2022 (12) TMI 526

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....he adjustments proposed by the learned Transfer Pricing Officer (TPO) in his order passed under section 92CA (3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel (DRP). Each of the ground is referred to separately, which may kindly be considered independent of each other. On the facts and circumstances of the case and in law, the learned AO/TPO/ Hon'ble DRP have: General ground: 1. erred in determining the total taxable income of the appellant at INR 6,49,49,092 as against INR 1,09,25,800 as reported in the return of income filed by the appellant. Transfer Pricing Grounds: 2. erred in making an addition of INR 5.40,23,292 to the total income of the appellant in respect of international transaction pertaining to provision of contract software development services by the appellant to its associated enterprise (AE) (hereinafter referred to as 'impugned transaction'); Invalid reference made to TPO: 3. erred in making a reference to the TPO under section 92CA of the Act for determining the arm's length price ('ALP") of the international transactions in a mechanica....

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....rs of Hon'ble ITAT in the appellant's own case for earlier years (e. AY 2009-10, AY 2010-11 and AY 2011-12), wherein the Hon'ble ITAT had remanded back the cases to the file of TPO/AO to determine ALP by examining the functional profile of the appellant. Alternate benchmarking adopted by TPO: 11. erred in carrying out an alternate benchmarking analysis in respect of the impugned transaction, by selecting the following 4 engineering design service provider companies, which is contradictory to primary analysis so undertaken, in violation of provisions of law and lacks any cogent reasoning • Acropetal Technologies Limited (EDS Segment) • Holtec Consulting Private Limited • Mitcon Consultancy Services Limited • Cether Consulting Engineering Limited resulting in an arm's length margin of 38 33 percent for the impugned transaction, as against the Appellant's margin of 15.00 percent Working capital adjustment: 12. erred in not making suitable adjustments to account for differences in working capital deployed by the appellant vis-à-vis the comparable companies. Risk a....

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....'s functional profile to be of R&D service provider on the basis of mere nomenclature in the inter-company agreement and ignoring the functional profile of the appellant as documented in TP study report i.e. rendering contract software development services in the nature of documentation, coding and testing of software; 4. erred in not appreciating the detailed documentary evidence submitted by the appellant in the form of STPI forms, bug fixing activities in support of nature of activities being in the nature of software development carried out by it during relevant AY and making incorrect inferences merely on the basis of inter-company Erroneous characterization of the appellant as owner of intangible property: 5. erred in determining the appellant as the economic owner of the Intangible Property (IP) as a result of research and development services provided by the appellant to its Associated Enterprises Rejection of comparables selected by appellant in TP documentation: 6. erred in erroneously rejecting the comparable companies selected by the appellant in its TP documentation, maintained under Rule 10D(4) of the Income-tax Rules, 1962 (Rules) for t....

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....as made to the learned DCIT 3(3)(1), Mumbai, (the learned Transfer Pricing Officer) for determination of Arm‟s Length Price of the international transaction. 04. The assessee has entered into seven different type of International transactions, however, the dispute before us is only with respect to International Transaction of provision of contract research and development (R&D) services amounting to Rs.40,24,59,724/- originally. Subsequently, there is a demerger of one of the segment and the value of the transaction was then stated to be only Rs. 20,36,94,379/-. 05. Assessee adopted the Transactional Net Margin Method as the most appropriate method and stated that its international transactions are at arm‟s length selecting 24 comparables, taking Profit level indicator of OP/OC of 9.80%, whereas the margin of the assessee is 15.03%. 06. However so far as the functions of the assessee are concerned, Assessee submitted that assessee is engaged in provision of contract software development services, whereas the ld Transfer Pricing Officer noted that assessee is engaged in R&D services. In T P Study Report transactions is treated as software development services, w....

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....ngth Price of the international transaction. Assessee aggrieved and has preferred this appeal. 08. The learned Authorized Representative submitted that ground no. 1, 2, and ground no. 4 of the appeals are general in nature and further, ground no. 3 and 5 are not pressed. Accordingly, all these grounds of appeal are dismissed. 09. The learned Authorized Representative submitted that only ground no. 6 and 7 are pressed and all other grounds are merely consequential. He submitted that the ground no. 6 challenges that functions of assessee are characterized as contract research and development service provider, but Assessee is merely a contract software development service provider. The lower authorities have merely gone on the basis of nomenclature of the agreement and not on the functional profile of the assessee. He referred to page no. 66 of the Paper Book, which is the annexure no. 2 of the form no. 3CEB where assessee has given a description of the transaction of contract software development services. However, the learned Transfer Pricing Officer has classified the assessee as research and development service provider. He further referred to page no. 311 of the Paper Book,....

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....the agreement produced before the lower authorities showed that the title of agreement is research and development activity. However, the evidences produced before us in the form of log of bug fixing activities, details of employees, the various forms filed, the organization structure, form no. 3CEB as well as the earlier year orders of co-ordinate Bench indicate that assessee is engaged in contract software development services. Thus, the real functions of the assessee, the use of assets well as the risk assumed by the assessee are clearly in dispute. As the learned Transfer Pricing Officer and the learned Dispute Resolution Panel without verifying, the actual functions performed by the assessee were guided only by the title of the agreement, characterizes assessee as research and development service provider. Lower authorities also without looking into the functional profile claimed by the assessee in form no. 3CEB have changed the characterization of assessee. As the functions performed by assessee is not verified and merely based on agreement , lower authorities have upheld the benchmarking of International Transactions. Decision of coordinate benches in assessee‟s own ca....