation to the international transactions and also not giving due cognizance to the rules notified by the CBDT vide Notification No. 83/2015 [F.No. 142/25/2015-TPOJ. Ground of objection 11- +/-3% tolerable range as provided in proviso to Section 92C(2) of the Act. The Ld. TPO/ AO and the Hon'ble DRP have erred in law and in facts, in computing the arm's length price without giving benefit of +/- 3 percent under the proviso to Section 92C of the Act. ....
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....bmission that Ground Nos.14 was consequential in nture in levying of interest under sections 234B & 234C of the Act and Ground No.15 was against the initiation of penalty u/s.271(1)(c) of the Act. The grounds Nos.14 & 15 were not argued by ld.A.R. Consequently, the same is dismissed as not pressed. 5. In regard to the transfer pricing issues, it was submitted by ld.A.R that the assessee has three lines of business; i) Software Development Services, ii) Content Development Services and iii) on-line Tutoring services. It was a submission that when the assessee had done transfer pricing study, it had treated the software development services and the content development services as Information Technology Services (I.T.Services) and in respect of on-line tutoring services, the same was treated as Information Technology Enabled Services (I.T.E.S). It was a submission that the ld. Assessing Officer however treated the software development services as Information Technology Services, but treated the content development services and the on-line tutoring services as Information Technology Enabled Services. It was a submission that the software development services involved software develo....
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.... of ITeS amounting to INR 6.62 Cr. 3. Issues Under Dispute - The issues under dispute are on selection of comparable companies and non-grant of economic adjustments viz, working capital and risk adjustment. 4. Transfer pricing ('TP') adjustment - INR 58.81 lacs Key Objections on comparable companies Name of company Companies to be Excluded -Ground No.3 Support from judicial pronouncements-covered judgements Hartron Communications Ltd (harton) Significant fluctuations in the turnover - Where revenue has increased 350% compared to previous years (Page 6 of paper book 3) High fluctuation in margins -The margins of Hartron has highly fluctuated which is as follows: Year 2010-11 2011-12 2012-13 2013-14 2014-15 Turnover INR Crores 2.08 3.81 18.43 10.33 14.37 % of change - +82.86 383.1 -43.95 39.19 Year 2010-11 2011-12 2012-13 2013-14 2014-15 Profit/Loss INR Crores -2.03 -1.41 4.61 -0.26 -3.74 % of change -97.56 -37.15 25.05 -2.52 -26.02 -Unreliable financial information -Qualification in theAudi....
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....ge WC days 70 35 30 39 278 4 67 67 Particulars WC Days Comparable companies (Average) 67 Harland India 15 Judicial Precedents - Delhi ITAT in Agilent Technologies (International) Pvt Ltd., - M/s.Mobis India Ltd Vs. DCIT (ITA No.2112/Mds./2011 in Hon'ble Chennai ITAT. 6. Comparable companies and margins Harland India's Margins - 10.39% (Page 17of Appeal set) TPO Comparables E4e Health Care Ltd Jindal Intelicom Ltd MPS Ltd.(Rejected by DRP) Microgentic Systems Ltd. ICRA Online Ltd. Infosys BPO ltd Acropetal Technologies Ltd Hartron communication Ltd. Accentia Technologies Ltd.(Rejected by DRP) TP Study comprables Aptech Ltd. Compucom Software Ltd. First Object Technology Ltd. Usha Martin Education Ltd. NIIT Ltd. Education initiative Pvt Ltd. 7. Disallowance on 60% depreciation on computer software- INR 30.37 lacs - Ground No 12 * The Company has claimed depreciation on software licenses at the rate of 60 percent. * The description of additions made to computer software during the subject AY are as follows: ....
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.... 6.1 In respect of second comparable being M/s.Infosys BPO Ltd., it was submitted by ld.A.R that the same was not liable to be considered as a comparable in so far as M/s.Infosys BPO Ltd., is much larger company comparable to that of the assessee company and the turnover of M/s.Infosys BPO Ltd., was 39 times the turnover of the assessee and M/s.Infosys BPO Ltd., had significant brand value in market. For this ld.A.R placed reliance on the decision of Co-ordinate Bench of this Tribunal in the case of M/s.BNP Paribas Global Securities in ITA No.2141/Chny/2017 dated 06.03.2018. 6.2 In respect of third comparables being M/s.ICRA Online Ltd., it was submitted by ld.A.R that the said comparable was not in the processing services, more specifically known as KPO Services, which is hired services. It was a submission that as KPO services were specific services and hired services, the same cannot be compared to the services rendered by the assessee. 6.3 In respect of fourth comparables being M/s.E4e Health Business, It was a submission that the said comparable was again in the KPO services and there was no segmented information available in respect of the same. It was a prayer that thi....
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....on'ble Delhi High Court in the case of M/s.MCKINSEY Knowledge Centre India Pvt Ltd., referred to supra, which has been referred to by the assessee itself shows that if from the available date on record, the results for the financial year can be reasonably extrapolated, then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. Applying the said principles clearly shows that there is a variation in the margins for various assessment years, does not mean that the margins for particular year cannot be considered. It would be very much available to the assessee to point out the reasons for the higher rate of margins in the case of particular comparable. But that is not open, what is specifically kept in mind that is that method had been applied herein, is TNMM i.e. Transactional Net Margin Method, whether the turnover is high or not, would not make a different nor would be the question working capital adjustments be required, what is being compared as a percentage of profitability. It is very much open to the assessee to point out how the percentages as disclosed by the comparables are higher on account of from specific reaso....
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.... M/s.R.Systems has been re-worked on quarterly basis and the average of the same has also been determined by the assessee. The average of which has been produced before the TPO and the DRP. The same being comparable to the assessee's business, the ld. TPO is directed to re-work the PLI after taking into consideration M/s.R.systems as the comparable. The assessee is to provide the financial re-working to the TPO for the necessary adjustments. In the circumstances, the prayer of exclusion of M/s.Harton Communictions, M/s.Infosys BPO Ltd., M/s.ICRA Online Ltd., and E4e Health Business from the list of comparables stands rejected and the assessee's request for including of M/s.R.Systems as comparable stands accepted. 10. Coming to the issue of working capital adjustments, as mentioned earlier the methodology applied herein is TNMM, no specific adjustments towards working capital is permitted, in so far as making only an adjustment of one item being working capital will make the financials of the comparable unworkable. What is comparable is the percentage of the margins, and obviously when arriving at the margins for each of the comparables, such comparables would have taken into con....